Unit 3 (b) – Business level
strategies
R.Kannan
What Is Business-Level Strategy?
Business-level strategy
– A plan of action to use the firm’s resources and
distinctive competencies to gain competitive
advantage.
Abell’s “Business Definition” process
– Customer needs – product differentiation (what)
– Customer groups – market segmentation (who)
– Distinctive competencies – competitive actions
(how)
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Competitive positioning: Generic
Business level strategies
•With cost leadership and differentiation on
two axes we can depict the three issues of
differentiation, cost and pricing option
•Value creation frontier is reached by
following one or more of the four building
blocks of competitive advantage
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Competitive positioning: Generic
Business level strategies
•To reach the value creation frontier the
company must follow one or a combination
of generic business strategy
•Generic means all companies can follow
these strategies
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Cost Leadership
• Lower the cost structure and increase
efficiency – Wal Mart, Dell
– Development of distinctive competencies in
different functions –
• Manufacturing -flexible manufacturing systems,
• Materials management - efficient materials
management techniques,
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Cost Leadership
• Sales - capturing large, stable set of customer orders,
• Human resource - instituting training programs that
increases employee productivity
• R & D – process improvements
• Service industry –
– Supply chain management,
– organizational structure,
– rigorous use of budgets to reduce production and selling costs
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Cost Leadership
• Low to moderate level of differentiation
• Wait till the customer need is established
• Position its product to average customer,
ignore different market segments
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Competitive advantages
• Cost leader is protected by cost advantage
– Less affected by increase in cost of inputs
(powerful suppliers, or price (powerful buyers)
– Increases its bargaining power over its suppliers
due to bulk purchases
– Ward off substitutes by lowering the price
– Low cost advantage acts as a barrier to entry
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Principal threats
• Competitors ability to pursue new strategies
that reduce their cost structures –
technological change, lower labour costs
• Competitors ability to imitate the cost leader China
• Single minded desire to reduce costs –
customer support reduction
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Focused cost Leadership strategy
• Concentrate on Narrow business segments
defined by geography, type of customer, or
product line
• Competes with the cost leader,
– in the segments in which it can operate without
cost disadvantage
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Focused cost Leadership strategy
– Producing custom built products that do not lend
easily to economies of scale
– Operates at value creating frontier as it has no
cost disadvantage in its market segment
competing against companies following cost
leadership or differentiated strategies
– Cost structure will be higher
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Cost leadership: implications and
conclusions
• Enormous effort needed to incorporate
latest information, material management
and manufacturing technologies into their
operations to reduce costs
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Cost leadership: implications and
conclusions
• Requires on- going strategic thinking to
keep business model aligned with changing
environment
• Respond to strategic moves of its
differentiated competitors and improve
quality and features in the long run
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Differentiation strategy
• Producing a product or service that the
customer as different or distinct in some
aspects – charge premium price
– Mercedes Benz, BMW, Rolex watches
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Differentiation – strategic choices
• Gains competitive advantage by investing its
resources
– Excellent quality – P & G
– Superior innovation – Samsung
– Responsiveness to customer needs – IBM, Godrej,
Dell, BMW
– High level of quality of service – FedEx, Lawyer
firms, Consultants
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Differentiation – strategic choices
– Appeal to customers’ psychological desires
(prestige or status) – BMW, Rolex
– Differentiation can also be tailored to age groups
and socio economic groups
– Dividing its market into many segments and
niches _ Toyota, Dell
– Developing distinctive competencies in the
functions that provide it with competitive
advantage
– Controlling the cost structure – Savoy Hotel
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Differentiation: Competitive
advantages and disadvantages
• Safeguards company against competitors
- Brand Loyalty, Patents and first mover
advantage
• Suppliers power – Pass on the price
increases to the customers
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Differentiation: Competitive
advantages and disadvantages
• Buyers – distinct product and brand loyalty
• Entry Barriers – Differentiation and brand
loyalty
• Substitute products – Customer need,
Premium price for distinctness
• Challenges – Sustaining the distinctiveness
(imitation), Limited life of patents and first
movers’ advantage
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Implications and conclusions
• Strategic choices that reinforces each other
and together increase the value of goods or
services
• Warding off imitation - Design or functionality
• First movers’ disadvantage
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Focused differentiation
• Business model based on differentiation and
generic business level strategies – distinctive
products in one or more market segments
• Selecting niche means focusing on one type of
customers – very rich or very young.
• Reaching the value frontier by developing a
distinctive product which meets better
customer needs in the given market segment
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Focused differentiation challenges
• Niche disappears over time – technological
changes, changes in taste and preferences –
and the company cannot move easily to a new
niche
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Choosing a Generic Business-Level Strategy
Product/Market/Distinctive-Competency Choices
and Generic Competitive Strategies
Cost Leadership Differentiation
Focus
Product
Differentiation
Low
(principally
by price)
High
(principally by
uniqueness)
Low to high
(price or
uniqueness)
Market
Segmentation
Low
(mass market)
High
(many market
segments)
Low
(one or a few
segments)
Distinctive
Competency
Manufacturing
and materials
management
Research and
development, sales
and marketing
Any kind of
distinctive
competency
TABLE 6.1
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Types of Business-Level Strategies
FIGURE 6.1
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Choosing a Business-Level Strategy
Cost-leadership strategy success is affected by:
– Competitors producing at equal or lower costs.
