Strategic Management Theory An Integrated Approach 11th Edition Hill Solutions Manual 1

STRATEGIC MANAGEMENT THEORY AN
INTEGRATED APPROACH 11TH EDITION

HILL SOLUTIONS MANUAL
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CHAPTER 5
Business-Level Strategy
Synopsis of Chapter
The purpose of this chapter is to discuss the various business level strategies that a company can use to
compete effectively in a business and in an industry. This chapter argues that the basis of all successful
business models is the choice of business-level strategies that work together to provide competitive
advantage. At the most basic level a company can adopt two strategies; one is to lower its costs, and the
second is differentiation. Although, in actuality, a company that adopts both these strategies will
eventually emerge at the top. This leads to the concept of “value innovation.” Value innovation implies
greater efficiency, and greater value through superior differentiation at a lower cost. Innovators can push
frontiers in any industry.
An important component of this chapter is market segmentation. Companies segment or group customers
based on important differences to gain a competitive advantage. Market segmentation directly impacts a
company’s business-level strategy. This chapter discusses four generic business-level strategies—broad
low-cost, focus low-cost, broad differentiation, and focus differentiation. Every company must adopt the
most appropriate strategy suited to them to achieve a competitive advantage in the market. However, for
competitive advantage, implementing the business-level strategy is as important as identifying it. There
must be an alignment between business-level strategy, functional strategy, and organization for the
implementation to be accomplished.
Most successful companies build their competitive advantage by redefining their product offering,
creating value innovation, and pioneering a new market space. This process of finding a new market
where a company can innovate, and pave its own way is known as “searching for a blue ocean.” Finally,
the chapter ends with a good example of a company that successfully implements a business-level
strategy which summarizes all the concepts in the text.
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Chapter 5: Business-Level Strategy
Learning Objectives
1. Explain the difference between low-cost and differentiation strategies.

2. Articulate how the attainment of a differentiated or low-cost position can give a company a
competitive advantage.
3. Explain how a company executes its business-level strategy through function level strategies and
organizational arrangements.
4. Describe what is meant by the term “value innovation.”
5. Discuss the concept of blue ocean strategy, and explain how innovation in business-level strategy
can change the competitive game in an industry, giving the innovator a sustained competitive
advantage.
Opening Case
Nordstrom’s Success Story
Nordstrom is one of America’s biggest fashion retailers. For over 100 years, their tradition for customer
service, selection, quality, and value have built the business from scratch. Nordstrom targets the affluent
customer base, and their shops and merchandise give an impression of luxury that not everyone can
afford. However, the one fact that differentiates them from their rivals is their topnotch customer service.
Nordstrom’s salespeople are class apart. They are employed because of their exceptional potential for
serving customers. Nordstrom believes that the customer is always right. Customer service is pivotal to
the business, and their needs must always be fulfilled. The CEO, Blake Nordstrom, puts his salespeople
above himself, and believes that they are the reason for the company’s success. Despite continual growth
and success, Nordstrom believes in maintaining and improving efficiency and customer service.
Teaching Note:
Nordstrom’s success comes from its topnotch customer service, and continual efficiency. However, is
Nordstrom’s success partly based on the fact that their current customer base constitutes the wealthy?
You could ask students if they know of other such success stories, and to share it with the rest of the class.
Lecture Outline
I. Overview
This chapter looks at the formulation of business-level strategy. Business-level strategy refers to the
overarching competitive theme of a company in a given market. At its most basic, business-level strategy
is about who a company decides to serve (which customer segments), what customer needs and desires
the company is trying to satisfy, and how the company decides to satisfy those needs and desires.
This chapter looks at how managers decide what business-level strategy to pursue, and how they go about
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executing that strategy in order to attain a sustainable competitive advantage. The chapter starts by
looking at two basic ways that companies chose how to compete in a market—by lowering costs and by
differentiating their good or service from that offered by rivals so that they create more value. Next, it
considers the issue of customer choice and market segmentation, and discusses the choices that managers
must make when it comes to their company’s segmentation strategy. Then it discusses the various
business-level strategies that an enterprise can adopt and what must be done to successfully implement
those strategies. The chapter closes with a discussion of how managers can think about formulating an
innovative business-level strategy that gives their company a unique and defendable position in the
marketplace.
II. Low Cost and Differentiation
Strategy is about the search for competitive advantage. At the most fundamental level, a company has a
competitive advantage if it can lower costs relative to rivals and/or if it can differentiate its product
offering from those of rivals, thereby creating more value.
A. Lowering Costs
In commodity markets, competitive advantage goes to the company that has the lowest costs. Low
costs will enable a company to make a profit at price points where its rivals are losing money. Low
costs can also allow a company to undercut rivals on price, gain market share, and maintain or even
increase profitability. Being the low-cost player in an industry can be a very advantageous position.
Although lowering costs below those of rivals is a particularly powerful strategy in a pure
commodity industry, it can also have great utility in other settings.
5.1 Strategy in Action: Southwest Airlines Forges Ahead
Southwest Airlines has long been the most profitable U.S. airline. It is famous for its low fares, generally
some 30% below those of its major rivals, which are balanced by an even lower cost structure, which has
enabled it to record superior profitability even in bad years such as 2008–2009 when the industry faced
slumping demand. A major source of Southwest’s low-cost structure seems to be its very high employee
productivity. Southwest runs its operation with fewer people than competitors and does so successfully
because of the following reasons:
 Southwest’s managers devote enormous attention to whom they hire.
 Southwest also reduces its costs by striving to keep its operations as simple as possible.
 Another major difference between Southwest and most other airlines is that Southwest flies point to
point rather than operating from congested airport hubs.
Teaching Note:
This case describes the business model of Southwest Airlines. Southwest’s strategies have helped it stay
ahead of its competitors. You could discuss with the students how companies can increase their profits by
eliminating unnecessary costs, and sticking to the basics.
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1. Differentiation
Differentiation implies distinguishing oneself from rivals by offering something that they
find hard to match. There are many ways that a company can differentiate itself from rivals.
A product can be differentiated by superior reliability, better design, superior functions and
features, better point-of-sale service, better after sales service and support, etc.
Differentiation gives a company two advantages:

