Business-Level Strategy
Chapter Five
1
Strategic
Inputs
Chapter 4
Internal
Environment
Strat. Intent
The Strategic
Strat. Mission
Strategy Formulation
Chapter 55
Chapter
Bus.
Bus.–-Level
Level
Strategy
Strategy
Chapter 7
Chapter 6
Competitive Corp. - Level
Dynamics
Strategy
Chapter 9
Chapter 8
Acquisitions & International
Strategy
Restructuring
Strategic
Outcomes
Strategic Actions
Chapter 3
External
Environment
Chapter 2
Above Average
Returns
Chapter 10
Cooperative
Strategies
Chapter 1
Strategic
Competitiveness
.
Management
Process
.
Strategy Implementation
Chapter 11
Chapter 12
Corporate
Structure
Governance
& Control
Chapter 13 Chapter 14
Strategic Entrepreneurship
Leadership & Innovation
Feedback
2
The Central Role of Customers
In selecting a business-level strategy, the firm
determines
1. Who it will serve.
2. What needs those target customers have
that it will satisfy.
3. How those needs will be satisfied.
© 2006 by Nelson, a division of Thomson Canada Limited.
5-3
Core Competency, Strategy and
Business Level Strategy
Core
Competency
Strategy
Business
Level
Strategy
The resources and capabilities that are
determined to be a source of competitive
advantage for a firm over its rivals.
An integrated & coordinated set of actions
taken to exploit core competencies & gain a
competitive advantage.
Actions taken to provide customers value
and gain a competitive advantage by
exploiting core competencies in specific,
individual product markets.
4
Three Generic Strategies
5
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Competitive Advantage and
Business Performance
Competitive Advantage
Differentiation
Differentiation Cost Stuck in
and Cost Differentiation Cost
Focus the Middle
Focus
Performance
Return on
investment (%)
35.5
32.9
30.2
17.0
23.7
17.8
Sales Growth (%)15.1
13.5
13.5
16.4
17.5
12.2
5.3
5.3
5.5
6.1
6.3
4.4
123
160
100
141
86
105
Gain in Market
Share (%)
Sample Size
McGraw-Hill/Irwin
Strategic Management, 3/e
Adapted from Exhibit5.2 Competitive advantage and business performance
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
How to Obtain a Cost Advantage
1
Determine and Control Cost Drivers
2
Reconfigure the Value Chain as needed
Alter production process
Change in automation
New raw material
New advertising media
New distribution channel
Direct sales in place
of indirect sales
Forward integration
Backward integration
Alter location relative
to suppliers or buyers
7
Value-Chain Activities: Overall Cost
Leadership
McGraw-Hill/Irwin
Strategic Management, 3/e
Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership
Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from
Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright ©
1985 by Michael E. Porter.
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Cost Leadership Strategy and the
Five Forces of Competition
Rivalry with Existing
Competitors
Five Forces of
Competition
Bargaining Power
of Suppliers
Can use cost leadership strategy
to advantage since:
 competitors avoid price wars
with cost leaders, creating
higher profits for the entire
industry
9
Cost Leadership Strategy and the
Five Forces of Competition
Bargaining Power of Buyers
(Customers)
Five Forces of
Competition
Bargaining Power
of Suppliers
Can mitigate buyers’ power by:
Driving prices far below
competitors and cause exit and
shift power back to firm.
10
Cost Leadership Strategy and the
Five Forces of Competition
Bargaining Power of Suppliers
Can mitigate suppliers’ power by:
Five Forces of
Competition


Bargaining Power
of Suppliers
being able to absorb cost
increases due to low cost position
being able to make very large
purchases, reducing chance of
supplier using power
11
Cost Leadership Strategy and the
Five Forces of Competition
Threat of New Entrants
Five Forces of
Competition
Bargaining Power
of Suppliers
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
learning curve
12
Value-Chain Activities: Differentiation
Exhibit 5.5 Value-Chain Activities: Examples of Differentiation
Source: Adapted with the permission of The Free Press, a division of
Simon & Schuster, Inc., from Competitive Advantage: Creating and
Sustaining Superior Performance by Michael E. Porter. Copyright ©
1985 by Michael E. Porter.
McGraw-Hill/Irwin
Strategic Management, 3/e
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Differentiation Strategy and the Five
Forces of Competition
Threat of Substitute Products
Five Forces of
Competition
Well positioned relative to substitutes
because:

Bargaining Power
of Suppliers
brand loyalty to a differentiated product
tends to reduce customers’ testing of
new products or switching brands.
14
Major Risks of Cost Leadership
Business Level Strategy
Dramatic technological change could take
away your cost advantage.
Competitors may learn how to imitate
Value Chain.
Focus on efficiency could cause Cost
Leader to overlook changes in customer
preferences.
15
Generic Business Level Strategies
Source of Competitive Advantage
Cost
Broad
Target
Market
Breadth of
Competitive
Scope
Uniqueness
Cost
Differentiation
Leadership
Narrow
Target
Market
16
Differentiation strategy
“An integrated set of actions designed by a
firm to produce or deliver goods or
services that customers perceive as being
different in ways that are important to
them.”
17
How to Obtain a Differentiation
Advantage
Control if needed
Reconfigure to
maximize
Cost Drivers Value Chain
• Lower buyers’ costs
• Raise performance of product or service
• Create sustainability through:
- customer perceptions of uniqueness
- customer reluctance to switch to non-unique product
18
Differentiation Strategy and the Five
Forces of Competition
Rivalry Among Competing Firms
Can defend against competition because:
Five Forces of
Competition

brand loyalty to differentiated product
offsets price competition
Bargaining Power
of Suppliers
19
Differentiation Strategy and the Five
Forces of Competition
Bargaining Power of Buyers
Five Forces of
Competition
Bargaining Power
of Suppliers
Can mitigate buyer power because:
 well differentiated products
reduce customer sensitivity to
price increases
20
Differentiation Strategy and the Five
Forces of Competition
Bargaining Power of Suppliers
Five Forces of
Competition
Can mitigate suppliers’ power by:


Bargaining Power
of Suppliers
absorbing price increases due to higher
margins
passing along higher supplier prices
because buyers are loyal to differentiated
brand
21
Differentiation Strategy and the Five
Forces of Competition
Threat of New Entrants
Five Forces of
Competition
Can defend against new entrants
because:

Bargaining Power
of Suppliers

new products must surpass proven
products or,
new products must be at least
equal to performance of proven
products, but offered at lower
prices
22
Differentiation Strategy and the Five
Forces of Competition
Threat of Substitute Products
Five Forces of
Competition
Well positioned relative to
substitutes because:

Bargaining Power
of Suppliers
brand loyalty to a differentiated
product tends to reduce customers’
testing of new products or
switching brands
23
Major Risks of a Differentiation
Business Level Strategy
Customers may decide that the
differentiation between the
differentiator’s product and the cost
leaders price is too large.
A firm’s means of differentiation may
cease to provide value for which
customers are willing to pay.
The means of uniqueness may no longer
be valued by customers.
24
Focus Strategies
Focus strategies are an integrated set of
actions designed to produce or deliver
goods or services that serve the needs of
a particular competitive segment.
25