Business-Level

Strategy
Chapter Four
BA 495.009
42
Agenda
Introduction
Customers: Who? What? How?
Types of Business-level Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Integrated Strategies
Wrap-up
43
Introduction to
Business-level Strategy
44
Business-Level Strategy (Defined)
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.
45
Customers
46
Customers: Their Relationship to Business-
Level Strategies
Key Issues
in
Business-level
Strategy
Who will be
served?
What needs will
be satisfied?
How will those
needs be satisfied?
47
Who: Determining the Customers to Serve
Market segmentation
A process used to cluster people with similar needs
into individual and identifiable groups.
All Customers

Industrial
Markets
Consumer
Markets
48
Market Segmentation: Consumer Markets
Demographic factors
Socioeconomic factors
Geographic factors
Psychological factors
Consumption patterns
Perceptual factors
49
Market Segmentation: Industrial Markets
End-use segments
Product segments
Geographic segments
Common buying factor
segments
Customer size segments

410
What: Determining Which Customer
Needs to Satisfy
Customer needs are related to a products
benefits and features.
A firms ability to meet customer needs creates
VALUE for the customer.
Two forms of value:
Low cost
Unique, or differentiated product
411
How: Determining Core Competencies
Necessary to Satisfy Customer Needs
Firms use core competencies to implement
value-creating strategies that satisfy customers
needs.
Only firms with capacity to continuously improve,
innovate and upgrade their competencies can
expect to meet and/or exceed customer
expectations across time.
412
Types of Business-level Strategies
413
The Purpose of a Business-Level Strategy
Business-Level Strategies
Are intended to create differences between the firms
position relative to those of its rivals.
To position itself, the firm must decide whether it
intends to:
Perform activities differently or
Perform different activities as compared to its rivals.
414
Two Choices for Business Level Strategies
Types of potential competitive advantage
Achieving lower overall costs than rivals
Possessing the capability to differentiate the firms
product or service and command a premium price
Types of competitive scope
Broad scope
Narrow scope
415
Types of Business-Level Strategies
Cost Uniqueness
Differentiation Cost Leadership
Focused
Differentiation
Focused Cost
Leadership
Integrated Cost
Leadership/
Differentiation
Broad
Target
Narrow
Target
Competitive Advantage
Competitive
Scope
416
Cost Leadership Strategy
417
Cost Leadership Strategy
An integrated set of actions taken to produce
goods or services with features that are
acceptable to customers at the lowest cost,
relative to that of competitors with features that
are acceptable to customers.
Relatively standardized products
Features acceptable to many customers
Lowest competitive price
418
SOURCE: Adapted with the permission
of The Free Press, an imprint of Simon &
Schuster Adult Publishing Group, from
Competitive Advantage: Creating and
Sustaining Superior Performance, by
Michael E. Porter, 47. Copyright 1985,
1998 by Michael E. Porter.
Cost Leadership Value Chain
419
Internal Success in Cost Leadership
Each value-creating activity
must be based on the
following:
Simplification of
processes and
procedures
Achieving efficiency and
effectiveness
Reducing costs (of
activities done both
internally and externally)

420
Cost Leadership Strategy: Competitors
Due to cost leaders
advantageous position
rivals hesitate to compete
on basis of price.
Lack of price competition
leads to greater profits.
Threat of
new
entrants
Bargaining
power of
suppliers
Rivalry
among
competing
firms
Bargaining
power of
buyers
Threat of
substitute
products
Rivalry with
Existing Competitors
421
Cost Leadership Strategy: Buyers
Customers already
value firms low-price
position
Can mitigate buyers
power by:
Driving prices far below
competitors, causing
them to exit, thus
shifting power with
buyers back to the firm.
Threat of
new
entrants
Bargaining
power of
suppliers
Rivalry
among
competing
firms
Bargaining
power of
buyers
Threat of
substitute
products
Bargaining Power
of Buyers
422
Cost Leadership Strategy: 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.
Threat of
new
entrants
Bargaining
power of
suppliers
Rivalry
among
competing
firms
Bargaining
power of
buyers
Threat of
substitute
products
Bargaining Power
of Suppliers
423
Cost Leadership Strategy: New Entrants
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.
Threat of
new
entrants
Bargaining
power of
suppliers
Rivalry
among
competing
firms
Bargaining
power of
buyers
Threat of
substitute
products
The Threat of
Potential Entrants
424
Cost Leadership Strategy: Substitutes
Cost leader is well
positioned to lower
prices in order to
maintain value position.
Need to be aware of
disruptive technology or
other non-traditional
substitutes.
Threat of
new
entrants
Bargaining
power of
suppliers
Rivalry
among
competing
firms
Bargaining
power of
buyers
Threat of
substitute
products
Product
Substitutes
425
Risks of Cost Leadership Strategy
Processes used to produce and distribute good
or service may become obsolete due to
competitors innovations
Focus on cost reductions may occur at expense
of customers perceptions of differentiation
Competitors, using their own core competencies,
may successfully imitate the cost leaders
strategy
426
Differentiation Strategy
427
Differentiation Strategy
An integrated set of actions taken to produce
goods or services (at an acceptable cost) that
customers perceive as being different in ways
that are important to them.
Focus is on nonstandardized products
Appropriate when customers value differentiated
features more than they value low cost.
428
Potential Aspects of Differentiation
Superior quality
Unusual or unique features
More responsive customer
service
Rapid product innovation
Advanced technological
features
Image of prestige or status