 It can allow the company to charge a premium price for its good or service, should it
chose to do so.
 It can help the company to grow overall demand and capture market share from its
rivals.
It is important to note that differentiation often (but not always) raises the cost structure of
the firm. On the other hand, there are situations where successful differentiation, because it
increases primary demand so much, can actually lower costs.
Figure 5.1: Options for Exploiting Differentiation
2. The Differentiation–Low Cost Tradeoff
The thrust of the discussion so far is that a low cost position and a differentiated position are
two very different ways of gaining a competitive advantage. The enterprise that is striving
for the lowest costs does everything it can to be productive and drive down its cost structure,
whereas the enterprise striving for differentiation necessarily has to bear higher costs to
achieve that differentiation.
However, presenting the choice between differentiation and low costs in these terms is
something of a simplification. The successful differentiator might be able to subsequently
reduce costs if differentiation leads to significant demand growth and the attainment of scale
economies. But in actuality, the relationship between low cost and differentiation is subtler
than this. In reality, strategy is not so much about making discrete choices as it is about
deciding what the right balance is between differentiation and low costs.
The convex curve in Figure 5.2 illustrates what is known as an efficiency frontier (also
known in economics as a production possibility frontier). The efficiency frontier shows all of
the different positions that a company can adopt with regard to differentiation and low cost,
assuming that its internal functions and organizational arrangements are configured
efficiently to support a particular position. The efficiency frontier has a convex shape
because of diminishing returns. Diminishing returns imply that when an enterprise already
has significant differentiation built into its product offering, increasing differentiation by a
relatively small amount requires significant additional costs. The converse also holds: when
a company already has a low-cost structure, it has to give up a lot of differentiation in its
product offering to get additional cost reductions.
Figure 5.2: The Differentiation-Low Cost Tradeoff
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The essential point here is that there are often multiple positions on the differentiation–low
cost continuum that are viable in the sense that they have enough demand to support an
offering. The task for managers is to identify a position in the industry that is viable and then
configure the functions and organizational arrangements of the enterprise so that they are run
as efficiently and effectively as possible, and enable the firm to reach the frontier. To
successfully implement a business-level strategy and get to the efficiency frontier, a company
must be pursuing the right functional-level strategies, and it must be appropriately
organized. Business-level strategy, functional-level strategy, and organizational
arrangement must all be aligned with each other.
3. Value Innovation: Greater Differentiation at a Lower Cost
The efficiency frontier is not static; it is continually being pushed outwards by the efforts of
managers to improve their firm’s performance through innovation. The term value
innovation is used to describe what happens when innovation pushes out the efficiency
frontier in an industry, allowing for greater value to be offered through superior
differentiation at a lower cost than was previously thought possible. When a company is able
to pioneer process innovations that lead to value innovation, it effectively changes the game
in an industry and may be able to outperform its rivals for a long period of time.
Figure 5.3: Value Innovation in the PC Industry
III. Who are Our Customers? Market Segmentation
Business-level strategy begins with the customer. It starts with deciding who the company is going to
serve, what needs or desires it is trying to satisfy, and how it is going to satisfy those needs and desires.
One of the most fundamental questions that any company faces is whether to recognize differences in
customers, and if it does, how to tailor its approach depending on which customer segment or segments it
decides to serve. The first step toward answering these questions is to segment the market according to
differences in customer demographics, needs, and desires.
Market segmentation refers to the process of subdividing a market into clearly identifiable groups of
customers with similar needs, desires, and demand characteristics. Customers within these segments are
relatively homogenous, whereas they differ in important ways from customers in other segments of the
market.
1. Three Approaches to Market Segmentation
There are three basic approaches to market segmentation that companies adopt:
 One is to choose not to tailor different offerings to different segments, and instead
produce and sell a standardized product that is targeted at the average customer in that
market.
 A second approach is to recognize differences between segments and create different
product offerings for the different segments.
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 A third approach is to target only a limited number of market segments, or just one,
and to become the very best at serving that particular segment.
When managers decide to ignore different segments, and produce a standardized product for
the average consumer, they are said to be pursuing a standardization strategy. When they
decide to serve many segments, or even the entire market, producing different offerings for
different segments, they are said to be pursuing a segmentation strategy. When they decide
to serve a limited number of segments, or just one segment, they are said to be pursuing a
focus strategy.
2. Market Segmentation, Costs and Revenues
It is important to understand that the different approaches to market segmentation have

