Lecture Note 2 in Management 16A

Business-Level Strategy
An organization's core competencies should be focused on satisfying customer needs or preferences in
order to achieve above average returns. This is done through Business-level strategies. Business level
strategies detail actions taken to provide value to customers and gain a competitive advantage by
exploiting core competencies in specific, individual product or service markets. Business-level strategy is
concerned with a firm's position in an industry, relative to competitors and to the five forces of
competition.
Customers are the foundation or essence of a organization's business-level strategies. Who will be
served, what needs have to be met, and how those needs will be satisfied are determined by the senior
management.
Who are the customers?
Demographic, geographic, lifestyle choices (tastes and values), personality traits, consumption patterns
(usage rate and brand loyalty), industry characteristics, and organizational size.
What are the goods and/or services that potential customers need?
Knowing ones customers is very import in obtaining and sustaining a competitive advantage. Being able
to successfully predict and satisfy future customer needs is important. (Perhaps one of Compaq's
mistakes was not understanding who their real customer was and what that customer -- end user -wanted.)
How to satisfy customer needs?
Organizations must determine how to bundle resources and capabilities to form core competencies and
then use these core competencies to satisfy customer needs by implementing value-crating strategies.
Business-Level Strategies
There are four generic strategies that are used to help organizations establish a competitive advantage
over industry rivals. Firms may also choose to compete across a broad market or a focused market. We
also briefly discuss a fifth business level strategy called an integrated strategy.
1. Cost Leadership Organizations compete for a wide customer based on price. Price is based on
internal efficiency in order to have a margin that will sustain above average returns and cost to the
customer so that customers will purchase your product/service. Works well when product/service is
standardized, can have generic goods that are acceptable to many customers, and can offer the lowest
price. Continuous efforts to lower costs relative to competitors is necessary in order to successfully be a
cost leader. This can include:

Building state of art efficient facilities (may make it costly for competition to imitate)
Maintain tight control over production and overhead costs
Minimize cost of sales, R&D, and service.

Porter's 5 Forces Model

Earlier we discussed Porter's Model. A cost leadership strategy may help to remain profitable even with:
rivalry, new entrants, suppliers' power, substitute products, and buyers' power.

Rivalry Competitors are likely to avoid a price war, since the low cost firm will continue to earn
profits after competitors compete away their profits (Airlines).
Customers Powerful customers that force firms to produce goods/service at lower profits may
exit the market rather than earn below average profits leaving the low cost organization in a
monopoly positions. Buyers then loose much of their buying power.
Suppliers Cost leaders are able to absorb greater price increases before it must raise price to
customers.
Entrants Low cost leaders create barriers to market entry through its continuous focus on
efficiency and reducing costs.

Substitutes Low cost leaders are more likely to lower costs to entice customers to stay with
their product, invest to develop substitutes, purchase patents.

How to Obtain a Cost Advantage?

Determine and Control Cost

Reconfigure the Value Chain as Needed

Risks

Technology
Imitation
Tunnel Vision

Value Chain A framework that firms can use to identify and evaluate the ways in which their resources
and capabilities can add value. The value of the analysis lays in being able to break the organization's
operations or activities into primary (such as operations, marketing & sales, and service) and support (
staff activities including human resources management & procurement) activities. Analyzing the firm's
value-chain helps to assess your organizations to what you perceive your competitors value-chain,
uncover ways to cut costs, and find ways add value to customer transactions that will provide a
competitive advantage.
2. Differentiation - Value is provided to customers through unique features and characteristics of an
organization's products rather than by the lowest price. This is done through high quality, features, high
customer service, rapid product innovation, advanced technological features, image management, etc.
(Some companies that follow this strategy: Rolex, Intel, Ralph Lauren)
Create Value by:

Lowering Buyers' Costs Higher quality means less breakdowns, quicker response to problems.
Raising Buyers' Performance Buyer may improve performance, have higher level of enjoyment.
Sustainability Creating barriers by perceptions of uniqueness and reputation, creating high
switching costs through differentiation and uniqueness.

Risks of Using a Differentiation Strategy

Uniqueness
Imitation
Loss of Value

Porter's Five Forces Model Effective differentiators can remain profitable even when the five forces
appear unattractive.

