Business-Level Strategy

Business-Level Strategy
Developing a firm-specific business model
that will allow a company to gain
competitive advantage over its rivals in a
market or industry
Customers needs
Customer groups
Distinctive competencies (how customers
need will be satisfied)
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Choosing a Generic BusinessLevel Strategy

Generic strategies
All businesses can pursue them regardless of
whether they are manufacturing, service, or
nonprofit
Can be pursued in different kinds of industry
environments
Results from a companys consistent choices
on product, market, and distinctive
competencies
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Product/Market/Competency Choices and Generic

Competitive Strategies

Conditions Suitable for Seeking a Cost Advantage

Cost advantage should be sought

when the nature of the product does not allow
benefit enhancement (nails)
when consumers are relatively price sensitive
(BOP, say) and
when the product is a search good rather than
an experience good

Conditions Suitable for Seeking a Benefit Advantage

Benefit advantage should be sought
when consumers are willing to pay a premium for
benefit enhancements
when economies of scale and learning have been
already exploited and differentiation is the best route to
value creation and
when the product is an experience good.

Generic Business-Level Strategy: Cost

Leadership
Establish a cost structure that allows the
company to provide goods and services at
lower unit costs than competitors
Advantages
If rivals charge similar prices, the cost leader
achieves superior profitability
The cost leader is able to charge a lower price
than competitors

E. g. Wal-Mart, Huawei
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Cost Leadership Strategic Choices

The cost leader does not try to be the
industry innovator
The cost leader positions its products to
appeal to the average customer
The overriding goal of the cost leader is to
increase efficiency and lower its costs
relative to its rivals

Cost Leadership Advantages:

Dealing with the 5 Forces
Protected from industry competitors by cost advantage
Less affected by increased prices of inputs if there are
powerful suppliers
Less affected by a fall in price of outputs if there are
powerful buyers
Purchases in large quantities increase bargaining power
over suppliers
Ability to reduce price to compete with substitute
products, low prices may be unattractive to substitutes
Low costs and prices are a barrier to entry
E.g. Wal-Mart
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Cost Leadership Disadvantages

Competitors may lower their cost structures
in different ways
Wal-Mart v. Amazon
HP-Compaq

Competitors may imitate the cost leaders

methods
More tangible than differentiation strategy

Cost reductions may affect demand

Chinese bicycles
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Generic Business-Level Strategy:

Differentiation
Create a product that customers perceive
as different or distinct in an important way
Advantages
Premium price. E. g. Sony TVs
Increased revenues = superior profitability

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Differentiation Strategic Choices

Quality, innovation, responsiveness to customer
needs
A differentiator strives to differentiate itself along as
many dimensions as possible
BMW: prestige, engineering, luxury, reliability, service

A differentiator segments its market into many niches

Toyota, Kellogg

A differentiated company concentrates on the

organizational functions that provide the source of
differentiation advantage
R&D important, materials management less so
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Differentiation Advantages:
Dealing with the 5 Forces
Customers develop brand loyalty
Powerful suppliers are not a problem because the
company is geared more toward the price it can charge
than its costs
Differentiators can pass price increases on to customers

Powerful buyers are not a problem because the product

is distinct
Differentiation and brand loyalty are barriers to entry
The threat of substitute products exists

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Differentiation Disadvantages
Difficulty in maintaining long-term
distinctness in customers eyes
Agile competitors can quickly imitate
Patents and first-mover advantage are limited

Difficulty of maintaining premium price

Intangible v. tangible attributes: prestige
watches v. HD-DVD players

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Features of Cost Leadership and

Differentiation Strategies
Generic strategy
COST
LEADERSHIP

Key strategy elements

requirements

Resource & organizational

Scale-efficient plants.
Access to capital. Process
Design for manufacture.
engineering skills. Frequent
Control of overheads &
reports. Tight cost control.
R&D. Avoidance of
Specialization of jobs and
marginal customer
functions. Incentives for
accounts.
quantitative targets.

DIFFERENTIATION

Emphasis on branding
Marketing. Product
and brand advertising,
engineering. Creativity.
design, service, and
Product R&D
quality.
Qualitative measurement
and incentives. Strong
cross-functional
coordination.

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Features of Cost Leadership and

Differentiation Strategies
CL MBA

WTP MBA

Teaching or research
focus?
Electives?
Rote or applied
learning?
Bureaucratic, rulebased or
autonomous
policies?
Standardized or
customized exams?
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Generic Business-Level Strategy: Dual

Competitive Advantage
Pursuing the business models of the cost leader and
differentiator simultaneously
Dell, Samsung, Toyota, Body Shop

Firms that offer high quality products expand market

share and enjoy cost advantages due to economies of
scale and learning
Learning economies (experience curve effects) may be
more important for high quality production than for low
quality production
High quality producers may also be more efficient
producers
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Dual Advantage Strategic Choices

Using robots and flexible manufacturing cells reduces
costs while producing different products
Standardizing component parts used in different end
products can achieve economies of scale
Limiting customer options reduces production and
marketing costs
JIT inventory can reduce costs and improve quality and
reliability
Using the Internet and e-commerce can provide
information to customers and reduce costs
Low-cost and differentiated products are often both
produced in countries with low labor costs
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Tradeoff Between Costs and

Product Variety

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Generic Business-Level Strategy: Focus

Serving the needs of a specific market segment
Geographic
Cavin Kare, Jumbo King

Type of customer
Y-Films
Body Shop
Snapdeal v. Purpleswarms

Segment of the product line

Bose- high-end audio
Tax prep software
Intuit- personal finance software (Quicken)

After choosing a market segment, a focused company positions

itself using either
Low-cost OR differentiation
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Why Focus Strategies Are

Different

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Focus Advantages
The focuser is protected from rivals to the extent it can
provide a product or service they cannot
Body Shop v. LOreal
Red Bull

The focuser has power over buyers because they cannot

get the equivalent product from broad-market firms
The threat of new entrants is limited by customer loyalty to
the focuser/small size of niche
Customer loyalty/knowledge of customer needs lessens
the threat from substitutes
The focuser stays close to its customers and their changing
needs
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Focus Disadvantages
The focuser is at a disadvantage with regard to powerful
suppliers because it buys in small volume (but it may be able to
pass costs along to loyal customers)
Because of low volume, a focuser may have higher costs than a
low-cost company
The focusers niche may disappear because of technological
change or changes in customers tastes
Portfolio risk
Physical data storage v. cloud computing
Diet companies, health fads

Differentiators will compete for a focusers niche once it grows

big enough
Get acquired?
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