Chapter 5 - Business Level Strategy

Fall 2021 - ULS
Strategic Management
Chapter 5: Business Level
Strategy
Johnson, Whittington, Scholes, Angwin, and Regner. Exploring Strategy, 10 th Edition, Pearson
Fred David, 12th Edition, Pearson
1
Business Level Strategy. Fall 2021 - ULS
Learning outcomes
• Identify strategic business units (SBUs) in organizations.
• Assess business strategy in terms of the generic strategies

of cost leadership, differentiation and focus.
• Identify business strategies suited to hypercompetitive

conditions.
• Assess the benefits of cooperation in business strategy.
• Apply principles of game theory to business strategy.
2
Chapter Content
1) Introducing SBU’s
2) Concept of Generic Strategy & Competitive Advantage
3) Porter’s Generic Strategy Options
4) Strategy Clock
5) Interactive Strategy
6) Game Theory
3
1
Introducing SBU’s
4
Strategic business units (SBUs)

A strategic business unit (SBU) supplies goods or services
for a distinct domain of activity. It is an independent entity
• 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)
– Capabilities-based criteria (similar strategic capabilities).
5
The purpose of SBUs
• To decentralise initiative to smaller units within the

corporation so SBUs can pursue their own distinct strategy
• To allow large corporations to vary their business
strategies according to the different needs of external
markets
• To encourage accountability – each SBU can be held
responsible for the success or failure of its own strategy.
6
Example of SBU - LG
They provide a long list of consumer products such as fridges,
televisions, air conditions, and more.
Each of them is made by different strategic business divisions.
They are responsible for manufacturing and delivering products

but have to take into account making decisions, investments,
and budgets.
Accordingly, LG’s main concern is to spend more time and

attention on tracking costs, income, and profits.
7
SBU
Business
Generic Strategies Strategy Interactive Strategies
• Cost Leadership • Hypercompetitive
• Differentiation Strategy
• Focus • Cooperation
• Hybrid Strategy • Game Theory
8
Basic criteria to identify appropriate SBUs:
Market-
based Capabilities-
criteria based criteria
9
Market-based
How to criteria
identify?
Different parts of an organization might be regarded as the same

SBU if they are targeting the same customer types , through the
same sorts of channels and facing similar competitors .
On the other hand, it would usually be sensible to distinguish a

unit tailoring products or services to specific local needs from one
that offers standardized products or services globally.
10
How to Capabilities-
identify? based criteria
Parts of an organization should only be regarded as the same

SBU if they have similar strategic capabilities. Many traditional
retailers or financial services companies operate their internet
services as distinct SBUs. (from face-to-face to internet)
Even though they may be targeting very similar customers, the
capabilities involved in the internet-based businesses are
typically too different to the original physical stores or outlets to
manage within the same unit. (way of managing customer needs)
11
2
Concept of
Generic Strategy
Michael Porter
& Competitive
Advantage
12
Generic strategies - Concept

Michael Porter introduced the term ‘generic strategy’ to
mean basic types of competitive strategy that holds across
many kinds of business situations.
Competitive strategy is concerned with how a strategic

business unit achieves competitive advantage in its
domain of activity.
Competitive Competitive
Strategy Advantage
13
What is a competitive
advantage about?
14
Competitive advantage is about how an SBU creates

value for its users. This value is more important than the
costs of supplying them and superior to that of rival SBUs.
More Specifically
Producing goods or services better or

more cheaply than its rivals. This will allow
generating more sales or superior margins.
15
Competitive advantage
Producing goods or services better or

more cheaply than its rivals.
What about the quality?
16
more about other means

to achieve competitive
Advantage?
17
Competitive advantage First

mover
Other means
may be relevant Time- Cost
based based
in a particular
context.
Technology
-based Differentiated
product
18
Is the most obvious way of achieving competitive
Cost- advantage. Customers are aware of the price and will
based usually choose the lowest price if all else is equal.
Low prices are only sustainable if costs are low.
Differentiated
product
The offering is not only perceived different
but it is really “unique” in a tangible way.
(Product performance)
19
The first player to adopt a new product or approach
may have competitive advantage just because it was
first.
First- Such advantage may occur if the first mover is
mover able to grab a larger share of the available market
while its offering is still unique.
By the time competitors have imitated the offering, the first mover
may have achieved economies of scale, wide coverage, more
awareness or brand recognition which sustain its advantage
20
Time can often be as important as price in a
modern business.
For instance, the time to bring new products to
market can be critical in high technology and
Time-
fashion markets where product lives are short.
based
In other circumstances the ability to deliver quickly or within very

tight timescales may be as important as price. Many customers
will pay more for fast or reliable delivery.
21
Rapid advances in technology can have
important effects on the basis of competition.
The overall lessons on technology-based
advantage are that innovation may be a source
Technology- of business advantage and that innovation may
based be based on technology.
The trick of achieving competitive advantage from technology is to

harness the technology to create business innovation rather
than exploit technology for its own sake.
22
3
The Generic Strategy Options
Towards developing an edge
23
Porter’s Generic
Strategy Porter's generic
strategies are ways of
Components gaining competitive
advantage – in other
words, developing
the "edge" that gets
you the sale and takes
it away from your
competitors.
24
How to develop an edge ?
25
A
Cost Leadership
B
Developing an Differentiation
edge through: C
Cost /
Differentiation
Focus
26
Three generic strategies
27
A
Cost Leadership Strategy
28
The Cost Leadership Strategy (1)