different implications for costs and revenues:
 A standardization strategy is typically associated with lower costs than a segmentation
strategy. A standardization strategy involves the company producing one basic
offering, and trying to attain economies of scale by achieving a high volume of sales.
 In contrast, a segmentation strategy requires that the company customize its product
offering to different segments, producing multiple offerings, one for each segment.
Customization can drive up costs for two reasons:
o The company may sell less of each offering, making it harder to achieve
economies of scale
o Products targeted at segments at the higher-income end of the market may
require more functions and features, which can raise the costs of production and
delivery
It is important not to lose sight of the fact that advances in production technology, and
particularly lean production techniques, have allowed for mass customization—that is, the
production of more product variety without a large cost penalty. In addition, by designing
products that share common components, some manufacturing companies are able to achieve
substantial economies of scale in component production, while still producing a variety of
end products aimed at different segments.
Although a standardization strategy may have lower costs than a segmentation strategy, a
segmentation strategy does have one big advantage—it allows the company to capture
incremental revenues by customizing its offerings to the needs of different groups of
consumers, and thus selling more in total. A company pursuing a standardization strategy
where the product is aimed at the average consumer may lose sales from customers who
desire more functions and features, and are prepared to pay more for that. Similarly, it may
lose sales from customers who cannot afford to purchase the average product, but might
enter the market if a more basic offering was available.
As for a focus strategy, here the impact on costs and revenues is subtler. Companies that
focus on the higher-income or higher-value end of the market will tend to have a higher cost
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structure for two reasons:

