Chapter 4: Business-Level Strategy
 Overview:
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Defining business-level strategy
Risks of business-level strategies
Differences in business-level strategies
5-Forces
Relationship between customers and strategy
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Introduction
 Strategy: Increasingly important to a firm’s success and
concerned with making choices among two or more
alternatives.
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Choices dictated by
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External environment (O and T)
Internal resources, capabilities and core competencies (S and W)
 Business level-strategy: Integrated and coordinated set of
commitments and actions the firm uses to gain a
competitive advantage by exploiting core competencies in
specific product markets/industry
 How we intend to compete in a specific industry or product
market
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Business-Level Strategies
 Purpose: To create differences between position
of a firm and its competitors
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Positioning and strategic group mapping
 Firm must make a deliberate choice to
 Perform activities differently
 Perform different activities
 This choice impacts how value chain activities are
performed to create unique value
 No single strategy is better than others
 Contingent on internal and external environment
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Business-Level Strategies
 Two types of competitive advantage firms must
choose between
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Low Cost (Are our costs LOWER than rivals costs?)
Distinctiveness (Are we DIFFERENT than rivals?)
 Two types of ‘competitive scope’ firms must
choose between
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Broad target
Narrow target
 The combination of competitive advantage and
competitive scope yield 5 major strategic options
at the business level
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Each strategy can potentially be used by any organization 4
competing in any industry
Five Business-Level Strategies
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Types of Business-Level Strategies
 Cost Leadership Strategy
 Competitive advantage: THE low-cost leader and
operates with margins greater than competitors
 Competitive scope: Broad
 Integrated set of actions designed to produce or deliver
goods or services with features that are acceptable to
customers at the lowest cost, relative to competitors
 No-frills, standardized or commodity-like product
 Must have competitive levels of quality, service, and
other features and lowest overall costs
 Continuously reduce the costs of and increase the
efficiency of value chain activities
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Examples of Value-Creating Activities
Associated with the Cost Leadership Strategy
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Types of Business-Level Strategies
 Cost Leadership Strategy
 In relationship to the 5 competitive forces:
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Existing Rivalry
 Rivals hesitate to compete on the basis of price
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Bargaining Power of Buyers (Customers)
 Powerful buyers are limited in their ability to force the cost
leader to reduce prices
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Bargaining Power of Suppliers
 Cost leaders can absorb supplier price increases
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Potential Entrants
 Efficiency can serve as a barrier to entry
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Product Substitutes
 Can reduce prices when faced with substitutes
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Thus built in defense against all 5 competitive forces
Also ability to compete based on costs and prices
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Types of Business-Level Strategies
 Cost Leadership Strategy
 Competitive Risks
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Innovations by competitors can quickly eliminate cost
advantage
Too much focus on cost reduction versus competitive
levels of differentiation
Competitors may learn how to successfully imitate a
cost leader’s strategy
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Types of Business-Level Strategies
 Differentiation
 Competitive advantage: Differentiation/uniqueness
 Competitive scope: Broad
 Integrated set of actions designed by a firm to produce
or deliver goods or services at an acceptable cost that
customers perceive as being different/unique in ways
that are important to them
 Targeted customers perceive product value
 Customized products – differentiating on as many
features as possible
 Can differentiate in many ways and in many value chain
areas
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Examples of Value-Creating Activities Associated
with the Differentiation Strategy
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Types of Business-Level Strategies
 Differentiation
 In relationship to the 5 Forces:
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Existing Rivalry
 Customers loyalty to differentiated products reduces their sensitivity to
price increases
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Bargaining Power of Buyers (Customers)
 Uniqueness and loyalty reduces customer’s sensitivity to price
increases
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Bargaining Power of Suppliers
 Because of higher margins supplier price increases can be passed on
the to the customer
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Potential Entrants
 Customer loyalty and uniqueness can serve as substantial barriers to
new entry
