Business Level Strategy

UG Strategic Management (2021/22) Lecture - Week 4
Department
Department of Management
of Management
STRATEGIC MANAGEMENT
Week 4: Business Level Strategies
Strategic Management (MOMN069H6) Session 4 1
Strategic Choices? Strategic Futures!

The strategic audit process aims to generate information managers need in
order to make decisions about the strategies and business model(s) the
company needs to pursue in order to achieve sustained competitive
advantage.
Internal Strengths & Competitor

Environment Weaknesses Analysis
SWOT Competitive
Analysis Position
External Opportunities Industry

Environment & Threats Analysis
Strategic Choices
1
Lecture - Week 4
The Exploring Strategy Framework

Exploring Strategy, 12e, Fig 1.4, p13
Strategic Choices
Strategic Choices
 Strategic choices involve the options for
strategy in terms of both the:
 Directions in which strategy might move.
 Methods by which strategy might be pursued.
 Fundamental questions for Strategic Choice:
 How should business units compete?
 Which businesses to include in the portfolio?
 Where should the organisation compete?
 Is the organisation innovating appropriately?
 Should the organisation buy other companies, form
alliances or go it alone?
2
Lecture - Week 4
Hierarchy of Strategy
Corporate-level
Strategy
Concerned with the overall purpose
and scope of an organisation and
how to add value to business units
Business-level
Strategy
Concerned with the way a business
seeks to compete in its particular market.
Operational/Functional-level Strategy
Concerned with how different parts of the organisation
deliver the strategy in terms of managing resources,
processes and people
Strategic Management (MOMN069H6) Session

Session5 4 5
The Strategic Management Process

 Strategic management process aims to identify
strategies that align company resources and
capabilities to environment inorder to create
and sustain competitive advantage.
 Need to be aligned at different strategic levels,
corporate, business and functional:
 Functional-level strategy: Directed at operational
effectiveness.
 Business-level strategy: Overall competitive approach.
 Corporate-level strategy: Overall approach to growth
and profitability.
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Lecture - Week 4
Organisational Purpose
 Need to be clear about the organisation’s
purpose, i.e. it’s reason for existing:
 Why are we in business?
 Who are our customers?
 What are we trying to achieve?
 What are our “values” and “beliefs?
 What is the “passion” that drives the organization
forward?
 How do we meet customer needs?
Business and Corporate Level Strategies
The Three Elements of Strategy
1. Generic (Business 2. Alternative 3. Alternative

Level) Strategies (Strategic) Directions (Strategy) Methods:
The basis on which an In which organisations By which the direction of
organisation seeks to may choose to develop strategic development
achieve a lasting within generic strategy can be achieved:
competitive position in (Ansoff Growth Strategies): • Internal (Organic)
its industry (Porter): • Consolidation/ Development
• Cost Based Withdrawal • Acquisition
• Differentiation • Market Penetration • Joint Development
• Focus • Product Development (Strategic Alliances)
• Diversification
Adapted from: 'Exploring Corporate Strategy', Johnson & Scholes, 1993 (see also ‘Exploring Strategy’, 12 th edition, Fig11.1)
4
Lecture - Week 4
Coursework Report: Strategic Review

 Strategic Review (Weeks 1-3)
 SWOT – Internal Analysis
• Capabilities and Competences
• Resources, Skills, Management
• Products/Customers
 SWOT – External Analysis
• PEST Analysis
• Porter’s 5-Forces Analysis
• Competitor Analysis
 Porter’s Generic (Business Level) Strategies (Week 4)
• Company’s Approach to Competing in the Market?
 Ansoff’s (Corporate Level) Growth Strategies (Week 5)
• Company’s Approach to Growth. Possible future options?
Strategic Management (MOMN069H6) Session 4

1 9
Business Level Strategy

 The plan of action (or business model) that managers
adopt for using a firm’s resources and capabilities in
order to gain competitive advantage over rivals in a
market or industry.
 The Business Model identifies the who, what and
how:
 Who are the Customers?
 What are Customers’ needs?
 How customers’ needs will be satisfied? What distinctive
competencies will be used?
 Basic choices about customers, products, activities in the
value chain.
10
5
Lecture - Week 4
The Business Model