 They will have to add features and functions to their product to appeal to higher-
income consumers, and this will raise costs.
 The relatively limited nature of demand associated with serving just a segment of the
market may make it harder to attain economies of scale.
For companies focusing on the lower-income end of the market, or a segment that desires
value for money, a different calculus comes into play. Such companies tend to produce a
more basic offering that is relatively inexpensive to produce and deliver. This may help them
to drive down their cost structures.
IV. Business -Level Strategy Choices
The basic business-level strategy choices that companies make are sometimes called generic business-
level strategy. The various choices are illustrated in Figure 5.4.
Figure 5.4: Generic Business-Level strategies
Companies that pursue a standardized or segmentation strategy both target a broad market. However,
those pursuing a segmentation strategy recognize different segments, and tailor their offering accordingly,
whereas those pursuing a standardization strategy just focus on serving the average consumer. Companies
that target the broad market can either concentrate on lowering their costs so that they can lower prices
and still make a profit, in which case they are said to be pursuing a broad low-cost strategy, or they can
try to differentiate their product in some way, in which case they are pursuing a broad differentiation
strategy. Companies that decide to recognize different segments, and offer different product to each
segment, are by default pursuing a broad differentiation strategy.
Companies that target a few segments, or more typically, just one, are pursuing a focus or niche strategy.
These companies can either try to be the low-cost player in that niche, in which case they are pursuing a
focus low-cost strategy, or they can try to customize their offering to the needs of that particular segment
through the addition of features and functions, in which case they are pursuing a focus differentiation
strategy.
There is often no one best way of competing in an industry. The important thing for managers is to know
what their business-level strategy is, to have a clear logic for pursuing that strategy, to have an offering
that matches their strategy, and to align the functional activities and organization arrangements of the
company with that strategy so that the strategy is well executed.
Michael Porter, who was the originator of the concept of generic business-level strategies, has argued that
companies must make a clear choice between the different options outline in Figure 5.4.6 If they don’t,
Porter argues, they may become “stuck in the middle” and experience poor relative performance. At the
limit, there is considerable value in this perspective. On the other hand, there are some important caveats
to this argument:
 Through improvements in process and product, a company can push out the efficiency frontier in
its industry, redefining what is possible, and deliver more differentiation at a lower cost than its
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rivals.
o In such circumstances, a company might find itself in the fortunate position of being both the
differentiated player in its industry and having a low-cost position.
o Ultimately its rivals might catch up, in which case it may well have to make a choice
between emphasizing low cost and differentiation.
 It is important for the differentiated company to recognize that it cannot take its eye off the
efficiency ball.
o Similarly, the low-cost company cannot ignore product differentiation.
o The task facing a company pursuing a differentiation strategy is to be as efficient as possible
given its choice of strategy.
o The differentiated company should not cut costs so far that it harms its ability to differentiate
its offering from that of rivals.
o At the same time, it cannot let costs get out of control.
5.2 Strategy in Action: Microsoft Office versus Google Apps
Microsoft rose to fame because of an important innovation in 1989. It was the first company to offer word
processing, spreadsheet, and presentation programs in an interoperable bundle. The package was also
priced affordably. Microsoft expanded its market position using thoughtful strategies, and this helped it
achieve a monopoly position for almost two decades.
However, in 2006 Google introduced Google Apps. This was an online version of the Office suite.
Google’s approach was not to match Office on features, but to be good enough for the majority of users.
This helped reduce development costs. Google followed a low-cost strategy, and quickly made its
presence felt in many small and large enterprises. Microsoft still has a stronghold on the industry, but it
cannot ignore Google Apps. Nevertheless, Microsoft remains competitive, and it came up with its own
cloud-based Office 365.
As both companies are currently on-par with one another, the market is yet to see who emerges as the
leader.
Teaching Note:
Both Microsoft and Google Apps are competing to offer the best cloud-based Office suite. You could
initiate a discussion with the students on what either of the companies must do to emerge as the leader in
the market. Also, you could ask the students to express their opinions on what today’s businesses are
required to do in order to succeed.
V. Business-Level Strategy, Industry and Competitive Advantage
Properly executed, a well-chosen and well-crafted business-level strategy can give a company a
competitive advantage over actual and potential rivals. More precisely, it can put the company in an
advantageous position relative to each of the competitive forces.
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A low-cost enterprise can make profits at price points that its rivals cannot profitably match. This makes it
very hard for rivals to enter its market. In other words, the low-cost company can build an entry barrier
into its market.
A low-cost position and the ability to charge low prices and still make profits also give a company
protection against substitute goods or services. Low costs can help a company to absorb cost increases
that may be passed on downstream by powerful suppliers. Low costs can also enable the company to
respond to demands for deep price discounts from powerful buyers and still make money. The low-cost
company is often best positioned to survive price rivalry in its industry. Indeed, a low-cost company may
deliberately initiate a price war in order to grow volume and drive its weaker rivals out of the industry.
A successful differentiator is also protected against each of the competitive forces. The brand loyalty
associated with differentiation can constitute an important entry barrier, protecting the company’s market
from potential competitors. Because the successful differentiator sells on non-price factors, it is also less
exposed to pricing pressure from powerful buyers. The successful differentiator may be able to implement
price increases without encountering much, if any, resistance from buyers. The brand loyalty enjoyed by
the differentiated company also gives it protection from substitute goods and service.
The differentiated company is protected from intense price rivalry within its industry by its brand loyalty,
and by the fact that non-price factors are important to its customer set. At the same time, the differentiated
company often does have to invest significant effort and resources in non-price rivalry, such as brand
building through marketing campaigns or expensive product development efforts, but to the extent that it
is successful, it can reap the benefits of these investments in the form of stable or higher prices.
Focused companies often have an advantage over their broad market rivals in the segment or niche that
they compete in. The same can be true for a differentiated company. By focusing on a niche, and
customizing the offering to that segment, a differentiated company can often outsell differentiated rivals
that target a broader market.
VI. Implementing Business–Level Strategy
For a company’s business-level strategy to translate into a competitive advantage, it must be well
implemented. This means that actions taken at the functional level should support the business-level
strategy, as should the organizational arrangements of the enterprise. There must be an alignment or fit
between business-level strategy, functional strategy, and organization (Figure 5.5).
Figure 5.5: Strategy is Implemented through Function and Organization
1. Lowering Costs through Functional Strategy and Organization
Companies achieve a low-cost position primarily through pursuing functional level strategies
that result in superior efficiency and superior product reliability. The following are clearly
important:
 Achieving economies of scale and learning effects
 Adopting lean production and flexible manufacturing technologies
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 Implementing quality improvement methodologies to ensure that the goods or services

