10/29/20

CHAPTER 5
BUSINESS-LEVEL STRATEGY

Assoc Prof. Dr. Lê Thái Phong

Dean, Faculty of Business Administration
Foreign Trade University
E: [email protected]
T: 0975.055.299

Learning outcomes
• Identify Strategic business units (SBUs)
1 in organisations

• Assess business strategy in terms of cost

2 leadership, differentiation, and focus

• Assess the benefits of cooperation in

3 business strategy

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“I surf to where hockey balls will

be there….

not where it has to roll over.”

- Wayne Gretsky

Strategic model

Company Environ-
ment

4 levels of strategy
• Function-level strategy
Strategy • Business-level strategy
• Corporate-level strategy
• International strategy

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Introduction
• This chapter is about strategic choices at the
level of strategic business units
• A strategic business unit (SBU): any business
that supplies goods/ services to a distinct
domain of activity
– Independent restaurant
– A subsidiary of a large diversified firm

Core The resources and capabilities that have been

Competency determined to be a source of competitive
advantage for a firm over its rivals.

An integrated and coordinated set of

Strategy actions taken to exploit core competencies
and gain a competitive advantage.

Actions taken to provide value to

Business customers and gain a competitive
Level advantage by exploiting core
Strategy competencies in specific, individual
product markets.
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Business-level strategy
Business-level strategy: an integrated & coordinated set of commitments and
actions the firm uses to gain a competitive advantage by exploiting core
competencies in specific product markets

Strategy makes following decisions:

1. Customer’s needs–
WHAT needs will be satisfied?
2. Customer groups
WHO will be served?
3. Distinctive competencies
HOW will those needs be satisfied?

These decisions determine which strategies will

be formulated and implemented to put a business
model into operation.

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Who: Determining the Customers to Serve

• Market segmentation
A process used to cluster people with similar needs
into individual and identifiable groups.

All Customers
Consumer Industrial
Markets Markets

Identify customer groups & market segments

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Three approaches for segmentation

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Customer segmentation
ž A company cannot satisfy all the needs from
various customers
ž Segmentation helps an org. to align internal
processes according to the most important
customer expectations or their impact on
shareholder value

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Customer segmentation

ž Geography
ž Demographic factors
ž Gender
ž Age
ž Professional
ž Juran: Vital few & useful many

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What: Determining Which Customer Needs to Satisfy

• Customer needs are related to a product’s

benefits and features.
• A firm’s ability to meet customer needs
creates VALUE for the customer.
• Two forms of value:
– Low cost
– Unique, or differentiated product

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Example?
ž Discuss with your friends
ž Give some examples of how firms segment
their customers

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Understanding customer needs

IDEO

ž Design doesn’t begin with a far-out or a cool

drawing
ž Begins with a deep understanding of people

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Understanding customer needs

ž For example: credit card user. What do they
need?
ž Applying for an account?
ž Using the card?
ž Billing?
ž Customer service?

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How: Determining Core Competencies Necessary to Satisfy

Customer Needs

• Firms use core competencies to implement

value-creating strategies that satisfy
customers’ needs.
• Only firms with capacity to continuously
improve, innovate and upgrade their
competencies can expect to meet and/or
exceed customer expectations across time.

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The Purpose of a Business-Level Strategy

• Business-Level Strategies
• Are intended to create differences between the firm’s
position relative to those of its rivals.
• To position itself, the firm must decide whether it
intends to:
• Perform activities differently or
• Perform different activities as compared to its rivals.

