Chapter 4: Business-Level Strategy

 Overview:
 Defining business-level strategy
 Risks of business-level strategies
 Differences in business-level strategies
 5-Forces
 Relationship between customers and strategy

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 Introduction

 Strategy: Increasingly important to a firm’s success and

concerned with making choices among two or more
alternatives.
 Choices dictated by
 External environment (O and T)
 Internal resources, capabilities and core competencies (S and W)
 Business level-strategy: Integrated and coordinated set of
commitments and actions the firm uses to gain a
competitive advantage by exploiting core competencies in
specific product markets/industry
 How we intend to compete in a specific industry

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 Business-Level Strategies
 Purpose: To create differences between position
of a firm and its competitors
 Firm must make a deliberate choice to
 Perform activities differently
 Perform different activities
 Impacts how value chain activities will be performed to
create unique value
 No strategy better than others
 Contingent on internal and external environment

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 Business-Level Strategies
 Two types of competitive advantage firms must
choose between
 Cost (Are our costs LOWER than rivals costs?)
 Uniqueness (Are we DIFFERENT than rivals?)
 Two types of ‘competitive scope’ firms must
choose between
 Broad target
 Narrow target
 These combine to yield 5 different generic
business level strategies
 Can potentially be used by any organization competing
in any industry 4
Five Business-Level Strategies

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 Types of Business-Level Strategies

 Cost Leadership Strategy

 Competitive advantage: THE low-cost leader and
operates with margins greater than competitors
 Competitive scope: Broad
 Integrated set of actions designed to produce or deliver
goods or services with features that are acceptable to
customers at the lowest cost, relative to competitors
 No-frills, standardized or commodity-like product
 Must have competitive levels of quality, service, and
other features and lowest overall costs
 Continuously reduce the costs / increase the efficiency
of value chain activities
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 Examples of Value-Creating Activities
Associated with the Cost Leadership Strategy

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 Types of Business-Level Strategies
 Cost Leadership Strategy
 In relationship to the 5 Forces:
 Existing Rivalry
 Rivals hesitate to compete on the basis of price
 Bargaining Power of Buyers (Customers)
 Powerful buyers can force cost leader to reduce prices up to a
point
 Bargaining Power of Suppliers
 Cost leaders can absorb suppliers price increases
 Potential Entrants
 Efficiency can serve as a barrier to entry
 Product Substitutes
 Can reduce prices when faced with substitutes 8

 Thus built in defense against all 5 forces

 Types of Business-Level Strategies
 Cost Leadership Strategy
 Competitive Risks
 Innovations by competitors can quickly eliminate cost
advantage
 Too much focus on cost reduction versus competitive
levels of differentiation
 Competitors may learn how to successfully imitate a
cost leader’s strategy

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 Types of Business-Level Strategies

 Differentiation
 Competitive advantage: Differentiation/uniqueness
 Competitive scope: Broad
 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/unique in ways
that are important to them
 Targeted customers perceive product value
 Customized products – differentiating on as many
features as possible
 Can differentiate in many ways and in many value chain
areas
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Examples of Value-Creating Activities Associated
with the Differentiation Strategy

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 Types of Business-Level Strategies
 Differentiation
 In relationship to the 5 Forces:
 Existing Rivalry
 Customers are loyal purchasers of differentiated products
 Bargaining Power of Buyers (Customers)
 Uniqueness and loyalty reduces customer’s sensitivity to price
increases
 Bargaining Power of Suppliers
 Provide high quality components, driving up firm’s costs
 Cost may be passed on to customer
 Potential Entrants
 Substantial barriers (see above) and would require significant resource
investment
 Product Substitutes
 Customer loyalty effectively positions firm against product substitutes
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 Types of Business-Level Strategies
 Differentiation
 Risks
 Can charge too high of a price premium
 Differentiation theme no longer valuable to customers
 Over-differentiating
 Customer experience shows differentiation not worth the
cost
 Counterfeiting

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 Types of Business-Level Strategies

 Focus strategies
 Competitive advantage: Cost Leadership or
Differentiation
 Competitive scope: Narrow
 An integrated set of actions taken to produce goods or
services that serve the needs of a particular competitive
segment
 Attractive when:
 Firm lacks resources to compete in the broader market
 Firm may be able to more effectively serve a narrow market
segment than larger industry-wide competitors
 Niche is attractive 14
 Large firms may overlook small niches
 Types of Business-Level Strategies

 Focus strategy examples

 Buyer groups
 Youths/senior citizens
 Product line segments
 Professional painter groups
 Geographic markets
 West vs. East coast

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 Types of Business-Level Strategies

 Focused Cost Leadership

 Competitive advantage: Low-cost
 Competitive scope: Narrow industry segment
 Motel 6, Kia
 Focused Differentiation
 Competitive advantage: Differentiation
 Competitive scope: Narrow industry segment
 Ritz-Carlton, Apple, Rolls Royce

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 Types of Business-Level Strategies

 Focus strategies
 Risks
 Same basic risks as broad cost leadership or broad
differentiation plus:
 A competitor may be able to focus on a more narrowly
defined competitive segment and "outfocus” the focuser
 A company competing on an industry-wide basis may
decide that the market segment served by the focus
strategy firm is attractive and worthy of competitive
pursuit
 Customer needs within a narrow competitive segment
may become more similar to those of industry-wide
customers as a whole
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 Types of Business-Level Strategies
 Integrated Cost Leadership/Differentiation
 Efficiently produce products with differentiated attributes
 Efficiency: Sources of low cost
 Differentiation: Source of unique value
 Involves engaging in primary and support activities that
allow a firm to simultaneously pursue low cost and
differentiation
 Low price with somewhat highly differentiated features
 More value for the money
 Often called best-cost strategy
 Examples: Toyota, Target
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 Types of Business-Level Strategies
 Integrated Cost Leadership/Differentiation
 Risks of Integrated Strategies
 Harder to implement than other strategies
 Must simultaneously reduce costs while increasing
differentiation
 Can get ‘stuck in the middle’ resulting in no advantages and
poor performance

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 Other Business-Level Strategies

 Strategic Alliances and Partnerships (Chapter 9)

 Mergers and Acquisitions (Chapter 7)
 Vertical Integration (Chapter 6)
 Outsourcing (Chapter 3)
 Offensive and Defensive Strategies (Chapter 5)
 First-Mover Advantages and Disadvantages (Chapter 5)

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 Customers and their Relationship with
Business-Level Strategies
 Strategic competitiveness results when firm can
satisfy customers by using its competitive
advantages
 Five components in customer relationships
 Effectively managing relationships w/ customers
 Deliver superior value and build customer loyalty
 Reach, richness and affiliation
 Access and connection to customers, depth and detail of
information, and facilitating interactions with customers
 Who: Determining the customers to serve
 What: Determining which customer needs to satisfy
 How: Determining core competencies necessary to
satisfy customer needs 21