the company produces are reliable, so that time, materials, and effort are not wasted
producing and delivering poor-quality products that have to be scrapped, reworked, or
produced again from scratch
 Streamlining processes to take out unnecessary steps
 Using information systems to automate business process
 Implementing just-in-time inventory control systems
 Designing products so that they can be produced and delivered at as low a cost as
possible
 Taking steps to increase customer retention and reduce customer churn
In addition, to lower costs the firm must be organized in such a way that the structure,
control systems, incentive systems, and culture of the company all emphasize and reward
employee behaviors and actions that are consistent with, or lead to, higher productivity and
greater efficiency. The kinds of organizational arrangements that are favored in such
circumstances include a flat organizational structure with very few levels in the management
hierarchy, clear lines of accountability and control, measurement and control systems that
focus on productivity and cost containment, incentive systems that encourage employees to
work in as productive a manner as possible.
2. Differentiation through Functional-Level Strategy and Organization
As with low costs, to successfully differentiate itself a company must pursue the right actions
at the functional level, and it must organize itself appropriately. Pursuing functional-level
strategies that enable the company to achieve superior quality in terms of both reliability and
excellence are important, as is an emphasis upon innovation in the product offering, and high
levels of customer responsiveness. Superior quality, innovation, and customer
responsiveness are three of the four building blocks of competitive advantage, the other
being efficiency. Specific functional strategies designed to improve differentiation include
the following:
 Customization of the product offering and marketing mix to different market segments
 Designing product offerings that have high perceived quality in terms of their
functions, features, and performance, in addition to being reliable
 A well-developed customer care function for quickly handling and responding to
customer inquiries and problems
 Marketing efforts focused on brand building and perceived differentiation from rivals
 Hiring and employee development strategies designed to ensure that employees act in
a manner that is consistent with the image that the company is trying to project to the
world
As for organizing, creating the right structure, controls, incentives, and culture can all help a
company to differentiate itself from rivals. In a differentiated enterprise, one key issue is to
make sure that marketing, product design, customer service, and customer care functions all
play a key role. Making sure that control systems, incentive systems, and culture are aligned
with the strategic thrust is also extremely important for differentiated companies.
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VII. Competing Differently: Searching for a Blue Ocean
Sometimes companies can fundamentally shift the game in their industry by figuring out ways to offer
more value through differentiation at a lower cost than their rivals. This is referred to as value innovation,
term that was first coined by Chan Kim and Renee Mauborgne. Their basic proposition is that many
successful companies have built their competitive advantage by redefining their product offering through
value innovation and, in essence, creating a new market space. They describe the process of thinking
through value innovation as searching for the blue ocean—which they characterize as a wide open market
space where a company can chart its own course.
Kim and Mauborgne use the concept of a strategy canvas to map out how value innovators differ from
their rivals. When thinking about how a company might redefine its market and craft a new business-level
strategy, Kim and Mauborgne suggest that managers ask themselves the following questions:
 Eliminate: Which factors that rivals take for granted in our industry can be eliminated, thereby
reducing costs?
 Reduce: Which factors should be reduced well below the standard in our industry, thereby lowering
costs?
 Raise: Which factors should be raised above the standard in our industry, thereby increasing value?
 Create: What factors can we create that rivals do not offer, thereby increasing value?
Figure 5.6: A Strategy Canvas for Southwest Airlines
This is a useful framework, and it directs managerial attention to the need to think differently than rivals
in order to create an offering and strategic position that are unique. If such efforts are successful, they can
help a company to build a sustainable advantage.
One of the great advantages of successful value innovation is that it can catch rivals off guard and make it
difficult for them to catch up. In sum, value innovation, because it shifts the basis of competition, can
result in a sustained competitive advantage for the innovating company due to the relative inertia of rivals
and their inability to respond in a timely manner without breaking prior strategic commitments.
Teaching Note: Ethical Dilemma
This question should be used to discuss how Costco’s actions have impacted its business-level strategy,
and also how it can rebuild its manufacturing base in the U.S. You could initiate a discussion on this
ethical dilemma, and emphasize how a low-cost business level strategy does not mean that product quality
must be compromised.
Answers to Discussion Questions
1. What are the main differences between a low cost strategy and a differentiation strategy?
In commodity markets, competitive advantage goes to the company that has the lowest costs. Low
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costs will enable a company to make a profit at price points where its rivals are losing money. Low
