BUSINESS LEVEL STRATEGY &
COMPETITIVE ADVANTAGE
Payne
(5)
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Strategic Decisions at Multiple Levels
• Corporate Strategy
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Moves to achieve diversification
Actions to boost performance of individual businesses
Capturing synergy among business units (2 + 2 = 5 effects) !
Establishing investment priorities and steering corporate resources
into the most attractive business units
• Business Strategy
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Forming responses to changes in industry and competitive
conditions, buyer needs and preferences, economy, regulations, etc.
Crafting competitive moves leading to sustainable competitive
advantage
Building competitively valuable competencies and capabilities
Uniting strategic initiatives of functional areas
Addressing strategic issues facing the company
Functional Strategy
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Game plan for a strategically-relevant function, activity, or business
process
Details how key activities will be managed
Provide support for business strategy
Specify how functional objectives are to be achieved
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Core Competencies and Strategy
Core
competencies
The resources and capabilities that have been
determined to be a source of competitive
advantage for a firm over its rivals
Strategy
An integrated and coordinated set of actions
taken to exploit core competencies and gain a
competitive advantage
Business-level
strategy
Actions taken to provide value to customers and
gain a competitive advantage by exploiting core
competencies in specific, individual product
markets
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Definition of Competitive Advantage
The essence of strategy lies in creating tomorrow’s competitive advantages
faster than competitors mimic the ones you possess today. - Gary Hamel and
C.K. Prahalad
•
COMPETITIVE ADVANTAGE exists when a
firm’s strategy gives it an edge in:
–
–
Defending against competitive forces and
Securing customers
…such that the firm earns (or has the potential
to earn) a persistently higher rate of profit.
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Gaining of Competitive Advantage
•
COMPETITIVE ADVANTAGE comes with the
offering of SUPERIOR VALUE through:
–Offering buyers a
–Offering a
good product at a lower price
better product/service buyers think is worth a premium price
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Business-Level Strategy
Business-level strategy: 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.
Key Issues:
• What good/service to offer customers?
• How to manufacture or create the good or service?
• How to distribute the good/service in the marketplace?
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The Decision Logic of Strategy Formulation
May be
Corporate or
Business
Strategic
Decisions
Establishment of mission, vision, values, objectives
-- the Directional Strategies
Identification, evaluation, and selection of
-- the Adaptive Strategies
Identification, evaluation, and selection of
-- the Market Entry Strategies
Identification, evaluation, and selection of
-- the Positioning Strategies
Implementation through development of
-- the Functional & Operational Strategies
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Adaptive Strategies
• Delineate how the organization will adapt to
changes in the environment or competitive
landscape:
Expansion
•Diversification
•Vertical Integration
•Market Development
•Product Development
•Penetration
Contraction
•Divestiture
•Liquidation
•Harvesting
•Retrenchment
•Outsourcing
Stabilization
•Enhancement
•Status Quo
Corporate Strategy Decisions Only
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Adaptive: Expansion-Market/Product
Development & Penetration
• Market Development -- expand geographic service
area or by targeting new market segments within
the present area.
– Building new store near high-growth residential areas
• Product Development -- introduction of new
product/services in present markets, through
product/service enhancement and line expansion.
• Penetration -- centered on promotional,
distribution, and pricing strategies with current
products or services.
– 1 in 12 wins Coca-Cola or “buy one, get one free” for
Tinactin.
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The BCG Portfolio Matrix
22%
Stars
Question Marks
20%
18%
16%
14%
12%
10%
Cash Cows
8%
Dogs
6%
4%
0.1X
1X
1.5X
2X
0
10X
2%
Relative Market Share
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Adaptive: Stabilization Strategies
When past strategies have been viewed as
appropriate and few changes are required:
• Enhancement - when organization just “needs to
do things better;” takes forms of CQI, TQM
programs, speeding delivery, adding flexibility to
service design
• Status Quo - maintenance of services at the
current levels, defending against competitors
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Market Entry Strategies
• Carry out the expansion and stabilization strategies
through:
– Purchase Strategies:
May be
Corporate
Decision if in
Different
Market
• Acquisition – purchase of new product, unit or organization
• Licensing – lease technology, product or service
• Venture Capital Investment – “try out” investment option
– Cooperation Strategies:
• Mergers – two organizations come together as one
• Strategic Alliance – long-term agreement to work together
• Joint Venture – combined resources to work on common
issue of interest
– Developmental Strategies:
• Internal Development – uses existing resources or
structures
• Internal Ventures – establishes new entity for
developmental purposes
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Positioning Strategies
• Business Level Positioning:
– Position the organization vis-à-vis other organizations
within the market
– These are market-oriented and best articulate the
competitive advantage within the market
– May be market-wide (or broad-based) or directed at a
particular segment (or niche-focused)
• Based largely on Generic Business Strategies:
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Low-Cost Leadership Strategy
Broad Differentiation Strategy
Best-Cost Provider or Integrated Strategy
Focused Low-Cost Strategy
Focused Differentiation Strategy
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“Three” Generic Strategies
Competitive Advantage
Lower Cost
Differentiation
Industry
-Wide
Cost
Leadership
Differentiation
Competitive
Scope
Single
Segment
Focus
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“Four” Generic Strategies
Competitive Advantage
Lower Cost
Differentiation
Broad
Target
Cost
Leadership
Differentiation
Competitive
Scope
Narrow
Target
Cost Focus
Differentiation
Focus
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“Five” Generic Strategies
Competitive Advantage