Rivalry Brand loyalty means that customers will be less sensitive to price increases, as long as
the firm can satisfy the needs of its customers (audiofiles).
Suppliers Because differentiators charge a premium price they can more afford to absorb
higher costs and customers are willing to pay extra too.
Entrants Loyalty provides a difficult barrier to overcome. Substitutes (trans. 4-26) Once again
brand loyalty helps combat substitute products.

3. Focused Low Cost- Organizations not only compete on price, but also select a small segment of the
market to provide goods and services to. For example a company that sells only to the U.S. government.
4. Focused Differentiation - Organizations not only compete based on differentiation, but also select a
small segment of the market to provide goods and services.
Focused Strategies - Strategies that seek to serve the needs of a particular customer segment (Local
Government).
Companies that use focused strategies may be able serve the smaller segment (e.g. business travelers)
better than competitors who have a wider base of customers. This is especially true when special needs
make it difficult for industry-wide competitors to serve the needs of this group of customers. By serving
a segment that was previously poorly segmented an organization has unique capability to serve niche.

Risks of Using Focused Strategies:

Maybe out focused by competitors (even smaller segment)

Segment may become of interest to broad market firm(s)

5. Using an Integrated Low-Cost/Differentiation Strategy

This new strategy may become more popular as global competition increases. Firms that use this
strategy may see improvement in their ability to:

Adaptability to environmental changes.

Learn new skills and technologies
More effectively leverage core competencies across business units and products lines which
should enable the firm to produce produces with differentiated features at lower costs.

Thus the customer realizes value based both on product features and a low price. Southwest airlines is
one example of a company that does uses this strategy.
However, organizations that choose this strategy must be careful not to: becoming stuck in the middle
i.e., not being able to manage successfully the five competitive forces and not achieve strategic
competitiveness. Must be capable of consistently reducing costs while adding differentiated features.
Core Competencies and Strategy
Core competencies are the underpinnings of an organizations skills and the cornerstone of successful
strategic execution. Core competencies represent the fundamental knowledge, abilities, and expertise
of an organization. They are what make individuals and organizations unique. Furthermore, your ability
to understand and measure organizational core competencies is a critical factor in reaching your desired
goals.
Management should ask these questions:
1. What skills and attributes do the members of my organization need in order to accomplish their
assigned tasks? (Determine necessary skills and attributes for leaders, managers, and staff.)
2. Does my organization possess the necessary competencies at each job level?
3. If not, how far off are we from possessing the necessary competencies?
4. When hiring new staff, how will we assure those individuals obtain the necessary skills and attributes?
5. When assessing the performance of current staff, how will we measure their capabilities against the
required competencies?
6. Can we train our people to obtain the necessary competencies?
7. Overall, how will we go from where we are today to where we need to be in terms of core
competencies?
8. Do we need to adjust our strategic goals to align with our existing competencies?
An organizations core competencies rest in the people who will put their knowledge, abilities, and
expertise to work. If leaders of the organization fail to understand how current core competencies
relate to the organizations future goals, strategic and operational plans may be seriously flawed. Only
with a deep understanding of the competencies required to accomplish strategic goals can the
organization implement successfully.
Customer Segmentation
Customer Segmentation is the subdivision of a market into discrete customer groups that share similar
characteristics. Customer Segmentation can be a powerful means to identify unmet customer needs.
Companies that identify underserved segments can then outperform the competition by developing
uniquely appealing products and services. Customer Segmentation is most effective when a company

tailors offerings to segments that are the most profitable and serves them with distinct competitive
advantages. This prioritization can help companies develop marketing campaigns and pricing strategies
to extract maximum value from both high- and low-profit customers. A company can use Customer
Segmentation as the principal basis for allocating resources to product development, marketing, service
and delivery programs.
Customer Segmentation requires managers to:

Divide the market into meaningful and measurable segments according to customers' needs,
their past behaviors or their demographic profiles
Determine the profit potential of each segment by analyzing the revenue and cost impacts of
serving each segment
Target segments according to their profit potential and the company's ability to serve them in a
proprietary way
Invest resources to tailor product, service, marketing and distribution programs to match the
needs of each target segment
Measure performance of each segment and adjust the segmentation approach over time as
market conditions change decision making throughout the organization

Companies use Customer Segmentation to:

Prioritize new product development efforts

Develop customized marketing programs
Choose specific product features
Establish appropriate service options
Design an optimal distribution strategy
Determine appropriate product pricing