429
SOURCE: Adapted with the permission
of The Free Press, an imprint of Simon &
Schuster Adult Publishing Group, from
Competitive Advantage: Creating and
Sustaining Superior Performance, by
Michael E. Porter, 47. Copyright 1985,
1998 by Michael E. Porter.
Differentiation Value Chain
430
Internal Success in Differentiation
Establishing the
importance of quality
Accuracy, speed and
responsiveness
Understanding and
meeting customers
unique preferences

431
Differentiation Strategy: Competitors
Defends against
competitors because brand
loyalty to differentiated
product offsets price
competition.
Threat of
new
entrants
Bargaining
power of
suppliers
Rivalry
among
competing
firms
Bargaining
power of
buyers
Threat of
substitute
products
Rivalry with
Competitors
432
Differentiation Strategy: Buyers
Can mitigate buyers power
because well differentiated
products reduce customer
sensitivity to price increases.
Threat of
new
entrants
Bargaining
power of
suppliers
Rivalry
among
competing
firms
Bargaining
power of
buyers
Threat of
substitute
products
Bargaining Power
of Buyers
433
Differentiation Strategy: 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.
Threat of
new
entrants
Bargaining
power of
suppliers
Rivalry
among
competing
firms
Bargaining
power of
buyers
Threat of
substitute
products
Bargaining Power
of Suppliers
434
Differentiation Strategy: New Entrants
Can defend against new
entrants because:
Customer loyalty is difficult to
disrupt.
New products must be at least
equal to performance of proven
products, but offered at lower
prices.
Threat of
new
entrants
Bargaining
power of
suppliers
Rivalry
among
competing
firms
Bargaining
power of
buyers
Threat of
substitute
products
The Threat of
Potential Entrants
435
Differentiation Strategy: Substitutes
Well positioned relative to
substitutes because brand
loyalty to a differentiated
product tends to reduce
customers testing of new
products or switching
brands.
Threat of
new
entrants
Bargaining
power of
suppliers
Rivalry
among
competing
firms
Bargaining
power of
buyers
Threat of
substitute
products
Product
Substitutes
436
Risks of Differentiation Strategy
The price differential between the differentiators product
and the cost leaders product becomes too large.
Differentiation ceases to provide value for which
customers are willing to pay.
Experience narrows customers perceptions of the value
of differentiated features.
Counterfeit goods replicate differentiated features of the
firms products.
437
Focus Strategies
438
Focus Strategies
An integrated set of actions taken to produce
goods or services that serve the needs of a
particular competitive segment.
Particular buyer groupyouths or senior citizens
Different segment of a product lineprofessional
craftsmen versus do-it-yourselfers
Different geographic marketsEast coast versus
West coast
439
Focus Strategies
Types of focused strategies
Focused cost leadership strategy
Focused differentiation strategy
Focused strategies are similar to
their counterparts in larger
industry:
Similar areas of emphasis from
analyzing the Value Chain
Similar analysis of Porters Five
Forces
440
Factors That Drive Focused Strategies
Large firms may overlook small niches.
A firm may lack the resources needed to
compete in the broader market.
A firm is able to serve a narrow market segment
more effectively than can its larger industry-wide
competitors.
Focusing allows the firm to direct its resources to
certain value chain activities to build competitive
advantage.
441
Competitive Risks of Focus Strategies
A focusing firm may be outfocused by its
competitors.
A large competitor may set its sights on a firms niche
market.
Customer preferences in niche market may change to
more closely resemble those of the broader market.
442
Integrated Strategies
443
Integrated Cost Leadership/
Differentiation Strategy
Firms performing value chain activities in ways
that allow them to simultaneously pursue low
cost and differentiation.
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.
444
Risks of the Integrated Cost Leadership/
Differentiation Strategy
Often involves compromises
Becoming neither the lowest cost nor the most
differentiated firm.
Becoming stuck in the middle
Firm engages in economics such that it cannot
achieve benefit of premium pricing from differentiation
nor cost savings from cost leadership.
445
Wrap-up
446
Source: Adapted with the
permission of The Free Press, an
imprint of Simon & Schuster Adult
Publishing Group, from Competitive
Advantage: Creating and Sustaining
Superior Performance, by Michael E.
Porter, 12. Copyright 1985, 1998
by Michael E. Porter.
Business Strategies
447
Implementing Business Level Strategies
These are key initiatives that allow the firm
to implement its business-level strategy
effectively.
These are basis for measuring your success
in each of the key initiatives. Success in
your initiatives will deliver success in your
business-level strategy.
Key Initiatives
Tactics
Metrics
These are specific tactics that support each
initiative.
448
Wrap-up
Introduction
Customers: Who? What? How?
Types of Business-level Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Integrated Strategies
Questions