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Product Substitutes
 Customer loyalty effectively positions firm against substitute products
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Again built in defense against 5 competitive forces
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Types of Business-Level Strategies
 Differentiation
 Risks
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Can charge too high of a price premium
Differentiation theme no longer valuable to
customers
Over-differentiating
 Customer experience shows differentiation not worth
the cost
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Counterfeiting
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Types of Business-Level Strategies
 Focus strategies
 Competitive advantage: Cost Leadership or
Differentiation
 Competitive scope: Narrow
 An integrated set of actions taken to produce goods or
services that serve the needs of a particular competitive
segment
 Attractive when:
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Firm lacks resources to compete in the broader market
Firm may be able to more effectively serve a narrow market
segment than larger industry-wide competitors
Firm has resources well suited to the niche
Niche is attractive
Large firms may overlook small niches
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Types of Business-Level Strategies
 Focus strategy examples
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Particular buyer groups
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Different segment of a product line
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Youths vs. senior citizens
Men vs. women
Professional vs. do-it-yourself painters
Luxury vs. sport cars
Geographic markets
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West coast vs. East coast
North America vs. Europe
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Types of Business-Level Strategies
 Focused Cost Leadership
 Competitive advantage: Low-cost
 Competitive scope: Narrow industry segment
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Motel 6, Kia
 Focused Differentiation
 Competitive advantage: Differentiation
 Competitive scope: Narrow industry segment
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Ritz-Carlton, Apple, Rolls Royce
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Types of Business-Level Strategies
 Focus strategies
 Risks
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Same basic risks as broad cost leadership or broad
differentiation plus:
A competitor may be able to focus on a more narrowly
defined competitive segment and "outfocus” the focuser
A company competing on an industry-wide basis may
decide that the market segment served by the focus
strategy firm is attractive and worthy of competitive
pursuit
Customer needs within a narrow competitive segment
may become more similar to those of industry-wide
customers as a whole
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Types of Business-Level Strategies
 Integrated Cost Leadership/Differentiation
 Efficiently produce products with differentiated attributes
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Efficiency: Sources of low cost
Differentiation: Source of unique value
Involves engaging in primary and support activities that
allow a firm to simultaneously pursue low cost and
differentiation
Low price with somewhat highly differentiated features
More value for the money
Often called best-cost or a hybrid strategy
Examples: Toyota, Target
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Types of Business-Level Strategies
 Integrated Cost Leadership/Differentiation
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Risks of Integrated Strategies
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Harder to implement than other strategies
Must simultaneously reduce costs while increasing
differentiation
Can get ‘stuck in the middle’ resulting in no advantages
and poor performance
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Types of Business-Level Strategies
 The Relative Nature of Business-Level Strategies
 Competitive advantages are always relative to other
firms
 As are the competencies and capabilities they are based
on
 To be successful
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Low cost firms must have the lowest overall costs
Differentiated firms must have higher levels of differentiation
Having the same level of costs and/or differentiated
features as a competitor is unlikely to lead to a
competitive advantage over them
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Other Business-Level Strategies
 Strategic Alliances and Partnerships (Chapter 9)
 Mergers and Acquisitions (Chapter 7)
 Vertical Integration (Chapter 6)
 Outsourcing (Chapter 3)
 Offensive and Defensive Strategies (Chapter 5)
 First-Mover Advantages and Disadvantages (Chapter 5)
 Business Model
 Functional Area Strategies
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Customers and their Relationship with
Business-Level Strategies
 Strategic competitiveness results when firm can
satisfy customers by using its competitive
advantages
 Five components in customer relationships
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Effectively managing relationships w/ customers
 Deliver superior value and build customer loyalty
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Reach, richness and affiliation
 Access and connection to customers, depth and detail of
information, and facilitating interactions with customers
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Who: Determining the customers to serve
What: Determining which customer needs to satisfy
How: Determining core competencies necessary to
satisfy customer needs
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