CHAPTER 4

STRATEGIC Business-Level Strategy

ACTIONS:
STRATEGY
FORMULATION
Strategic Management
Competitiveness and Globalization:
PowerPoint Presentation by Charlie Cook
Concepts and Cases Seventh edition
The University of West Alabama
© 2007 Thomson/South-Western.
All rights reserved. Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson
Business-Level Strategy (Defined)
• An integrated and coordinated set of
commitments and actions the firm uses to gain a
competitive advantage by exploiting core
competencies in specific product markets.

© 2007 Thomson/South-Western. All rights reserved. 4–2

Customers: Their Relationship to Business-
Level Strategies
Who will be
served?

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

How will those

needs be satisfied?

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Who: Determining the Customers to Serve
• Market segmentation
 A process used to cluster people with similar needs
into individual and identifiable groups.

All Customers
Consumer Industrial
Markets Markets

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Market Segmentation
• Consumer Markets • Industrial Markets
 Demographic factors  End-use segments
 Socioeconomic factors  Product segments
 Geographic factors  Geographic segments
 Psychological factors  Common buying factor
segments
 Consumption patterns
 Customer size
 Perceptual factors
segments

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TABLE 4.1 Basis for Customer Segmentation

Consumer Markets
• Demographic factors (age, income, sex, etc.)
• Socioeconomic factors (social class, stage in the family life cycle)
• Geographic factors (cultural, regional, and national differences)
• Psychological factors (lifestyle, personality traits)
• Consumption patterns (heavy, moderate, and light users)
• Perceptual factors (benefit segmentation, perceptual mapping)

Industrial Markets
• End-use segments (identified by SIC code)
• Product segments (based on technological differences or
production economics)
• Geographic segments (defined by boundaries between countries or
by regional differences within them)
• Common buying factor segments (cut across product market and
geographic segments)
• Customer size segments Source: Adapted from S. C. Jain, 2000, Marketing Planning and
Strategy, Cincinnati: South-Western College Publishing, 120.
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What: Determining Which Customer
Needs to Satisfy
• Customer needs are related to a product’s
benefits and features.
• Customer needs are neither right nor wrong,
good nor bad.
• Customer needs represent desires in terms of
features and performance capabilities.

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How: Determining Core Competencies
Necessary to Satisfy Customer Needs
• Firms use core competencies to implement value
creating strategies that satisfy customers’ needs.
• Only firms with capacity to continuously improve,
innovate and upgrade their competencies can
expect to meet and/or exceed customer
expectations across time.

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The Purpose of a Business-Level Strategy
• Business-Level Strategies
 Are intended to create differences between the firm’s
position relative to those of its rivals.

• To position itself, the firm must decide whether it

intends to:
 Perform activities differently or
 Perform different activities as compared to its rivals.

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Types of Potential Competitive Advantage
• Achieving lower overall costs than rivals
 Performing activities differently (reducing process
costs)

• Possessing the capability to differentiate the

firm’s product or service and command a
premium price
 Performing different (more highly valued) activities.

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Types of Business-Level Strategies

Competitive Advantage

Cost Uniqueness

Broad Cost Leadership Differentiation

Target
Integrated Cost
Competitive
Leadership/
Scope Differentiation

Narrow Focused Cost Focused

Target Leadership Differentiation

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Cost Leadership Strategy
• An integrated set of actions taken to produce
goods or services with features that are
acceptable to customers at the lowest cost,
relative to that of competitors with features that
are acceptable to customers.
 Relatively standardized products
 Features acceptable to many customers
 Lowest competitive price

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Cost Leadership Strategy
• Cost saving actions required by this strategy:
 Building efficient scale facilities
 Tightly controlling production costs and overhead
 Minimizing costs of sales, R&D and service
 Building efficient manufacturing facilities
 Monitoring costs of activities provided by outsiders
 Simplifying production processes

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How to Obtain a Cost Advantage

Determine Reconfigure
and control Value Chain
Cost Drivers if needed

 Alter production process  New raw material

 Change in automation  Forward integration
 New distribution channel  Backward integration
 New advertising media  Change location relative
 Direct sales in place of to suppliers or buyers
indirect sales

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 FIGURE 4.3 Examples of Value-Creating Activities Associated
with the Cost Leadership Strategy