 WHO: who do we expect to be interested in our
products, i.e. who are our customers?
 WHAT: value are you creating for your
customers? (not only the tangible product, or
the technology behind the system but
intangible value which is difficult to imitate).
 HOW: will you be get the products (or services)
into the hands of the customers
(manufacturing, distribution).
 Need to be clear about the link between the 3.
11
IKEA
12
6
Lecture - Week 4
LEGO
13
Generic (Business-Level) Strategies

 Porter introduced the term ‘Generic Strategy’
to mean basic types of competitive strategy that
holds across different business situations.
 Competitive strategy is concerned with how a
business achieves competitive advantage in its
domain of activity.
 Competitive advantage is about how a business
creates value for its customers, which is greater
than the costs of supplying the products and
superior to that of rival businesses.
14
7
Lecture - Week 4
Business Level Strategies

 Companies that dominate an industry can never
take a leading position for granted.
 To create a successful business model, strategic
managers must formulate business-level
strategies that will allow a company to attract
customers and lead them away from
competitors.
 Two sources of Competitive Advantage (Porter):
 Cost
 Differentiation
15
Strategic business units (SBUs)

 Porter talks in terms of strategic business units
(SBUs). Supply products or services to a distinct
domain/well defined market.
 A small business has just one SBU.
 A large diversified corporation is made up of multiple
businesses (SBUs).
 SBUs can be called ‘divisions’ or ‘profit centres’
 SBUs can be identified by:
 Market based criteria (similar customers, channels
and competitors).
 Capability based criteria (similar strategic capabilities).
16
8
Lecture - Week 4
Business Level Strategies

(Porter’s Generic Strategies)
Competitive Advantage
Lower Cost Differentiation
COST LEADERSHIP DIFFERENTIATION

• Aim to become the lowest cost • Aims to provide product(s) with
Broad Target
producer in the industry (Q). unique attributes.

Competitive Scope
• Lower costs = lower prices. • Customers prepared to pay

• Increased profitability: similar premium prices (branding).
products or comparable quality. • Profits via ‘pricing’
COST FOCUS DIFFERENTIATION FOCUS

Narrow Target
• Aim to achieve sustainable cost • Aim to achieve sustainable product

leadership in chosen market differentiation in chosen market
segment(s). segment(s).
• Niche markets. • Niche markets.
Ian D Harrison: Adapted from Exploring Strategy - Fig 7.2
17
Generic Strategies: Costs, Prices and Profits
Profit = Revenue - Costs
Source: ‘Exploring Strategy’, 2020, 12th Edition, Figure 7.4
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9
Lecture - Week 4
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.
 It implies:
 relatively standardized products
 features acceptable to many customers
 lowest competitive price
19
Cost-leadership
 Cost-leadership strategy involves becoming
the lowest-cost company in the industry.
 Key cost drivers that can help deliver cost
leadership:
 Lower input costs.
 More efficient operations.
 Economies of scale
 Experience curve effects.
 Product process and design.
20
10
Lecture - Week 4
Exploiting the Experience Curve

 Unit manufacturing costs for a product typically decline
by some characteristic amount each time accumulated
output of the product is doubled.
 Economies of scale and learning effects underlie the
experience curve – first observed in the aircraft industry
(Alchian 1963)
 Relate to the systematic lowering of the cost structure,
and consequent unit cost reductions, that occur over the
life of a product (Hirschmann 1964, BCG 1972, Ghemawat 1985)
21
The Experience Curve
Strategic significance of the experience

curve: Increasing company’s product
volume and market share will lower the
company’s cost structure relative to rivals.
Unit costs decline,

each time accumulated output is doubled
Source: Strategic Management – An Integrate Approach, Jones, Hill and Schilling, 2013, 11th Edition, Figure 4.4
22
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Lecture - Week 4
The Soft Drinks Experience Curve

Source: Ian Harrison (original unknown)
6.0
1 line at
5.5 300 cans Estimated Cost Reductions in the
5.0
per min Production of Soft Drinks
4.5
4.0
Pence per litre
1 line at
800 cans
3.5 per min
1 line at 2 lines at 2 lines at
3.0 1,500 cans 1,500 cans 2,000 cans
per min per min per min
2.5
2.0
1.5
1.0
0 50 100 150 200 250 300 350 400
Production (million litres per Year)
23
Major Risks of Cost Leadership Strategy
 There can only be one cost leader

