CHAPTER 7:

STRATEGY FORMULATION:
BUSINESS LEVEL STRATEGY
REFERENCE: HENRY “UNDERSTANDING STRATEGIC MANAGEMENT”, CHAPTER 7
Previously……
Strategic Analysis
 External environmental analysis
 General environment – PESTLE
 Competitive environment – 5 Forces
 Internal analysis
 Value Chain Analysis
 Resources and capabilities
 Performance analysis
 SWOT analysis
Lecture Preview

 Defining business and corporate strategy

 Business strategy and competitive
advantage;
 Porter's generic competitive strategies
 Resource-based approach to strategy
 Industry life-cycle
 Turbulent markets and strategy formulation.
What is Business
Strategy?
• A MEANS OF FORMULATING A COMPETITIVE STRATEGY AT THE
INDIVIDUAL BUSINESS UNIT

•A STRATEGIC BUSINESS UNIT (SBU) IS A DISTINCT PART OF AN

ORGANIZATION WHICH FOCUSES UPON A PARTICULAR
MARKET
FOR ITS PRODUCTS AND SERVICES

• CORPORATE STRATEGY: WHAT BUSINESS DO WE WANT TO BE

IN?

• BUSINESS LEVEL STRATEGY: HOW ARE WE GOING TO COMPETE

IN OUR CHOSEN BUSINESS?
Generic Competitive Strategies

Figure 7.1 Three Generic Competitive Strategies

Competitive
Strategies
PORTER (1980) DEVELOPED THREE GENERIC
STRATEGIES TO HELP AN ORGANIZATION
OUTPERFORM RIVALS WITHIN AN
INDUSTRY

• OVERALL COST LEADERSHIP

• DIFFERENTIATION STRATEGY

• FOCUS STRATEGY
Leadership
Strategy
•INVOLVES A FIRM BEING THE LOWEST COST
PRODUCER
WITHIN THE INDUSTRY
•THIS ALLOWS THE FIRM TO OUTPERFORM
RIVALS WITHIN
THE INDUSTRY BECAUSE IT CAN CHARGE
LOWER
PRICES
•ITS LOWEST COST BASE STILL ALLOWS IT TO
EARN A
Lower costs >> lower prices and/or higher margins
PROFIT

Economies of scale! Experience!

Overall Cost Leadership Strategy and Experience
Curve
•A DOMINANT MARKET SHARE ALLOWS A
FIRM TO
ACCUMULATED THE GREATEST EXPERIENCE
•AS ITS MARKET-SHARE CONTINUES TO GROW
SO ITS
COST ADVANTAGE INCREASES
• A STRATEGY OF GROWTH WHICH ENHANCES
ITS
ACCUMULATIVE EXPERIENCE AND FURTHER
LOWERS
“Virtuous
ITS COSTS Circle”
economies-of-scale
growth growth
experience
 Cost Leadership strategies and
Porter’s Five Forces Analysis

 A cost leadership strategy allows an

organization to generate above-average profits
even where there is intense rivalry.
 Defend itself against customer power and
supplier power
 A low cost producer will be in a better
position in relation to the threats of new
entrants and or substitutes
Being the lowest cost producer strengthens the firm
in relation to all five forces!
The Risks of Following an Overall Cost
Leadership Strategy
•CAN BE EXPENSIVE AS THE ORGANIZATION
CONTINUALLY UPDATES ITS CAPITAL
EQUIPMENT
• MAY BE EASY TO IMITATE THE
ACTIVITIES OF THE COST LEADER
•CHANGING TECHNOLOGY MAY NULLIFY
PAST
INVESTMENTS IN CAPITAL EQUIPMENT
•CUSTOMERS MAY BECOME LESS PRICE
SENSITIVE
Differentiation
Strategy
AIMED AT A BROAD MARKET.
COMPETING ON THE BASIS OF A PRODUCT OR SERVICE
THAT IS RECOGNISED BY CONSUMERS AS UNIQUE.

