CHAPTER 4

BUSINESS-LEVEL STRATEGY
Learning Outcomes;
At the end of this chapter, you will be able to:
• Discuss the relationship between customers and
business-level strategies in terms of who, what, and
how.
• Explain the purpose of forming and implementing a
business-level strategy.
• Describe business models and explain their
relationship with business-level strategies. Explain the
differences among five types of business-level
strategies.
• Use the five forces of competition model to explain
how firms can earn above-average returns when using
each business-level strategy.
• Discuss the risks associated with using each of the 2
business-level strategies.
Business-Level Strategy
It is an integrated and
coordinated set of commitments
and actions the firm uses to gain
a competitive advantage by
exploiting core competencies in a
specific product market.
 Customer: Their Relationship
with Business-Level Strategies

Effectively Reach, Who: What: How:

Managing Richness, and Determining Determining Determining
Relationships Affiliation the Customers Which Core
with to Serve Customer Competencies
Customers Needs to Necessary to
Satisfy Satisfy
Customer
Needs
Effectively Managing Relationships
with Customers

Firms strengthen their relationships with customers by

delivering superior value to them. Strong interactive
relationships with customers often provide the
foundation for the firm to earn profits because of how
well they serve customers’ unique needs.

Importantly, delivering superior value often results in

increased customer satisfaction. In turn, customer
satisfaction has a positive relationship with profitability
because satisfied customers are more likely to be repeat
customers.

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Reach, Richness, and Affiliation

The reach dimension of relationships with customers

revolves around the firm's access and connection to
customers. In general, firms seek to extend their
reach, adding customers in the process of doing so.

Richness, the second dimension of firms' relationships

with customers, concerns the depth and detail of the
two-way flow of information between the firm and the
customer.

Affiliation, the third dimension, is concerned with

facilitating useful interactions with customers. Viewing
the world through the customer's eyes and constantly
seeking ways to create more value for the customer
have positive effects in terms of affiliation.

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Who: Determining the Customers
to Serve

Deciding who the target customer is that the firm

intends to serve with its business-level strategy is an
important decision. Companies divide customers into
groups based on differences in customers' needs to
make this decision.

Market segmentation is the process of dividing

customers into groups based on their needs.

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What: Determining Which Customer Needs
to Satisfy
Consumer Markets
• Demographic factors (age, income, sex, etc.)
• Socioeconomic factors (social class, stage in the family life cycle)
• Geographic factors (cultural, regional, and national differences)
• Psychological factors (lifestyle, personality traits)
• Consumption patterns (heavy, moderate, and light users)
• Perceptual factors (benefit segmentation, perceptual mapping)

Industrial Markets
• End-use segments (identified by Standard Industrial Classification [SIC]
code)
• Product segments (based on technological differences or production
economics)
• Geographic segments (defined by boundaries between countries or by
regional differences within them)
• Common buying factor segments (cut across product market and
geographic segments)
• Customer size segments
 Customer: Their Relationship
with Business-Level Strategies

Effectively Reach, Who: What: How:

Managing Richness, and Determining Determining Determining
Relationships Affiliation the Customers Which Core
with to Serve Customer Competencies
Customers Needs to Necessary to
Satisfy Satisfy
Customer
Needs
How: Determining Core Competencies
Necessary to Satisfy Customer Needs

Firms use core competencies (how) to implement value-

creating strategies, thereby satisfying customers' needs.

Only those firms with the capacity to improve consistently,

innovate, and upgrade their competencies can meet and
exceed customers' expectations across time.

By continuously upgrading their competencies, firms are

able to maintain an advantage over their rivals by providing
customers with products that create value that exceeds the
value created for them by competitors' offerings.33

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The Purpose of Business-Level
Strategy
The purpose of a business-level strategy is
to create differences between the firm's
position and those of its competitors. To
position itself differently from competitors, a
firm must decide if it intends to perform
activities differently or if it will perform
different activities.
Business Models and their Relationship with
Business-Level Strategies

A business model, which describes what a firm does

to create, deliver, and capture value for stakeholders,
is part of a firm's business-level strategy.
In essence, a business model is a framework for how
the firm will use processes to create, deliver, and
capture value, while a business-level strategy is the
path the firm will follow to gain a competitive
advantage by exploiting its core competencies in a
specific product market.
There are many types of business models including
the franchise, freemium, subscription, and peer-to-
peer models. Firms may pair each type of business
model with any one of the five generic business-level
strategies as the firm seeks to compete successfully
against rivals.
 Cost Leadership Differentiation
Strategy Strategy

Focused Cost Focused

Leadership Differentiation
Types of Business- Strategy Strategy

Level Strategies
Integrated Cost
Leadership/
Differentiation

Presentation Title
Cost Leadership Strategy
The cost leadership strategy is an
integrated set of actions taken to produce
product with features that are acceptable
to customers at the lowest cost, relative to
that of competitors. Firms using the cost
leadership strategy commonly sell
standardized good-or services, but with
competitive levels of differentiation, to the
industry's most typical customers.
Understanding the 5 Forces of Competition in Cost Leadership Strategy

Rivalry with Existing Competitors

Having the low-cost position is valuable when dealing with rivals. Because leader's advantageous
position, rivals hesitate to compete on the price variable especially before evaluating the potential
outcomes of such competition.