SOURCE: Adapted with the permission

of The Free Press, an imprint of Simon &
Schuster Adult Publishing Group, from
Competitive Advantage: Creating and
Sustaining Superior Performance, by
Michael E. Porter, 47. Copyright © 1985,
1998 by Michael E. Porter.
© 2007 Thomson/South-Western. All rights reserved. 4–15
Cost Leadership Strategy: Competitors

Rivalry with • Due to cost leader’s

Existing Competitors advantageous position:
Threat of  Rivals hesitate to compete
new
entrants on basis of price.
Rivalry
among Bargaining
power of
 Lack of price competition
competing
firms suppliers leads to greater profits.

Threat of Bargaining
substitute power of
products buyers

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Cost Leadership Strategy: Buyers

Bargaining Power • Can mitigate buyers’

of Buyers power by:
 Driving prices far below
Threat of
new competitors, causing
entrants
Rivalry
them to exit, thus
Bargaining
among
power of shifting power with
competing
firms suppliers buyers back to the firm.
Threat of Bargaining
substitute power of
products buyers

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Cost Leadership Strategy: Suppliers

Bargaining Power • Can mitigate suppliers’

of Suppliers power by:
Threat of
 Being able to absorb cost
new increases due to low cost
entrants
Rivalry position.
among Bargaining
power of
competing
suppliers  Being able to make very
firms
large purchases,
Threat of Bargaining reducing chance of
substitute power of
products buyers supplier using power.

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Cost Leadership Strategy: New Entrants

The Threat of • Can frighten off new

Potential Entrants entrants due to:
Threat of  Their need to enter on a
new
entrants
large scale in order to be
Rivalry
Bargaining
cost competitive.
among
competing power of
firms suppliers  The time it takes to move
down the learning curve.
Threat of Bargaining
substitute power of
products buyers

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Cost Leadership Strategy: Substitutes

Product • Cost leader is well

Substitutes positioned to:
Threat of  Make investments to be
new
entrants
first to create substitutes.
Rivalry
among Bargaining  Buy patents developed by
competing power of
firms suppliers potential substitutes.

Threat of Bargaining
 Lower prices in order to
substitute power of maintain value position.
products buyers

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Cost Leadership Strategy (cont’d)
• Competitive Risks
 Processes used to produce and distribute good or
service may become obsolete due to competitors’
innovations.
 Focus on cost reductions may occur at expense of
customers’ perceptions of differentiation
 Competitors, using their own core competencies, may
successfully imitate the cost leader’s strategy.

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Differentiation Strategy
• An integrated set of actions taken to produce
goods or services (at an acceptable cost) that
customers perceive as being different in ways
that are important to them.
 Focus is on nonstandardized products
 Appropriate when customers value differentiated
features more than they value low cost.

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How to Obtain a Differentiation Advantage

Control Reconfigure
Cost Drivers Value Chain to
if needed maximize

 Lower buyers’ costs

 Raise performance of product or service
 Create sustainability through:
 Customer perceptions of uniqueness
 Customer reluctance to switch to non-
unique product or service

© 2007 Thomson/South-Western. All rights reserved. 4–23

 Figure 4.4 Examples of Value-Creating Activities Associated
with the Differentiation Strategy

SOURCE: Adapted with the permission

of The Free Press, an imprint of Simon &
Schuster Adult Publishing Group, from
Competitive Advantage: Creating and
Sustaining Superior Performance, by
Michael E. Porter, 47. Copyright © 1985,
1998 by Michael E. Porter.
© 2007 Thomson/South-Western. All rights reserved. 4–24
Differentiation Strategy: Competitors

Rivalry with • Defends against

Competitors competitors because brand
loyalty to differentiated
Threat of product offsets price
new
entrants competition.
Rivalry
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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Differentiation Strategy: Buyers

Bargaining Power • Can mitigate buyers’ power

of Buyers because well differentiated
products reduce customer
Threat of sensitivity to price increases.
new
entrants
Rivalry
among Bargaining
competing power of
firms suppliers