Basis for Consumer Market Segmentation

The segmentation of consumer markets requires the creation of sub-groups from a larger population to
more specifically target them. There are virtually dozens of ways that a market might be segmented and
the segments chosen will depend on the business and the products or services it offers. Basically,
segmentation is all about identifying specific groups of people based on common characteristics.
Demographics
One common way of segmenting a market is through the use of demographics. Demographics are
quantitative characteristics of a group of people. These characteristics might include sex, age, income or
geography (where they live). Businesses that segment their market based on demographics are
attempting to target specific market segments that are more likely to be interested in what they have to
offer. The cosmetics industry, for example, primarily targets women. The hunting industry might be
more likely to target men. Luxury car makers target their markets based on income. Marketers are likely
to consider multiple demographic characteristics when segmenting their consumer markets.
Psychographics
Psychographics are qualitative attributes of a market and refer to the way people think and what they
like to do. Psychographics is sometimes categorized with the acronym IAO which stands for Interests,
Activities and Opinions. It can be difficult for marketers to segment their markets into these types of
categories on their own.
Purchase Behaviors (Consumption Patterns)
An important way for businesses to segment their consumer markets is through purchase behavior.
Keeping good records of customers and their purchases, allows marketers to identify those who have
purchased certain types of products or spent at certain levels and to then target them with similar
offers. Marketers are also able to target customers of other businesses through by renting lists, which
can be used in direct marketing efforts through traditional mail or, increasingly, online.
Geographic Factors
Geographic segmentation divides the market into different geographical units, be they neighbourhoods,

cities, counties, countries, or world regions such as Europe or South East Asia etc.
Such segmentation will seek to identify factors, which should be taken into account in developing
appropriate marketing strategies for each area, including Language, Climate, and Lifestyles
Geographical segmentation is most commonly used by multi-national and global businesses, who may
alter their marketing mix based on the differing needs of consumers in each geographic segment they
operate within.
Methods of Market Segmentation
There is a large array of analytical techniques applicable to market segmentation. The most frequently
used are briefly described below.
Cluster Analysis
Cluster analysis is a set of techniques for discovering structure, or groups of individuals, within a set of
data comprising measures on each individual. The measures could be, for example, an attitudinal
battery. There is no dependent variable all variables are treated equally.
Conjoint Analysis
This technique aims to decompose preference into component parts, such as brand, quality, and
price. This technique views products as bundles of attributes and uses an experimental design to vary
attribute levels to create product descriptions. Survey respondents then rank the products and the
analysis works out how much each attribute contributes to preference. It is a good technique for
benefit segmentation.
CHAID/Regression Trees
This was called Automatic Interaction Detection for a long time and now also goes under various names
used by software vendors, including Regression Tree, Answer Tree, Classification Tree and CART. It is a
technique frequently employed in Data Mining and it is a useful exploratory analysis technique prior to
regression analysis. It can quickly analyse a large set of candidate explanatory variables to determine
the most influential variables on a dependent variable.
The basic idea is to hierarchically segment the population on the database based on a dependent
(categorical) variable such as bought/did not buy a product. The explanatory variables are categorical
too, such as:

Demographic variables (age group, gender, occupation);

Attitudes (agree/disagree with various statements);
Previous behaviour (bought/did not buy another product).

Discriminant Analysis
This technique is used to quantify the relationship between segment membership (eg bought, did not
buy) and explanatory variables such as income and attitudes. It is often used after CHAID identifies
candidate explanatory variables, to formally quantify and test the significance of relationships.
Pulling It Together
The more segments that marketers are able to identify and combine to specifically target groups of
individuals most likely to be interested in what they have to offer, the more effective--and cost
effective--their marketing efforts can be. Toward this end, businesses attempt to learn as much as they
can about their customers--where they live, their age, their income levels, what they purchase, what
their hobbies are and what their likes and dislikes are. This information can then be used to "clone"
these customers by reaching out to non-customers who share similar traits and characteristics.
INDUSTRIAL MARKET SEGMENTATION
The major segmenting dimensions both physical and behavioral from a consumer-oriented marketers
perception have been discussed. Consumer market segmentation applies to retailers, personal service

