Chapter 4
Business-Level Strategy
Part 2 Strategic Actions: Strategy Formulation
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Presentation design
by Charlie Cook
Learning Objectives
Studying this chapter should provide you with
the strategic management knowledge needed to:
1. Define business-level strategy.
2. Discuss the relationship between customers and
business-level strategies in terms of who, what, and how.
3. Explain the differences among business-level strategies.
4. Use the five forces of competition model to explain how
above-average returns can be earned through each
business-level strategy.
5. Describe the risks of using each of the business-level
strategies.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4–2
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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4–3
Core Competencies and Strategy
Core
Competencies
Resources and superior capabilities that are
sources of competitive advantage over a
firm’s rivals
Strategy
An integrated and coordinated set of
actions taken to exploit core competencies
and gain competitive advantage
Business-level
Strategy
Providing value to customers and gaining
competitive advantage by exploiting core
competencies in individual product markets
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4–4
Customers: Their Relationship
with Business-Level Strategies
Who will be
served?
Key Issues
in
Business-level
Strategy
What needs will
be satisfied?
How will those
needs be satisfied?
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4–5
Effectively Managing Relationships
with Customers
• Firms must manage all aspects of their
relationship with customers.
– Reach: firm’s access and connection to customers
– Richness: depth and detail of two-way flow of
information between the firm and the customer
– Affiliation: facilitation of useful interactions with
customers
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4–6
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
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4–7
Market Segmentation
• Consumer Markets
–
–
–
–
–
–
Demographic factors
Socioeconomic factors
Geographic factors
Psychological factors
Consumption patterns
Perceptual factors
• Industrial Markets
–
–
–
–
End-use segments
Product segments
Geographic segments
Common buying factor
segments
– Customer size
segments
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4–8
Table 4.1
Basis for Customer Segmentation
Consumer Markets
1. Demographic factors (age, income, sex, etc.)
2. Socioeconomic factors (social class, stage in the family life cycle)
3. Geographic factors (cultural, regional, and national differences)
4. Psychological factors (lifestyle, personality traits)
5. Consumption patterns (heavy, moderate, and light users)
6. Perceptual factors (benefit segmentation, perceptual mapping)
Industrial Markets
1. End-use segments (identified by SIC code)
2. Product segments (based on technological differences or
production economics)
3. Geographic segments (defined by boundaries between countries
or by regional differences within them)
4. Common buying factor segments (cut across product market and
geographic segments)
5. Customer size segments
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4–9
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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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4–10
How: Determining Core Competencies
Necessary to Satisfy Customer Needs
• Firms must decide:
– Who to serve, what customer needs to meet, and how
to use core competencies to implement value creating
strategies that satisfy target 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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4–11
The Purpose of a
Business-Level Strategy
• Business-Level Strategies
– Are intended to create differences between the firm’s
competitive position and those of its competitors.
• 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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4–12
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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4–13
Competitive Scope
• Broad Scope
– The firm competes in many
customer segments.
• Narrow Scope
– The firm selects a segment or
group of segments in the
industry and tailors its strategy
to serving them at the
exclusion of others.
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4–14
Types of Business-Level Strategies
Basis for Customer Value
Broad
Target
Lowest Cost
Distinctiveness
Cost Leadership
Differentiation
Integrated Cost
Leadership/
Differentiation
Target
Market
Narrow
Target
Focused Cost
Leadership
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Focused
Differentiation
4–15
Figure 4.1
Five Business-Level Strategies
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4–16
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.
• Product Characteristics
– Relatively standardized (commoditized) products
– Features broadly acceptable to many customers
– Lowest competitive price
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4–17
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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4–18
How to Obtain a Cost Advantage
Determine
and control
Cost Drivers
Reconfigure
Value Chain
if needed
 Alter production process
 New raw material
 Change in automation
 Forward integration
 New distribution channel
 Backward integration
 Change location relative
to suppliers or buyers
 New advertising media
 Direct sales in place of
indirect sales
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4–19
Figure 4.2
Examples of Value-Creating Activities Associated with the Cost Leadership Strategy
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4–20
Value-Creating Activities
for Cost Leadership
• Cost-effective MIS
• Few management layers
• Simplified planning
• Consistent policies
• Effecting training
• Easy-to-use manufacturing
technologies
• Investments in
technologies
• Finding low-cost raw
materials
• Monitor suppliers’
performances
• Link suppliers’ products to
production processes
• Economies of scale
• Efficient-scale facilities
• Effective delivery
schedules
• Low-cost transportation
• Highly trained sales force
• Proper pricing
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4–21
Cost Leadership Strategy: Competitors
• Due to cost leader’s
advantageous position:
– Rivals hesitate to compete
on basis of price.
