MAN4001 –

S T R AT E G I C
MANAGEMENT

Competitiveness & Globalization

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 UNIT 4 :
BUSINESS LEVEL
S T R AT E G I E S

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Business-level Strategy
Business-level strategy is 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.
Business-level strategy indicates the choices the firm has made about how it intends to compete in
individual product markets.
Business-level strategy is a deliberate choice about how the firm will perform the value chain
activities to create unique value
E.g. Southwest’s Competitive Advantages (rivals unable to imitate):
● Tight integration among activities
● Cost leadership strategy
● Unique culture and customer service

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 Customers Relationship with Business-Level Strategies

Strategic competitiveness results only when the firm satisfies a group of customers by
using its competitive advantages as the basis for competing in individual product markets.

A key reason firms must satisfy customers with their business-level strategy is that returns
earned from relationships with customers are the lifeblood of all organizations.

o Effectively Managing Relationships with Customers

o Reach, Richness, and Affiliation
o Who: Determining the Customers to Serve
o What: Determining Which Customer Needs to Satisfy
o How: Determining Core Competencies Necessary to Satisfy Customer Needs

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Reach, Richness, and Affiliation

The reach dimension of relationships with customers is concerned with the firm’s access and
connection to customers. In general, firms seek to extend their reach, adding customers in the
process of doing so. (Facebook, Netflix)

Richness, the second dimension of firms’ relationships with customers, is concerned with the
depth and detail of the two-way flow of information between the firm and the customer.
(Customer centric)

Affiliation, the third dimension, is concerned with facilitating useful interactions with customers.
Viewing the world through the customer’s eyes and constantly seeking ways to create more value
for the customer.

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Who, What, & How
Deciding who the target customer is that the firm intends to serve with its business-level strategy
is an important decision. Companies divide customers into groups based on differences in the
customers’ needs – market segmentation.

A firm must identify the targeted customer group’s needs (what) that its goods or services can
satisfy. Needs (what) are related to a product’s benefits and features.

A firm then determines how to use its capabilities and competencies to develop products that can
satisfy the needs of its target customers. Firms use core competencies (how) to implement value-
creating strategies and thereby satisfy customers’ needs.

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The Purpose of a Business-Level Strategy
The purpose of a business-level strategy is to create differences between the firm’s position and
those of its competitors.

To position itself differently from competitors, a firm must decide whether it intends to perform
activities differently or to perform different activities.
When selecting a business-level strategy, firms evaluate two types of potential competitive
advantages: “lower cost than rivals, or the ability to differentiate and command a premium price
that exceeds the extra cost of doing so.”
Having lower cost derives from the firm’s ability to perform activities differently than rivals;
being able to differentiate indicates the firm’s capacity to perform different (and valuable)
activities

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Types of Business-Level Strategies

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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.
Firms using the cost leadership strategy commonly sell standardized goods or services (but with
competitive levels of differentiation) to the industry’s most typical customers.
Process innovations, which are newly designed production and distribution methods and
techniques that allow the firm to operate more efficiently, are critical to successful use of the cost
leadership strategy
Effective use of the cost leadership strategy allows a firm to earn above-average returns in spite
of the presence of strong competitive forces
E.g. Wal-Mart is known for its ability to continuously reduce its costs, creating value for
customers

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Cost Leadership Value Chain Activities

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Differentiation Strategy

The differentiation strategy is 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.
While cost leaders serve a typical customer in an industry, differentiators target customers for
whom value is created by the manner in which the firm’s products differ from those produced
and marketed by competitors.
Product innovation is critical to successful use of the differentiation strategy.
E.g. High fashion stores such as Gucci and Louis Vuitton

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Differentiation Value Chain Activities

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Focus Strategies
The focus strategy is an integrated set of actions taken to produce goods or services that serve the
needs of a particular competitive segment.
Firms use a focus strategy when they utilize their core competencies to serve the needs of a
particular industry segment or niche to the exclusion of others.
Examples of specific market segments that can be targeted by a focus strategy include
(1) a particular buyer group (e.g., youths or senior citizens),
(2) a different segment of a product line (e.g., products for professional painters or the do-it-
yourself group),
(3) a different geographic market (e.g., northern or southern Italy).