firms (banks or hair salons), and professional services (doctors or dentists) whose goal is to sell their
products or services to the ultimate consumer. What about the manufacturer, what about the
manufacturer, wholesaler, or business service firm whose products or services will be used by another
company, as opposed to individual consumer. In several respects this is a different problem and, as such,
requires a different planning, analysis, and strategic marketing approach. The major differences
between consumer and industrial markets are:
1. The Scope of the Geographic Trade Area
2. Product/Market Factors
3. The Nature of the Purchase Decision
4. The closeness of the Customer
Scope of the Geographic Trade Area. The area an industrial marketer serves is typically larger than the
one served by local retailers or personal -professional service firms-of course there are many national
international retailers. However, most retailers and service firms generate a majority of their business
from a relatively small geographic trade area. It is common for the industrial firm to conduct business in
several countries, states, and regions.
Product -Market Factors. Most industrial sales are larger than those in consumer markets. Of course,
there are consumer purchases of automobiles, boats, or houses. But for individuals these are rare
purchases. Most consumer sales are relatively small compared to industrial sales of equipment,
materials, components, products, or services. Industrial sales come from derived, not final, demand,
which makes the industrial firm more susceptible to cyclical market pressures. Steel producers are
greatly dependent on automobile sales.
Product Segment
The core theory of product segmentation is that a company can produce a single product with relatively
minor variations, market it to different customer groups -- sometimes under different brand names -and thereby increase market share while reducing the cost of developing radically different products.
Segmentation relies on market research to identify the product characteristics that resonate with target
markets. Product development engineers then provide different iterations of the same basic model that
meet the preferred traits for each market segment.
Product segmentation provides a mechanism for a company to distribute the risk of selling a high-cost
product across different target markets. Instead of having one product with one market and one supplyand-demand curve -- essentially putting all of the manufacturer's eggs in a single basket -- the
manufacturer can sell sister models of the product at different prices to different market segments.
Even if one segment reacts poorly, another segment may respond better than expected. In addition,
segmentation allows for economies of scale. Although there are differences associated with
manufacturing toasters, for example, it's easier for a company to sell five different types of toasters than
to sell one type of toaster, one type of dishwasher and one type of foam-rubber action figure.
Product segmentation proliferates at large enterprises. For example, General Motors segments its
products into different brands -- Chevrolet, Buick, Hummer, Cadillac -- that are aimed at different
socioeconomic groups. Although most of the parts in these different brands are interchangeable, thus
saving GM money, the marketing strategy differs. Likewise, smartphone manufacturers segment their
products. Apple's iPhone and Samsung's Galaxy class Android phones come in different models -different storage, different features, different price.
The goal of a well-executed product segmentation strategy is to sell more products to more people at
lower marginal production costs. As sales progress, marketing professionals can evaluate the
profitability of individual items within the product family to identify opportunities to discontinue specific
products or to further refine the segmentation model. If a particular product outperforms expectations,
marketing analysts can learn what worked and apply the lessons to other products.
Nature of the Purchase decision. In industrial markets complex decision making occurs on a regular
basis. Often many people will be involved in purchase decisions. Special justifications, authorizations,
and approvals will be needed, and months can pass before a sale is transacted. The industrial sales
person is confronted with more intelligent, calculating, and rational buyers than are typically found in
the consumer sector.

Closeness of the Customer as a major criterion for excellence, industrial companies are naturally closer
to their customers. Their satisfaction level will vary from poor to excellent depending on how well they
implement the marketing concept - customer satisfaction at a profit. Closeness in industrial markets is
nurtured because personal selling is the most effective promotional strategy.
Bases for Segmentation - Industrial Markets
The difference between consumer and industrial segmentation is the specific variable used as part of
these dimensions. Demographics provide a good example. Lets assume the variable in question is
income. In consumer markets, our concern may be household, family, or per capita income. In industrial
markets our interest would be basic financial statistics about the firm (e.g., total revenues, sales by
division or product line. Geographic bases as well as product usage and benefits sort are basically the
same as consumer markets.
Standard Industrial Classification (SIC) Codes. This is one of the simplest and most important industrial
segmenting bases. SIC codes have evolved from a statistical government data collection facilitator to a
customer -supplier classification tool for industrial marketers. This classification spans the U.S. economic
activities including agriculture, mining, construction, manufacturing, transportation, communication,
wholesale and retail trade, finance, service and public administration. An example is Major two digit
groups; wholesale trade is categories 50 and 51 representing durable and non- durables respectively. A
three-digit industry code is assigned (e.g., 501 represents the wholesaling of motor vehicles parts and
supplies.
End-Use: With this approach the final application of the product is the segmenting base. Industrial
products can take many forms, including raw material, work in progress, and finish goods and
accessories. The end use of the product has a definite impact on the purchase decision.