The Cost Leadership Strategy
There are two main ways of achieving a Cost Leadership Strategy:
•Increasing profits by reducing costs, while charging industry-

average prices.
•Increasing market share by charging lower prices, while still making

a reasonable profit on each sale because we still have reduced
costs.
29
Cost Leadership is about

minimizing the cost to the
organization of delivering products
and services.
The cost or price paid by the customer is a separate
issue!
No to confuse with the cost to the organization
30

How to apply it?
Four key cost drivers can help delivering cost leadership:
Lower input costs Economies of scale
Product/process design Experience
31
The Cost Leadership Strategy (3 a)

Lower input costs
Many companies seek competitive advantage through locating
their labor-intensive operations in countries with low labor costs.
Examples
Service call centers in India or manufacturing in China.
Location close to raw material sources can also be advantageous,
as for example the Brazilian steel producer CSN which benefits
from its own local iron-ore facilities.
32
The Cost Leadership Strategy (3 b)

Economies of scale - 1
They are important wherever there are high fixed costs. Fixed costs
are those costs necessary for a certain level of output.
For example:
A pharmaceutical manufacturer typically needs to do extensive R&D
before it produces a single pill.
Economies of scale spread these fixed costs over high levels of

output: the average cost due to an expensive R&D project halves
when output increases from one million to two million units.
33

Economies of scale in purchasing can also reduce input costs.
For example:
The large airlines are able to negotiate steep discounts from
aircraft manufacturers.
(Bargaining power of buyers)
34

The diseconomies of scale- Rare

cases to keep in mind
Large volumes of output that require special

overtime payments to workers or involve the
extensive use of equipment and the neglect of
maintenance can soon become very expensive.
35
The Cost Leadership Strategy (3 c)

Product/process design - 1
Engineers can choose to build a product from cheap

standard components rather than expensive specialized
components.
Organizations can choose to interact with customers
exclusively through cheap web-based methods, rather than
via telephone or stores.
36
The Cost Leadership Strategy (3 d)

Product/process design - 2
In designing a product or service, it is important to

recognize whole-life costs : in other words, the costs to
the customer not just of purchase but of subsequent
use and maintenance.
In the photocopier market, for example, Canon eroded
Xerox’s advantage (which was built on service and a
support network) by designing a copier that needed far
less servicing.
37

Experience - 1
The experience curve implies that the cumulative
experience gained by an organization with each unit of
output leads to reductions in unit costs.
For example, for many electronic components per unit
costs can drop as much as 95 per cent every time the
accumulated volume doubles.
Simply the more experience an organization has in an
activity, the more efficient it gets at doing it. (Much less
error or error free)
38

Experience - 2
The efficiencies are basically of two sorts.
First, there are gains in labor productivity as staff simply

learn to do things more cheaply over time (this is the
specific learning curve effect).
Second, costs are saved through more efficient designs

or equipment as experience shows what works best.
39

Experience - 3
* Market entry timing

The learning * Market share holding
curve effect * Continuous improvement
40

Experience - 4 The learning curve effect
Market share holding
Market entry timing Companies with higher market share
Early entrants into a have more ‘cumulative experience’
market will have simply because of their greater volumes
experience that late
entrants do not yet have Continuous improvement
and so will gain a cost Improvements normally
advantage. continue over time
41
Economies of
scale and the
experience
curve
42
Cost-leaders options (1)
Cost-leaders have two options
Parity
Proximity
43
Cost-leaders options (2) Where a competitor is sufficiently

Parity allows the cost- close to competitors in terms of
leader to charge the same product or service features,
prices as the average customers may only require small
competitor in the cuts in prices to compensate for
marketplace, while the slightly lower quality. the
translating its cost Parity proximate cost-leader still earns
advantage wholly into Proximity better profits than the average
extra profit competitor because its lower price
eats up only a part of its cost
The Brazilian steel producer advantage.
CSN, with its cheap irone This proximate cost leadership
sources, is able to charge the strategy might be the option
average price for its steel, chosen initially by Chinese car
and take the cost difference manufacturers in export
in greater profit. markets, for example.
44
Costs, prices
and profits for
generic
strategies
45
B
Differentiation Strategy
46
The Differentiation Strategy (1)
Differentiation involves making your products or services

different from and more attractive than those of your competitors.
How to make it so?
It depends on the exact nature of your industry and of the

products and services themselves, but will typically involve
features, functionality, durability, support, and also brand image
that your customers value.
47
To make a success of a differentiation strategy,

organizations need:
•Good research & development and innovation.

