Chapter 8

Business level strategy

These PowerPoint slides are copyrighted, accompany the book (9780195997040, Strategic
Management 3e, Louw and Venter, 2013) and are used with permission from the publisher, Oxford
University Press Southern Africa
 Learning outcomes
• After reading this chapter, you should be able to:
• comment on where the choice of business level strategy fits into the
strategic management process
• distinguish between the different types of business level strategies
• identify the business level strategies in an organisation
• critically evaluate the choice of business level strategy in an organisation.
 Overview
• This chapter introduces the concept of business level strategy.
• The choice of business level strategy forms an integral part of
strategic decision making.
• The purpose of strategy is to plan and formalise the route that the
organisation will take to reach its end destination.
• Strategic decision makers have to consider various factors
that impact on the choice of business level strategy, or a combination
of these strategies.
• The aim is to ensure that the strategic decision makers make the
correct choices to ensure sustainability and survival in the long term.
 8.1 Introduction

• Business level strategies deal with an organisation’s plans to

compete successfully.
• They are often referred to as competitive strategies because they
relate to the organisation’s deliberate decisions on how to meet its
customers’ needs, how to counter the competitive efforts of its
rivals, how to cope with the existing market conditions, and how
to sustain or build its competitive advantage.
8.2 Levels of strategies
 8.3 Factors influencing strategic
choice
• Strategic intent as captured in the vision and mission statement.
• Nature of competition in the industry.
• The impact of the chosen strategy on the organisation’s stakeholders
is also a factor that the organisation needs to consider.
 8.4 Business level strategies
• When one strips away the details to reach the real substance, the
biggest and most significant differences among competitive
strategies are:
o whether an organisation’s target market is broad or narrow
o whether the organisation is pursuing a competitive advantage linked to low
cost or
o product differentiation a combination of the above.
8.4 Business level strategies (cont.)
 8.4 Business level strategies (cont.)
• Overall cost leadership is a strategy that is built on low input
costs. The savings from the lower costs are then transferred to a
large, price sensitive market.
• Differentiation is a strategy that is built on unique and valued
offerings. The target market tends to be smaller, but is willing to
pay more for the unique offering.
• Focus is a strategy followed by organisations that direct their
competitive efforts to a specific niche in the marketplace.
8.4 Business level strategies (cont.)
 8.4.1 Overall cost leadership strategy