Lower Cost
Differentiation
Broad
Target
Competitive
Scope
Narrow
Target
Cost
Leadership
Differentiation
Best Cost
Provider
Cost Focus
Differentiation
Focus
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A Low-Cost Leadership Strategy
Objective: Open up a sustainable cost advantage over
rivals, using lower-cost edge as a basis either to:
–
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Under-price rivals and reap market share gains OR
Earn higher profit margin selling at going price
Keys to Success:
• Make achievement of low-cost relative to rivals the THEME of
firm’s business strategy
• Find ways to drive costs out of business year-after-year
Characteristics
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Cost conscious corporate culture
• Efficient scale facilities
• Tightly controlled production costs and
overhead
• Minimized costs of sales, R&D and
service
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Efficient manufacturing facilities
• Simplified production processes
• Intensive scrutiny of budget
requests
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Drivers of Cost Advantage
• Economies of Scale
– Indivisibilities
– Specialization and Division of
Labor
• Economies of Learning
– Increased Dexterity
– Improved Coordination and
Organization
• Process Technology and
Process Design
– Mechanization and
Automation
– Efficient Utilization of
Materials
– Increased Precision
• Product Design
– Design for Automation
– Designs to Economize on
Materials
• Input Costs
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Location Advantages
Ownership of Low-Cost Inputs
Bargaining Power
Supplier Cooperation
• Capacity Utilization
– Ratio of Fixed to Variable Costs
– Costs of Installing and Closing
Capacity
• Managerial / Organizational
Efficiency
– Organizational Slack
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A Low-Cost Strategy Works Best When:
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Price competition is vigorous
Product is standardized or readily
available from many suppliers
There are few ways to achieve
differentiation that have value
Most buyers use product in same ways
Buyers incur low switching costs
Buyers are large and have significant
bargaining power
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A Low-Cost Strategy Fails When:
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Being overly aggressive in cutting price (revenue
erosion of lower price is not offset by gains in sales
volume--profits go down, not up)
• Low cost methods are easily imitated by rivals
• Becoming too fixated on reducing costs and ignoring
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Buyer interest in additional features
Declining buyer sensitivity to price
Changes in how the product is used
Technological breakthroughs open up cost reductions
for rivals
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Structure for Cost Leadership Strategy
• Operations is main function
• Process engineering is
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•
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Office of the President
emphasized over R&D
Large centralized staff
Formalized procedures
Structure is mechanical, job
roles highly structured
Engineering
Centralized Staff
Accounting
Operations
Marketing
Personnel
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A Differentiation Strategy
Objective
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Incorporate differentiating features that cause buyers to prefer
firm’s product or service over the brands of rivals
Keys to Success
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Find ways to differentiate that CREATE VALUE for buyers
and that are NOT EASILY MATCHED or CHEAPLY
COPIED by rivals
Not spending more to achieve differentiation than the price
premium that can be charged
Characteristics
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Uniqueness is achieved in ways that:
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Buyers perceive as valuable
Rivals find hard to match or copy
Can be incorporated at a cost well below the price premium
that buyers will pay
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Differentiation Strategy
Differentiation actions required:
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Developing new systems and processes
Shaping perceptions through advertising
Quality focus
Capability in R&D
Maximize human resource contributions through
low turnover and high motivation
Factors Driving Differentiation:
 Unique product features
 Quality of inputs
 Unique product performance  Exceptional skill or experience
 Exceptional services
 Detailed information
 New technologies
 Extensive personal relationships
with buyers and suppliers
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A Differentiation Strategy Works Best When:
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There are many ways to differentiate a product that
have value and please customers
• Buyer needs and uses are diverse
• Few rivals are following a similar type of
differentiation approach
• Technological change is fast-paced and competition
is focused on evolving product features
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A Differentiation Strategy Fails When:
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Trying to differentiate on a feature buyers do
not perceive as lowering their cost or
enhancing their well-being
• Over-differentiating such that product features
exceed buyers’ needs
• Charging a price premium that buyers perceive
is too high
• Failing to signal value
• Not understanding what buyers want or prefer
and differentiating on the “wrong” things
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Structure for Differentiation Strategy
President and
Limited Staff
R&D
New Product
R&D
Marketing
Marketing
Operations
Finance
Human
Resources
• Marketing is the main function for tracking new product ideas
• New product R&D is emphasized
• Most functions are decentralized
• Formalization is limited to foster change and promote new ideas
• Overall structure is organic; job roles are less structured
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Best Cost Provider/Integrative Strategy
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Objective
Combine a strategic emphasis on low-cost with a
strategic emphasis on differentiation
– Make an upscale product at a lower cost
– Give customers more value for the money
Keys to Success
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Create superior value by MEETING OR EXCEEDING
buyer expectations on product attributes and BEATING
their price expectations
Be the low-cost producer of a product with GOOD-TOEXCELLENT product attributes, then use cost
advantage to UNDERPRICE comparable brands
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Integrative Strategy: A Hybrid or the
“Mega-Strategy”?