•The ability to deliver high-quality products or services.
•Effective sales efforts.
•Influential communication so that the market understands
the benefits offered by the differentiated offerings.
48
Large organizations pursuing a differentiation

strategy need to stay alert & agile with their new
product development processes.
Otherwise, they risk to be attacked on several fronts

by competitors pursuing Focus Differentiation
strategies in different market segments.
49

Differentiation involves uniqueness along some dimensions
that are sufficiently valued by customers to allow a price
premium.
Two key issues:
The strategic customer The key competitors
On whose needs the Who are the existing rivals

differentiation is based and
who may become a rival.
50
Differentiation in the US airline
industry
51
C
Focus Strategy
52
The Focus Strategy (1)

Companies that use Focus Strategies concentrate on
particular niche markets. By understanding the dynamics of
such a market and the unique needs of customers within it, a
company develops uniquely low-cost or well-specified
products for the market.
Because they serve customers in their market uniquely well,

they tend to build strong brand loyalty amongst their
customers. This makes their particular market segment less
attractive to competitors. (A market quite difficult to
compete in)
53
Once an organization has selected a Focus strategy as

its main approach, it is still essential that the organization
decides which type to chose:
Cost Leadership or a Differentiation Focus.
Focus is not normally not enough on its own.
54

But whether you use Cost Focus or Differentiation
Focus, the key to making a success of a generic
Focus strategy is to ensure that you are adding
something extra as a result of serving only that
market niche.
It's simply not enough to focus on only one market segment

because your organization is too small to serve a broader
market
(if you do so, you risk competing against better-resourced
broad market companies' offerings).
55

The "something extra"
The "something extra" that you add can contribute to
reduce costs (perhaps through your knowledge of
specialist suppliers)
Or to increase differentiation (though your deep

understanding of customers' needs).
Could be in the quality
of service itself.
56
BUT, we need not to confuse

Cost Focus and Differentiation
Focus
57
Cost Focus and Differentiation Focus

The terms "Cost Focus" and "Differentiation Focus" can
be a little confusing, as they could be interpreted as
meaning "a focus on cost" or "a focus on differentiation."
“Cost Focus” means emphasizing cost-

minimization within a focused market, and
“Differentiation Focus” means pursuing strategic
differentiation within a focused market.
58
Stuck in the middle’
Cost
Focus
Differentiation
Focus
59
‘Stuck in the middle’?

Porter 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’ doing no strategy well.
• The argument for pure generic strategies is controversial.
Porter acknowledges that the strategies can be combined

(Focus & differentiation)
(e.g. if being unique costs nothing).
60
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 can create cost

efficiency. Accordingly, quality is improved.
• Competitive failures – if rivals are similarly ‘stuck in the

middle’ or if there is no significant competition then ‘middle’
strategies may be OK.
61
4
The Strategy Clock
An alternative to generic
strategy
62
The Strategy Clock - 1

The strategy clock provides an alternative approach to
generic strategy which gives more scope for hybrid
strategies.
It has two distinct features:
• It is focused on the prices to customers rather than the
costs to organisations.
• The circular design allows for incremental adjustments in
strategy rather than stark choices.
63
The Strategy Clock - 2

* No price premium
* With price premium
* Higher benefits and * Top quality big premium
lower prices
* Cost advantage
* Price sensitive
* Increased price and
low perceived benefit
64
The Strategy Clock – 3 Differentiation

• Strategies in this zone seeks to provide products that offer
perceived benefits that differ from those offered by
competitors.
• A range of alternative strategies from:

― differentiation without price premium (12 o’clock) – used to
increase market share.
― differentiation with price premium (1 o’clock) – used to
increase profit margins.
― focused differentiation (2 o’clock) – used for customers that
demand top quality and will pay a big premium.
65
The Strategy Clock – 4 Low price

Low price combined with low perceived value.
• A standard low price strategy (9 o’clock)

Low prices combined with similar quality to competitors
aimed at increasing market share. Needs a cost advantage
(such as economies of scale) to be sustainable, e.g.
Asda/Walmart in grocery retailing.
• A ‘no frills’ strategy (7 o’clock)

Focusing on price sensitive market segments – typified by
low-cost airlines like Ryanair.
66
The Strategy Clock – 5 Hybrid
Seeks to simultaneously achieve higher benefits and lower

prices relative to those of competitors.
Hybrid strategies can be used:
* To enter markets and build position quickly

* To aggressively attempt to win market share
* To build volume sales and gain from mass production.
A classic example is IKEA.