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Two Choices for Business Level Strategies

• Types of potential competitive advantage

• Achieving lower overall costs than rivals
• Possessing the capability to differentiate the firm’s
product or service and command a premium price
• Types of competitive scope
• Broad scope
• Narrow scope

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Generic competitive strategy

Competitive advantage
Lower cost Differentiation
Broad target

1 2
Competitive scope

Cost-leadership Differentiation

3a 3b
Narrow target

Cost-leadership Differentiation
focus focus

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Generic competitive strategies

• Competitive strategy: concern with how an
SBU achieves competitive advantage in its
domain of activity
• Competitive advantage: how an SBU creates
value for its users both greater than the costs
of supplying them & superior to that of rival

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Generic competitive strategies

• To be competitive: customers see sufficient
values (make them pay more)
• To be advantage: greater value than
competitors
• Absence of competitive advantage: vulnerable
to attack by competitors

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Cost-leadership
• Becoming the lowest-cost organization in a
domain of activity.
• 4 key cost-drivers
• Input costs:
– labour + raw materials
– Shifting to low labour costs: call center in India,
manufacturing in China

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Cost leadership
• Economies of scale: very important for high
fixed costs
– Phamar: R&D.
– Also important in purchasing

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Cost leadership
• Experience: cumulative experience gained by
a firm
• The more experience, the more efficient
– Labour productivity: learn to do thing cheaper
– More efficient designs or equipment
• 3 implications
– Entry timing
– Market share
– Theoretically endless

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Cost leadership
• Product/ process design:
– Efficiency can be designed in at the outset
– Eg: cheap standards components
– Interaction via web, not phone
–…

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Cost leadership: measures

● Economies of scale § Product features

● Asset utilization § Performance
● Capacity utilization pattern § Mix & variety of products
• Seasonal, cyclical § Service levels
● Interrelationships § Small vs. large buyers
● Order processing § Process technology
and distribution § Wage levels
● Value chain linkages § Product features
• Advertising & sales § Hiring, training,
• Logistics & operations motivation

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Cost leadership: 2 options

• 1. Parity (Equivalence) with competitors in
product or service features valued by
customers
– Charge same price, while translating cost
advantages into extra profit

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Cost leadership: 2 options

• 2. Proximity (closeness) to competitors in
terms of features
– Customers require small cuts in price to
compensate for the slightly lower quality

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Cost Leadership Value Chain

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Cost Leadership Strategy: Competitors

Rivalry with
Existing Competitors • Due to cost leader’s
advantageous position rivals
Threat of new
hesitate to compete on
entrants basis of price.
Rivalry
among Bargaining • Lack of price competition
power of
competing
firms suppliers leads to greater profits.

Threat of Bargaining
substitute power of
products buyers

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Cost Leadership Strategy: Buyers

Bargaining Power • Customers already value
of Buyers firm’s low-price position
• Can mitigate buyers’ power
Threat of new
entrants
by:
– Driving prices far below
Rivalry competitors, causing them to
Bargaining
among
power of exit, thus shifting power with
competing
firms suppliers buyers back to the firm.

Threat of Bargaining
substitute power of
products buyers

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Cost Leadership Strategy: Suppliers

Bargaining Power • Can mitigate suppliers’
of Suppliers power by:
– Being able to absorb cost
Threat of new increases due to low cost
entrants
position.
Rivalry
among Bargaining – Being able to make very large
power of
competing
suppliers purchases, reducing chance
firms
of supplier using power.
Threat of Bargaining
substitute power of
products buyers

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Cost Leadership Strategy: New Entrants

The Threat of
• Can frighten off new
Potential Entrants
entrants due to:
Threat of new
entrants
– Their need to enter on a
large scale in order to be
Rivalry
among Bargaining cost competitive.
power of
competing
firms suppliers
– The time it takes to
move down the learning
Threat of Bargaining
substitute power of curve.
products buyers

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Cost Leadership Strategy: Substitutes

Product • Cost leader is well
Substitutes positioned to lower
prices in order to
Threat of new
entrants maintain value position.
Rivalry
among Bargaining • Need to be aware of
competing
firms
power of
suppliers
disruptive technology or
other non-traditional
Threat of
substitute
Bargaining
power of
substitutes.
products buyers

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Major Risks of Cost Leadership Strategy

Dramatic technological change could take

away your cost advantage.
Competitors may learn how to imitate Value
Chain.

Focus on efficiency could cause Cost Leader to

overlook changes in customer preferences.