costs can also allow a company to undercut rivals on price, gain market share, and maintain or even
increase profitability. Being the low-cost player in an industry can be a very advantageous position.
Differentiation implies distinguishing oneself from rivals by offering something that they find hard
to match. There are many ways that a company can differentiate itself from rivals. A product can be
differentiated by superior reliability (it breaks down less often, or not at all), better design, superior
functions and features, better point-of-sale service, better after sales service and support, better
branding, and so on. Differentiation gives a company two advantages:
 It can allow the company to charge a premium price for its good or service, should it chose
to do so.
 It can help the company to grow overall demand and capture market share from its rivals.
Differentiation often (but not always) raises the cost structure of the firm. On the other hand, there
are situations where successful differentiation, because it increases primary demand so much, can
actually lower costs.
2. Why is market segmentation such an important step in the process of formulating a business level
strategy?
Market segmentation refers to the process of subdividing a market into clearly identifiable groups
of customers with similar needs, desires, and demand characteristics. Market segmentation is an
important step in the process of formulating a business level strategy because it helps companies
identify the basic business-level strategy choices that they make.
3. How can a business-level strategy of (a) low cost and (b) differentiation offer some protection
against competitive forces in a company’s industry?
(a) Low cost business-level strategy
A low-cost enterprise can make profits at price points that its rivals cannot profitably match.
This makes it very hard for rivals to enter its market. In other words, the low-cost company
can build an entry barrier into its market. It can, in effect, erect an economic moat around its
business that keeps higher-cost rivals out. A low-cost position and the ability to charge low
prices and still make profits also give a company protection against substitute goods or
services.
Low costs can help a company to absorb cost increases that may be passed on downstream by
powerful suppliers. Low costs can also enable the company to respond to demands for deep
price discounts from powerful buyers and still make money. The low-cost company is often
best positioned to survive price rivalry in its industry. Indeed, a low-cost company may
deliberately initiate a price war in order to grow volume and drive its weaker rivals out of the
industry.
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(b) Differentiation business-level strategy
A successful differentiator is also protected against each of the competitive forces. The brand
loyalty associated with differentiation can constitute an important entry barrier, protecting the
company’s market from potential competitors. Because the successful differentiator sells on
non-price factors, it is also less exposed to pricing pressure from powerful buyers. Indeed, the
converse may be the case—the successful differentiator may be able to implement price
increases without encountering much, if any, resistance from buyers. The differentiated
company can also fairly easy absorb price increases from powerful suppliers and pass those on
downstream in the form of higher prices for its offerings, without suffering much, if any, loss
in market share.
The brand loyalty enjoyed by the differentiated company also gives it protection from
substitute goods and service. The differentiated company is also protected by the fact that non-
price factors are important to its customer set. At the same time, the differentiated company
often does have to invest significant effort and resources in non-price rivalry, such as brand
building through marketing campaigns or expensive product development efforts, but to the
extent that it is successful, it can reap the benefits of these investments in the form of stable or
higher prices.
4. What is required to transform a business-level strategy from an idea into reality?
The following functional strategies and organizational arrangements are required to transform a
business-level strategy from an idea into reality:
 Lowering costs through functional strategy and organization
o Companies achieve a low-cost position primarily through pursuing those functional
level strategies that result in superior efficiency and superior product reliability.
o The firm must be organized in such a way that the structure, control systems, incentive
systems, and culture of the company all emphasize and reward employee behaviors
and actions that are consistent with, or lead to, higher productivity and greater
efficiency.
o The kinds of organizational arrangements that are favored in such circumstances
include a flat organizational structure with very few levels in the management
hierarchy, clear lines of accountability and control, measurement and control systems
that focus on productivity and cost containment, incentive systems that encourage
employees to work in as productive a manner as possible.
 Differentiation through functional-level strategy and organization
o Pursuing functional-level strategies that enable the company to achieve superior
quality in terms of both reliability and excellence are important, as is an emphasis
upon innovation in the product offering, and high levels of customer responsiveness.
o The differentiated firm cannot ignore efficiency; by virtue of its strategic choice, the
differentiated company is likely to have a higher cost structure than the low-cost
player in its industry.
o As for organizing, creating the right structure, controls, incentives, and culture can all
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help a company to differentiate itself from rivals.

