Business Level Strategies

Learning Objectives

Studying this chapter should provide you with

the strategic management knowledge needed to:
1. Define business-level strategy.
2. Discuss the relationship between customers and business-
level strategies in terms of who, what, and how.
3. Explain the differences among business-level strategies.
4. Use the five forces of competition model to explain how
above-average returns can be earned through each
business-level strategy.
5. Describe the risks of using each of the business-level
strategies.
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Business-Level Strategy (Defined)
An integrated and coordinated set of commitments and actions the
firm uses to gain a competitive advantage by exploiting core
competencies in specific product markets.

1–3
Core Competencies and Strategy

Resources and superior capabilities that are sources

Core
of competitive advantage over a firm’s rivals
Competencies

An integrated and coordinated set of actions taken to

Strategy exploit core competencies and gain competitive
advantage

Providing value to customers and gaining

Business-level
competitive advantage by exploiting core
Strategy
competencies in individual product markets

4–4
Effectively Managing Relationships
with Customers

Firms must manage all aspects of their relationship with customers.

Access to information creates knowledgeable customers and thus
drives competition (for loyalty).
Reach: firm’s access and connection to customers (FB, Netflix)
Richness: depth and detail of two-way flow of information between the
firm and the customer. Broader & deeper information-based exchanges
(Amazon)
Affiliation: facilitation of useful interactions with customers (Tesco’s
CCO)

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Customers: Their Relationship
with Business-Level Strategies

Who will be
served?

Key Issues
in What needs will
Business-level be satisfied?
Strategy

How will those

needs be satisfied?

4–6
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

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Market Segmentation (cont’d)

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What: Determining Which
Customer Needs to Satisfy
Customer needs are related to a product’s benefits and features.
Customer needs are neither right nor wrong, good nor bad.
Customer needs represent desires in terms of features and
performance capabilities.
Ex: Starbucks

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How: Determining Core Competencies
Necessary to Satisfy Customer Needs
Firms must decide:
who to serve, what customer needs to meet, and how to use core
competencies to implement value creating strategies that satisfy target
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 the deliberate choices &

are intended to create differences between the firm’s competitive position
and those of its competitors.
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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• Limited Passenger Service
• Frequent & reliable departures
• Lean & highly productive ground n gate crews
• High craft utilization with few models
• Very low ticket prices
• Point to point routes between secondary cities
• Secondary airports

PRESENTATION TITLE 12
Types of Potential
Competitive Advantage
Achieving lower overall costs than rivals
Performing activities differently (reducing process costs)
Possessing the capability to differentiate the firm’s product or
service and command a premium price
Performing different (more highly valued) activities.

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1–14
Competitive Scope
Broad Scope
The firm competes in many customer segments.
Narrow Scope
The firm selects a segment or group of segments in the industry and tailors
its strategy to serving them at the exclusion of others.

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Business Level Strategies

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Cost Leadership Strategy

An integrated set of actions taken to produce goods or services

with features that are acceptable to customers at the lowest cost,
relative to that of competitors.
Product Characteristics
Relatively standardized (commoditized) products
Features broadly acceptable to many customers
Lowest competitive price

1–18
Cost Leadership Strategy
Cost saving actions required by this strategy
• Building efficient scale facilities
• Tightly controlling production costs and overhead
• Minimizing costs of sales, R&D and service
• Building efficient manufacturing facilities
• Monitoring costs of activities provided by outsiders
• Simplifying production processes

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How to Obtain a Cost Advantage

Determine Reconfigure
and control Value Chain if
Cost Drivers needed

 Alter production process  New raw material

 Change in automation  Forward integration
 New distribution channel  Backward integration
 New advertising media  Change location relative to
 Direct sales in place of suppliers or buyers
indirect sales

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Value-Creating Activities for Cost Leadership

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Value-Creating Activities for Cost
Leadership
• Cost-effective MIS • Monitor suppliers’ performances
• Few management layers • Link suppliers’ products to production
• Simplified planning processes
• Consistent policies • Economies of scale
• Effecting training • Efficient-scale facilities
• Easy-to-use manufacturing • Effective delivery schedules
technologies • Low-cost transportation
• Investments in technologies
• Highly trained sales force
• Finding low-cost raw
materials
• Proper pricing

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Cost Leadership Strategy: Competitors

• Due to cost leader’s advantageous Rivalry with Existing

Competitors (Amazon)
position:
• rivals hesitate to compete on basis of
Threat of new
price. entrants
• lack of price competition leads to Rivalry
greater profits. among Bargaining
power of
competing
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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Cost Leadership Strategy: Buyers
• Can mitigate buyers’ power by: Bargaining Power
of Buyers
• driving prices far below
competitors, causing them to exit,
thus shifting power with buyers Threat of new
entrants
(customers) back to the firm.
Rivalry
• Counterbalancing among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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Cost Leadership Strategy: Suppliers

• Can mitigate suppliers’ power by: Bargaining Power

of Suppliers
• being able to absorb cost increases
due to low cost position.
Threat of new
• being able to make entrants
very large purchases, reducing
Rivalry
chance of supplier using power. among Bargaining
competing power of
firms suppliers

