Chapter 4: Business-Level Strategy: Overview

Chapter 4: Business-Level Strategy
Overview:
Defining business-level strategy

Risks of business-level strategies
Differences in business-level strategies
5-Forces
Relationship between customers and strategy
The Strategic Management Process
Introduction
Strategy: Increasingly important to a firms success and
concerned with making choices among two or more

alternatives. Choices dictated by
External environment (O and T)

Internal resources, capabilities and core competencies (S and
W)
Business level-strategy: Integrated and coordinated set of
commitments and actions the firm uses to gain a

competitive advantage by exploiting core competencies in
specific product markets/industry
How we intend to compete in a specific industry
3
Business-Level Strategies
Purpose: To create differences between position of
a firm and its competitors

Firm must make a deliberate choice to
Perform activities differently

Perform different activities
Impacts how value chain activities will be performed to
create unique value

No strategy better than others
Contingent on internal and external environment
4
Two types of competitive advantage firms must
choose between
Cost (Are our costs LOWER than rivals costs?)

Uniqueness (Are we DIFFERENT than rivals? How?)
Two types of competitive scope firms must
choose between
Broad target
Narrow target
These combine to yield 5 different generic
business level strategies
Can potentially be used by any organization competing

5
in any industry
Five Business-Level Strategies
Types of Business-Level Strategies

Cost Leadership Strategy
Competitive advantage: THE low-cost leader and operates
with margins greater than competitors
Competitive scope: Broad
Integrated set of actions designed to produce or deliver
goods or services with features that are acceptable to
customers at the lowest cost, relative to competitors
No-frills, standardized or commodity-like product
Must have competitive levels of quality, service, and other

features and lowest overall costs
Continuously reduce the costs / increase the efficiency of

7
value chain activities
Examples of Value-Creating Activities

Associated with the Cost Leadership Strategy

In relationship to the 5 Forces:
Existing Rivalry
Rivals hesitate to compete on the basis of price
Bargaining Power of Buyers (Customers)

Powerful buyers can force cost leader to reduce prices up to a point
Bargaining Power of Suppliers

Cost leaders can absorb suppliers price increases
Potential Entrants
Efficiency can serve as a barrier to entry
Product Substitutes
Can reduce prices when faced with substitutes
Thus built in defense against all 5 forces

9

Competitive Risks
Innovations by competitors can quickly eliminate cost

advantage
Too much focus on cost reduction versus competitive
levels of differentiation
Competitors may learn how to successfully imitate a
cost leaders strategy
10

Differentiation
Competitive advantage: Differentiation/uniqueness
Competitive scope: Broad
Integrated set of actions designed by a firm to produce or
deliver goods or services at an acceptable cost that customers
perceive as being different/unique in ways that are important
to them
Targeted customers perceive product value
Customized products differentiating on as many features as

possible
Can differentiate in many ways and in many value chain areas

11
Examples of Value-Creating Activities Associated

with the Differentiation Strategy
12

Differentiation
In relationship to the 5 Forces:
Existing Rivalry
Customers are loyal purchasers of differentiated products
Bargaining Power of Buyers (Customers)

Uniqueness and loyalty reduces customers sensitivity to price
increases
Bargaining Power of Suppliers

Provide high quality components, driving up firms costs
Cost may be passed on to customer
Potential Entrants
Substantial barriers (see above) and would require significant resource
investment
Product Substitutes
Customer loyalty effectively positions firm against product substitutes
13

Differentiation
Risks
Can charge too high of a price premium

Differentiation theme no longer valuable to customers
Over-differentiating
Customer experience shows differentiation not worth the
cost
Counterfeiting
14

Focus strategies
In general, the firms core competencies used to serve
the need of a particular industry segment or niche to the
exclusion of others.
May lack resources to compete in the broader market
May be able to more effectively serve a narrow
market segment than larger industry-wide competitors
Firms may direct resources to certain value chain
activities to build competitive advantage
Large firms may overlook small niches
15