• Organisations that choose cost leadership strategies aim to build

and sustain their competitive advantage by reducing its costs, or
keeping its costs lower than those of their competitors.
• The advantages of a lower cost base give the organisation an edge
over its competitors, provided that the organisation offers a
product or service that customers want to buy.
• If an organisation is so intent on reducing costs and thereby
produce low quality products that no one wants to buy, the
potential advantages of the cost leadership strategy are lost.
 8.4.1.2 Best value strategy
• A best value strategy is also referred to as the low price strategy.
• This strategy seeks to achieve a lower price than competitors while
trying to maintain a similar value product or service to that offered
by competitors with a large market size.
• If an organisation aims to achieve competitive advantage through a
low price strategy, it has two basic choices in trying to achieve
sustainability.
• The first is to try to identify and focus on a large market segment
that is unattractive to competitors. In this way it avoids competitive
pressures to erode prices below levels that would achieve
acceptable returns.
• The second, more challenging, situation is where there is
competition on the basis of price. Here, tactical advantage may be
gained by reducing prices
 8.4.1.2 Best value strategy (cont.)
• Cost advantages are possible even when competing organisations
offer similar products or services. Sources of cost advantage include
the following:
o In most cases, organisations choose a cost-leadership strategy because of
market size and the inherent cost advantages flowing from economies of scale
in manufacturing, marketing, distribution, or any other function of the
organisation.
o Another source of cost advantage can be obtained when an organisation
owns specialised machines, as in the case of Mango Airlines’ fleet of fuel-
efficient aircraft, to enable high levels of production. Often, these specialised
machines cannot be kept in operation by small organisations.
o In many cases the organisation’s cost advantage lies in its low overhead costs
– an organisation with high volumes of production can spread its overhead
costs over more units and thereby reduce the overhead costs per unit.
 8.4.1.3 Advantages of cost
leadership strategy
• When pursuing a cost leadership strategy, the cost leader is protected
from industry competitors by its cost advantage.
• If there are powerful suppliers, the cost leader’s lower costs also mean
that it will be less affected than its competitors by increases in the price
of inputs.
• Moreover, since cost leadership usually requires a big market share, the
cost leader purchases in relatively large quantities, increasing its
bargaining power over suppliers.
• Further, if the bargaining power of buyers is high, the cost leader is less
affected by a fall in the price it can charge for its products.
• If substitute products start to come into the market, the cost leader can
reduce its price to compete with them, and retain its market share.
• Finally, the cost leader’s advantage constitutes a barrier to entry since
other organisations are unable to enter the industry and match the
leader’s costs or prices.
 8.4.1.4 Disadvantages of the cost
leadership strategy
• The principal dangers of the cost leadership strategy can be identified
in competitors’ abilities to find ways to produce at lower cost and
beat the cost leader at its own game.
• Rival organisations also engage with the various strategic options,
and devise ways to out-compete competitors.
• Competitors’ ability to easily imitate the cost leader’s methods is
another threat to the cost leadership strategy.
• Finally, the cost leadership strategy carries a risk that the cost leader,
in its single-minded desire to reduce costs, may lose sight of changes
in customers’ tastes.
 8.4.2 Differentiation strategy
• The differentiation strategy, which is also referred to as the premium
strategy aims to produce products and services considered unique across
the industry.
• A differentiation strategy may be achieved in a number of ways. For
example, the uniqueness may be based on dimensions widely valued by the
customers. The aim is to achieve higher market share than competitors,
which in turn could yield cost benefits by offering better products or
services at the same price.
• Alternatively, the aim could be to enhance margins by pricing slightly
higher.
• This strategy may be achieved through improvements in products that
render them unique.
• This requires an investment in research and development (R&D) and design
expertise.
• Another approach is to demonstrate how the product or service meets
customer needs better than that of the competitor.
 Factors impacting on success of
differentiation strategies
• Clear identification of customers
• Understanding what is valued by customers or what customers
are willing to pay for
• Clear identification of competitors
• Ease of imitation
 8.4.2.1 Advantages of differentiation strategies
• Safeguard an organisation against competitors to the degree that
customers develop brand loyalty towards its products.
• A differentiator can tolerate more increases in prices of its inputs than
a cost leader.
• Unlikely to experience problems with powerful buyers because the
differentiator offers the buyer a unique product.
• Threat of substitute products depends on the ability of competitors’
products to meet the same customers’ needs as the differentiator’s
products.
• Brand loyalty creates a barrier to entry.
 8.4.2.2 Disadvantages of differentiation
strategies
• Threat of imitation by competitors
• Importance of differentiation diminishes as customers become
more price sensitive
• Threat of charging a price higher than the market will bear
 8.4.3 Focus strategies
• A focus strategy is followed when the organisation focuses on a
specific niche in the marketplace, and develops its competitive
advantage by offering products especially developed for the niche.
• A focus strategy aimed at securing a competitive edge based either
on low cost or offering best value, becomes increasingly attractive
when the target market niche is big enough to be profitable and
offers good growth potential.
• The focus strategy is also attractive when industry leaders do not
see that having a presence in the niche is crucial to their own
success.
• In this case, focusers can often escape battling head-to-head against
some of the industry’s biggest and strongest competitors.
 8.4.3.1 Advantages of focus strategies
• The focus strategy offers protection to the organisation in terms of its rivals
to the extent that it can provide a product or service they cannot.
• This ability also gives the focuser power over its buyers because they
cannot get the same thing from anyone else.
• A focused organisation is at a disadvantage because it buys in small
volumes, which puts it at the mercy of powerful suppliers.
• However, as long as the focused organisation can pass on price increases to
loyal customers, this disadvantage may not be a significant problem.
• The development of customers’ loyalty also lessens the threat from
substitute products.
• Finally, potential entrants have to overcome the customer loyalty that the
focuser has generated.
• This protection from the five forces allows the focuser to earn above-
average returns on its investment.
• Another advantage of the focus strategy is that it permits an organisation to
stay close to its customers and respond to their changing needs.
 8.4.3.2 Disadvantages of focus strategies
• The first disadvantage applies to production costs: since a focuser
produces in small volumes, its production costs often exceed those of a
low-cost organisation.
• Higher costs can also reduce profitability if a focuser is forced to invest
heavily in developing a distinctive competency to compete with a
differentiated organisation.
• The second problem is that the focuser’s niche can suddenly disappear
because of technological change or changes in consumers’ tastes.
• Unlike the more generalist differentiator, a focuser cannot move easily to
new niches, given its concentration of resources and competency in one
or only a few niches.
• Finally, there is the prospect that differentiators will compete for a
focuser’s niche by offering a product that can satisfy the demands of the
focuser’s customers.
• A focuser is vulnerable to attack and, therefore, has to defend its niche
constantly.
 8.4.3.3 Low cost focus
• When choosing a focus strategy based on low cost, the strategic
decision makers choose to concentrate on a narrow buyer
segment and attempt to out-compete competitors by having
lower costs.
• The organisation is therefore able to serve niche customers at a
lower price. As mentioned earlier, Kulula.com is an example of a
South African airline that focuses on low-budget flyers and
secures a competitive advantage by cutting out in-flight meals
and other cost decreasing activities.
 8.4.3.4 Best value focus
• This strategy is also referred to as differentiation focus strategy.
With this strategy the aim is to concentrate on a narrow buyer
segment and to out-compete competitors by offering niche
customers customised attributes that meet their requirements
better than the competitors’ products.
• Successful use of a focused differentiation strategy depends on
the existence of a buyer segment that wants special product
attributes or seller capabilities, and on an organisation’s ability to
stand apart from rivals competing in the same target market
niche.
 8.4.4 Combining business level strategies

