Chapter 5

Business-Level Strategy

Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland

©2004 by South-Western/Thomson Learning 1

The Strategic Management Process
Chapter 1
Strategic Chapter 2
Introduction to
Thinking Strategic Leadership
Strategic Management

Chapter 3 Chapter 4
Strategic Strategic Intent
The External The Internal
Analysis Environment Organization
Strategic Mission

Chapter 5 Chapter 6
Chapter 7
Business-Level Competitive Rivalry and
Creating Strategy Competitive Dynamics
Corporate-Level Strategy
Competitive
Advantage Chapter 8
Chapter 9 Chapter 10
Acquisition and
International Strategy Cooperative Strategy
Restructuring Strategies

Monitoring
And Creating Chapter 11 Chapter 12
Entrepreneurial Corporate Governance Strategic Entrepreneurship
2
Opportunities
Discussion Questions
Click
Here 1. What role does the organization’s
concern for customers play in shaping
its strategy?
Click
Here 2. What is business level strategy? What
are some types of business level
strategy?
Click
Here 3. What type of customers are necessary
to pursue a cost leadership strategy?
How is a cost leadership strategy
developed?
Click
Here More discussion questions 3
Discussion Questions (cont.)
Click
Here
4. How does establishing the cost leadership
position deal with the five competitive forces?
What are the risks of pursuing cost
leadership?
Click
5. What type of customers are necessary to
Here pursue a differentiation strategy? How is a
differentiation strategy developed?
6. How does establishing differentiation help a
firm fend off threats from the five forces?
Click
Here
What are the risks of pursuing differentiation?

4
Discussion Questions (cont.)
Click
Here 7. When should a focus strategy be
implemented? What are the risks
of a focus strategy?
Click
Here 8. What is the integrated low-cost
differentiation strategy? What are
the arguments as to why it is
increasing in importance? What
are the risks associated with the
integrated strategy?
5
Discussion Question 1

What role does the organization’s

concern for customers play in
shaping its strategy?

6
Managing Relationships With
Customers
 Customer relationships are strengthened by
offering them superior value
– help customers to develop a new competitive
advantage
– enhance the value of existing competitive
advantages
 Successful companies chart new
competitive space in order to serve new
customers as they simultaneously try to
find new ways to better server existing
customers 7
Managing Relationships With
Customers
 Establish a competitive advantage along
these dimensions:
Reach
– the firm’s access and connection to customers
Richness
– the depth and detail of the two-way flow of
information between the firm and customers
Affiliation
– facilitating useful interactions with customers

8
The Central Role of Customers
In selecting a business-level
strategy, the firm determines
1. who it will serve
2. what needs those target customers
have that it will satisfy
3. how those needs will be satisfied

9
Basis for Customer Segmentation

Customers
Consumer Industrial
Markets Markets

10
Market Segmentation: Consumer Markets
Demographic factors
Per. Dem. Socioeconomic factors
Consumer Geographic
Con. Soc.
Markets factors
Psychological factors
Psy. Geo.
Consumption patterns
Perceptual factors
11
Market Segmentation: Industrial Markets
End-use segments
Product segments Size End

Geographic segments Industrial

Buy.Markets Pro.
Common buying factor
segments Geo.
Customer size segments
Click
Here Return to Discussion Questions
12
Discussion Question 2

What is business level strategy?

What are some types of business
level strategy?

13
 Core Competencies and Strategy
The resources and capabilities that have
Core been determined to be a source of
competencies competitive advantage for a firm over its
rivals

An integrated and coordinated set of

Strategy actions taken to exploit core competencies
and gain a competitive advantage

Actions taken to provide value to customers

Business-level and gain a competitive advantage by
strategy exploiting core competencies in specific,
individual product markets 14
Business-Level Strategy
Business-level strategy: 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

15
Key Issues of Business-Level
Strategy
 What good or service to offer customers
 How to manufacture or create the good or
service
 How to distribute the good or service in
the marketplace

16
Types of Business-Level Strategies
 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 to perform different activities
as compared to its rivals

17
 Five Generic Strategies
Competitive Advantage
Cost Uniqueness
Cost Differentiation
Leadership
Competitive Scope
Broad
target
Integrated Cost
Leadership/
Differentiation
Narrow
target

Click
Here

Return to
Focused Cost Focused
Discussion
Leadership Differentiation
Questions 18
Discussion Question 3

What type of customers are

necessary to pursue a cost
leadership strategy? How is a cost
leadership strategy developed?

