C H A P T E R 4

BUSINESS
LEVEL
STRATEGY
Definition
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.
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
Customers: Their Relationship
With Business – Level Strategy

Who will be
served?

Key Issues
in What needs will
Business-level be satisfied?
Strategy

How will those

needs be satisfied?
Effectively Managing
Relationships
with Customers

• Reach: firm’s access and

connection to customers
• Richness: depth and detail of
two-way flow of information
between the firm and the
customer
• Affiliation: facilitation of useful
interactions with customers
 Who: Determining the Customers
to Serve

MARKET SEGMENTATION
• A process used to cluster people
with similar needs into individual
and identifiable groups.

All Customers

Consumer Industrial
Markets Markets
 Market Segmentation
 Consumer Markets  Industrial Markets
• End-use segments
• Demographic factors • Product segments
• Socioeconomic • Geographic segments
factors • Common buying
• Geographic factors factor segments
• Psychological factors • Customer size
• Consumption segments
patterns
• Perceptual factors
What: Determining Which 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.
 How: Determining Core Competencies
Necessary to Satisfy Customer Needs

• Firms must decide:

• who to serve, what customer needs to
meet, and how to use core competencies to
implement value creating strategies that
satisfy target 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.
The Purpose of a
Business – Level
Strategy

Business - Level Strategies:

• are intended to create differences
between the firm’s competitive position
and those of its competitors.
To position itself, the firm must
decide whether it intends to:
• perform activities differently or
• perform different activities as
compared to its rivals.
Types of Potential
Competitive
Advantage

Achieving lower overall costs than

rivals
• Performing activities differently
(reducing process costs)
Possessing the capability to
differentiate the firm’s product or
service and command a premium
price
• Performing different (more highly
valued) activities.
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.
Business Level Strategies
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.

Product Characteristics
• Relatively standardized (commoditized)
products
• Features broadly acceptable to many
customers
• Lowest competitive price
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
How to Obtain a Cost Advantage

Determine Reconfigure
and control Value
Cost Chain if
Drivers needed

 Alter production process  New raw material

 Change in automation  Forward integration
 New distribution channel  Backward integration
 New advertising media  Change location
 Direct sales in place relative to suppliers
of indirect sales or buyers
Value – Creating Activities for
Cost Leadership
Value – Creating Activities for
Cost Leadership
• Cost-effective MIS • Monitor suppliers’
• Few management layers performances
• Link suppliers’ products
• Simplified planning
to production processes
• Consistent policies • Economies of scale
• Effecting training • Efficient-scale facilities
• Easy-to-use manufacturing • Effective delivery
technologies schedules
• Investments in technologies • Low-cost transportation
• Finding low-cost raw • Highly trained sales
materials force
• Proper pricing
Cost Leadership Strategy:
Competitors
Due to cost leader’s Rivalry with
advantageous position: Existing
• rivals hesitate to compete on Competitors
basis of price. Threat of
new
• lack of price competition entrants
leads to greater profits. Rivalry
among Bargainin
competing g power
firms of
suppliers

Threat of Bargaining
substitute power of
products buyers
Cost Leadership Strategy:
Buyers
Bargaining Power
Can mitigate buyers’ power
of Buyers
by:
• driving prices far below
Threat of
competitors, causing them to new
exit, thus shifting power with entrants
Rivalry
buyers (customers) back to among Bargainin
g power
the firm. competing
of
firms
suppliers

Threat of Bargaining
substitute power of
products buyers
Cost Leadership Strategy:
Suppliers
Can mitigate suppliers’ Bargaining Power
power by: of Suppliers
• being able to absorb cost
increases due to low cost Threat of
new
position. entrants
• being able to make Rivalry
Bargainin
among
very large purchases, competing g power
firms of
reducing chance of supplier suppliers
using power. Threat of Bargaining
substitute power of
products buyers
Cost Leadership Strategy:
New Entrants
Can frighten off new The Threat of
entrants due to: Potential Entrants
• their need to enter on a large
scale in order to be cost Threat of
new
competitive. entrants
• the time it takes to move Rivalry
Bargainin
among
down the industry learning competing g power
firms of
curve. suppliers