 Technological change can eliminate cost
advantage (PESTLE).
 Spillovers lead to imitation (can be copied).
 Efficiency focus may create blind spots with
respect to customer preferences.
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Lecture - Week 4
Differentiation strategy
 An integrated set of actions designed by a
company to produce or deliver goods or
services that customers perceive as adding
value.
 Non-commodity/non-standardised products.
 Unique attributes.
 Customers value differentiated features more
than they value low cost/price.
 E.g. Rolex, BMW luxury cars
25
Customer Needs and

Product Differentiation
 Two factors determine which product a
customer chooses to satisfy their
needs/wants:
1. The way a product is differentiated from other
products of its type so that it is appealing.
2. The price of the product.
 Differentiation involves uniqueness along
some dimension that is sufficiently valued by
customers to allow for a price premium.
26
13
Lecture - Week 4
Differentiation Strategies
Required Actions: Dangers of Differentiation:
 Signal and shape buyer  Difficult to sustain
perceptions. (Imitation by competitors).
 Quality focus.  Failing to signal value.
 Develop new “systems” and  Price premium may exceed
processes. what the company’s target
 Innovation Capability (R&D). customers are willing to pay.
 Key theme/implication:  Differentiating on
need to maximize human characteristics not valued
capital contributions by buyers.
(Theory Y?)
27
Some Differentiation Themes
Unique taste Multiple features Prestige
Wide selection and Quality Manufacturing

one-stop shopping
Reliable, superior Technological Top-of-the-line

service Leadership
28
14
Lecture - Week 4
Focus strategies
 A focus strategy targets a narrow segment or
domain of an activity and tailors its products
or services to the needs of that specific
segment to the exclusion of others.
 Two types of focus strategy:
 cost-focus strategy (e.g.: Ryanair).
 differentiation focus strategy (e.g.: Ecover).
 Your company’s strategy?
29
Why Focus Strategies Are Different

Jones &Hill
Figure 5.7
30
15
Lecture - Week 4
Focus Strategies
Factor Driving Focus Strategies: Risks of Focus Strategies
 Large companies overlook  Company may lack resources
small niches. to compete in the broader
 Company be able to serve a market (limits to growth).
narrow market segment more  Company may be “out-
effectively than can larger focused” by competitors.
industry-wide competitors.  Preferences of niche market
 Focus may allow the company may change to match those of
to direct resources to certain the broad market (dynamic
value chain activities to build market conditions).
competitive advantage.
31
Coursework Report: Generic Strategies

 To what extent can
Porter's Generic
Strategies be used to
describe the business
level strategies being
pursued by your
company?
 Low Cost?
 Differentiation?
 Your Customers?
 Customer needs?
 Product attributes?
Strategic Management (MOMN069H6) Session 1

4 32
32
16
Lecture - Week 4
Coursework Report: Generic Strategies

Competitive Advantage
Lower Cost Differentiation
Broad Target
COST LEADERSHIP DIFFERENTIATION

Competitive Scope
Narrow Target
COST FOCUS DIFFERENTIATION FOCUS
33
Generic Strategies and the

Value Chain
The Value Chain helps organizations in 2 ways:
 Achieve COST ADVANTAGE by better
understanding costs and trying to reduce
them as much as possible.
 Reach high level of DIFFERENTIATION by
focusing on those activities associated with
the company’s core competences.
34
17
Lecture - Week 4
Generic Strategies and the

Value Chain
Cst Leadership
J&H Fig 5.6 JWS - Fig 3.4
35
Cost Leader Value Chain
Cst Leadership
Adapted from Michael E. Porter, Competitive Advantage (New York: Free Press, 1985).
36
18
Lecture - Week 4
Differentiator Value Chain

Firm Superior MIS—To integrate Facilities that Widely respected
infrastructure value-creating activities to promote firm CEO enhances
improve quality image firm reputation
Programs to attract talented Provide training and
Human resource engineers and scientists incentives to ensure a strong
management customer service orientation
Superior material handling Excellent applications
Technology and sorting technology engineering support
development
Purchase of high-quality Use of most prestigious outlets