19
Cost Leadership Strategy
An integrated set of actions designed to
produce or deliver goods or services at the
lowest cost, relative to competitors with
features that are acceptable to customers
– relatively standardized products
– features acceptable to many customers
– lowest competitive price

20
 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
21
 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
• New distribution channel
• New advertising media
• Direct sales in place of
indirect sales
• Forward integration
• Backward integration
• Change location
relative to suppliers or
buyers
22
 Factors That Drive Costs
● Economies of scale ● Product features
● Asset utilization ● Performance
● Capacity utilization ● Mix & variety of
pattern products
• Seasonal, cyclical ● Service levels
● Interrelationships ● Small vs. large buyers
● Order processing ● Process technology
and distribution ● Wage levels
● Value chain linkages ● Product features
• Marketing & sales ● Hiring, training,
• Logistics &
motivation
operations
• Service 23
Questions Leading to Lower Costs
1. How can an activity be performed
differently or even eliminated?
2. How can a group of linked value activities
be regrouped or reordered?
3. How might coalitions with other firms
lower or eliminate costs?

Click
Here Return to Discussion Questions
24
Discussion Question 4

How does establishing the cost

leadership position deal with the
five competitive forces? What are
the risks of pursuing cost
leadership?

25
 Cost Leadership Strategy and the
Five Forces of Competition
R
at
o f
d uc ts Co ival
mp ry
eti Am
Rivalry Among Competing
h re Pro ng on
T te
bs ti
tu Fi g
rm
s
Firms
Su
Can use cost leadership
Five Forces of of B u g Powe r
strategy to advantage since:
Thr trants

yer s
En
ea t o

Competition ● competitors avoid price

a inin
f Ne

Barg

wars with cost leaders,

w

Bargaining Power
of Suppliers creating higher profits for
the entire industry

26
 Cost Leadership Strategy and the
Five Forces of Competition
R
at
o f
d uc ts Co ival
mp ry
eti Am
Bargaining Power of
h re Pro ng on
T te
bs ti
tu Fi g
rm
s
Buyers
Su
Can mitigate buyers’ power by:
Five Forces of of B u g Powe r
Thr trants

yer s ● driving prices far below

En
ea t o

Competition
competitors, causing them
a inin
f Ne

Barg

to exit and shifting power

w

Bargaining Power
of Suppliers with buyers back to the
firm

27
 Cost Leadership Strategy and the
Five Forces of Competition
R
at
o f
d uc ts Co ival
mp ry
eti Am
Bargaining Power of
h re Pro ng on
T te
bs ti
tu Fi g
rm
s
Suppliers
Su
Can mitigate suppliers’ power
Five Forces of of B u g Powe r
by:
Thr trants

yer s
En
ea t o

Competition ● being able to absorb cost

a inin
f Ne

Barg

increases due to low cost

w

Bargaining Power
of Suppliers position
● being able to make very large

purchases, reducing chance

of supplier using power
28
 Cost Leadership Strategy and the
Five Forces of Competition
R
at
o f
d uc ts Co ival
mp ry
eti Am
Threat of New Entrants
h re Pro ng on
T te
bs ti
tu Fi g
rm
s
Can frighten off new entrants
Su
due to:
Five Forces of of B u g Powe r ● their need to enter on a large
Thr trants