Threat of Bargaining
substitute power of
products buyers
Cost Leadership Strategy:
Substitutes
Cost leader is well Product
positioned to: Substitutes
• lower prices in order to
maintain its value position. Threat of
new
• make investments to add entrants
features unavailable in Rivalry
among Bargainin
substitutes. competing g power
firms of
• buy intellectual property and suppliers

patents developed by Threat of Bargaining

potential substitutes. substitute power of
products buyers
Cost Leadership
Strategy
Competitive Risks
• Processes used to produce and
distribute good or service may become
obsolete due to competitors’
innovations.
• Too much focus on cost reductions
may occur at expense of customers’
perceptions of differentiation.
• Competitors may successfully imitate
the cost leader’s strategy.
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.

• Focus is on non-standardized
products
• Appropriate when customers
value differentiated features
more than they value low cost
 How to Obtain a
Diff erentiation Advantage
Control Reconfigure
Cost Value
Drivers if Chain to
needed maximize

 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
Value – Creating Activities and
Diff erentiation
Value – Creating Activities and
Diff erentiation
• Highly developed MIS
• Emphasis on quality
• Worker compensation for
creativity/productivity
• Use of subjective
performance measures
• Basic research capability
• Technology
• High quality raw materials
• Delivery of products
• High quality replacement
parts
• Superior handling of
incoming raw materials
• Attractive products
• Rapid response to
customer specifications
• Order-processing
procedures
• Customer credit
• Personal relationships
 Diff erentiation Strategy:
Competitors
• Defends against Rivalry with
competitors because Existing
customer’s brand loyalty to
differentiated product offsets
Competitors
price competition. Threat of
new
entrants
Rivalry
among Bargainin
competing g power
firms of
suppliers

Threat of Bargaining
substitute power of
products buyers
 Diff erentiation Strategy:
Buyers
• Can mitigate buyers’ powerBargaining Power
because well differentiated of Buyers
products reduce customer
sensitivity to price increases.
Threat of
new
entrants
Rivalry
among Bargainin
competing g power
firms of
suppliers

Threat of Bargaining
substitute power of
products buyers
 Diff erentiation Strategy:
Suppliers
Can mitigate suppliers’ Bargaining Power
power by: of Suppliers
• absorbing price increases
due to higher margins. Threat of
new
• passing along higher entrants
supplier prices because Rivalry
Bargainin
among
buyers are loyal to a competing g power
firms of
differentiated brand. suppliers

Threat of Bargaining
substitute power of
products buyers
 Diff erentiation Strategy:
New Entrants
Can defend against new The Threat of
entrants because: Potential Entrants
• new products must surpass
proven products. Threat of
new
• new products must be at entrants
least equal to performance Rivalry
Bargainin
among
of proven products, but competing g power
firms of
offered at lower prices. suppliers

Threat of Bargaining
substitute power of
products buyers
 Diff erentiation Strategy:
Substitutes
Well-positioned relative Product
to substitutes because: Substitutes
• brand loyalty to a
differentiated product tends Threat of
new
to reduce customers’ entrants
testing of new products or Rivalry
Bargainin
among
switching brands. competing g power
firms of
suppliers

Threat of Bargaining
substitute power of
products buyers
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 the
differentiated features of the firm’s
products.
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—youths or
senior citizens
• Different segment of a product
line—professional craftsmen versus
do-it-yourselfers
• Different geographic markets—
east coast versus west coast
Focus Strategies
Types of focused strategies
• Focused cost leadership
strategy
- companies produce low-cost products
to compete with their competitors in
the same target market
• Focused differentiation
strategy
- companies offer products and services
with unique features that fulfill the
demands of the market
 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 a
niche market may change to
more closely resemble those of
the broader market.
 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.
• Commitment to strategic flexibility is
necessary for implementation of integrated
cost leadership/ differentiation strategy.
 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
 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
• Customer relationship management
(CRM)
 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
• Increased customer satisfaction
• Lower input and operating process costs
• Reduced time-to-market for innovative
products
T h e e n d