• The strategic decision makers may decide on a business level

strategy or a combination of these strategies.
• When choosing a strategy, the strategic decision makers can
evaluate each strategy option based on a set of criteria that
considers the organisation’s strategic direction, goals, resources,
capabilities, the opportunities in the environment and the
competitors.
 8.5 Evaluating strategies
• Appropriateness – SWOT matrix, decision trees, scenarios
• Feasibility
• Desirability
• Consistency
• Validity
• Attractiveness to stakeholders
 8.5.1.1 The SWOT matrix
• The SWOT matrix does not give an indication of which strategic
option to choose, but it does guide the organisation as to its viable
options. Clockwise, the quadrants are numbered 1 to 4:
o Quadrant 1 is characterised by strengths and opportunities (SO).
o Quadrant 2 has weaknesses matched with opportunities (WO).
o In quadrant 3, the organisation is both weak and externally threatened (WT).
o Quadrant 4 features strengths and threats (ST).
o What does this mean? Simply, the most attractive area in which to operate is
quadrant 1. Businesses operating here are the most fortunate and deserve
strategic attention.
o The organisation operating in quadrant 2 needs to overcome its weaknesses
before embarking on opportunity exploitation.
o Quadrant 3 is the worst possible scenario, while there is a question mark in
quadrant 4 since the organisation is threatened by, for example competition,
despite internal strengths.
8.5.1.1 The SWOT matrix (cont.)
 8.5.1.2 Decision trees
• A decision tree offers a graphical representation of the various
strategic options available.
• It is used to estimate the outcome of the possible strategies.
Organisations use decision trees to eliminate options by
progressively introducing requirements that must be met, for
example growth, investment, or diversity.
8.5.1.2 Decision trees
 8.5.1.3 Scenarios
• Scenario analysis is a useful tool that forms part of the basic
strategic management process in many organisations.
• It explores ‘what if’ questions for their impact on the strategy
under consideration.
 8.5.2 Feasibility
• Feasibility means that the organisation is capable of
carrying out the proposed strategies.
• Questions that the organisation needs to ask when
considering the feasibility of a strategy include the
following:
o Is the strategy capable of achieving the objectives that it
addresses?
o C an the strategy be implemented effectively and efficiently?
o D o we have the resources to implement this strategy?
 8.5.3 Desirability
• Desirability relates to assessing the ability of the strategy to
produce results in either the short term or the longer term
in light of the needs and priorities of the organisation.
• Desirability also relates to the risk in terms of vulnerability
and timing.
• There may be inherent risks in the possible retaliation of
competitors, or there may be risks involved in
overstretching resources through diversification.
• Another risk may be the cash flow and the organisation’s
borrowing requirements that are sensitive to the
organisation’s ability to forecast demand accurately.
 8.5.4 Consistency
• When an organisation considers consistency, it looks at
whether the strategy option is in accordance with the strategic
intent and objectives of the organisation.
• For example, Telkom’s strategic direction is to be a leading
customer- and employee centered information
communications and technology (ICT) solutions service
provider. Diversifying into the pay-TV industry may be a
strategic option, but it is not consistent with Telkom’s overall
strategic intent and objectives.
 8.5.4 Consistency (cont.)
• Validity means that the calculations and other
assumptions on which the strategy is based, are well
grounded and meaningful.
• These assumptions can be based on valid and relevant
business information.
• The organisation’s collective experience and business
judgments play an integral part in considering the
validity and suitability of a strategic option.
 8.5.6 Attractiveness to stakeholders
• When evaluating a strategic option to determine its
attractiveness to stakeholders, the organisation needs to
determine if the strategy is appealing to those people whose
needs need to be satisfied.
• The stakeholders are interested in the strategic options that
are under consideration because they may be affected by
them.
• Because an organisation aims for long-term sustainability, it
should consider the impact of potential strategies on
stakeholders.
 8.6 Summary
• The three bases for business level, or competitive, strategies
are cost, differentiation and focus:
o The first option is an overall cost leadership strategy. When an
organisation pursues this strategy, it aims to gain a competitive
advantage over competitors by maintaining a lower overall cost base.
The cost advantage can only be realised if the organisation’s product
or service appeals to a broad spectrum of customers. The best value
strategy seeks to achieve a lower price than competitors while trying
to maintain a similar value product or service to that offered by
competitors.
o Second, a differentiation strategy where the organisation seeks to
provide products or services that are unique or different from those
of the competitors. The differentiation strategy is viable in markets
where the customers are price insensitive.
o Finally, with a focus, or niche, strategy, the organisation develops its
competitive advantage by offering products especially developed for
the identified niche market. The focus strategy can be based on
offering the lowest cost or best value to the identified niche market.
 Discussion questions
1. Comment on where the choice of business level strategy fits into the
strategic management process.
2. Provide examples of organisations pursuing the various business level
strategies. Justify your answer.
3. Explain how you would evaluate the choice of a strategy in an
organisation.
4. Differentiate between the business level strategies and explain why some
of these strategies work better in certain types of competitive conditions
than others.
5. Explain some of the pitfalls associated with each of the business level
strategies.
6. Can organisations combine cost leadership and differentiation strategies?
Why or why not? Provide examples to strengthen your argument.