yer s
En
ea t o

Competition scale in order to be cost

a inin
f Ne

competitive
Barg
w

Bargaining Power ● the time it takes to move

of Suppliers

down the learning curve

29
 Cost Leadership Strategy and the
Five Forces of Competition
R
at
o f
d uc ts Co ival
mp ry
eti Am
Threat of Substitute
h re Pro ng on
T te
bs ti
tu Fi g
rm
s
Products
Su
Cost leader is well positioned
Five Forces of of B u g Powe r
to:
Thr trants

yer s
En
ea t o

Competition ● make investments to be

a inin
f Ne

Barg

first to create substitutes

w

Bargaining Power
of Suppliers ● buy patents developed by

potential substitutes
● lower prices in order to

maintain value position

30
 Structure for Cost Leadership
Strategy
• Operations is main function Office of the President
• Process engineering is
emphasized over R&D
• Large centralized staff
• Formalized procedures Centralized Staff
• Structure is mechanical, job
roles highly structured

Engineering Operations Accounting

Marketing Personnel
31
Click
Here Return to Discussion Questions

Risks of Cost Leadership Strategy

 Processes used by the cost leader to produce
and distribute its good or service could
become obsolete because of competitors’
innovations
 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
 Competitors may learn how to successfully
imitate the cost leader’s strategy

32
 Discussion Question 5

What type of customers are

necessary to pursue a differentiation
strategy? How is a differentiation
strategy developed?

33
Differentiation Strategy
An integrated set of actions designed by a
firm to produce or deliver goods or services
(at an acceptable cost) that customers
perceive as being different in ways that are
important to them
– price for product can exceed what the firm’s
target customers are willing to pay
– nonstandardized products
– customers value differentiated features more
than they value low cost
34
Differentiation Strategy
 Value provided by unique features and
value characteristics
 Command premium price
 High customer service
 Superior quality
 Prestige or exclusivity
 Rapid innovation

35
Differentiation Strategy
Differentiation actions required by this strategy:
– developing new systems and processes
– shaping perceptions through advertising
– quality focus
– capability in R&D
– maximize human resource contributions
through low turnover and high motivation

36
 How to Obtain a Differentiation
Advantage
Control if Reconfigure to
needed 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
37
Factors That Drive Differentiation
 Unique product features
 Unique product performance
 Exceptional services
 New technologies
 Quality of inputs
 Exceptional skill or experience
 Detailed information
 Extensive personal relationships with
buyers and suppliers
38
 Differentiation Strategy and the
Five Forces of Competition
R
at
o f
d uc ts Co ival
mp ry
eti Am
Rivalry Among Competing
h re Pro ng on
T te
bs ti
tu Fi g
rm
s
Firms
Su
Can defend against
Five Forces of of B u g Powe r
competition because:
Thr trants

yer s
En
ea t o

Competition ● brand loyalty to

a inin
f Ne

Barg

differentiated product
w

Bargaining Power
of Suppliers offsets price competition

Click
Here Return to Discussion Questions
39
 Discussion Question 6

How does establishing differentiation

help a firm fend off threats from the
five forces? What are the risks of
pursuing differentiation?

40
 Differentiation Strategy and the
Five Forces of Competition
R
at
o f
d uc ts Co ival
mp ry
eti Am
Bargaining Power of Buyers
h re Pro ng on
T te
bs ti
tu Fi g
rm
s
Can mitigate buyer power
Su
because:
Five Forces of of B u g Powe r ● well differentiated products
Thr trants

yer s
En
ea t o

Competition reduce customer sensitivity

a inin
f Ne

to price increases
Barg
w

Bargaining Power
of Suppliers

41
 Differentiation Strategy and the
Five Forces of Competition
R
at
o f
d uc ts Co ival
mp ry
eti Am
Bargaining Power of
h re Pro ng on
T te
bs ti
tu Fi g
rm
s
Suppliers
Su
Can mitigate suppliers’ power
Five Forces of of B u g Powe r
by:
Thr trants

