CHAPTER 5

BUSINESS-LEVEL STRATEGY

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LEARNING OBJECTIVES
 Explain the difference between low-cost and
differentiation strategies
 Explain how a company executes its business-
level strategy through function-level strategies
Describe what is meant by the term value
innovation
 Discuss the concept of blue ocean strategy, and
explain how innovation in business-level strategy
can change the competitive game in an industry

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 STRATEGIES MANAGERS
USE

Single businesses that are independent and formulate its

own competitive strategies - strategic business units (SBUs)
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STRATEGY PYRAMID

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BUSINESS VS CORPORATE LEVEL STRATEGY
 Business level: How to produce/sell a product
 Corporate level: Should we sell that product at all?

 A corporate strategy is an organizational strategy that specifies

what businesses a company is in—or wants to be in—and what it
wants to do with those businesses.
The three main types of corporate strategies are:
-growth,
-stability,
-renewal.
 For organizations in multiple businesses, each business has its own
competitive strategy (business –level strategies) that defines the
products or services it will offer, the customers it wants to reach,
and so on.
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 BUSINESS VS. FUNCTIONAL
STRATEGIES
Functional strategies used by an organization’s
various functional departments have to support
the competitive (business-level) strategy

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 BUSINESS-LEVEL/COMPETITIVE STRATEGY
 Way a company positions itself in the marketplace to
gain a competitive advantage; a strategy for how an
organization will compete in its business.
 Business-level strategy is about who a company decides
to serve (which customer segments), what customer
needs and desires the company is trying to satisfy, and
how the company decides to satisfy those needs and
desires.
 For companies in multiple businesses, each business
(strategic business unit) has its own competitive
strategy (products/services that will offer, the
customers it wants to reach)
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 COMPETITIVE ADVANTAGE
What sets an organization apart; its distinctive edge
that comes from its:
distinctive competencies (core resources and capabilities)

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 COMPETITIVE STRATEGY
A company has a competitive advantage if it can lower costs
relative to rivals and/or if it can differentiate its product
offering from those of rivals.

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LOWERING COSTS
 Enable a company to:
 Gain a competitive advantage in commodity markets
(for oil, gold, silver, copper)
 Undercut rivals on price
 Gain market share
 Maintain or increase profitability

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DIFFERENTIATION
 Distinguishing oneself from rivals by offering
something that they find hard to match
 Product differentiation is achieved through:
 Superior quality, reliability, functions, and features
 Better design, branding, point-of-sale service, after
sales service, and support
 Advantages
 Allows a company to charge a premium price
 Helps a company to grow overall demand and capture
market share from its rivals

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FIGURE 5.1 - OPTIONS FOR EXPLOITING
DIFFERENTIATION

Source: Charles W.L. Hill © Copyright 2013.

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THE DIFFERENTIATION-LOW COST TRADEOFF
The enterprise that is striving for the lowest costs does
everything it can to be productive and drive down its cost
structure, whereas the enterprise striving for differentiation
necessarily has to bear higher costs to achieve that
differentiation.
Strategy is not so much about making
discrete choices as it is about deciding
what the right balance is between
differentiation and low costs.

different positions that a company can

adopt with regard to differentiation and low
cost.

Source: Charles W.L. Hill © Copyright 2013.

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THE DIFFERENTIATION-LOW COST TRADEOFF
 There are often multiple positions on the
differentiation–low cost continuum that are
viable in the sense that they have enough
demand to support an offering.
 To get to the efficiency frontier, a company must:
 Pursue the right functional-level strategies
 Be properly organized
 Ensure its business-level strategy, functional-level
strategy, and organizational arrangement align with
each other

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VALUE INNOVATION
 Occurs when innovations push out the efficiency
frontier in an industry, enabling greater value to
be offered through superior differentiation
 At a lower cost than was thought possible
 Enable a company to outperform its rivals for a
long period of time

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VALUE INNOVATION IN THE PC INDUSTRY

Source: Charles W.L. Hill © Copyright 2013.

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EXAMPLES FOR VALUE INNOVATION
 Netflix vs Blockbuster; DELL vs IBM (Take out a
part of the value chain)
 I-phone vs Samsung/Nokia (Design and
Marketing -> upper and lower end of the value
chain)
 Pizza Express vs. other Pizza restaurants
 Yum Brands vs other fast food chains in PRC

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 SEGMENTATION: the process of
WHO ARE OUR CUSTOMERS? subdividing a market into clearly identifiable
groups of customers with similar needs,
MARKET SEGMENTATION desires, and demand characteristics.

Standardization strategy

• Producing a standardized product for the average

customer, ignoring different segments (Coca Cola?!?)

