Building Competitive Advantage
through Business Level Strategy
Chapter 5
Levels of Strategic Management
From Chapter 1
Key Question for Each Level
• Corporate Strategy – what business(es)
should the organization be in?
• Business Strategy – how should the
organization compete?
• Functional Strategy – how should the
organization’s resources be best
employed to support business strategy?
Business-Level Strategy
How do we compete in this
business?
Business-Level Strategy
• Developing a firm-specific business model
that will allow a company to gain
competitive advantage over its rivals in a
market or industry
– Customers’ needs
– Customer groups
– Distinctive competencies (how customers’
need will be satisfied)
Customer Needs and Product
Differentiation
• Customer needs
– Desires, wants, or cravings that can be
satisfied through product attributes
• Product differentiation
– Designing products to satisfy customers’
needs
• Balancing differentiation with costs
• Ability to charge a higher price
• Different ways to achieve distinctness
Customer Groups and Market
Segmentation
• Market segmentation
– The way a company decides to group
customers, based on their different needs or
preferences
• Price
• Kinds of needs
– An evolving process
Customer Groups and Market
Segmentation (cont’d)
• Strategies to market segmentation
– Choose not to recognize that different groups
of customers have different needs; serve the
average customer
– Segment a market and develop a product to
suit the needs of each segment
– Recognize that the market segments but
concentrate on serving only one segment
The Dynamics of BusinessLevel Strategy
• Make a consistent and compatible set of
choices concerning:
– How to differentiate and price the product
– When and how much to segment the market
to maximize demand
– Where and how to invest capital in order to
create value while keeping cost structures
viable (for competitive pricing)
The Dynamics of BusinessLevel Strategy
Source: Copyright © C. W. L. Hill and G. R. Jones, “The Dynamics of Business-Level Strategy,”
(unpublished manuscript, 2002).
Choosing a Generic BusinessLevel Strategy
• Generic strategies
– All businesses can pursue them regardless of
whether they are manufacturing, service, or
nonprofit
– Can be pursued in different kinds of industry
environments
– Results from a company’s consistent choices
on product, market, and distinctive
competencies
Product/Market/DistinctiveCompetency Choices and Generic
Competitive Strategies
Generic Business-Level
Strategy: Cost Leadership
• Establish a cost structure that allows the
company to provide goods and services at
lower unit costs than competitors
• Advantages
– If rivals charge similar prices, the cost leader
achieves superior profitability
– The cost leader is able to charge a lower price
than competitors
Cost Leadership Strategic
Choices
• The cost leader does not try to be the
industry innovator
• The cost leader positions its products to
appeal to the “average” customer
• The overriding goal of the cost leader is to
increase efficiency and lower its costs
relative to its rivals
Cost Leadership Advantages
• Protected from industry competitors by cost
advantage
• Less affected by increased prices of inputs if there
are powerful suppliers
• Less affected by a fall in price of inputs if there are
powerful buyers
• Purchases in large quantities increase bargaining
power over suppliers
• Ability to reduce price to compete with substitute
products
• Low costs and prices are a barrier to entry
Cost Leadership Disadvantages
• Competitors may lower their cost
structures
• Competitors may imitate the cost leader’s
methods
• Cost reductions may affect demand
Generic Business-Level
Strategy: Differentiation
• Create a product that customers perceive
as different or distinct in an important way
• Advantages
– Premium price
– Increased revenues = superior profitability
Differentiation Strategic Choices
• Quality, innovation, responsiveness to
customer needs
• A differentiator strives to differentiate itself
along as many dimensions as possible
• A differentiator segments its market into
many niches
• A differentiated company concentrates on
the organizational functions that provide
the source of differentiation advantage
Differentiation Advantages
• Customers develop brand loyalty
• Powerful suppliers are not a problem because the
company is geared more toward the price it can
charge than its costs
• Differentiators can pass price increases on to
customers
• Powerful buyers are not a problem because the
product is distinct
• Differentiation and brand loyalty are barriers to entry