• CONSUMERS ARE WILLING TO PAY A PREMIUM PRICE

•A DIFFERENTIATED PRODUCT IS DIFFICULT TO

IMITATE

REQUIRES DIFFERENT RESOURCES, CAPABILITIES

AND ORGANIZATIONAL ARRANGEMENTS THAN COST
LEADERSHIP
Resource and capability analysis may favour one
generic strategy or another!
Types of differentiation:
 Design or brand image e.g. BMW
 Customising products e.g. DELL
 Advanced technology e.g. Intel
 Marketing abilities e.g. Proctor and Gamble
 Reliability e.g. Toyota?
 Product engineering skills e.g. e.g. Bosch
 Creativity e.g. Apple
 Customer service e.g. John Lewis Partnership
Differentiation and
Porter’s Five Forces
 A defence against competition e.g. brand loyalty
 A defence against new entrants and substitutes
 Buyers constrained by a lack of alternatives
 Premium price so easier to pay suppliers
The Risks of Following a Differentiated Strategy

•THE HIGH PRICE CHARGED FOR DIFFERENTIATION

MUST NOT BE
TOO FAR ABOVE COMPETITORS THAT IT RESULTS IN
REDUCED
BRAND LOYALTY

• REDUCED NEED FOR A DIFFERENTIATED PRODUCT

E.G. MORE PRICE SENSITIVE

•COMPETITORS MAY NARROW THE ATTRIBUTES OF

DIFFERENTIATION WHICH RESULTS IN CONSUMERS
BEING FACED
WITH A VIABLE SUBSTITUTE
Focus Strategy
SERVES A SEGMENT (OR SEGMENTS) OF THE
MARKET
A GROUP OF CONSUMERS, A GEOGRAPHICAL
distinctive and expensive
MARKET OR ANY VIABLE SEGMENT OF THE
MARKET
EXAMPLES: CARTIER, BURBERRY AND TOYOTA
BY FOCUSING ON A NICHE OF THE MARKET, THE
ORGANIZATION MAY BE BETTER PLACED TO MEET
THE NEEDS OF BUYERS
AN ORGANIZATION CAN ACHIEVE COMPETITIVE
ADVANTAGE EITHER THROUGH LOWER COSTS OR
DIFFERENTIATION FOCUS
 Bases for market segmentation

Industrial
buyers
Buyer Demographics
characteristics Households Lifestyle
Purchase occasion
Distribution
channels

Geographic
location
Product features
Price level
Pysical size
Product Technological design
characteristics Performance characteristics
Pre- and post sales service
The Risks of Following a Focus Strategy

• CUSTOMER PREFERENCES MAY CHANGE AND THE NICHE

PLAYER MAY BE UNABLE TO RESPOND

•BROAD-BASED COMPETITORS BELIEVE THE SEGMENT

REPRESENTS AN ATTRACTIVE SUBMARKET AND OUTFOCUS
THE
FOCUSER

• THE DIFFERENCE BETWEEN THE SEGMENT AND THE MAIN

MARKET NARROWS LEAVING FOCUS-BASED COMPETITORS
AT A
DISADVANTAGE E.G. BLACK AND GREEN’S AND CADBURY
IN THE FAIRTRADE CHOCOLATE MARKET
Stuck in the
Middle
AN ORGANIZATION THAT FAILS TO PURSUE AT LEAST ONE OF
THESE GENERIC STRATEGIES WILL BECOME “STUCK IN THE
MIDDLE” PORTER (1980)

IS THIS TRUE?
A Resource-Based Approach to Strategy
Formulation

Grant (1991) distinguishes between

resources and capabilities:
 Resources are inputs into the production process

 Capability is the capacity to perform some task or activity

Resources are the source of an

organization’s capability but capabilities
are the main source of an organization’s
competitive advantage.
A Resource-
Based
Approach to
Strategy
Formulation
Source:
Grant (1991)
Implications for Strategy
Formulation
 Porter’s generic strategies based on Five Forces analysis
- market positioning approach

 Resource-based approach

Are the two approaches compatible or incompatible?

Industry Life-Cycle
Strategy Formulation and Market Turbulence

Four Different Competitive Environments

1. Equilibrium

2. Fluctuating Equilibrium

3. Punctuated Equilibrium

4. Disequilibrium
Strategy Formulation and Market Turbulence
Lecture Review

 Defining business and corporate strategy

 Business strategy and competitive advantage;
 Porter's generic competitive strategies
 Resource-based approach to strategy
 Industry life-cycle
 Turbulent markets and strategy formulation.