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Competitive advantage comes from matching close rivals
on key product attributes and beating them on price.
• Success depends on having the skills and capabilities to
provide attractive performance and features at a lower
cost than rivals.
• A best-cost producer can often out-compete both a lowcost provider and a differentiator when
•
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Standardized features/attributes won’t meet the diverse needs of buyers
Many buyers are price and value sensitive
**The most powerful competitive approach a company can
pursue is to strive relentlessly to become a lower-and-lower
cost producer of a higher-and-higher caliber product.
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Major Risk of Integrated Strategy
• An integrated cost/differentiation business level
strategy often involves compromises (neither the
lowest cost nor the most differentiated firm)
• The firm may become “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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A Focus / Niche Strategy
Objective
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Involves concentrated attention on a narrow piece of
the total market
Serve niche buyers better than rivals
Keys to Success
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Choose a market niche where buyers have distinctive
preferences, special requirements, or unique needs
Develop unique capabilities to serve needs of target
buyer segment
Two Types
• Achieve LOWER COSTS than rivals in serving the
segment-- A low-cost strategy
• Offer niche buyers SOMETHING DIFFERENT
from rivals-- A differentiation strategy
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A Focused Strategy Works Best When:
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Costly or difficult for multi-segment rivals to
serve specialized needs of target niche
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No other rivals are concentrating on same
segment
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Firm’s resources do not allow it to go after a
bigger piece of market
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Industry has many different segments, creating
more focusing opportunities
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A Focused Strategy Fails When:
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Competitors find effective ways to match a
focuser’s capabilities in serving niche
• Niche buyers’ preferences shift towards product
attributes desired by majority of buyers--the
niche becomes part of the overall market
• Segment becomes so attractive it becomes
crowded with rivals, causing segment profits to
be splintered
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Offensive and Defensive Strategies
Offensive Strategies
Are undertaken to build new or stronger market
positions and/or create competitive advantage.
Key Insight: The chances for a successful offensive initiative are
improved when it is based on a company’s resource strengths
and strongest competencies and capabilities.
Defensive Strategies
Can protect competitive advantage, but rarely are
the basis for creating advantage.
Key Insight: When to make a move is as important as what move
to make. Two defenses – 1) Block avenues challengers can take
in mounting offensive attacks, 2 ) Make it clear any challenge
will be met with strong counterattack
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Attacking Competitor Strengths
Options:
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Offer equally good product at a lower price
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Offer a better product at the same price
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Leapfrog into next-generation technologies
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Add appealing new features
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Run comparison ads
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Construct new plant capacity
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Offer a wider product line
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Develop better customer service capabilities
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Attacking Competitor Weaknesses
Basic Approach
Concentrate company strengths and resources directly
against a rival’s weaknesses
Weaknesses to Attack
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Geographic regions where rival is weak
Segments rival is neglecting
Go after those customers a rival is least equipped to serve
Rivals with weaker marketing skills
Introduce new models exploiting gaps in rivals’ product
lines
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Guerrilla Offenses
Approach
Use principles of surprise and hit-and-run to attack in
locations and at times where conditions are most
favorable to initiator
Appeal
Well-suited to small challengers with limited resources
Options
• Focus on narrow target weakly defended by rivals
• Challenge rivals where they are overextended and when they
are encountering problems
• Make random scattered raids on leaders
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Occasional low-balling on price
Intense bursts of promotional activity
Legal actions charging antitrust violations, patent infringements, or
unfair advertising
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Preemptive Strikes
Approach
Involves moving first to secure an advantageous position that
rivals are foreclosed or discouraged from duplicating!
Options

Expand capacity ahead of demand in hopes of discouraging
rivals from following suit
 Tie up best or cheapest sources of essential raw materials
 Move to secure best geographic locations
 Obtain business of prestigious customers
 Build an image in buyers’ minds that is unique & hard to copy
 Secure exclusive or dominant access to best distributors
 Acquire desirable, but struggling, competitor
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