This document discusses business-level strategy, defining it as an integrated set of actions a firm uses to gain a competitive advantage in a specific industry. It outlines the five main business-level strategies - cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation - and discusses the competitive advantages, scope, value chain activities, risks, and relationship to Porter's Five Forces for each strategy. Choosing and implementing the right business-level strategy is important for a firm's success and depends on its internal resources and capabilities as well as external market conditions.
1. 1
Chapter 4: Business-Level Strategy
Overview:
Defining business-level strategy
Risks of business-level strategies
Differences in business-level strategies
5-Forces
Relationship between customers and strategy
2. 2
Introduction
Strategy: Increasingly important to a firm’s success and
concerned with making choices among two or more
alternatives.
Choices dictated by
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
3. 3
Business-Level Strategies
Purpose: To create differences between position
of a firm and its competitors
Firm must make a deliberate choice to
Perform activities differently
Perform different activities
Impacts how value chain activities will be performed to
create unique value
No strategy better than others
Contingent on internal and external environment
4. 4
Business-Level Strategies
Two types of competitive advantage firms must
choose between
Cost (Are our costs LOWER than rivals costs?)
Uniqueness (Are we DIFFERENT than rivals?)
Two types of ‘competitive scope’ firms must
choose between
Broad target
Narrow target
These combine to yield 5 different generic
business level strategies
Can potentially be used by any organization competing
in any industry
6. 6
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 / increase the efficiency
of value chain activities
8. 8
Types of Business-Level Strategies
Cost Leadership Strategy
In relationship to the 5 Forces:
Existing Rivalry
Rivals hesitate to compete on the basis of price
Bargaining Power of Buyers (Customers)
Powerful buyers can force cost leader to reduce prices up to a
point
Bargaining Power of Suppliers
Cost leaders can absorb suppliers price increases
Potential Entrants
Efficiency can serve as a barrier to entry
Product Substitutes
Can reduce prices when faced with substitutes
Thus built in defense against all 5 forces
9. 9
Types of Business-Level Strategies
Cost Leadership Strategy
Competitive Risks
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
10. 10
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
12. 12
Types of Business-Level Strategies
Differentiation
In relationship to the 5 Forces:
Existing Rivalry
Customers are loyal purchasers of differentiated products
Bargaining Power of Buyers (Customers)
Uniqueness and loyalty reduces customer’s sensitivity to price
increases
Bargaining Power of Suppliers
Provide high quality components, driving up firm’s costs
Cost may be passed on to customer
Potential Entrants
Substantial barriers (see above) and would require significant resource
investment
Product Substitutes
Customer loyalty effectively positions firm against product substitutes
13. 13
Types of Business-Level Strategies
Differentiation
Risks
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
Counterfeiting
14. 14
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:
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
Niche is attractive
Large firms may overlook small niches
15. 15
Types of Business-Level Strategies
Focus strategy examples
Buyer groups
Youths/senior citizens
Product line segments
Professional painter groups
Geographic markets
West vs. East coast
17. 17
Types of Business-Level Strategies
Focus strategies
Risks
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
18. 18
Types of Business-Level Strategies
Integrated Cost Leadership/Differentiation
Efficiently produce products with differentiated attributes
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 strategy
Examples: Toyota, Target
19. 19
Types of Business-Level Strategies
Integrated Cost Leadership/Differentiation
Risks of Integrated Strategies
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
20. 20
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)
21. 21
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
Effectively managing relationships w/ customers
Deliver superior value and build customer loyalty
Reach, richness and affiliation
Access and connection to customers, depth and detail of
information, and facilitating interactions with customers
Who: Determining the customers to serve
What: Determining which customer needs to satisfy
How: Determining core competencies necessary to
satisfy customer needs