67
The Strategy Clock – 6 Non-competitive strategy
Increased prices with low perceived

product or service benefits.
• . In competitive markets such strategies

will be doomed to failure
• Only feasible where there is strategic
‘lock-in’ or a near monopoly position.
68
Strategic lock-in
Strategic lock-in is where users become dependent on a
supplier and are unable to use another onde without
substantial switching costs.
Lock-in can be achieved in two main ways:

• Controlling complementary A razor that can only work with
products or services. one type of blade
• Creating a proprietary Microsoft with its windows
industry standard. operating system
69
5
Interactive Strategy
70
Interactive Strategy - 1
Business strategy choices depend on what competitors
do or are (Are they passive or are they interactive).
• Richard D’Aveni gives an example of how competitors

may interact in terms of competitive moves in price
and perceived quality.
• Kumar gives an example of how firms might respond to

the entry of a low price rival.
71
Hyper competition
Hyper competition describes markets with continuous
disequilibrium and change, e.g. popular music or consumer
electronics.
• It may be impossible to plan for long-term sustainable
competitive advantage.
• Planning may actually destroy competitive advantage by
slowing down responses.
• Successful hyper competition demands speed and initiative
rather than defensiveness and late reaction.
72
Interactive strategies in hyper competition

Four key principles:
• Cannibalise bases of success
• Series of small moves rather than big moves
• Be unpredictable
• Mislead the competition.
73
Responding to Low Cost

Rivals & Cooperating
with Rivals
74
Responding to low cost rivals
75
Cooperating with rivals
76
6
Game theory
77
Game theory
Game theory encourages an organisation to consider
competitors’ moves and their implications for its own
strategy.
• Game theory is particularly important where competitors
are interdependent.
• In these circumstances it is important to:
– Get in the mind of competitors to understand how they
reason, act and sense.
– Think forwards and reason backwards.
78
ULS – 2021 / 2022
Financial Aspects (5)
79
ULS – 2021 / 2022
Financial Aspects (5)
80
Game theory Prisoner’s dilemma
81
Game theory Lessons from game theory

Game theory encourages managers to consider how a
‘game’ can be transformed from ‘lose–lose’ competition to
‘win–win’ cooperation.
Four principles:
• Ensure repetition
• Signalling
• Deterrence
• Commitment.
82
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Fall 2021 - ULS

• Assess business strategy in terms of the generic strategies

• Identify business strategies suited to hypercompetitive

• Assess the benefits of cooperation in business strategy.

• Apply principles of game theory to business strategy.

Strategic business units (SBUs)

• A small business has just one SBU.

• SBUs can be called ‘divisions’ or ‘profit centres’.

• To decentralise initiative to smaller units within the

Each of them is made by different strategic business divisions.

They are responsible for manufacturing and delivering products

Accordingly, LG’s main concern is to spend more time and

Basic criteria to identify appropriate SBUs:

Different parts of an organization might be regarded as the same

On the other hand, it would usually be sensible to distinguish a

Parts of an organization should only be regarded as the same

Generic strategies - Concept

Competitive strategy is concerned with how a strategic

Competitive advantage is about how an SBU creates

Producing goods or services better or

Producing goods or services better or

What about the quality?

more about other means

Competitive advantage First

In other circumstances the ability to deliver quickly or within very

The trick of achieving competitive advantage from technology is to

How to develop an edge ?

Three generic strategies

The Cost Leadership Strategy (1)

There are two main ways of achieving a Cost Leadership Strategy:

•Increasing profits by reducing costs, while charging industry-

•Increasing market share by charging lower prices, while still making

The Cost Leadership Strategy (2)

Cost Leadership is about

The Cost Leadership Strategy (3)

Lower input costs Economies of scale

Product/process design Experience

The Cost Leadership Strategy (3 a)

The Cost Leadership Strategy (3 b)

Economies of scale spread these fixed costs over high levels of

The Cost Leadership Strategy (3 b)

Economies of scale in purchasing can also reduce input costs.

The Cost Leadership Strategy (3 b)

The diseconomies of scale- Rare

Large volumes of output that require special

The Cost Leadership Strategy (3 c)

Engineers can choose to build a product from cheap

The Cost Leadership Strategy (3 d)

In designing a product or service, it is important to

The Cost Leadership Strategy (3 d)

The Cost Leadership Strategy (3 d)

The efficiencies are basically of two sorts.

First, there are gains in labor productivity as staff simply

Second, costs are saved through more efficient designs

The Cost Leadership Strategy (3 d)

* Market entry timing

The Cost Leadership Strategy (3 d)