BUSINESS-LEVEL

STRATEGY

CHAPTER 4
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 KNOWLEDGE OBJECTIVES
Studying this chapter should provide you with the
strategic management knowledge needed to:
 Define business-level strategy.
 Discuss the relationship between customers and business-level
strategies in terms of who, what, and how.
 Explain the differences among business-level strategies.
 Use the five forces of competition model to explain how above-
average returns can be earned through each business-level
strategy.
 Describe the risks of using each of the business-level strategies.

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 THE
STRATEGIC
MANAGEME
NT PROCESS

Figure 1.1
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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

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 BUSINESS-LEVEL STRATEGY

Key Issues
Which good or
service to provide

Business-level How to
Strategy manufacture it

How to
distribute it

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 CORE COMPETENCIES AND STRATEGY

Resources and superior capabilities that are

Core
sources of competitive advantage over a
Competencies
firm’s rivals

An integrated and coordinated set of

Strategy actions taken to 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

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 CUSTOMERS: BUSINESS-LEVEL STRATEGIC ISSUES
Customers are the foundation of successful business-
level strategy
 Who will be served by the strategy?
 What needs those target customers have that the strategy
will satisfy?
 How those needs will be satisfied by the strategy?
Selecting customers & deciding their needs, the firm try to
satisfy& how it will do – are challenging choices for today’s
org.

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 CUSTOMERS: WHO, WHAT, WHERE
Firms must manage all aspects of their relationship
with customers
 Reach: firm’s success and connection to customers: exp : Amazon.com
– offer 4.5 million titles & located on tens of millions of computer screen
 Richness: depth and detail of two-way flow of information between the
firm and the customer. To build competitive advantage in relations to
customers. Exp: HSBC offer online services – allow broader & deeper
info based exchanges.
 Affiliation: facilitation of useful interactions with customers. Internet
navigators such as Microsoft CarPoint help online client find & sort info
to prospective car buyers.

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 CUSTOMER NEEDS—WHO?

Determining the Customers to Serve

Consumer Industrial
Customers
Markets Markets

Market Segmentation

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 CUSTOMER NEEDS—WHAT?

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
 Having close & frequent interactions with current &
potential customers help to identify group & indv current
& future needs

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 CUSTOMER NEEDS—HOW?

Determining the 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
 All org must be able to use their competencies (the how) to satisfy
the needs (the what) of the target group of customers(the who) the
firm has chosen to serve by using its business-level strategy.

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 TYPES OF 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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 TYPES OF POTENTIAL COMPETITIVE
ADVANTAGE
Achieving lower overall costs than rivals
Performing activities differently (cheaper
process)
Possessing the capability to differentiate
the firm’s product or service and
command a premium price
Performing different (valuable) activities

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 TWO TARGETS OF 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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 SOUTHWEST AIRLINES’ ACTIVITY SYSTEM

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 FIVE BUSINESS-
LEVEL STRATEGIES

SOURCE: Adapted with the

permission of The Free Press, an
imprint of Simon & Schuster Adult
Publishing Group, from Competitive
Advantage: Creating and Sustaining
Superior Performance, by Michael
E. Porter, 12. Copyright © 1985,
1998 by Michael E. Porter.
Figure 4.1
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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 with features that
are acceptable to customers
 Relatively standardized products
 Features acceptable to many customers
 Lowest competitive price

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 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 and Reconfigure, if

control needed
Cost Drivers Value Chain

 Alter production process  New raw material

 Change in automation  Forward integration
 New distribution channel  Backward integration
 New advertising media  Change location relative
 Direct sales in place of to suppliers or buyers
indirect sales
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EXAMPLES
OF VALUE-
CREATING
ACTIVITIES
ASSOCIATED
WITH THE
COST
LEADERSHIP
STRATEGY

SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive
Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright © 1985, 1998 by Michael E. Porter.
Figure 4.2
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 VALUE-CREATING ACTIVITIES FOR COST
LEADERSHIP
Cost-effective MIS Monitor suppliers’
performances
Few management layers
Link suppliers’ products
Simplified planning to production processes
Consistent policies Economies of scale
Effecting training Efficient-scale facilities
Easy-to-use Effective delivery
manufacturing schedules
technologies
Low-cost transportation
Investments in
technologies Highly trained sales force
Finding low cost raw Proper pricing
materials

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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
large scale in order to be
cost competitive
 The time it takes to move
down the learning curve

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 COST LEADERSHIP STRATEGY: SUPPLIERS