Procurement components to enhance
product image
Superior Flexibility Accurate and Creative Rapid response

material and speed in responsive and to customer
handling responding order innovative service
operations to changes processing advertising requests
to minimize in manu- programs
damage facturing Effective Complete
Quick
specs product
replenish-
Fostering
of personal
Cst Leadership
inventory of
replacement
transfer of Low defect ment to relation- parts and
inputs to rates to reduce ship with supplies
manufactur- improve customer’s key
ing process quality inventory customers
Inbound Operations Outbound Marketing Service

logistics logistics and sales
Source: Adapted from Michael E. Porter, Competitive Advantage (New York: Free Press, 1985).
37
Competitive Positioning and

Functional Level Strategies
 A different perspective on generic strategies.
 Value Creation: the value the products of
different companies inside an industry can give
customers at any one time (Jones and Hill).
 Value Creation driven by the company’s
Functional Strategies:
 Efficiency of operations
 Quality
 Responsiveness to Customers
 Innovation
Source: Strategic Management – An Integrate Approach, Jones and Hill, 3rd Edition
38
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Lecture - Week 4
The Roots of Competitive Advantage
Source: Strategic Management – An Integrate Approach, Jones, Hill and Schilling, 2013, 11th Edition, Figure 4.1
39
COMPETITIVE POSITIONING AND

THE VALUE CREATION FRONTIER
 Value Creation Frontier  Differentiation
the maximum value the
products of different
companies in an
industry can give
customers at any time.
 Companies on the value
creation frontier have
the most successful
business level strategy Value Creation Frontier
in a particular industry. driven by the company’s
Functional Strategies Cost Leadership
Source: Strategic Management – An Integrate Approach, Jones and Hill, Figure 5.5
40
20
Lecture - Week 4
‘Stuck in the middle’?

Porter’s argues:
 It is best to choose which generic strategy to
adopt and then stick rigorously to it.
 Failure to do this leads to a danger of being
‘stuck in the middle’ i.e. doing no strategy well.
 The argument for pure generic strategies is
controversial. Even Porter acknowledges that
the strategies can be combined (e.g. if being
unique costs nothing).
41
Combining generic strategies

 A company can create separate strategic
business units each pursuing different generic
strategies and with different cost structures.
 Technological or managerial innovations where
both cost efficiency and quality are improved.
 Competitive failures – if rivals are similarly
‘stuck in the middle’ or if there is no significant
competition then ‘middle’ strategies may be OK.
42
21
Lecture - Week 4
The Strategy Clock
Exploring Strategy
12th Edition, Fig 7.5
43
Strategy clock
 Differentiation Strategies
1. Differentiation without PRICE
 premium (HIGH perceived benefits and
 moderate prices)
2. Differentiation with PRICE
premium (HIGH perceived benefits and
high prices)
 Low Price Strategies

1.Low Price Standard Strategy
(Low price with REASONABLE VALUE)
2. No Frills Strategy
  (Low Benefits and Low Prices)
 Hybrid Strategies
(Low Price + Differentiation)
e.g. IKEA, Ryanair, Easyjet?
 Non-Competitive Strategies
(Low Benefits and high prices)
Low/no competition
Source: Adapted from Exploring Strategy, 12th Edition, Fig 7.5
44
22
Lecture - Week 4
Strategy Clock - 1
 1. Differentiation Strategies: Strategies that
seek to provide products/services that offer
benefits that differ from those offered by
competitors.
 2. Low price Strategies combined with:
 low perceived product benefits focusing on price
sensitive market segments, e.g. a ‘no frills’ strategy
typified by low cost airlines such as Ryanair.
 lower price than competitors while offering similar
product benefits, aimed at increasing market share,
e.g. Asda /Walmart.
45
Strategy Clock - 2
 3. Hybrid Strategies: seek to simultaneously
achieve differentiation and low price relative
to competitors.
 Hybrid strategies can be used:
 to enter markets and build position quickly.
 as an aggressive attempt to win market share.
 to build volume sales and gain from mass
production.
 E.g. IKEA, Easyjet, Tesco?
46
23
Lecture - Week 4
Strategy Clock - 3
 4. Non-competitive Strategies: seek to
increase prices without increasing
service/product benefits.
 In competitive markets such strategies will
be doomed to failure.
 Only feasible where there is strategic ‘lock-
in’ or a near monopoly position
(historical/traditional examples include,
energy, rail travel, telecoms, etc).
47
Planned v Emergent Strategies?
Changes in the
External
Environment
Adapted from: Strategic Management – An Integrate Approach, Jones, Hill and Schilling, 2013, 11th Edition, Figure 1.7
48
24
Lecture - Week 4
‘The market dictates the product we sell’
Source: BBC Business 22 October 2018