– The bargaining strength of suppliers.
– Powerful buyers demanding lower prices.
– Substitute products moving into the market.
– New entrants overcoming entry barriers.
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Choosing a Business-Level Strategy
Differentiation strategy success is achieved
through:
– An emphasis on product or service quality.
– Innovation in providing new features for which
customers will pay a premium price.
– Responsiveness to customers after the sale.
– Appealing to the psychological desires of
customers.
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Choosing a Business-Level Strategy
Differentiation strategy success is affected by:
– Competitors imitating features and services.
– Increases in supplier costs exceeding
differentiator’s price premium.
– Buyers becoming less brand loyal.
– Substitute products adding similar features.
– New entrants overcoming entry barriers related to
differentiator’s competitive advantage.
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Choosing a Business-Level Strategy
Focus strategy success is affected by:
– Competitor entry into focuser’s market segment.
– Suppliers capable of increasing costs affecting only
the focuser.
– Buyers defecting from market segment.
– Substitute products attracting customers away
from focuser’s segment.
– New entrants overcoming entry barriers that are
the source of the focuser’s competitive advantage.
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Dynamics of competitive
positioning
• While some companies are able to develop
business model and strategies that allow them
to reach the value frontier many other cannot
and so achieve only average or below average
profits – Toyota, Dell, Wal-Mart
– Why some companies are able to sustain their
competitive advantage?
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Dynamics of competitive
positioning
– How the business model puts the company in
strategic groups of competitors
– Why differences in performances are to be
expected and why some companies run into
competitive problems that threaten their
existence?
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Competitive Positioning for
Superior positioning: Broad
differentiation
• Need to lower cost structure and
differentiate in a global competitive
environment
• Middle of value creation frontier occupied
by broad differentiators
– Selecting a level of differentiation giving
competitive advantage in the chosen market
segment
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Competitive Positioning for
Superior positioning: Broad
differentiation
– Lowering the cost structure over time
– Threat to both cost leaders and differentiators
– Toyota – New technology
– The way in which a business model
differentiates distrupts the industry
competitive equilibrium
• Mass production days Vs. Lean production days –
GM Vs. Toyota
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Competitive Positioning for
Superior positioning: Broad
differentiation
– Low cost structure is to make product targeted
to one market segment and allow limited
customization
– Using internet and e-commerce to become
broad differentiator
• Dell and Amazon
– Rapidly expanding the range of products
– Highly efficient materials management systems
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Strategic Groups and BusinessLevel Strategy
Implications for business-level strategy
– Immediate competitors are companies
pursuing same strategy within the same
strategic group.
– Different strategic groups can have a different
standing with respect to the effects of the five
competitive forces.
First mover advantage
– Benefits are first choice of customers and
suppliers, setting standards, building entry
barriers.
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Strategic Groups
• Map competitors according to the choice of
business model and identify the products,
market segments and competencies for
competitive advantage
• Identify the companies in its strategic group
which may be close substitutes
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Strategic Groups
• Benchmark against closest rivals on important
performance dimensions
• Focus attention to other strategic groups to
determine possible threats
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Choosing an Investment Strategy at
the Business Level
Investment strategy
– The resources (human, functional, and
financial) required to gain sustainable
competitive advantage.
Competitive position
– Market share is an indicator of competitive
strength.
– Distinctive competencies are competitive tools.
Life Cycle Effects
– An industry’s life cycle stage affects its
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attractiveness to investment
prospects.
Strategic Groups
• Map competitors according to the choice of
business model and identify the products,
market segments and competencies for
competitive advantage
• Identify the companies in its strategic group
which may be close substitutes
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Choosing an Investment Strategy at the Business
Level
Stage of the
Industry Life Cycle
Strong Competitive
Position
Weak Competitive
Position
Embryonic
Share building
Share building
Growth
Growth
Market concentration
Shakeout
Share increasing
Market concentration or
harvest/liquidation
Maturity
Hold-and-maintain or profit
Harvest or
liquidation/divestiture
Decline
Market concentration or
harvest (asset reduction)
Turnaround, liquidation,
or divestiture
TABLE 6.2
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Failures in competiton
• Fit between business model and strategies
required for sustainable competitive
advantage
– Cost leader should not strive for high level of
market segmentation
– Differentiator should not try to reduce cost on the
base of its differentiation
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Failures in competiton
– Business level strategies should work in harmony
and maintain competitive position
– Continuously improve their business model
– Strategic business intent
• Factors for making competitive errors
– Focuser may over expand losing control of
business
– Differentiators can end up in the middle if
focused competitors attack their markets with
more low cost or specialized products
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