Business Level
Strategy
Ijaz Ahmed
Strategy
Concerned with making choices among two or more
alternatives
The choices are influenced by
opportunities and threats
nature and quality of the resources, capabilities, and core
competencies
Strategies are purposeful,
precede the taking of actions to which they apply,
demonstrate a shared understanding of the firms vision and
mission.
Acers decisions to acquire Gateway and Packard Bell were
quite purposeful.
Acquiring Gateway helped the firm establish a better foothold in
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.
Core strategy, Every firm has one, how it
intends to compete
Reach, Richness,
Affiliation
Reach
The reach dimension of relationships with customers is
concerned with the firms access and connection to
customers
Richness
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.
Affiliation
the third dimension, is concerned with facilitating
Customers: Their
Relationship to BusinessLevel Strategies
Who will be
served?
Key Issues
in
Business-level
Strategy
What needs will
be satisfied?
How will those
needs be satisfied?
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
Markets
Industrial
Markets
Market Segmentation
Consumer Markets
Demographic factors
Socioeconomic
factors
Industrial Markets
End-use segments
Product segments
Geographic factors
Geographic segments
Psychological factors
Common buying
Consumption
patterns
Perceptual factors
factor segments
Customer size
segments
Market 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 (consumer perceptions
Market Segmentation
Industrial Markets
End use segment (Standardized Industrial
Classification Code) (High speed and low speed
motors)
Geographic segments (defined by boundaries
between countries or by regional differences
within them)
Common buying factor segments
Five factors are typically found to be important in
most industrial buying situations: product
performance, productquality, service, delivery,
andprice.
What: Determining
Which Customer
Needs to Satisfy
Customer needs are related to a products
benefits and features.
Customer needs are neither right nor wrong,
good nor bad.
Customer needs represent desires in terms of
features and performance capabilities.
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.
The Purpose of a BusinessLevel Strategy
Business-Level Strategies
Are intended to create differences between
the firms 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
rivals.
Types of Potential
Competitive Advantage
Achieving lower overall costs than rivals
Performing activities differently (reducing
process costs)
Possessing the capability to differentiate the
firms product or service and command a
premium price
Performing different (more highly valued)
activities.
Types of Business-Level
Strategies
Competitive Advantage
Broad
Target
Competitive
Scope
Narrow
Target
Cost
Uniqueness
Cost Leadership
Differentiation
Integrated Cost
Leadership/
Differentiation
Focused Cost
Leadership
Focused
Differentiation
Firms serving a broad target market seek to
use their competitive advantage on an
industry-wide basis.
A narrow competitive scope means that the
firm intends to serve the needs of a narrow
target customer group.
With focus strategies, the firm selects a
segment or group of segments in the industry
and tailors its strategy to serving them to the
exclusion of others.
Buyers with special needs and buyers located in
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
Relatively standardized products
Features acceptable to many customers
Lowest competitive price
Process innovations
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
Cost leaders goods and services must have
competitive levels of differentiation that create
value for customers while maintaining low cost
KIA motors
Cost cutting could lead to limited potential for all-
important process innovations, employment of
lower-skilled workers, poor conditions on the
production line, accidents, and a poor quality of
Research suggests that having a competitive
advantage in terms of logistics creates more
value when using the cost leadership strategy
than when using the differentiation strategy.
Big Lotss
Sell name-brand products at prices that are
20 to 40 percent below those of discount
retailers and roughly 70 percent below those
of traditional retailers.
Big Lotss buyers search for manufacturer
overruns and discontinued styles to find
goods priced well below wholesale prices.
Buys from overseas suppliers.
Big Lots satisfies the customers need to
access the differentiated features of brandname products, but at a fraction of their initial
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
How to Obtain a Cost
Advantage
Determine
and control
Cost
Drivers
Reconfigur
e Value
Chain if
needed
Alter production process
Change in automation
New raw material
Forward integration
New distribution channel
New advertising media
Direct sales in place
of indirect sales
Backward integration
Change location
relative to suppliers
or buyers
Examples of Value-Creating Activities
Associated with the Cost Leadership Strategy
Cost Leadership Strategy:
Competitors
Rivalry with
Existing
Competitors
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargainin
g power
of
suppliers
Bargaining
power of
buyers
Due to cost leaders
advantageous position:
Rivals hesitate to
compete on basis of
price.
Lack of price competition
leads to greater profits.
Cost Leadership Strategy:
Buyers
Bargaining Power
of Buyers
Threat of
substitute
products
power by:
Driving prices far
Threat of
new
entrants
Rivalry
among
competing
firms
Can mitigate buyers
Bargainin
g power
of
suppliers
Bargaining
power of
buyers
below competitors,
causing them to exit,
thus shifting power
with buyers back to
the firm.
Cost Leadership Strategy:
Suppliers
Bargaining Power
of Suppliers
Threat of
substitute
products
suppliers power by:
Being able to absorb
Threat of
new
entrants
Rivalry
among
competing
firms
Can mitigate
Bargainin
g power
of
suppliers
Bargaining
power of
buyers
cost increases due to
low cost position.
Being able to make
very large purchases,
reducing chance of
supplier using power.
Cost Leadership Strategy:
New Entrants Can frighten off new
The Threat of
Potential Entrants
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
entrants due to:
Their need to enter on
a large scale in order to
be cost competitive.
The time it takes to
Bargainin
g power
of
suppliers
Bargaining
power of
buyers
move down the
learning curve.
Efficiency
Cost Leadership Strategy:
Substitutes
Product
Substitutes
Cost leader is well
positioned to:
Make investments to be
first to create
substitutes.
