Competing For Advantage
Part III – Creating Competitive Advantage
Chapter 5 – Business-Level Strategy
The Strategic
Management
Process
Business-Level Strategy
 Key Terms
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
 Business-Level
Types of Business-Level Strategy
Features of the Five Business-Level Strategies
 Generic, can be used across industries
 Two distinct types of competitive
advantage:
Low Cost
 Differentiation

 Choice of scope:
 Broad
 Narrow (niche)
 Effectiveness depends upon external
environment and internal resources and
capabilities
Serving Customers
 Key Terms
Segmentation – process of
clustering people with similar needs
into individual and identifiable groups
to determine which customer
segments to target
 Market
Decisions About Serving Customers
 Who (which customers) will be served –
Market segmentation
 What customer needs will be satisfied –
Low cost vs. differentiation
 How those needs will be satisfied –
Core competencies
Strategy and Structure
 Key Terms
Structure – specifies
the firm's formal reporting
relationships, procedures, controls,
and authority and decision-making
processes
 Organizational
Strategy and Structure
 Key Terms (cont.)



Simple Structure – owner-manager makes all major
decisions and monitors all activities, while staff acts
as extension of manager's supervisory authority
Functional Structure – CEO and a limited corporate
staff make all decisions, with functional line
managers in dominant organizational areas
Multidivisional Structure – operating divisions each
represent a separate business or profit center in
which the top corporate officer delegates
responsibilities for day-to-day operations and
business-unit strategies to division managers
Cost Leadership Strategy
 Key Terms
Leadership Strategy – 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
 Cost
Cost Leadership Strategy –
Implementation
 No-frill, standardized goods
 Continuously reduce costs of
value chain activities
Value-Creating Activities Associated
with Cost Leadership Strategy
Cost Leadership Strategy and the Five
Forces of Competition
 Low-cost position is a valuable defense against rivals
 Powerful customers can demand reduced prices
 Costs leaders are in a position to absorb supplier
price increases and relationship demands, and to
force suppliers to hold down their prices
 Continuously improving levels of efficiency and cost
reduction can be difficult to replicate and serve as
significant entry barriers to potential competitors
 Cost leaders hold an attractive position in terms of
product substitutes, with the flexibility to lower prices
to retain customers
Strategy and Organizational Structure
 Specialization
 Centralization
 Formalization
Cost Leadership Strategy and the
Functional Structure
Cost Leadership Strategy and the
Functional Structure
Simple reporting relationships
 Few decision-making and authority layers
 Centralized corporate staff
 Strong operational focus on process
improvements
 Low-cost culture
 Centralized staff decision-making authority
 Jobs specialization
 Highly formalized rules and procedures

Risks of Cost Leadership Strategy
 Processes
can become obsolete
 Focus
on cost reductions can come at
the expense of understanding
customer perceptions and needs
 Strategy
could be imitated, requiring
the firm to increase the value offered
to retain customers
Differentiation Strategy
 Key Terms
Strategy – 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 in ways
that are important to them
 Differentiation
Differentiation Strategy –
Implementation
 Target customers – perceived
product value
 Customized products –
differentiating on as many
features as possible
Differentiation Strategy –
Implementation (cont.)
 Unusual features
 Responsive
customer service
 Rapid product
innovations
 Technological
leadership
 Perceived prestige
and status
 Different tastes
 Engineering design
 Performance
Value-Creating Activities Associated
with the Differentiation Strategy
Differentiation Strategy and the Five
Forces of Competition
 Customer loyalty provides the most valuable
defense against rivals
 Uniqueness products reduce customer
sensitivity to raised prices
 High margins (for differentiated products)
insulate from supplier influence
 Customer loyalty and product uniqueness serve
as significant entry barriers
 Firms with customers loyal to their products are
positioned effectively against product substitutes
Differentiation Strategy and the
Functional Structure
Differentiation Strategy and the
Functional Structure
 Complex and flexible reporting
relationships
 Cross-functional product development
teams
 Strong focus on marketing and product
R&D
 Development-oriented culture
 Decentralized decision making
 Broad job descriptions
 Informal rules and procedures
Risks of Differentiation Strategy
 Price differential for the differentiated product
may be perceived as too large
 Firm's means of differentiation may cease to
provide value for which customers are willing
to pay (successful rival imitation)
 Experience can narrow customers'
perceptions of the value of a product's
differentiated features
 Counterfeit goods might appear in the
marketplace
Focus Strategy
 Key Terms
Strategy – integrated set of
actions designed to produce or
deliver goods or services to a narrow
target consumer based on specific
differences in the market
 Focus
Focus Strategy – Market Segments
 Buyer group
 Product line segment
 Geographic market
Focus Strategy – Reasons
 Large firms may overlook small niches
 Firms may lack resources to compete in
the broader market
 Firms may be able to serve a narrow
market segment more effectively than
larger, industry-wide competitors
 Firms may direct resources to certain
value chain activities to build competitive
advantage
Focus Strategy – Types
 Focused cost leadership strategy
 Focused differentiation strategy
Value-Creating Activities Associated
with the Focus Strategy
 Focused cost leadership strategy

