Chapter 5
Business-Level Strategy
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
©2004 by South-Western/Thomson Learning
1
The Strategic Management Process
Strategic
Thinking
Chapter 1
Introduction to
Strategic Management
Chapter 2
Strategic Leadership
Strategic
Analysis
Chapter 3
The External
Environment
Chapter 4
The Internal
Organization
Strategic Intent
Strategic Mission
Chapter 5
Business-Level
Strategy
Chapter 6
Competitive Rivalry and
Competitive Dynamics
Chapter 7
Corporate-Level Strategy
Chapter 8
Acquisition and
Restructuring Strategies
Chapter 9
International Strategy
Chapter 10
Cooperative Strategy
Creating
Competitive
Advantage
Monitoring
And Creating
Entrepreneurial
Opportunities
Chapter 11
Corporate Governance
Chapter 12
Strategic Entrepreneurship
2
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
3
Business-Level Strategy
Intended to create differences
between the firm’s position relative
to those of its rivals
 In selecting a business-level
strategy, a firm determines:

– who will be served
– what needs those target customers
have that it will satisfy
– how those needs will be satisfied
4
Who Will be Served

Market segmentation (see Table 5.1)
Consumer
Markets
Customers
Industrial
Markets
5
What Needs to Satisfy
 Create
value for customers. 2
generalized forms of value:
– Low cost products with acceptable
features
– Highly differentiated product features
with acceptable cost
 Value
for industrial customers
includes being a source of the
customers’ competitive advantage
6
Types of Business-Level Strategies

To position itself, the firm must
decide whether it intends to:
– perform activities differently (to achieve
lower cost), or
– to perform different activities as
compared to its rivals (to differentiate
products and command a premium
price exceeding the marginal cost of
differentiation)
7
Five Generic Strategies
Broad
target
Cost
Uniqueness
Cost
Leadership
Differentiation
Integrated Cost
Leadership/
Differentiation
Narrow
target
Competitive Scope
Competitive Advantage
Focused Cost
Leadership
Focused
Differentiation
8
Cost Leadership Strategy
An integrated set of actions designed to
produce or deliver goods or services at the
lowest cost, relative to competitors with
features that are acceptable to customers
– relatively standardized products
– features acceptable to many customers
– lowest competitive price
9
Cost Leadership Strategy
Cost saving actions required by this strategy:
– building efficient scale facilities
– tightly controlling production costs and
overhead
– minimizing costs of sales, R&D and service
– building efficient manufacturing facilities
– monitoring costs of activities provided by
outsiders
– simplifying production processes
10
Cost Leadership Strategy and the
Five Forces of Competition
Rivalry Among Competing
Firms
Five Forces of
Competition
Bargaining Power
of Suppliers
Can use cost leadership
strategy to advantage since:
 competitors avoid price
wars with cost leaders,
creating higher profits for
the entire industry
11
Cost Leadership Strategy and the
Five Forces of Competition
Bargaining Power of
Buyers
Five Forces of
Competition
Bargaining Power
of Suppliers
Can mitigate buyers’ power by:
 driving prices far below
competitors, causing them
to exit and shifting power
with buyers back to the
firm
12
Cost Leadership Strategy and the
Five Forces of Competition
Bargaining Power of
Suppliers
Five Forces of
Competition
Bargaining Power
of Suppliers
Can mitigate suppliers’ power
by:
 being able to absorb cost
increases due to low cost
position
 being able to make very large
purchases, reducing chance
of supplier using power
13
Cost Leadership Strategy and the
Five Forces of Competition
Threat of New Entrants
Five Forces of
Competition
Bargaining Power
of Suppliers
Can frighten off new entrants
due to:
 their need to enter on a large
scale in order to be cost
competitive
 the time it takes to move
down the learning curve
14
Cost Leadership Strategy and the
Five Forces of Competition
Threat of Substitute
Products
Five Forces of
Competition
Cost leader is well positioned
to lower prices in order to
maintain value position
Bargaining Power
of Suppliers
15
Strategy and Structure