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Differentiation
• Differentiation involves uniqueness along
some dimension that is sufficiently valued by
customers to allow a price premium
– Vary between markets
• Clothing retail: store size, locations, fashion
• Cars: safety, style, fuel efficiency
– Each market: may differentiate along different
dimension
• BMW: sportier image
• Mercedes: conservative values

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Differentiation
• Can identify potential for differentiation by
mapping against competitors based on
important features valued by customers
• Example: airlines
– Southwest was able to differentiate on attributes
that highly valued by customers

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Differentiation
• Attributes to differentiate: choose carefully. 2
keys factors:
– Strategic customers. Who are they? What do they
really want?
– Key competitors
• Benetton – knitwear – lost ground because
Marks&Spensers

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Differentiation
• Allows higher prices, but comes at a cost
• Investment in R&D, branding, staff quality
• But: additional costs < gains in price
• Rolls- Royce + Bentley: fail agaits Mercedes
– Expensive crafting of wood and leather interiors,
the full costs even wealthy customers were not
prepared to pay for.

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Potential Aspects of Differentiation

• Superior quality
• Unusual or unique features
• More responsive customer
service
• Rapid product innovation
• Advanced technological
features
• Image of prestige or status

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Differentiation Business Level Strategy

Effectiveness with Differentiation grows out
of Value Chain activities
Examples:

Heineken beer Raw materials

Steinway pianos Raw materials & Workmanship

Mercedes Benz autos Technology and Workmanship

Intel microprocessors Technological superiority

Caterpillar tractors Service buyers’ needs quickly

anywhere in the world
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Differentiation Value Chain

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Differentiation Strategy: Competitors

Rivalry with
Competitors Defends against competitors
because brand loyalty to
Threat of new
entrants
differentiated product offsets
price competition.
Rivalry
among Bargaining
power of
competing
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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Differentiation Strategy: Buyers

Bargaining Power
of Buyers
Can mitigate buyers’ power
Threat of new because well differentiated
entrants
products reduce customer
Rivalry
Bargaining
sensitivity to price increases.
among
power of
competing
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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Differentiation Strategy: Suppliers

Bargaining Power • Can mitigate suppliers’
of Suppliers power by:
– Absorbing price increases due
Threat of new to higher margins.
entrants
– Passing along higher supplier
Rivalry
among Bargaining prices because buyers are
power of
competing loyal to differentiated brand.
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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Differentiation Strategy: New Entrants

The Threat of • Can defend against new
Potential Entrants
entrants because:
– Customer loyalty is difficult to
Threat of new disrupt.
entrants
– New products must be at least
Rivalry
among Bargaining equal to performance of proven
power of
competing
suppliers
products, but offered at lower
firms
prices.
Threat of Bargaining
substitute power of
products buyers

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Differentiation Strategy: Substitutes

Product
Substitutes
Well positioned relative to
substitutes because brand
Threat of new
entrants
loyalty to a differentiated
product tends to reduce
Rivalry
among Bargaining customers’ testing of new
power of
competing
firms suppliers products or switching
brands.
Threat of Bargaining
substitute power of
products buyers

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Major Risks of a Differentiation Strategy

Customers may decide that the price

differentiation between the differentiator’s
product and the cost leaders price is too
large.

The means of uniqueness may no longer be

valued by customers.

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Focus strategies
• A focus strategy targets a narrow segment of
domain of activity and tailors its products or
services to the needs of that specific segment
to the exclusion of others
– Focuser achieves competitive advantage by
dedicating itself to serving target segments better
than others (which cover a wider range of
segment)
• Cost focus and differentiation focus

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Cost focus
• Cost focusers identify areas where broader
cost-based strategies fail because of the added
costs of trying to satisfy a wide range of needs
• UK food retail: Iceland Foods: frozen & chilled
foods

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Cost focus
• Ryanair: targeting price-conscious holiday
travellers

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Differentiation focus
• Differentiation focusers look for specific needs
that broader differentiators do not serve so
well

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Differentiation focus
• ARM Holdings: dominating mobile phone chip