Activities required to use the focused cost
leadership strategy are identical to those
shown in Figure 5.2 (slide 13)
 Focused differentiation strategy

Activities required to use the focused
differentiation strategy are identical to those
shown in Figure 5.4 (slide 22)
Focus Strategy and the Five Forces of
Competition
 Focused cost leadership strategy

Refer to cost leadership Five Forces Analysis
(slide 14)
 Focused differentiation strategy

Refer to differentiation Five Forces Analysis
(slide 23)
Differentiation Strategy and the
Simple Structure
 A firm using a focus strategy may
choose a simple organizational
structure:

A simple structure is matched with
focus strategies when a firm offers a
single product line in a single
geographic market

Refer to Figure 5.3 (slide 16)
Differentiation Strategy and the
Simple Structure
 A firm using a focus strategy may
choose a functional organizational
structure:



As a business grows and expands, a
functional structure is required
Depending on its focused cost leadership
or focused differentiation strategy, the
functional structures presented in Figures
5.3 and 5.5 apply
Refer to Figure 5.5 (slide 24)
Risks of Differentiation Strategy
 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
 The needs of customers within a narrow
competitive segment may become more
similar to those of industry-wide customers as
a whole
Integrated Cost
Leadership/Differentiation Strategy
 Key Terms
 Integrated
Cost Leadership/
Differentiation Strategy – 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 in ways
that are important to them
Integrated Strategy – Advantages
 Improved speed of adapting to
environmental changes
 Improved speed of learning new skills
and technologies
 Improved leverage of core
competencies while competing against
rivals
Integrated Strategy – Implementation
Benefits
 Evidence suggests a relationship between
use of an integrated strategy and achieving
above-average returns
 Businesses that combine multiple forms of
competitive advantage in low-profit-potential
industries are shown to outperform
businesses that compete with a single form
Value-Creating Activities Associated
with the Integrated Strategy
 Integrating cost leadership and
differentiation strategies (which
emphasize different primary and
support activities) requires a balance
when selecting the activities to perform
 A flexible organizational structure is
required
Integrated Strategy and the Flexible
Structure
 Commitment to strategic flexibility
 Flexible decision-making patterns, with partial
centralization
 Less specialized jobs than in a traditional
functional structure—workers are more
sensitive to balancing cost and differentiation
 Modular structures to produce modular goods
create differentiation and simultaneously hold
down costs
Balancing Mixed Objectives
 Flexible manufacturing systems
 Information networks
 Total Quality Management (TQM)
systems
Risks of Integrated Strategy
 Failure to establish a leadership position
can result in a firm being "stuck in the
middle," unable to create value, and
unable to earn above-average returns
Ethical Questions
Can a commitment to ethical conduct on issues
such as the environment, product quality, and
fulfilling contractual agreements affect a firm’s
competitive advantage? If so, how?
Ethical Questions
Is there more incentive for differentiators or for
cost leaders to pursue stronger ethical conduct?
Ethical Questions
Can an overemphasis on cost leadership or
differentiation lead to ethical challenges?
Ethical Questions
A brand image can help differentiate goods or services. However,
concerns exist about the effect of brand images on consumer
behavior (for example, the effects of brand images managed by
tobacco firms on teenage smoking). Should firms be concerned
about how they form and use brand images? Why or why not?
Ethical Questions
To what extent should a manager be concerned
about the accuracy of the firm’s claims about its
products in its advertisements?