Threat of Bargaining
substitute power of
products buyers

© 2007 Thomson/South-Western. All rights reserved. 4–26

Differentiation Strategy: Suppliers

Bargaining Power • Can mitigate suppliers’

of Suppliers power by:
 Absorbing price increases
Threat of due to higher margins.
new
entrants  Passing along higher
Rivalry
among Bargaining supplier prices because
power of
competing
suppliers buyers are loyal to
firms
differentiated brand.
Threat of Bargaining
substitute power of
products buyers

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Differentiation Strategy: New Entrants

The Threat of • Can defend against new

Potential Entrants entrants because:
 New products must surpass
Threat of proven products.
new
entrants  New products must be at least
Rivalry
among Bargaining equal to performance of proven
power of
competing
suppliers products, but offered at lower
firms
prices.
Threat of Bargaining
substitute power of
products buyers

© 2007 Thomson/South-Western. All rights reserved. 4–28

Differentiation Strategy: Substitutes

Product • Well positioned relative to

Substitutes substitutes because:
 Brand loyalty to a
Threat of differentiated product tends
new to reduce customers’ testing
entrants
Rivalry of new products or switching
Bargaining
among
power of
brands.
competing
firms suppliers

Threat of Bargaining
substitute power of
products buyers

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Competitive Risks of Differentiation
• The price differential between the differentiator’s product
and the cost leader’s product becomes too large.
• Differentiation ceases to provide value for which
customers are willing to pay.
• Experience narrows customers’ perceptions of the value
of differentiated features.
• Counterfeit goods replicate differentiated features of the
firm’s products.

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Focus Strategies
• An integrated set of actions taken to produce
goods or services that serve the needs of a
particular competitive segment.
 Particular buyer group—youths or senior citizens
 Different segment of a product line—professional
craftsmen versus do-it-yourselfers
 Different geographic markets—East coast versus
West coast

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Focus Strategies (cont’d)
• Types of focused strategies
 Focused cost leadership strategy
 Focused differentiation strategy
• To implement a focus strategy, firms must be
able to:
 Complete various primary and support activities in a
competitively superior manner, in order to develop
and sustain a competitive advantage and earn above-
average returns.

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Factors That Drive Focused Strategies
• Large firms may overlook small niches.
• A firm may lack the resources needed to compete in the
broader market.
• A firm is able to serve a narrow market segment more
effectively than can its larger industry-wide competitors.
• Focusing allows the firm to direct its resources to certain
value chain activities to build competitive advantage.

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Competitive Risks of Focus Strategies
• A focusing firm may be “outfocused” by its competitors.
• A large competitor may set its sights on a firm’s niche
market.
• Customer preferences in niche market may change to
more closely resemble those of the broader market.

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Integrated Cost Leadership/
Differentiation Strategy
• A firm that successfully uses an integrated cost
leadership/differentiation strategy should be in a
better position to:
 Adapt quickly to environmental changes.
 Learn new skills and technologies more quickly.
 Effectively leverage its core competencies while
competing against its rivals.

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Integrated Cost Leadership/
Differentiation Strategy (cont’d)
• Commitment to strategic flexibility is necessary
for implementation of integrated cost
leadership/differentiation strategy.
 Flexible manufacturing systems (FMS)
 Information networks
 Total quality management (TQM) systems

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Flexible Manufacturing Systems
• Computer-controlled processes used to produce
a variety of products in moderate, flexible
quantities with a minimum of manual
intervention.
 Goal is to eliminate the “low-cost-versus-wide
product-variety” tradeoff.
 Allows firms to produce large variety of products at
relatively low costs.

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Information Networks
• Link companies electronically with their
suppliers, distributors, and customers.
 Facilitate efforts to satisfy customer expectations in
terms of product quality and delivery speed.
 Improve flow of work among employees in the firm
and their counterparts at suppliers and distributors.
 Customer relationship management (CRM)

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Total Quality Management (TQM) Systems
• Emphasize total commitment to the customer
through continuous improvement using:
 Data-driven, problem-solving approaches
 Empowerment of employee groups and teams
• Benefits
 Increased customer satisfaction
 Lower costs
 Reduced time-to-market for innovative products

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Risks of the Integrated Cost Leadership/
Differentiation Strategy
• Often involves compromises
 Becoming neither the lowest cost nor the most
differentiated firm.
• Becoming “stuck in the middle”
 Lacking the strong commitment and expertise that
accompanies firms following either a cost leadership
or a differentiated strategy.

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