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargainin
g power
of
suppliers
Bargaining
power of
buyers
Buy patents developed
by potential substitutes.
Lower prices in order to
maintain value position.
More customers
Cost Leadership Strategy
(contd)
Competitive Risks
Processes used to produce and distribute good
or service may become obsolete due to
competitors innovations.
Too much focus by the cost leader on cost
reductions may occur at the expense of trying
to understand customers perceptions of
competitive levels of differentiation.
Wal-Mart, for example, has been criticized for having too few
salespeople available to help customers and too few individuals at
checkout registers. These complaints suggest that there might be a
discrepancy between how Wal-Marts customers define minimal
levels of service and the firms attempts to drive its costs lower and
lower.
Competitors, using their own core
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.
When the firm has a thorough understanding of
what its target customers value
the relative importance they attach to the
satisfaction of different needs
for what they are willing to pay a premium,
the differentiation strategy can be effective in
helping it earn above-average returns
A good or service can be differentiated in many
ways.
Unusual features
responsive customer service
rapid product innovations and technological
leadership
How to Obtain a
Differentiation Advantage
Control
Cost
Drivers
if
needed
Reconfigu
re Value
Chain to
maximize
Raise performance of product or service
Create sustainability through:
Customer perceptions of uniqueness
Customer reluctance to switch to
non-unique product or service
Figure 4.4
Examples of Value-Creating Activities Associated
with the Differentiation Strategy
Differentiation Strategy:
Competitors
Rivalry with
Competitors
Defends against
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargainin
g power
of
suppliers
Bargaining
power of
buyers
competitors because
brand loyalty to
differentiated product
offsets price competition.
Differentiation Strategy:
Buyers
Bargaining Power
Can mitigate buyers
of Buyers
power because well
differentiated products
Threat of
reduce customer
new
entrants
sensitivity to price
Rivalry
Bargainin
among
increases.
g power
competing
firms
Threat of
substitute
products
of
suppliers
Bargaining
power of
buyers
Differentiation Strategy:
Suppliers
Bargaining Power
of Suppliers
Threat of
substitute
products
power by:
Absorbing price increases
Threat of
new
entrants
Rivalry
among
competing
firms
Can mitigate suppliers
due to higher margins.
Bargainin
g power
of
suppliers
Bargaining
power of
buyers
Passing along higher
supplier prices because
buyers are loyal to
differentiated brand.
Differentiation Strategy:
New Entrants
The Threat of
Potential Entrants
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Can defend against new
Bargainin
g power
of
suppliers
Bargaining
power of
buyers
entrants because:
New products must surpass
proven products.
New products must be at
least equal to performance
of proven products, but
offered at lower prices.
Differentiation Strategy:
Substitutes
Product
Substitutes
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargainin
g power
of
suppliers
Bargaining
power of
buyers
Well positioned relative
to substitutes because:
Brand loyalty to a
differentiated product
tends to reduce
customers testing of new
products or switching
brands.
Competitive Risks of
Differentiation
The price differential between the differentiators product
and the cost leaders product becomes too large.
Differentiation ceases to provide value for which customers
are willing to pay.
A differentiated product becomes less valuable if
imitation by rivals causes customers to perceive that
competitors offer essentially the same good or service,
but at a lower price
Experience narrows customers perceptions of the value of
differentiated features.
customers having positive experiences with generic tissues may
decide that the differentiated features of the Kleenex product
are not worth the extra cost.
Customer may be impressed with the quality of a Robert Talbott
Best of Class tie, positive experiences with less expensive ties
may lead to a conclusion that the price of the Best of Class tie
Competitive Risks of
Differentiation
Counterfeit goods
Counterfeit goods replicate differentiated features
of the firms products.
Counterfeits are those products bearing a
trademark that is identical to or indistinguishable
from a trademark registered to another party, thus
infringing the rights of the older of the trademark
Focus Strategies
An integrated set of actions taken to produce
goods or services that serve the needs of a
particular competitive segment.
Particular buyer groupyouths or senior
citizens
Different segment of a product lineproducts
for professional painters versus do-it-yourself
group
Different geographic markets Sindh vs Punjab
Focus Strategies (contd)
Focused cost leadership strategy(IKEA)
Design low-cost, modular furniture ready for assembly by
customer
To eliminate the need for sales associates or decorators,
IKEA positions the products in its stores so that customers
can view different living combinations (complete with
sofas, chairs, tables, etc.) in a single room like setting,
which helps the customer imagine how a grouping of
furniture will look in the home.
A third practice that helps keep IKEAs costs low is
requiring customers to transport their own purchases
rather than providing delivery service.
IKEA also offers some differentiated features
unique furniture designs, in-store playrooms for children,
wheelchairs for customer use, and extended hours.
Focus Strategies (contd)
Focused differentiation strategy
Kazoo Toys reading
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.
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.
Competitive Risks of Focus
Strategies
A focusing firm may be out-focused by its
competitors.
A large competitor may set its sights on a firms
niche market.
Customer preferences in niche market may
change to more closely resemble those of the
broader market. Cameras.
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.
Leadership/
Differentiation Strategy
(contd)
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
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.
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)
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
Exceeding customers expectations regarding
quality is a differentiating feature
And eliminating process inefficiencies to cut
costs allows the firm to offer that quality to
customers at a relatively low price.
Thus, an effective TQM system helps the firm
develop the flexibility needed to spot
opportunities to simultaneously increase
differentiation and reduce costs.
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.
