Understanding Business
Strategy
Concepts & Cases
Part 3: Strategy
Chapter 5: Business-Level Strategy
Copyright © 2009 South-Western, a part of Cengage Learning
All rights reserved.
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Power Point Presentation by Dr. Leslie A. Korb
Georgian Court University
Business-Level Strategies
 A business-level strategy is an action plan the
firm develops to describe how it will compete
in its chosen industry or market segment.

How to compete day-to-day

Wal-Mart
 An effective business-level strategy has a
clear statement of the value to be created for
customers.
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Types of Business-Level
Strategies
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Types of Business-Level
Strategies
 Firms choose from five, generic, business-
level strategies

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Cost leadership
Differentiation
Focused cost leadership
Focused differentiation
Integrated cost leadership/differentiation
Two key dimensions: competitive advantage &
competitive scope
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Types of Business-Level
Strategies
 A firm’s capabilities and core competencies
enable it either to produce standardized
products at lower costs than those of their
competitors or to produce unique products
that differ from competitors’ products that
create value for customers.

Examples: Procter & Gamble’s Tide and
Porsche’s 911 Carrera
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Types of Business-Level
Strategies
 By standardized products, we mean products
that are widely available and have a large
customer demand.

E.g. automotive tires
 Unique products have features different from
or in addition to the standardized product’s
features.

E.g. Guinness Beer
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Cost Leadership Strategy
 an action plan the firm develops to produce
goods or services at the lowest cost


Price its product lower than competitors
Gain a larger share of its target market
 Firms using a cost leadership strategy
commonly have economies of scale because
of the large quantities of standardized
products produced.
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Rivalry with Existing
Competitors
 Competitors find it extremely difficult to
compete against the cost leader on the basis
of price.



Reduce profit margins
Less capital to invest to improve operational
efficiency
Rivals compete across markets including
product markets and geographic markets
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Bargaining Power of Buyers
 Customers exercise power under several
conditions



Purchasing a large quantity of the cost
leader’s output
E.g. Wal-Mart
Cost leaders independence occurs by selling
to a large number of buyers
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Bargaining Power of Suppliers
 A supplier can exercise power over the cost
leader if it provides a significant amount of a
key input to the cost leader’s production
process
 Firms dependent on key natural resources to
produce their products when sources of
supply are limited may have to pay higher
prices
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Potential Entrants & Product
Substitutes
 cost leader’s ability to continuously drive its
costs lower and lower while still satisfying
customers’ needs makes it difficult for
potential entrants
 A product substitute is a product that can
replace the focal product
 The successfully positioned cost leader
commonly responds to product substitutes by
reducing the purchase price of its product
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Competitive Risks
 Competitors’ innovations may enable them to
produce their good or service at a cost that is
lower than that of the cost leader
 Concentrating too much on reducing costs
may eventually find the cost leader offering a
product at low prices to customers who are
less inclined to purchase it
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Differentiation Strategy
 An action plan the firm develops to produce
goods or services that customers perceive as
being unique in ways that are important to
them:


Physical sources: product durability, ease of
repair
Psychological differentiation: perceptions of
quality, courtesy of salespeople
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Differentiation Strategy
 Serves customers who want to buy a good or
service that is different from the good or
service purchased by an industry’s average
customer

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Different tastes,
Responsive customer service
Product design
Alternative distribution methods, and
Customer loyalty programs
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Differentiation Strategy
 Emphasizes Innovation
 Continuously introduces new and unique
products that provide value
 Firms want to develop core competencies in
one or more of the primary and support
activities
 The more unique value created for
customers, the more successful
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Five Forces & Differentiation
 Firms using the differentiation strategy do
everything they can to increase the loyalty of
their customers by providing them greater
benefits than do rivals.
 Firms using the differentiation strategy
continuously stress the uniqueness of their
products to customers (often through
advertising campaigns) to reduce customers’
sensitivity to price
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Five Forces & Differentiation
 The firm using the differentiation strategy
typically pays a premium price for the raw
materials used to make its product
 Customer loyalty and the need to provide
customers with more value than an existing
firm’s product provides to them are strong
challenges for potential rivals
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Five Forces & Differentiation
 Firms also try to establish barriers to entry to
reduce the number of potential entrants