https://www.bbc.co.uk/news/av/business-45893546/gopro-boss-the-market-dictates-the-product-we-sell
49
Summary
 Business strategy is concerned with seeking
competitive advantage in markets at the business
rather than corporate level.
 For large companies, business strategy needs to be
considered and defined in terms of strategic business
units (SBUs).
 Different generic strategies can be defined in terms
of cost-leadership, differentiation and focus.
 Managers need to consider how business strategies
can be sustained through strategic capabilities
(functional level strategies) and/or the ability to
achieve a ‘lock-in’ position with buyers.
50
25

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UG Strategic Management (2021/22) Lecture - Week 4

Week 4: Business Level Strategies

Strategic Management (MOMN069H6) Session 4 1

Strategic Choices? Strategic Futures!

Internal Strengths & Competitor

External Opportunities Industry

Strategic Management (MOMN069H6) Session 4 2

The Exploring Strategy Framework

Strategic Management (MOMN069H6) Session 4 3

Strategic Management (MOMN069H6) Session 4 4

Strategic Management (MOMN069H6) Session

The Strategic Management Process

Strategic Management (MOMN069H6) Session 4 6

Strategic Management (MOMN069H6) Session 4 7

Business and Corporate Level Strategies

The Three Elements of Strategy

1. Generic (Business 2. Alternative 3. Alternative

Strategic Management (MOMN069H6) Session 4 8

Coursework Report: Strategic Review

Strategic Management (MOMN069H6) Session 4

Business Level Strategy

Strategic Management (MOMN069H6) Session 4 10

The Business Model

Strategic Management (MOMN069H6) Session 4 11

Strategic Management (MOMN069H6) Session 4 12

Strategic Management (MOMN069H6) Session 4 13

Generic (Business-Level) Strategies

Strategic Management (MOMN069H6) Session 4 14

Business Level Strategies

Strategic Management (MOMN069H6) Session 4 15

Strategic business units (SBUs)

Strategic Management (MOMN069H6) Session 4 16

Business Level Strategies

COST LEADERSHIP DIFFERENTIATION

producer in the industry (Q). unique attributes.

• Lower costs = lower prices. • Customers prepared to pay

COST FOCUS DIFFERENTIATION FOCUS

• Aim to achieve sustainable cost • Aim to achieve sustainable product

Ian D Harrison: Adapted from Exploring Strategy - Fig 7.2

Strategic Management (MOMN069H6) Session 4 17

Generic Strategies: Costs, Prices and Profits

Profit = Revenue - Costs

Source: ‘Exploring Strategy’, 2020, 12th Edition, Figure 7.4

Strategic Management (MOMN069H6) Session 4 18

Strategic Management (MOMN069H6) Session 4 19

Strategic Management (MOMN069H6) Session 4 20

Exploiting the Experience Curve

Strategic Management (MOMN069H6) Session 4 21

The Experience Curve

Strategic significance of the experience

Unit costs decline,

Strategic Management (MOMN069H6) Session 4 22

The Soft Drinks Experience Curve

Strategic Management (MOMN069H6) Session 4 23

Major Risks of Cost Leadership Strategy

 There can only be one cost leader

Strategic Management (MOMN069H6) Session 4 24

Strategic Management (MOMN069H6) Session 4 25

Customer Needs and

Strategic Management (MOMN069H6) Session 4 26

Strategic Management (MOMN069H6) Session 4 27

Some Differentiation Themes