o In a differentiated enterprise, one key issue is to make sure that marketing, product
design, customer service, and customer care functions all play a key role.
5. What do we mean by the term value innovation? Can you identify a company not discussed in the
text that has established a strong competitive position through value innovation?
Value innovation is used to describe what happens when innovation pushes out the efficiency
frontier an industry, allowing for greater value to be offered through superior differentiation at a
lower cost than was previously thought possible.
Students’ choice of companies will differ.
Practicing Strategic Management
Small-Group Exercise: Identifying a Company That Has Achieved A

Competitive Advantage Through Value Innovation
The students are asked to break up into groups of three to five each and appoint one group member as a
spokesperson who will communicate the group’s findings to the class when called on to do so by the
instructor. They are asked to discuss the following scenario:
Identify a company that you are familiar with that seems to have gained a competitive advantage by
being a value innovator within its industry. Explain how this company has (a) created more value that
rivals in its industry, and (b) simultaneously been able to drive down its cost structure. How secure do
you think this company’s competitive advantage is? Explain your reasoning.
Teaching Note:
This exercise will give students a better understanding on value innovation, competitive advantage, and
business-level strategy. As the students present their findings to the class you may probe them to elicit
more information about the company being discussed. This will give the class a better insight into the
discussion. You may also encourage the class to ask questions, or challenge the opinions of the presenter.
Strategy Sign-On
Article File 5
Have students find examples of companies that are pursuing each of the generic business-level strategies.
They should discuss how successful has each of these companies been at pursuing its chosen strategy.
Teaching Note:
Almost every company, with the exception of those that are stuck in the middle, is pursuing one or more
15
of the generic strategies, so examples will be abundant. As they complete the exercise, students will see
how the generic strategies are built upon a series of strategic choices. They will also become aware of the
impact of strategy upon company success.
To extend this exercise, when a student chooses a firm pursuing one strategy, ask others to give examples
of other firms in that same industry that are pursuing a different strategy. The students can then note the
differences in strategic choices. They will also find that the advantages and disadvantages of opposite
strategies are often mirror images—that is, one strategy’s advantage is another strategy’s disadvantage.
Strategic Management Project: Developing Your Portfolio 5
This module deals with the business-level strategy pursued by the companies the students chose. They are
required to answer the following questions:
1. Which market segments is your company serving?
2. What business-level strategy is your company pursuing?
3. How is your company executing its business-level strategy through actions at the functional level,
and through organizational arrangements? How well is it doing? Are there things it could do
differently?
4. Take a blue ocean approach to the business of your company, and ask if it could and/or should
change its business-level strategy by eliminating, reducing, raising, or creating factors related to its
product offering.
Teaching Note:
This module asks students to investigate every major component of a business-level strategy. It tests
students’ understanding on market segmentation, value innovation, and product offering. You may also
ask the students to provide a short report based on the answers to the above questions.
You could ask the students to discuss what they would do differently if they were the managers of their
chosen company. Would they take a drastically different approach from what the company is currently
taking? If so, you could ask the students to state appropriate reasons for their decision.
Closing Case
A Different Approach: Lululemon
Back in 1998, self-described snowboarder and surfer dude Chip Wilson took his first commercial yoga
class. For Wilson, who had worked in the sportswear business and had a passion for technical athletic
fabrics, wearing cotton clothes to do sweaty, stretchy power yoga exercises seemed totally inappropriate.
And so the idea for Lululemon was born. Wilson’s vision was to create high-quality and stylishly
designed clothing for yoga and related sports activities using the very best technical fabrics. He built up a
design team, but outsourced manufacturing to low-cost producers, primarily in South East Asia.
16
The first store opened in Vancouver, Canada, in 2000. It quickly became a runaway success, and other
stores soon followed. As it has evolved, Lululemon’s strategy focuses on a number of key issues. Getting
the product right is undoubtedly a central part of the company’s strategy. The company’s yoga-inspired
athletic clothes are well designed, stylish, comfortable, and use the very best technical fabrics. An equally
important part of the strategy is to only stock a limited supply of an item. New colors and seasonal items,
for example, get 3- to 12-week life cycles, which keeps the product offerings feeling fresh.
The scarcity strategy has worked; Lululemon never holds sales, and its clothing sells for a premium price.
Lululemon continues to hire employees who are passionate about fitness. Employees are trained to
eavesdrop on customers, who are called “guests.” CEO Christine Day is not a fan of using “big data” to
analyze customer purchases. She believes that software-generated data can give a company a false sense
of security about the customer. Instead, Day personally spends hours each week in Lululemon stores
observing how customers shop, listening to their complaints, and then using their feedback to tweak
product development efforts.
Despite the company’s focus on providing quality, it has not all been plain sailing for Lululemon. In
2010, Wilson caused a stir when he had the company’s tote bags emblazoned with the phrase “Who is
John Galt,” the opening line from Ayn Rand’s 1957 novel, Atlas Shrugged. Atlas Shrugged has become a
libertarian bible, and the underlying message that Lululemon supported Rand’s brand of unregulated
capitalism did not sit too well with many of the stores’ customers. In early 2013, Lululemon found itself
dealing with another controversy when it decided to recall some black yoga pants that were apparently too
sheer, and effectively “see through” when stretched due to the lack of “rear-end coverage.” Despite this,
however, most observers in the media and financial community believe that the company will deal with
this issue, and be able to continue its growth trajectory going forward.
Answers to Case Discussion Questions
1. How would you describe Lululemon’s market segmentation strategy? Who do you think are
Lululemon’s typical customers?
Lululemon chose the third approach to market segmentation, the focus strategy, where it targeted
one market segment to become the very best at serving that particular segment. Lululemon targets
people who are fitness conscious. Moreover, because it uses stylish, high-quality, and technically
superior fabric, the price of the product is high, so the customers would ideally belong to the upper-
middle and upper class.
2. What generic business-level strategy is Lululemon pursuing? Does this strategy give it an
advantage over its rivals in the athletic clothing business? If so, how?
Students’ answers may vary. Lululemon is pursuing the broad differentiation strategy because it
differentiates its product by offering a unique product to one segment of the market. This strategy is
advantageous to Lululemon because the quality and consistency of their product keep customers
happy. Also, its high-priced items make sure that they have no competitors in the same segment.
17
3. In order to successfully implement its business level strategy; what does Lululemon need to do at
the functional level? Has the company done these things?
Students’ answers may vary. To successfully implement its business level strategy Lululemon must
try to achieve superior quality in terms of reliability and excellence, keep innovating the product
offering, and elicit customer responsiveness. Lululemon has already been doing these things, and
this is why its business-level strategy has proved to be successful.
4. How might the marketing and product missteps cited in the case impact upon Lululemon’s ability
to successfully execute its business-level strategy? What should Lululemon do to make sure that it
does not make similar mistakes going forward?
Students’ answers may vary. Lululemon’s support for Rand’s brand of unregulated capitalism did
not sit well with the store’s customers, and customer’s being mistreated by the store’s employees
also cost the company a great deal. These missteps could be seen as a lack of care toward customer
responsiveness. To make sure that these mistakes are not repeated, the company must be more
sensitive to the needs and desires of its customers, and customer service should be prioritized.