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Focus strategies
• Sucessful focus strategies depend on:
– Distinct segment needs
– Distinct segment value chains
– Viable segment economies

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Distinct segment needs

• If segment distinctiveness erodes => harder to
defend the segment against broader
competitors
– Blurring between smartphones used by general
consumers and by business people: RIM no
longer has a clear niche with Blackberry

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Distinct segment value chains

• Focus strategies are strengtherned if they
have distinctive value chains that will be
difficult or costly for rivals to construct
– P&G: cannot easily respond to Ecover: involving
transforming its purchasing and production
process

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Viable segment economics

• Segments can easily become too small to
serve economically as demand or supply
conditions change

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Integrated Cost Leadership/

Differentiation Strategy

• Firms performing value chain activities in ways

that allow them to simultaneously pursue low
cost and differentiation.
• A firm that successfully uses an integrated cost
leadership/differentiation strategy should be
in a better position to:
• Adapt quickly to environmental changes.
• Learn new skills and technologies more quickly.

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Risks of the Integrated Cost Leadership/

Differentiation Strategy

• Often involves compromises

– Becoming neither the lowest cost nor the most
differentiated firm.
• Becoming “stuck in the middle”
– Firm engages in economics such that it cannot
achieve benefit of premium pricing from
differentiation nor cost savings from cost
leadership.

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Work with team

• What business level strategy of our project?

– Cost leadership: How?
– Differentiation: how?
– Cost-leadership focus: how?
– Differentiation focus: how?

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Thank you very much!

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The strategy clock

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The strategy clock

• Provide another way of approaching the
generic strategies. 2 features:
– Based on price, not costs (easier to compare)
– Circular design of clock allows for more
continuous choices than Porter’s model

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Strategy clock: Differentiation zone

• 12 o’clock – 2 o’clock
• Close to 12: differentiation without price
premium
• Close to 1 and 2: differentiation with price
premium. Similar to a focus strategy

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Strategy clock: low-price zone

• 9 o’clock to 12 o’clock
• Close to 9: a standard low price strategy
• Close to 7: no frills strategy

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Strategy clock: hybrid strategy zone

• Hybrid strategies: lower price than
differentiators, and higher benefits than low-
price strategies
• Very effective to enter new markets
• Non-competitive strategies

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SBU
Business strategy

Generic strategies
- Cost leadership, Interactive strategies
differentiation, focus - Moves and couter-moves
- Strategic clock - Cooperation

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Interactive strategies
• Generic strategies need to be chosen,
adjusted, in the light of competitor’s strategies
• If all follow cost-leadership, then a
differentiation is sensible
• Thus, business strategy choices interact with
those of competitors

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Interactive price & quality strategies

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Corporative strategy

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Cooperative strategy
• Competition can escalate => dangerous to all
• Advantage may not always achieved via
competition
• Collaboration may be a choice
• Business trategy should include cooperative
options as well as competitive one

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Cooperative strategy
• Coping with Suppliers: A+B:
– increase purchasing power
– Standardise equipment=> cost reduction to
supplier
– Car industry eg
• Coping with Buyers: A+B
– Increase their power as suppliers vis-à-vis buyers
– Buyers may benefit if their inputs are standardized
– Food manufacturer: common pallet sizes

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Cooperative strategy
• Coping with Rivals
– C will be in danger of being squeezed of industry
• Coping with Entrants
– A+B: retaliation strategies against any new
• Substitutes:
– Improved costs or efficiencies coming from A+B
reduce the incentives for buyers to look for
substitutes
– Steel firms cooperates on reseach to reduce weight of
steel used in car => no aluminum or plastics

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Summary
• Business strategy is concerned with seeking
competitive advantage in markets at the
business level
• Business strategy needs to be considered and
defined in terms of strategic business unit (SBU)
• Different generic strategies can be defined in
terms of cost-leadership, differentiation, and
focus
• Cooperative strategies may offer alternatives to
competitive strategies or may run in parallel

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Thank you very much!

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