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:
• their need to enter on a
Threat of new
entrants large scale in order to be
cost competitive.
Rivalry
among Bargaining • the time it takes to move
power of
competing
firms suppliers down the industry
learning curve.
Threat of Bargaining
substitute power of
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 maintain its value position.
entrants
• make investments to add
Rivalry
among Bargaining features unavailable in
competing power of
suppliers
substitutes.
firms
• buy intellectual property and
Threat of Bargaining patents developed by
substitute power of potential substitutes.
products buyers

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Cost Leadership Strategy (cont’d)
Competitive Risks
• Processes used to produce and distribute good or service may become
obsolete due to competitors’ innovations.
• Too much focus on cost reductions may occur at expense of customers’
perceptions of differentiation.
• Competitors, using their own core competencies, may successfully
imitate the cost leader’s strategy.

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Differentiation Strategy
An integrated set of actions taken to produce goods or services (at
an acceptable cost) that customers perceive as being different in
ways that are important to them.
Focus is on non-standardized products
Appropriate when customers value differentiated features more than they
value low cost

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How to Obtain a
Differentiation Advantage

Control Reconfigure
Cost Drivers if Value Chain to
needed maximize

 Lower buyers’ costs

 Raise performance of product or service
 Create sustainability through:
 customer perceptions of uniqueness
 customer reluctance to switch to non-
unique product or service

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Value-Creating Activities and
Differentiation

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 Value-Creating Activities and
Differentiation
• Highly developed MIS • High quality replacement
• Emphasis on quality parts
• Worker compensation for • Superior handling of
creativity/productivity incoming raw materials
• Use of subjective performance measures • Attractive products
• Basic research capability • Rapid response to
customer specifications
• Technology
• Order-processing
• High quality raw materials
procedures
• Delivery of products • Customer credit
• Personal relationships

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Differentiation Strategy: Competitors

Rivalry with • Defends against

Existing Competitors
competitors because
(Apple vs Samsung)
customer’s brand loyalty
Threat of new to differentiated product
entrants
offsets price competition.
Rivalry
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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Differentiation Strategy: Buyers

Bargaining Power • Can mitigate buyers’

of Buyers (Callaway power because well
Golfclub)
differentiated products
Threat of new
reduce customer
entrants sensitivity to price
Rivalry increases.
among Bargaining
competing power of
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
Threat of new
entrants due to higher margins.
Rivalry
• passing along higher
among Bargaining
power of
supplier prices because
competing
firms suppliers buyers are loyal to a
differentiated brand.
Threat of Bargaining
substitute power of
products buyers

4–35
Differentiation Strategy: New Entrants

The Threat of • Can defend against new

Potential Entrants
entrants because:
• new products must surpass
Threat of new
entrants proven products.
Rivalry
• new products must be at least
among Bargaining
power of
equal to performance of
competing
firms suppliers proven products, but offered
at lower prices.
Threat of Bargaining
substitute power of
products buyers

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Differentiation Strategy: Substitutes

Product • Well-positioned relative to

Substitutes
substitutes because:
• brand loyalty to a
Threat of new
entrants differentiated product tends
to reduce customers’ testing
Rivalry
among Bargaining of new products or
power of
competing
suppliers switching brands.
firms

Threat of Bargaining
substitute power of
products buyers

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Competitive Risks of Differentiation
• The price differential between the differentiator’s product and
the cost leader’s product becomes too large.
• Differentiation ceases to provide value for which customers are
willing to pay.
• Experience narrows customers’ perceptions of the value of
differentiated features.
• Counterfeit goods replicate the differentiated features of the
firm’s products.

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Integrated Cost Leadership/
Differentiation Strategy
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.
• effectively leverage its core competencies while competing against its
rivals.

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Integrated Cost Leadership/
Differentiation Strategy (cont’d)
Commitment to strategic flexibility is necessary for
implementation of integrated cost leadership/ differentiation
strategy.
• Flexible manufacturing systems (FMS)
• Information networks (CRM)
• Total quality management (TQM) systems

1–40
Flexible Manufacturing Systems
Computer-controlled processes used to produce a variety of
products in moderate, flexible quantities with a minimum of
manual intervention.
Goal is to eliminate the “low-cost-versus-wide product-variety” tradeoff
Allows firms to produce large variety of products at relatively low costs

1–41
Information Networks
Link companies electronically with their suppliers, distributors,
and customers.
Facilitate efforts to satisfy customer expectations in terms of product
quality and delivery speed
Improve flow of work among employees in the firm and their counterparts
at suppliers and distributors
Customer relationship management (CRM)

1–42
Total Quality Management (TQM) Systems

Emphasize total commitment to the customer through continuous

improvement using:
data-driven, problem-solving approaches.
empowerment of employee groups and teams.
Benefits
Increased customer satisfaction
Lower input and operating process costs
Reduced time-to-market for innovative products

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Risks of an Integrated Cost Leadership/
Differentiation Strategy
Often involves compromises
Becoming neither the lowest cost nor the most differentiated firm
Becoming “stuck in the middle”
Lacking the strong commitment and expertise that accompanies firms
following either a cost leadership or a differentiated strategy

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PRESENTATION TITLE 45
PRESENTATION TITLE 46