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STRATEGIC MANAGEMENT THEORY AN

INTEGRATED APPROACH 11TH EDITION

Solution manual: https://testbankpack.com/

1. Explain the difference between low-cost and differentiation strategies.

Nordstrom’s Success Story

II. Low Cost and Differentiation

5.1 Strategy in Action: Southwest Airlines Forges Ahead

Differentiation gives a company two advantages:

2. The Differentiation–Low Cost Tradeoff

3. Value Innovation: Greater Differentiation at a Lower Cost

III. Who are Our Customers? Market Segmentation

1. Three Approaches to Market Segmentation

2. Market Segmentation, Costs and Revenues

It is important to understand that the different approaches to market segmentation have

structure for two reasons:

IV. Business -Level Strategy Choices

5.2 Strategy in Action: Microsoft Office versus Google Apps

V. Business-Level Strategy, Industry and Competitive Advantage

VI. Implementing Business–Level Strategy

1. Lowering Costs through Functional Strategy and Organization

 Implementing quality improvement methodologies to ensure that the goods or services

2. Differentiation through Functional-Level Strategy and Organization

VII. Competing Differently: Searching for a Blue Ocean

Teaching Note: Ethical Dilemma

Answers to Discussion Questions

(a) Low cost business-level strategy

(b) Differentiation business-level strategy

4. What is required to transform a business-level strategy from an idea into reality?

help a company to differentiate itself from rivals.

Practicing Strategic Management

Small-Group Exercise: Identifying a Company That Has Achieved A

Strategic Management Project: Developing Your Portfolio 5

A Different Approach: Lululemon

Answers to Case Discussion Questions

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