E.g. Patents
 Perceived unique value is difficult to replace,
even when a product substitute has a better
performance-to-price ratio that favors
substitution

E.g. Customer loyalty
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Competitive Risks
 Customers may decide that the price they are
paying for a product’s differentiated features
is too high.
 The source of differentiation being provided
by the firm may cease to create value for the
target customers.
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Competitive Risks
 The customer may conclude that the cost of
the differentiation isn’t acceptable
 Differentiated products run the risk of being
somewhat effectively counterfeited allowing
customers to question why they should pay a
higher price for the “real thing”
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Focused Strategies
 An action plan the firm develops to produce
goods or services that serve the needs of a
specific market segment
 Firms using the focus strategy intend to serve
the needs of a narrow customer segment
better than their needs can be met by the firm
targeting its products to the broad market
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Focused Strategies
 The focused cost leadership strategy is an
action plan the firm develops to produce
goods or services for a narrow market
segment at the lowest cost
 The focused differentiation strategy is an
action plan the firm develops to produce
goods or services that a narrow group of
customers perceive as being unique in ways
that are important to them
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Focused Strategies
 To successfully use either focus strategy, a
firm must perform many of the value chain’s
primary and support activities in ways that
enable it to create more value than
competitors can create for a narrow group of
target customers
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Competitive Risks
 A competitor may learn how to “outfocus” the
focusing firm
 A company serving the broad target market
may decide that the target market being
served by the focusing firm is attractive
 The needs of the narrow target customer may
change and become similar to those of the
broad market
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Integrated Cost
Leadership/Differentiation Strategy
 An action plan the firm develops to produce
goods or services, with strong emphasis on
both differentiation and low cost


Broad or narrow target market
Firms must develop flexibility to provide
service to both kinds of markets
 The possibility of being “neither fish nor fowl”
is the main risk of using the integrated cost
leadership/differentiation strategy
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Implementing Business-Level
Strategies
 Matching the right structure with the chosen
strategy enhances firm performance.

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Simple Structure
Functional Structure
Multidivisional Structure
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Implementing Business-Level
Strategies
 Firms implementing the cost leadership
strategy use a functional structure with highly
centralized authority in the corporate staff
 Jobs are highly specialized and organized
into homogenous subgroups and highly
formalized rules and procedures are
established
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Implementing Business-Level
Strategies
 The operations function is emphasized in this
structure to ensure that the firm’s product is
being produced at low costs
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Implementing Business-Level
Strategies
 The functional structure used by firms
implementing the differentiation strategy
differs from the one used by firms
implementing the cost leadership strategy


R&D and marketing functions are more
important
Authority is decentralized in this structure so
employees closest to the customer can decide
how to appropriately differentiate the firm’s
products
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Implementing Business-Level
Strategies
 When firms following a focus strategy have
only a single product line and operate in a
single geographic market, a simple structure
is effective for implementing the strategy
 A focused cost leadership strategy –
centralized functional structure emphasizing
efficiency
 A focused differentiation strategy - functional
decentralized structure encouraging cross
functional interaction to create innovation
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Implementing Business-Level
Strategies
 An integrated cost leadership/differentiation
strategy is difficult to implement

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Decisions must be partly centralized and partly
decentralized
Jobs are semispecialized
Some formal rules and procedures are needed
efficient processes maintain lower costs
The ability to change is also important in order
to develop and maintain differentiated goods
or services
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Business-Level Across Time
 The firm must continuously evaluate its
business level strategy and change it as
needed to create more value for customers or
bring the firm back on course


E.g. Hershey
E.g. Sam Walton & his customers
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