• The threat of substitute products depends on
competitors’ ability to meet customer needs
Differentiation Disadvantages
• Difficulty in maintaining long-term
distinctness in customers’ eyes
– Agile competitors can quickly imitate
– Patents and first-mover advantage are limited
• Difficulty of maintaining premium price
Generic Business-Level
Strategy: Cost Leadership and
Differentiation
• Pursuing the business models of the cost
leader and differentiator simultaneously
Cost Leadership and
Differentiation Strategic Choices
• Using robots and flexible manufacturing cells reduces
costs while producing different products
• Standardizing component parts used in different end
products can achieve economies of scale
• Limiting customer options reduces production and
marketing costs
• JIT inventory can reduce costs and improve quality and
reliability
• Using the Internet and e-commerce can provide
information to customers and reduce costs
• Low-cost and differentiated products are often both
produced in countries with low labor costs
Generic Business-Level
Strategy: Focus
• Serving the needs of a specific market
segment
– Geographic
– Type of customer
– Segment of the product line
• After choosing a market segment, a
focused company positions itself using
either
– Low-cost OR differentiation
Why Focus Strategies Are
Different
Focus Advantages
• The focuser is protected from rivals to the extent
it can provide a product or service they cannot
• The focuser has power over buyers because
they cannot get the same thing from anyone else
• The threat of new entrants is limited by customer
loyalty to the focuser
• Customer loyalty lessens the threat from
substitutes
• The focuser stays close to its customers and
their changing needs
Focus Disadvantages
• The focuser is at a disadvantage with regard to
powerful suppliers because it buys in small
volume (but it may be able to pass costs along
to loyal customers)
• Because of low volume, a focuser may have
higher costs than a low-cost company
• The focuser’s niche may disappear because of
technological change or changes in customers’
tastes
• Differentiators will compete for a focuser’s niche
Exercise
• Form groups
• Vail: describe in detail its generic strategy
• Pick an example for each generic strategy.
Explain
– Cost leadership
– Differentiation
– Focus
Business-Level Strategy: Stuck
in the Middle
• Companies that do not do the planning
necessary for success in their chosen strategy
– Product and market choices that have not been able
to obtain or sustain competitive advantage
• Successful generic competitive strategy:
– Product, market, and distinctive competency
decisions must result in a business-level strategy that
leads to competitive advantage and superior
profitability
– The environment and competition must be monitored
constantly in order to stay in tune with changes
Competitive Positioning and
Business-Level Strategy
• In every market segment or industry,
several companies typically compete for
the same customers
• The actions of one company have an
impact on the others
• Managers must position their companies
competitively with regard to customers and
competitors
Competitive Positioning:
Strategic Group Analysis
• Identifying the strategies that a company’s
rivals are pursuing
• Strategic groups: companies in an industry
that are pursuing a similar generic strategy
Competitive Positioning:
Choosing an Investment
Strategy
• The amount and type of resources that
must be invested to maximize a
company’s profitability over time
– Human
– Functional
– Financial
Choosing an Investment
Strategy at the Business Level
Competitive Positioning: Game
Theory
• Companies are players that are
simultaneously making choices
• The potential profitability varies depending
on the strategy one company selects and
the strategies that its rivals select
• Sequential move and simultaneous move
games
• Look forward and reason back
A Decision Tree for UPS’s
Pricing Strategy
Competitive Positioning: Game
Theory (cont’d)
• Know thy rival
• Find the most profitable dominant strategy
– Dominant strategy: one that makes you better
off than you would be if you pursued any other
strategy, no matter what strategy your
opponent uses
A Payoff Matrix for GM and Ford
Competitive Positioning: Game
Theory (cont’d)
• Strategy shapes the payoff structure of the
game
• By their choice of strategy and business
model, companies can alter the payoff
structure of the game, alter their dominant
strategy, and move away from a prisoner’s
dilemma type of game structure
Altered Payoff Matrix for GM
and Ford