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Business Level Strategy

A business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage and strategic position by exploiting core competencies in specific product markets. Choosing to perform activities differently or to perform different activities than rivals is the essence of business-level strategy. There are five five business-level strategies to establish and defend their desired strategic position against competitors: cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation. The effectiveness of each strategy is contingent both on the opportunities and threats in a firms external environment and on the strengths and weaknesses derived from the firms resource portfolio. The cost leadership strategy is 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. Firms using the cost leadership strategy commonly sell standardized goods or services to the industrys most typical customers. Cost leaders may want to concentrate on the primary activities of inbound logistics and outbound logistics. Implementing cost leadership strategy can maintain firms competitive positions. Cost leadership can bring advantageous position where rivals hesitate to compete on the basis of price. Prices that are low enough can prevent the next-most-efficient competitor from earning average returns and would force that firm to exit the market. The cost leader operates with margins greater than those of competitors. It serves as a significant entry barrier to potential competitors. The cost leader also holds an attractive position in terms of product substitutes. A product substitute becomes an issue for the cost leader when its features and characteristics, in terms of cost and differentiated features, are potentially attractive to the firms customers. The cost leadership strategy is not risk free. One risk is that the processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors innovations. A second risk is that too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers perceptions of competitive levels of differentiation. Imitation is a final risk of the cost leadership strategy. The differentiation strategy is an integrated set of actions taken to produce goods or services that customers perceive as being different in ways that are important to them. Through the differentiation strategy, the firm produces nonstandardized products for customers who value differentiated features more than they value low cost. Firms with differentiation strategy can position themselves in competitiveness. Customers tend to be loyal purchasers of products differentiated. As their loyalty to a brand

increases, customers sensitivity to price increases is reduced. The uniqueness of differentiated goods or services reduces customers sensitivity to price increases. Because the firm using the differentiation strategy charges a premium price for its products, suppliers must provide high-quality components. Customer loyalty and the need to overcome the uniqueness of a differentiated product present substantial barriers to potential entrants. Firms selling brand-name goods and services to loyal customers are positioned effectively against product substitutes. Risk of the differentiation strategy is that customers might decide that the price differential between the differentiators product and the cost leaders product is too large. Another risk of the differentiation strategy is that a firms means of differentiation may cease to provide value for which customers are willing to pay. A third risk of the differentiation strategy is that experience can narrow customers perceptions of the value of a products differentiated features. Counterfeiting is the differentiation strategys fourth risk. Counterfeits are those products bearing a trademark that is identical to or indistinguishable from a trademark registered to another party, thus infringing the rights of the older of the trademark. The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. Firms can create value for customers in specific and unique market segments by using the focused cost leadership strategy or the focused differentiation strategy. Focus strategies have three additional risks. First, a competitor may be able to focus on a more narrowly defined competitive segment and outfocus the focuser. Second, a company competing on an industry-wide 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 involved with a focus strategy is that the needs of customers within a narrow competitive segment may become more similar to those of industry-wide customers as a whole over time. Firms can also pursue integrated cost leadership/differentiation strategy. The objective of using this strategy is to efficiently produce products with some differentiated features. It is a risky strategy as well, because firms find it difficult to perform primary and support activities in ways that allow them to produce relatively inexpensive products with levels of differentiation that create value for the target customer. Firms that fail to perform the primary and support activities in an optimum manner become stuck in the middle.