Chapter 5

Business Level Strategy

Successful business model is the product of successful business level strategies. A successful business
model can give a company competitive advantage over rivals.
To craft a successful business model, strategic managers must determine three issues stated below:
1. What to be satisfied-customers needs: Customer needs are the wants that can be satisfied by
the means of attributes of the products. Customers choose a product based on:
A. Product differentiation
B. Price of the product
Product differentiation is the process of designing the products to satisfy the customer needs. If
managers take the strategies to differentiate the products in terms of innovation, quality on excellence,
customer responsiveness, and then it means that the company is pursuing a business model based on
offering customer differentiating products. If managers take strategies to increase the efficiency to
reduce cost or increase the quality of reliability, it means that the company is pursuing a business model
based on low cost.
When company differentiates its products it inc8urs a cost as well as it can charge a premium for the
cost. In developing a business model, strategic mangers face a tradeoff between the differentiation and
the price.
2. Who is to be a satisfied-customer group: Mangers must decide what kinds of products to offer
to which customer groups. Market segmentation is the way a company decides to group
customers based on important differences in their needs or preferences in order to gain a
competitive advantage.
There are three main approaches toward market segmentation in devising a business model.
a. Company may offer a product for average or typical customers. Here focus in on price not the
differentiation.
b. Each market segment is offered with customized products. Here focus on differentiation not the
price.
c. Company may choose one or two market segments and invest its resources to satisfy the needs
of the market segment.
Market segmentation is an ongoing process. It gives the strategic managers the opportunity to improve
its business model.
3. How customers needs are to be satisfied-distinctive competencies: The success of the business
model depends on the managers ability to implement the business model. And it is related to
the decision of invest the companys capital to acquire distinctive competencies.
Implementation of business model also requires the quality of functional level strategies for
differentiation and low cost structure.
Formulation of business model = Customers needs + Market segmentation
Implementation of business model = Building distinctive competencies
Competitive positioning & business level strategies
To create successful business model managers must choose those business level strategies which will
enable firm to determine:
1. The tradeoff between product differentiation and product cost
2. Market segmentation and range of products to offer
Now whether business level strategies will generate successful business model depends on strategic
managers ability to offer customers the products with more value while keeping its cost structure
lower.
Value Creation Frontier
Value creation frontier represents the maximum amount of value that the products of different
companies inside an industry can give the customers the maximum value through different business
models. Companies on value creation frontier are those that have the most successful business model.
A company can reach value creation frontier by choosing among four generic competitive strategies:
1. Cost leadership: A cost-leadership business model is based on lowering the companys cost
structure so it can make and sell the goods or services at a lower cost than its rivals. A cost
leader is often a large national company that targets the average customers.
2. Focused cost leadership: Focused cost leadership is developing the right strategies to serve just
one or two market segments.
3. Differentiation: Differentiation business model is based on creating a product that customers
perceive as different or distinct in some important way.
4. Focused differentiation: Focused differentiation is providing a differentiated product for just one
or two market segments.
Why are some companies in an industry able to reach value creation frontier while others fail even
when they appear to be using the same business model?
The answer lies on the understanding of dynamics involved in positioning a companys business model.
We can understand the dynamics of the business model in the following three perspectives:
1. Broad differentiation: The middle of the value creation frontier is the broad differentiation.
Companies can reach to broad differentiation by developing business-level strategies to improve
their differentiation and cost structure simultaneously. Companies that can formulate and
implement their business model based on broad differentiation can impose threat to both
differentiators and cost-leaders over time. If strategic managers can pursue this broad
differentiation business model, then they can steadily increase their market share and
profitability over time.
2. Strategic group analysis: Strategic group analysis helps companies in an industry better
understand the dynamics of competitive positioning. In strategic group analysis, managers
identify and chart the business models and business level strategies their industry rivals are
pursuing. Then they determine which strategies are successful and unsuccessful and why a
certain business model is working or not. In turn, this allows them to either fine tune or radically
alter their business models and strategies to improve their competitive advantage.
3. Ignorance to update: Many companies, through neglect, ignorance, or error, do not work to
continually improve their business model, do not perform strategic group analysis, and often fail
to identify and respond to changing opportunities and threats. As a result, business level
strategies do not work together, their business model starts to fail, and their profitability starts
to decline.
No company is safe in the jungle of competition. There is no more important task than ensuring that
ones company is optimally positioned against its rivals to compete for customers.