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Factors Driving Focused Strategies
Large firms may overlook small niches
o A firm may lack the resources needed to compete in the broader market
o A firm is able to serve a narrow market segment more effectively than its larger industry-wide
competitors can
o Focusing allows the firm to direct its resources to certain value chain activities to build
competitive advantage
Focused Cost Leadership Strategy – Ikea target young buyers and the firm offers home
furnishings that combine good design, function, and acceptable quality with low prices.
Focused Differentiation Strategy – high end vegan restaurant / Sellers of super yacht

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Integrated Cost Leadership/Differentiation Strategy
Because of these customer expectations, a number of firms engage in primary and support
activities that allow them to simultaneously pursue low cost and differentiation.
The objective of using this strategy is to efficiently produce products with some differentiated
features.
Efficient production is the source of maintaining low costs while differentiation is the source of
creating unique value.
Firms that successfully use the integrated cost leadership/differentiation strategy usually adapt
quickly to new technologies and rapid changes in their external environments.
E.g. Target Stores – “Expect more, pay less”

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Integrated Cost Leadership/Differentiation Strategy
A flexible manufacturing system (FMS) increases the “flexibilities of human, physical, and
information resources” that the firm integrates to create relatively differentiated products at
relatively low costs.
By linking companies with their suppliers, distributors, and customers, information networks
provide another source of flexibility. These networks, when used effectively, help the firm satisfy
customer expectations in terms of product quality and delivery speed.
Total quality management (TQM) is a “managerial innovation that emphasizes an
organization’s total commitment to the customer and to continuous improvement of every
process through the use of data-driven, problem-solving approaches based on empowerment of
employee groups and teams.” Firms develop and use TQM systems in order to (1) increase
customer satisfaction, (2) cut costs, and (3) reduce the amount of time required to introduce
innovative products to the marketplace.
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Porter Five Forces & The Cost Leadership Strategy

Threat of
THREAT OF NEW ENTRANTS
new entrants
• Barriers to potential entrants:
Rivalry
Bargaining
among
power of – Their need to enter on a large scale in order to
competing
firms
suppliers be cost competitive
Threat of Bargaining – The time it takes to move up the learning curve
substitute power of
products buyers – Efficiency of cost leaders through continuous
efforts to reduce costs enhances profit margins
and serves as a significant entry barrier

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Porter Five Forces & The Cost Leadership Strategy
BARGAINING POWER OF BUYERS
Threat of Can mitigate buyers’ power by:
new entrants
o Driving prices far below competitors, causing
Rivalry
Bargaining
among
power of
them to exit, thus shifting power away from
competing
firms
suppliers buyers back to the firm
Threat of Bargaining
o Powerful customers can force a cost leader to
substitute power of
products buyers
reduce its prices, but not below the level where
the next-most-efficient industry competitor can
earn average returns

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Porter Five Forces & The Cost Leadership Strategy

BARGAINING POWER OF SUPPLIERS

Threat of
new entrants

Rivalry
Bargaining
Can mitigate suppliers’ power by:
among
power of
competing
suppliers
o Being able to absorb cost increases due to low cost
firms
position
Threat of Bargaining
substitute power of
o Being able to make very large purchases, reducing
products buyers chance of supplier using power
o Outsourcing, to reduce costs may also require
relationship-building, particularly to a foreign
supplier
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Porter Five Forces & The Cost Leadership Strategy

PRODUCT SUBSTITUTES
Threat of
new entrants

Rivalry
Bargaining
among
power of Cost leader is well positioned to:
competing
suppliers
firms o Make investments to be first to create substitutes
Threat of Bargaining o Buy patents developed by potential substitutes
substitute power of
products buyers
o Lower prices in order to maintain value position
o Be more flexible than its differentiated competitors

