Business-Level Strategy

Business-level strategy: an
integrated and coordinated set
of commitments and actions the
firm uses to gain a competitive
advantage by exploiting core
competencies in specific product
markets
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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
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Strategy
Fundamental constraints
Scope
What good or service to offer, to which
customers

Value chain
How and where to create the good or
service
How to distribute the good or service in the
marketplace(s)
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Recall our value

creation model

Costs
Costs represent
represent
specific
specific investment
investment
choices
choices that
that
generate
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generate value
value

Broad or narrow scope?

Consumer Markets
Demographic
Per.

Dem.

Consumer
Con.
Soc.
Markets
Psy.

Geo.

Socioeconomic
Geographic
Psychological
Consumption patterns
Perceptual factors

Implications for configuration of

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value chain??

Broad or narrow scope?

Business Markets
End-use
Product segments

Size

End

Common buying factors

Industrial
MarketsPro.
Buy.

Customer size segments

Geo.

Geog segments

Implications for configuration of

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value chain??

Source of competitive
advantage - Value chains
Strategies create differences between the
firms position and its rivals
Sources of differences? - perform activities
differently; perform different activities
Two value-adding configurations (Porter,
1985)
Low cost
Differentiated
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Comparing Scope and Source

of Advantage
Competitive Advantage

Broad
target
Narrow
target

Competitive Scope

Cost
Cost Leader

Uniqueness
Differentiator

Integrated
Cost
Leader/
Differentiator

Focused
Cost

Focused
Differentiator

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
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Cost Leadership Strategy

Cost saving actions required by this strategy:
building efficient 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
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Cost Drivers
Major Cost Drivers
Economies of scale
Learning/Spillovers
Capacity utilization
Integration
Vertical Linkages
Timing
Location
Political/regulatory
Interrelationships
(corporate)

Discretionary decisions
Product features,
performance
Mix & variety of
products
Service levels
Small vs. large buyers
Process technology
Wage levels
Product features
Hiring, training,
motivation

Implications?
Implications?

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Value-Chain example:
Cost Leader
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Questions Leading to
Lower Costs

1. How can an activity be performed

differently, eliminated, externalized?
2. How can linked value activities be
regrouped or reordered?
3. How can upstream/downstream
collaboration lower costs?

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Implementation Pitfalls
Exclusive focus on Mfg
Misunderstand drivers (ABC useful)
Failure to recognize/exploit
linkages (e.g., across the board cost
reductions)

Contradictions

(e.g., gain mkt share

through ES but allow product clutter; cross
subsidies)
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Cost Leadership and

the Five Forces
Rivalry - competitors avoid price wars with
cost leaders
Buyers shift demand to you, increase
market power
Suppliers increased market power, absorb
cost increases (low cost position)
Entrants entry barriers (scale, learning)
Substitutes reinvest econ profit to
maintain advantage
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Major Risks of Cost

Leadership Strategy
There can only be one cost leader
Technological change can eliminate
cost advantage
Spillovers lead to imitation
Efficiency focus may create blind
spots re: customer preferences

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Differentiation Strategy
An integrated set of actions designed by a
firm to produce or deliver goods or
services that customers perceive as

adding value

price may exceed what the firms target

customers are willing to pay
Non-commodity products
customers value differentiated features
more than they value low cost
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Some Differentiation Themes

Unique taste
Dr. Pepper

Multiple features
Microsoft Windows and Office

Wide selection and one-stop shopping

Home Depot and Amazon.com

Reliable, superior service

FedEx, Ritz-Carlton

Spare parts availability

Caterpillar

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Themes
Prestige
Rolex

Quality manufacturing, few defects

Honda, Toyota

Technological leadership
3M Corporation, Intel

Top-of-the-line image
Ralph Lauren, Kiton

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Differentiation Strategy
Add downstream value
lower buyer cost
raise buyer performance

Cost
Add value to buyers value: reduce
downstream processing time, search time,
transaction costs, defect rates, direct costs,
learning curves, labor, space, installation,
etc. (e.g., CRM software)

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Factors That Drive

Differentiation
Value: Increase performance of buyers
value chain (or consumer perception)
Unique features, performance
Downstream channels (e.g., Catepillar dealer
network)
New technologies
Quality of inputs
Skill or know-how
Information
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Differentiation Strategy
Some differentiation actions required by
this strategy:
develop new systems and processes
signal and shape buyer perceptions
quality focus
capability in R&D
Implication - maximize human capital
contributions
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Firm
infrastructure

Superior MISTo integrate Facilities that Widely respected

value-creating activities to promote firm CEO enhances
improve quality
image
firm reputation

Programs to attract talented

Human resource engineers and scientists
management
Technology
development

Procurement

Provide training and

incentives to ensure a strong
customer service orientation

Superior material handling

and sorting technology

Excellent applications
engineering support

Purchase of high-quality
components to enhance
product image

Use of most prestigious outlets

Superior
material
handling
operations
to minimize
damage
Quick
transfer of
inputs to
manufacturing process

Flexibility
and speed in
responding
to changes
in manufacturing
specs
Low defect
rates to
improve
quality

Accurate and Creative

responsive and
order
innovative
processing advertising
programs
Effective
product
Fostering
replenishof personal
ment to
relationreduce
ship with
customers key
inventory
customers

Value-Chain example:
Differentiation
Inbound
logistics

Operations

Outbound
logistics

Marketing
and sales

Rapid response
to customer
service
requests
Complete
inventory of
replacement
parts and
supplies

Service

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Differentiation and the

Five Forces
Rivalry - brand loyalty to differentiated
products reduces price competition
Buyers differentiated products less price
elastic
Suppliers absorb price increases (higher
margins), pass along higher prices (buyer
loyalty)
Entrants must surpass proven products or
be equivalent at lower price
Substitutes diff raises switching costs
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Pitfalls of Differentiation
Strategies
Differentiating on characteristics not
valued by buyers (e.g., HP)
Over-differentiating
Price premium is too high
Failing to signal value
Focusing on product instead of entire
value chain

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Focused Business-Level
Strategies
A focus strategy must exploit a narrow
targets 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
finding their niche
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Factors Driving
Focus Strategies
Large firms 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
Focus may allow the firm to direct
resources to certain value chain activities
to build competitive advantage
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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

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Advantages of Integrated
Strategy
A firm that successfully uses an integrated
cost leadership/differentiation strategy should
be in a better position to:
adapt quickly to environmental changes
learn new skills and technologies more
quickly
effectively leverage its core competencies
while competing against its rivals

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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 now as low as
the cost leaders price)
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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
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Summary: Industry and Firm

Effects on Profit
Barriers to Entry

Industry
Attractiveness
Rate of Profit
in Excess of the
Competitive Level

Rivalry
Vertical Power
(buyer/seller)

Patents
Brands
Retaliatory
capability
Substitutability
Firm size
Financial resources

Cost
Advantage

Process technology
Plant size
Low-cost inputs

Differentiation
Advantage

Brands
Product technology
Marketing
capabilities

Competitive
Advantage

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