Bargaining Power of Buyers (Customers)

Powerful customers (e.g., those purchasing a significant amount of the focal firm's output) can force a
cost leader to reduce its prices. However, prices will not be reduce below the level at which the cost
leader's next-most-efficient industry competitor can earn average returns.

Bargaining Power of Suppliers

The cost leader generally operates with margins greater than the margins earned by its competitors.
Commonly, the cost leader maintains a strong commitment to reducing its costs further as a means
of increasing its margins.
Potential Entrants
Through continuous efforts to reduce costs to levels that are lower than those against whom it
competes, a cost leader becomes highly efficient.

Product Substitute
To retain customers, it often can reduce its product's price. With still lower prices and competitive
levels of differentiation, the cost leader increases the probability that customers will continue to
prefer its product rather than a substitute.

Competitive Risks of the Cost Leadership Strategy

1. The processes used by the cost leader to produce and distribute its product could become
obsolete because of competitors' innovations.
2. Too much focus by the cost leader on cost reductions may occur at the expense of trying to
understand customers' perceptions of competitive level of differentiation.“
3. Imitation is a final risk of the cost leadership strategy.
Differentiation Strategy
The differentiation strategy is an integrated
set of actions taken to produce products
(at an acceptable cost) that customers
perceive as being different in ways that are
important to them. While cost leaders serve
a typical customer in an industry,
differentiators target customers for whom
the firm creates value because of the
manner in which its products differ from
those produced and marketed by
competitors.
Understanding the 5 Forces of Competition in Differentiation Strategy

Rivalry with Existing Competitors

Customers tend to be loyal purchasers of products differentiated in ways that are meaningful to
them. As their loyalty to a brand increases, customers become less sensitive to price increases.

Bargaining Power of Buyers (Customers)

The distinctiveness of differentiated products reduces customers' sensitivity to price increases.
Customers are willing to accept a price increase when a product still satisfies their unique needs
better than does a competitor's offering.

Bargaining Power of Suppliers

Because the firm using the differentiation strategy charges a premium price for its products,
suppliers must provide high-quality components, driving up the differentiator’s costs.
Potential Entrants
Customer loyalty and the need to overcome the uniqueness of a differentiated product create
substantial barriers to potential entrants.

Product Substitute
Firms selling brand-name products to loyal customers hold an attractive position relative to product
substitutes.

Competitive Risks of the Differentiation Strategy

1. The differentiation strategy is that customers may decide that the price differential between the
differentiator's product and the cost leader's product is too large.
2. The differentiation strategy is that experience can narrow customer perceptions of the value of a
product's differentiated features.
3. Counterfeiting is the differentiation strategy's fourth risk.
4. The firm does not meet customers' expectations through its efforts to implement the
differentiation strategy.
Focus Strategies

The focus strategy is an integrated set of actions taken to produce products that serve
the needs of a particular segment of customers.

Market segments firms may choose to serve by implementing a focus strategy include
the following:
1. a particular buyer group (e.g., youth or senior citizens),
2. a different segment of a product line (e.g., products for professional painters or the
do-it-yourself group), or
3. a different geographic market (e.g., northern or southern Italy).

❑ Focused Cost Leadership Strategy

Demonstrating the low cost part of the firm's strategy is its commitment to
strive constantly to reduce costs without compromising quality.
❑ Focused Differentiation Strategy
For example, some of the new generation of food trucks populating cities
such as Los Angeles use the focused differentiation strategy, serving, for
example, organic food that often trained chefs and well-known restaurateurs
prepare.

❑ Competitive Risks of Focus Strategies

• First, a competitor may be able to focus on a more narrowly defined

competitive segment and thereby "out-focus" the focuser.
• A second risk is that a company competing on an industrywide basis may
decide that the market segment served by the firm using a focus strategy is
attractive and worthy of competitive pursuit.
• The third risk associated with using a focus strategy is that the needs of
customers within a narrow competitive segment may become similar to those
wide customers as a whole
Integrated Cost Leadership/Differentiation Strategy
The integrated cost leadership/differentiation strategy finds a firm
engaging simultaneously in primary value-chain activities and support
functions to achieve a low cost position with some product
differentiation.

• Flexible Manufacturing Systems

FMS is a computer-controlled process that firms use to produce a variety
of products in moderate, flexible quantities with a minimum of manual
intervention.

• Information Networks

By linking companies with their suppliers, distributors, and

customers, information networks provide another source of
flexibility. These networks, when used effectively, help the firm
satisfy customer expectations in terms of product quality and
delivery speed.
• Total Quality Management Systems

Total Quality Management Systems Total quality management (TQM)

"involves the implementation of appropriate tools/techniques to provide
products and services to customers with best quality.“

Firms develop and use TQM systems to

1. increase customer satisfaction,
2. cut costs, and
3. reduce the amount of time required to introduce innovative products
to the marketplace. Competitive Risks of the Integrated Cost
Leadership/Differentiation Strategy
Thank you!