Organization structure specifies a
firm’s formal reporting relationships,
procedures, controls, and authority and
decision-making processes
 3 structural characteristics:
– Specialization (type and number of jobs
required to complete work)
– Centralization (decision-making authority)
– Formalization (rules and procedure)
16
Structure for Cost Leadership
Strategy
• Operations is main function
• Process engineering is
•
•
•
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
17
Risks of Cost Leadership Strategy

Processes used by the cost leader to
produce and distribute its good or service
could become obsolete because of
competitors’ innovations
 Too much focus by the cost leader on cost
reductions may occur at the expense of
trying to understand customers’ perceptions
of “competitive levels of differentiation
 Competitors may learn how to successfully
imitate the cost leader’s strategy
18
Differentiation Strategy
An 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
– nonstandardized products
– customers value differentiated features
more than they value low cost
19
Differentiation Strategy





Value provided by unique features and
value characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
20
Differentiation Strategy
Differentiation actions required by
this strategy:
– 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
21
Differentiation Strategy and the
Five Forces of Competition
Rivalry Among Competing
Firms
Five Forces of
Competition
Bargaining Power
of Suppliers
Can defend against
competition because:
 brand loyalty to
differentiated product
offsets price competition
22
Differentiation Strategy and the
Five Forces of Competition
Bargaining Power of Buyers
Five Forces of
Competition
Can mitigate buyer power
because:
 well differentiated products
reduce customer sensitivity
to price increases
Bargaining Power
of Suppliers
23
Differentiation Strategy and the
Five Forces of Competition
Bargaining Power of
Suppliers
Five Forces of
Competition
Bargaining Power
of Suppliers
Can mitigate suppliers’ power
by:
 absorbing price increases
due to higher margins
 passing along higher
supplier prices because
buyers are loyal to
differentiated brand
24
Differentiation Strategy and the
Five Forces of Competition
Threat of New Entrants
Five Forces of
Competition
Bargaining Power
of Suppliers
Can defend against new
entrants because:
 new products must surpass
proven products or,
 new products must be at
least equal to performance
of proven products, but
offered at lower prices
25
Differentiation Strategy and the
Five Forces of Competition
Threat of Substitute
Products
Five Forces of
Competition
Bargaining Power
of Suppliers
Well positioned relative to
substitutes because:
 brand loyalty to a
differentiated product tends
to reduce customers’ testing
of new products or
switching brands
26
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
27
Major Risks of Differentiation
Strategy

Customers may decide that the price
differential between the differentiated
product and the cost leader’s product is
too large
 Means of differentiation may cease to
provide value for which customers are
willing to pay
28
Major Risks of Differentiation
Strategy
Experience may narrow customer’s
perceptions of the value of differentiated
features of the firm’s products
 Makers of counterfeit goods may attempt
to replicate differentiated features of the
firm’s products

29
Focused Business-Level Strategies
A focus strategy must exploit a narrow
target’s differences from the balance of
the industry by:
– isolating a particular buyer group
– isolating a unique segment of a product
line
– concentrating on a particular
geographic market
30
Factors That May Drive Focused
Strategies
Large firms may overlook small
niches
 Firm may lack resources to compete
in the broader market
 May be able to serve a narrow market
segment more effectively than can
larger industry-wide competitors

31
Structure for Focused Strategies
A
simple structure for smaller
firms
– Owner-manager makes all major
decisions and monitors all
activities
A
functional structure for larger
firms
32
Major Risks of Focused Strategies
Firm may be “outfocused” by
competitors
 Large competitor may set its sights
on your niche market
 Preferences of niche market may
change to match those of broad
market

33
Benefits of Integrated Strategy

Successful firms using this strategy have
above-average returns
 Firm offers two types of values to
customers
– some differentiated features (but less
than a true differentiated firm)
– relatively low cost (but not as low as the
cost leader’s price)
34
Using the Functional Structure

The integrated form of the functional
structure
– must have decision-making patterns that are
partially centralized and partially decentralized
– will have semi-specialized jobs and rules and
procedures that call for some formal and some
informal job behavior

Strategic flexibility is obtained via
– flexible manufacturing systems
– information networks
– total quality management systems
35
Major Risks 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
36