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Porter Five Forces & The Cost Leadership Strategy
RIVALRY WITH EXISTING COMPETITORS
Threat of
new entrants
Due to cost leader’s advantageous position:
Rivalry
Bargaining
among
competing
power of o Rivals hesitate to compete on basis of price
suppliers
firms
o Lack of price competition leads to greater profits
Threat of Bargaining
substitute power of
o Rivalry may be based on factors such as size, resources,
products buyers
location, market dependence, and prior competitive
interactions

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Porter Five Forces & The Differentiation Strategy
THREAT OF POTENTIAL ENTRANTS
Threat of Substantial barriers to potential entrants:
new
entrants o Customer loyalty and the need to overcome the
Rivalry
among
Bargainin uniqueness of a differentiated product
g power of
competing
firms
suppliers
o New products must surpass proven products
Threat of Bargaining o New products must be at least equal to the
substitute power of
products buyers performance of proven products, but offered at lower
prices

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Porter Five Forces & The Differentiation Strategy
BARGAINING POWER OF BUYERS
Threat of o Can mitigate buyers’ power because well
new
entrants differentiated products reduce customer
Rivalry
among
Bargainin sensitivity to price increases
g power of
competing
firms
suppliers o Customers are willing to accept a price increase
Threat of Bargaining
when a product satisfies their perceived unique
substitute power of needs, as long as they do not think that an
products buyers
acceptable product alternative exists

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Porter Five Forces & The Differentiation Strategy

BARGAINING POWER OF SUPPLIERS

Threat of
new
entrants
Can mitigate suppliers’ power by:
Rivalry
among
Bargainin o Absorbing price increases due to higher margins
g power of
competing
firms
suppliers from high-quality components
Threat of Bargaining o Alternatively, considering buyers’ relative
substitute power of
products buyers
insensitivity to price increases and their brand
loyalty, firms may pass along higher supplier prices
to the buyer

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Porter Five Forces & The Differentiation Strategy
PRODUCT SUBSTITUTES
Threat of
new

Rivalry
entrants Well-positioned relative to substitutes because:
Bargainin
among
competing
g power of o Brand loyalty to a differentiated product tends to
suppliers
firms
reduce:
Threat of Bargaining
substitute power of
o customers’ testing of new products
products buyers
o switching brands

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Porter Five Forces & The Differentiation Strategy
RIVALRY WITH EXISTING
Threat of COMPETITORS
new
entrants
Rivalry
Bargainin
among
g power of o The relationship between brand loyalty and price
competing
suppliers
firms sensitivity insulates a firm from competitive rivalry
Threat of Bargaining
substitute power of
products buyers o Reputation can also sustain the competitive
advantage of firms following a differentiation
strategy

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Cost Leadership – Risks
COMPETITIVE RISKS
OBSOLESCENCE: processes used to produce and distribute goods/services may
become obsolete due to competitors’ innovations

COST REDUCTIONS: too much focus on cost reductions may occur at expense of
customers’ perceptions of differentiation

IMITATION: competitors using their own core competencies, may successfully imitate
the cost leader’s strategy

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Differentiation – Risks
COMPETITIVE RISKS
PRICE DIFFERENTIAL: between the differentiator’s and the cost leader’s products
becomes too large

VALUE DIMINISHED: 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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Focused Strategies – Risks
COMPETITIVE RISKS
OUTFOCUSED: a focusing firm may be “outfocused” by its competitors

COMPETITION: a large competitor may decide that the market segment served by the
focus strategy firm is attractive and worthy of competitive pursuit

CHANGING PREFERENCES: customer preferences in the niche market may change to

more closely resemble those of the broader market

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Integrated Strategy – Risks
“STUCK in the MIDDLE”
o Strategy is gaining in popularity… but is RISKY
o Products do not offer sufficient value in terms of either low cost or differentiation
o Cost structure is not low enough for attractive pricing of products; products not
sufficiently differentiated to create value for target customer
RESULT: DO NOT EARN ABOVE-AVERAGE RETURNS

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 THE END!

Next class: Unit 5 – Vertical

Integration

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