Business Level Strategies

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.
 Business Level Strategies

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 to perform
different activities as compared to its rivals.
 Business Level Strategies

Core Competencies and Strategy

Core The resources and capabilities that have been

determined to be a source of competitive advantage
competencies for a firm over its rivals

An integrated and coordinated set of actions taken

Strategy to exploit core competencies and gain a competitive
advantage

Business-level Actions taken to provide value to customers and

gain a competitive advantage by exploiting core
strategy competencies in specific, individual product markets
 Business Level Strategies

Competitive Advantage

Low-cost Differentiation

Broad Target
Cost leadership Differentiation

Competitive
Scope

Cost Focus Differentiation

Narrow Target
Focus
 Business Level Strategies
Generic Commonly Required
Strategy Skills & Resources
Overall Cost Sustained capital investment &
Leadership access to capital
Process engineering skills
Intense supervision of labor
Products designed for ease in
manufacturing
Low cost distribution system
Differentiation Strong marketing abilities
Product engineering
Creative flair
Strong capability in basic research
Reputation for quality or technological
leadership
Long tradition in the industry or
unique combination of skills
drawn from other businesses
Strong cooperation from channels
Focus Combination of the above policies
directed at the particular strategic
target
Common Organizational
Requirements
Tight cost control
Frequent detailed control reports
Structured Firm and responsibilities
Incentives based on meeting
strict quantitative targets
Strong coordination among
functions in R&D, product
development, and marketing
Subjective measurement and
incentives instead of
quantitative measures
Amenities to attract highly
skilled labor, scientists, or creative
people
Combination of the above
policies directed at the particular
strategic target
 Business Level Strategies

Cost Leadership Strategies:

Firms must offer relatively standardized products with

features or characteristics that are acceptable to customers at the
lowest competitive price.

Firms must consider their value chain of primary and secondary

activities and link those activities to implement a cost leadership
strategy.
 Business Level Strategies

Cost Leadership Strategies:

Alternative cost reduction strategies include:

Building efficient scale facilities.
Cost reductions through experience.
Establish tight cost and overhead controls.
Avoidance of marginal customer accounts.
Cost minimization in R&D, service, and sales forces.

Requirements for usage:

High relative market share (economies of purchasing).

Favorable access to raw materials.
Design of products towards ease of manufacturing.
High margins are reinvested to maintain cost leadership.
Examples: Emerson Electronics, Texas Instruments, and Black & Decker.
 Business Level Strategies

Cost Leadership Strategies:

Defense against 5 competitive forces:

Competitors - Low cost position allows return after competitors have

competed away their profits.

Suppliers - Allows more flexibility to cope with input cost increases.

Buyers - Buyers can at best force your prices down to that of the next
lowest competitor (if they exit leaves firm as primary supplier).

New-entrants - Scale economies or cost advantages usually provide

substantial barriers to entry.

Substitutes - Low cost position allows reduction in prices to maintain

price/value relationship.
 Business Level Strategies

Cost Leadership Strategies:

Competitive risks:
Myopic viewpoint toward cost reduction (overlook buyer wants
and needs).
Rivals may successfully imitate the low-cost strategy.
Technology changes can result in cost or process breakthroughs
that nullify gains.
Heavy investment into a low-cost approach can lock a firm into
this strategy (vulnerability toward change).

When to use:

When firm is the market or cost leader (good strategy during a

price war).
If widespread competition exists, using low-cost strategies
allows winning the war of attrition.
 Business Level Strategies

Differentiation Strategies:

Goal is to provide value to customers through unique features and

characteristics of a firms products.

Differentiators focus or concentrate on product innovation and

developing product features that customers value. Products
generally cost more (offset cost of differentiation).

Cant completely ignore costs.

 Business Level Strategies
Differentiation Strategies:

Can differentiate based on:

Superior quality (John Deere, Mercedes)
Customer service (IBM or Caterpillar)
Engineering design (Hewlett-Packard)
Unique features
Image of prestige or exclusivity (LOreal Cosmetics, Mercedes)
Package design (Arizona Iced Tea)

Requirements for usage:

Use may require a high market share initially.

Implies a trade-off with low-cost (i.e., costs to differentiate).
Generally leads to a lower market share than in the low-cost approach.
 Business Level Strategies

Differentiation Strategies:

Defense against 5 competitive forces:

Competitors - Decreases rivalry due to brand loyalty and resulting lower

sensitivity to price.

Suppliers - Allows an increase in price margins (customers willing to pay

more, can withstand supplier price changes).

Buyers - Removes buyer power due to a lack of comparative alternatives.

New-entrants & Substitutes - Requires others to overcome customer

loyalty and product uniqueness.
 Business Level Strategies
Differentiation Strategies:

Competitive risks:
If selling price is too high buyers may become price sensitive despite
customer loyalty or uniqueness (price differential between standardized
and differentiated product is too high).

Buyers may decide they dont need the special features (means of
differentiation no longer provides value).

Rival firms may imitate the product thereby decreasing product

uniqueness.

When to use:

When ways exist to differentiate the product which buyers perceive

to have value.
When uses of the item are diverse.
When not many rivals are using the same strategy.
 Business Level Strategies

Focus Strategies:

Firms can also use core competencies to serve a narrow segment of

the market or a particular customer group.

Primary goals of a focused strategy:

Focus on a particular buyer group, segment of the market, etc.

To serve a narrow target or market segment more effectively than

broad-based competitors can due to core competencies.

Select target segments which are the least vulnerable to substitutes or

where competitors are the weakest.
 Business Level Strategies

Focus Strategies:

Two primary focused strategies:

Focused differentiation:

Requirements for usage similar to differentiation strategies.

Defense against the five forces similar to differentiation strategies.

Examples: Rolls Royce, Fort Howard Paper.

- Rolls Royce (prestige, quality, engineering design).

- Fort Howard Paper (specialty lens paper).
 Business Level Strategies

Focus Strategies:

Focused low-cost strategies:

Requirements for usage similar to low-cost strategies.

Defense against the five forces similar to differentiation strategies.

Examples: Rallys, Martin Brower, White Castle.

- Rallys (no frills service, limited menu, no dine-in).

- Martin Brower- 3rd largest food supplier, serves fast food
chains by:

Gearing to their purchasing cycles.

Locating warehouse locations based on their locations.
Stocking products only for these 8 firms
Meeting their specialized needs.
 Business Level Strategies

Focus Strategies:

Competitive risks:

Broad range competitors may find ways to match focused firms services.
Shifts in buyer preferences and needs.
A competitor may find a smaller segment within the target segment
(out-focus the focuser).

When to use:

When no rivals are in the same segment.

Resources dont permit operation in wide segments.
When their are different groups of buyers who use the product in
different ways.
When industry segments differ widely in size, growth, or profitability.