Segmentation strategy

• Producing different offerings for different segments,

serving many segments of the entire market (Toyota)

Focus strategy

• Serving a limited number of segments or just one

segment (Porsche, Ferrari, Lamborghini)

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 COMPARISON OF MARKET
SEGMENTATION APPROACHES

Standardization Segmentation Focus

strategy strategy strategy

• Associated with • Involves customization • Have a higher cost

lower costs than a of product offerings, structure as:
segmented strategy which drive up costs • New product
(mass production) as: features and
• Attempts to attain • Achieving economies functions need to be
economies of scale of scale is difficult added
through high sales • Production and • Attaining economies
volume delivery costs tend of scale is difficult
to be high
• Mass customization

Cost leadership strategy Differentiation strategy Focus strategy

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PORTER’S GENERIC STRATEGIES

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BUSINESS-LEVEL STRATEGIES
Broad low-cost strategy
• Lowering costs in order to lower prices and still make a profit (industry wide)

Broad differentiation strategy

• When a company differentiates its product in some way (industry wide)

Focus low-cost strategy

• Targeting a certain segment or niche and trying to be the low-cost player

in that niche

Focus differentiation strategy

• Customizing offering to the needs of particular segment through addition

of features and functions

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BUSINESS-LEVEL STRATEGY, INDUSTRY,
AND COMPETITIVE ADVANTAGE
Low-cost companies Differentiated companies

• Charge low prices and still make • Brand loyalty –an important entry barrier
• Selling on non-price factors- withstand
profits
pricing pressure from powerful buyers
• Absorb cost increases from
and increase prices without buyer
suppliers
resistance
• Offer deep discount prices for • Absorb price increases from suppliers
powerful buyers and still make and pass them to customers without

money losing market share

• Withstand substitute goods, as a result
• Often best positioned to survive
of brand loyalty
price rivalry in its industry
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FIGURE 5.5 - STRATEGY IS IMPLEMENTED
THROUGH FUNCTION AND ORGANIZATION

Source: Charles W.L. Hill © Copyright 2013.

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LOWERING COSTS THROUGH FUNCTIONAL
STRATEGY AND ORGANIZATION I
Superior efficiency & Superior reliability
 Achieve economies of scale and learning effects
 Adopt lean production and flexible
manufacturing technologies
 Implement quality improvement methodologies
to produce reliable goods
 Streamline processes
 Use information systems to automate business
process

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LOWERING COSTS THROUGH FUNCTIONAL
STRATEGY AND ORGANIZATION II
Superior efficiency & Superior reliability
 Implement just-in-time inventory control systems
 Design products with a focus on reducing costs
 Increase customer retention
 Ensure that the organization’s structure, systems,
and culture reward actions that lead:
 Higher productivity
 Greater efficiency

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DIFFERENTIATION THROUGH FUNCTIONAL-
LEVEL STRATEGY AND ORGANIZATION
Superior quality & Innovation & Customer Responsiveness
 Customize product offering and marketing mix to
different market segments
 Design product offerings that have a high perceived
quality regarding their:
 Functions
 Features
 Performance
 Reliability
 Handle and respond to customer queries and problems
promptly
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DIFFERENTIATION THROUGH FUNCTIONAL-
LEVEL STRATEGY AND ORGANIZATION
Superior quality & Innovation & Customer Responsiveness
 Focus marketing efforts on:
 Brand building
 Perceived differentiation from rivals
 Ensure employees act in a manner consistent with the
company’s image
 Create the right organizational structure, controls,
incentives, and culture
 Ensure that the control systems, incentive systems, and
culture align with the strategic thrust

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BLUE OCEAN STRATEGY
 Successful companies build their competitive
advantage by redefining their product offering
through value innovation
 Creating a new market space
 Process of thinking through value innovation is as
searching for a blue ocean
 Blue ocean - Wide open market space where a
company can chart its own course

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BLUE OCEAN STRATEGY
 To redefine its market and create a new
business-level strategy, a company must:
 Eliminate factors that rivals take for granted, and
reduce costs
 Reduce certain factors below industry standards, and
lower costs
 Raise certain factors above industry standards, and
increase value
 Create factors that rivals do not offer, and increase
value
https://www.youtube.com/watch?v=8ExRnpy4rPE

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SMALL GROUP EXERCISE (20MIN)
 Please position on the chart of Porter’s generic
strategies the following MNEs (EXPLAIN):
1. Coca-Cola
2. Starbucks coffee
3. Apple
4. Ikea
5. McDonalds
6. Walmart
7. Toyota
8. Porsche

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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33