yer s
En
ea t o

Competition ● absorbing price increases

a inin
f Ne

Barg

due to higher margins

w

Bargaining Power
of Suppliers ● passing along higher

supplier prices because

buyers are loyal to
differentiated brand
42
 Differentiation Strategy and the
Five Forces of Competition
R
at
o f
d uc ts Co ival
mp ry
eti Am
Threat of New Entrants
h re Pro ng on
T te
bs ti
tu Fi g
rm
s
Can defend against new
Su
entrants because:
Five Forces of of B u g Powe r ● new products must surpass
Thr trants

yer s
En
ea t o

Competition proven products or,

a inin
f Ne

● new products must be at

Barg
w

Bargaining Power
of Suppliers least equal to performance
of proven products, but
offered at lower prices

43
 Differentiation Strategy and the
Five Forces of Competition
R
at
o f
d uc ts Co ival
mp ry
eti Am
Threat of Substitute
h re Pro ng on
T te
bs ti
tu Fi g
rm
s
Products
Su
Well positioned relative to
Five Forces of of B u g Powe r
substitutes because:
Thr trants

yer s
En
ea t o

Competition ● brand loyalty to a

a inin
f Ne

Barg

differentiated product tends

w

Bargaining Power
of Suppliers to reduce customers’ testing
of new products or
switching brands

44
 Structure for Differentiation
Strategy
President and
Limited Staff
R&D Marketing

New Product Marketing Finance

R&D
Operations Human
Resources
• Marketing is the main function for tracking new product ideas
• New product R&D is emphasized
• Most functions are decentralized
• Formalization is limited to foster change and promote new ideas
• Overall structure is organic; job roles are less structured 45
Major Risks of Differentiation
Strategy
 Customers may decide that the price
differential between the differentiated
product and the cost leader’s product is
too large
 Means of differentiation may cease to
provide value for which customers are
willing to pay

46
Major Risks of Differentiation
Strategy
 Experience may narrow customer’s
perceptions of the value of differentiated
features of the firm’s products
 Makers of counterfeit goods may attempt
to replicate differentiated features of the
firm’s products

Click
Here Return to Discussion Questions
47
Discussion Question 7

When should a focus strategy be

implemented? What are the risks
of a focus strategy?

48
Focused Business-Level
Strategies
A focus strategy must exploit a narrow
target’s differences from the balance of
the industry by:
– isolating a particular buyer group
– isolating a unique segment of a product
line
– concentrating on a particular
geographic market
– finding their “niche”
49
Factors That May Drive Focused
Strategies
 Large firms may overlook small niches
 Firm may lack resources to compete in the
broader market
 May be able to serve a narrow market
segment more effectively than can larger
industry-wide competitors
 Focus may allow the firm to direct
resources to certain value chain activities
to build competitive advantage
50
Major Risks of Focused Strategies
 Firm may be “outfocused” by competitors
 Large competitor may set its sights on
your niche market
 Preferences of niche market may change
to match those of broad market

Click
Here Return to Discussion Questions
51
Discussion Question 8
What is the integrated low-cost
differentiation strategy? What are
the arguments as to why it is
increasing in importance? What
are the risks associated with the
integrated strategy?

52
Advantages of Integrated 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
53
Benefits of Integrated Strategy
 Successful firms using this strategy have
above-average returns
 Firm offers two types of values to
customers
– some differentiated features (but less
than a true differentiated firm)
– relatively low cost (but now as low as
the cost leader’s price)

54
Using the Functional Structure
 The integrated form of the functional
structure
– must have decision-making patterns that are
partially centralized and partially decentralized
– will have semi-specialized jobs and rules and
procedures that call for some formal and some
informal job behavior
 Strategic flexibility is obtained via
– flexible manufacturing systems
– information networks
– total quality management systems 55
Major Risks of Integrated Strategy
 An integrated cost/differentiation business
level strategy often involves compromises
(neither the lowest cost nor the most
differentiated firm)
 The firm may become “stuck in the
middle” lacking the strong commitment
and expertise that accompanies firms
following either a cost leadership or a
differentiated strategy

56