Focus strategy examples
Buyer groups
Product line segments
Youths/senior citizens
Professional painter groups
Geographic markets
West vs. East coast
Definition: An integrated set of actions taken to
produce goods or services that serve the needs of

a particular competitive segment
16

Focused Cost Leadership
Competitive advantage: Low-cost
Competitive scope: Narrow industry segment
Motel 6, Kia
Focused Differentiation
Competitive advantage: Differentiation
Competitive scope: Narrow industry segment
Ritz-Carlton, Apple, Rolls Royce
17

Focus strategies
Risks
Same basic risks as broad cost leadership or broad

differentiation plus:
A competitor may be able to focus on a more narrowly
defined competitive segment and "outfocus the focuser
A company competing on an industry-wide basis may
decide that the market segment served by the focus
strategy firm is attractive and worthy of competitive
pursuit
Customer needs within a narrow competitive segment
may become more similar to those of industry-wide
customers as a whole
18

Integrated Cost Leadership/Differentiation
Efficiently produce products with differentiated attributes
Efficiency: Sources of low cost

Differentiation: Source of unique value
Involves engaging in primary and support activities that

allow a firm to simultaneously pursue low cost and
differentiation
Low price with somewhat highly differentiated features
More value for the money
Often called best-cost strategy
Examples: Toyota, Target
19

Integrated Cost Leadership/Differentiation
Risks of Integrated Strategies
Harder to implement than other strategies
Must simultaneously reduce costs while increasing

differentiation
Can get stuck in the middle resulting in no advantages and

poor performance
20
Other Business-Level Strategies

Strategic Alliances and Partnerships
Mergers and Acquisitions
Vertical Integration
Outsourcing
Offensive and Defensive Strategies
Web Site Strategies
First-Mover Advantages and Disadvantages
Business Model
Functional-Area Strategies
21
Customers and their Relationship with

Strategic competitiveness results when firm can
satisfy customers by using its competitive

advantages
Five components in customer relationships
Effectively managing relationships w/ customers

Deliver superior value and build customer loyalty
Reach, richness and affiliation

Access and connection to customers, depth and detail of
information, and facilitating interactions with customers
Who: Determining the customers to serve

What: Determining which customer needs to satisfy
How: Determining core competencies necessary to
22
satisfy customer needs

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Chapter 4: Business-Level Strategy

Defining business-level strategy

The Strategic Management Process

concerned with making choices among two or more

External environment (O and T)

Business level-strategy: Integrated and coordinated set of

commitments and actions the firm uses to gain a

a firm and its competitors

Perform activities differently

Impacts how value chain activities will be performed to

create unique value

Cost (Are our costs LOWER than rivals costs?)

Two types of competitive scope firms must

These combine to yield 5 different generic

business level strategies

Can potentially be used by any organization competing

Five Business-Level Strategies

Types of Business-Level Strategies

No-frills, standardized or commodity-like product

Must have competitive levels of quality, service, and other

Continuously reduce the costs / increase the efficiency of

Examples of Value-Creating Activities

Types of Business-Level Strategies

Bargaining Power of Buyers (Customers)

Bargaining Power of Suppliers

Thus built in defense against all 5 forces

Types of Business-Level Strategies

Innovations by competitors can quickly eliminate cost

Types of Business-Level Strategies

Targeted customers perceive product value

Customized products differentiating on as many features as

Can differentiate in many ways and in many value chain areas

Examples of Value-Creating Activities Associated

Types of Business-Level Strategies

Bargaining Power of Buyers (Customers)

Bargaining Power of Suppliers

Types of Business-Level Strategies

Can charge too high of a price premium

Types of Business-Level Strategies

Types of Business-Level Strategies

Product line segments

West vs. East coast

Definition: An integrated set of actions taken to

produce goods or services that serve the needs of

Types of Business-Level Strategies

Ritz-Carlton, Apple, Rolls Royce

Types of Business-Level Strategies

Same basic risks as broad cost leadership or broad

Types of Business-Level Strategies

Efficiency: Sources of low cost

Involves engaging in primary and support activities that

Types of Business-Level Strategies

Risks of Integrated Strategies

Harder to implement than other strategies

Must simultaneously reduce costs while increasing

Can get stuck in the middle resulting in no advantages and

Other Business-Level Strategies

Customers and their Relationship with