Bargaining Power Can mitigate (make less)

of Suppliers suppliers’ power by:
 Cost leader operates with
margins greater than
competitors. Being able to
absorb cost increases due
to low cost position
 Being able to make very
large purchases, reducing
chance of supplier using
power

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 COST LEADERSHIP STRATEGY: BUYERS

Bargaining Power Can mitigate buyers’

of Buyers power by:
 Driving prices far below
competitors, causing them
to exit, thus shifting power
with buyers back to the
firm

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 COST LEADERSHIP STRATEGY: SUBSTITUTES

Product Substitutes Cost leader is well

positioned to:
 Make investments to be
first to create substitutes
 Buy patents developed by
potential substitutes
 Lower prices in order to
maintain value position

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 COST LEADERSHIP STRATEGY: COMPETITORS

Rivalry with Due to cost leader’s

Existing Competitors advantageous position:
 Rivals hesitate to compete
on basis of price
 Lack of price competition
leads to greater profits

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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
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
 Nonstandardized products
 Customers value differentiated features more
than they value low cost

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 HOW TO OBTAIN A DIFFERENTIATION
ADVANTAGE

Control if needed Reconfigure to

maximize

Cost Drivers Value Chain

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

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 EXAMPLES
OF VALUE-
CREATING
ACTIVITIES
ASSOCIATED
WITH THE
DIFFERENTIATI
ON STRATEGY

SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive
Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright © 1985, 1998 by Michael E. Porter.
Figure 4.3
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 DIFFERENTIATION STRATEGY: NEW ENTRANTS

The Threat of Can defend against

Potential Entrants new entrants
because:
 New products must
surpass proven products
 New products must be at
least equal to performance
of proven products, but
offered at lower prices

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 DIFFERENTIATION STRATEGY: SUPPLIERS

Bargaining Power Can mitigate suppliers’

of Suppliers power by:
 Absorbing price increases
due to higher margins
 Passing along higher
supplier prices because
buyers are loyal to
differentiated brand

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 DIFFERENTIATION STRATEGY: BUYERS

Bargaining Power Can mitigate buyers’

of Buyers power because well
differentiated
products reduce
customer sensitivity
to price increases

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 DIFFERENTIATION STRATEGY: SUBSTITUTES

Product Substitutes Well positioned

relative to
substitutes because
 Brand loyalty to a
differentiated product
tends to reduce
customers’ testing of new
products or switching
brands

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 DIFFERENTIATION STRATEGY: COMPETITORS

Rivalry with Defends against

Existing Competitors competitors because
brand loyalty to
differentiated product
offsets price
competition

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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 differentiated
features of the firm’s products

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 FOCUS STRATEGIES
An integrated set of actions taken to produce
goods or services that serve the needs of a
particular competitive segment
 Particular buyer group (e.g. youths or senior
citizens
 Different segment of a product line (e.g.
professional craftsmen versus do-it-yourselfers
 Different geographic markets (e.g. East coast
versus West coast)

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 FOCUS STRATEGIES (CONT’D)
Types of focused strategies
 Focused cost leadership strategy
 Focused differentiation strategy
To implement a focus strategy, firms must
be able to:
 Complete various primary and support
activities in a competitively superior manner,
in order to develop and sustain a competitive
advantage and earn above-average returns

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 FACTORS THAT DRIVE FOCUSED STRATEGIES

Large firms may overlook small niches.

A firm may lack the resources needed to compete in the
broader market
A firm is able to serve a narrow market segment more
effectively than can its larger industry-wide
competitors
Focusing allows the firm to direct its resources to certain
value chain activities to build competitive advantage

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 COMPETITIVE RISKS OF FOCUS STRATEGIES

A focusing firm may be “out focused” by its

competitors
A large competitor may set its sights on a
firm’s niche market
Customer preferences in niche market may
change to more closely resemble those of
the broader market

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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) –
computer controlled process used to produce a
variety of products in moderate, flexible
quantities with a minimum of manual
intervention. The goal to eliminate low cost vs.
product variety. Able to change quickly

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 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

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 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
 Information networks: by linking with suppliers, distributors &
customers. When used effectively able to better understand customers
& their needs. Also critical to establishment & successful of Enterprise
Resource Planning System (ERP) – an info system used to identify &
plan resources required across the firm.

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 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
 Increases customer satisfaction
 Cuts costs
 Reduces time-to-market for innovative products

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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”
 Lacking the strong commitment and expertise
that accompanies firms following either a cost
leadership or a differentiated strategy

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