– Lack of price competition
leads to greater profits.
Rivalry with
Existing Competitors
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Bargaining
power of
suppliers
Bargaining
power of
buyers
4–22
Cost Leadership Strategy: Buyers
• Can mitigate buyers’
power by:
– Driving prices far below
competitors, causing
them to exit, thus
shifting power with
buyers (customers)
back to the firm.
Bargaining Power
of Buyers
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Bargaining
power of
suppliers
Bargaining
power of
buyers
4–23
Cost Leadership Strategy: Suppliers
• Can mitigate suppliers’
power by:
– Being able to absorb
cost increases due to
low cost position.
– Being able to make
very large purchases,
reducing chance of
supplier using power.
Bargaining Power
of Suppliers
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Bargaining
power of
suppliers
Bargaining
power of
buyers
4–24
Cost Leadership Strategy: New Entrants
The Threat of
Potential Entrants
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargaining
power of
suppliers
Bargaining
power of
buyers
• Can frighten off new
entrants due to:
– Their need to enter on
a large scale in order to
be cost competitive.
– The time it takes to
move down the
industry learning curve.
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4–25
Cost Leadership Strategy: Substitutes
Product
Substitutes
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargaining
power of
suppliers
Bargaining
power of
buyers
• Cost leader is well
positioned to:
– Lower prices in order to
maintain its value position.
– Make investments to add
features unavailable in
substitutes.
– Buy intellectual property
and patents developed by
potential substitutes.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4–26
Cost Leadership Strategy (cont’d)
• Competitive Risks
– Processes used to produce and distribute good or
service may become obsolete due to competitors’
innovations.
– Too much 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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4–27
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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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4–28
How to Obtain a
Differentiation Advantage
Control
Cost Drivers
if needed
Reconfigure
Value Chain to
maximize
 Lower buyers’ costs
 Raise performance of product or service
 Create sustainability through:
 Customer perceptions of uniqueness
 Customer reluctance to switch to nonunique product or service
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4–29
Figure 4.3
Examples of Value-Creating Activities Associated with the Differentiation Strategy
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4–30
Value-Creating Activities
and Differentiation
• Highly developed MIS
• Emphasis on quality
• Worker compensation for
creativity/productivity
• Use of subjective
performance measures
• Basic research capability
• Technology
• High quality raw materials
• Delivery of products
• High quality replacement
parts
• Superior handling of
incoming raw materials
• Attractive products
• Rapid response to
customer specifications
• Order-processing
procedures
• Customer credit
• Personal relationships
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4–31
Differentiation Strategy: Competitors
Rivalry with
Existing Competitors
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargaining
power of
suppliers
• Defends against
competitors because
customer’s brand
loyalty to differentiated
product offsets price
competition.
Bargaining
power of
buyers
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4–32
Differentiation Strategy: Buyers
Bargaining Power
of Buyers
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargaining
power of
suppliers
• Can mitigate buyers’
power because well
differentiated
products reduce
customer sensitivity to
price increases.
Bargaining
power of
buyers
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4–33
Differentiation Strategy: Suppliers
Bargaining Power
of Suppliers
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargaining
power of
suppliers
Bargaining
power of
buyers
• Can mitigate suppliers’
power by:
– Absorbing price increases
due to higher margins.
– Passing along higher
supplier prices because
buyers are loyal to
differentiated brand.
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4–34
Differentiation Strategy: New Entrants
The Threat of
Potential Entrants
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargaining
power of
suppliers
Bargaining
power of
buyers
• Can defend against new
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.
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4–35
Differentiation Strategy: Substitutes
Product
Substitutes
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products
Bargaining
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.
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4–36
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 the differentiated
features of the firm’s products.
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4–37
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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4–38
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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4–39
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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4–40
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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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4–41
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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4–42
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 (CRM)
– Total quality management (TQM) systems
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4–43
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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4–44
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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4–45
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 input and operating process costs
– Reduced time-to-market for innovative products
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4–46
Risks of an 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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4–47