Chapter 4

BUSINESS-LEVEL STRATEGY

Learning Objectives:

1. Define business-level strategy.

2. Discuss the relationship between customers and business-level strategies in terms of

who,what, and how.

3. Explain the differences among business-level strategies.

4. Use the five forces of competition model to explain how above-average returns can be
earned through each business-level strategy.

5. Describe the risks of using each of the business-level strategies.

Lecture Notes:

• A business-level strategy is 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. Five
business-level strategies (cost leadership, differentiation, focused cost leadership, focused
differentiation, and integrated cost leadership/differentiation) are examined in the chapter.

• Customers are the foundation of successful business-level strategies. When considering customers, a
firm simultaneously examines three issues: who, what, and how. These issues, respectively, refer to the
customer groups to be served, the needs those customers have that the firm seeks to satisfy, and the
core competencies the firm will use to satisfy customers’ needs. Increasing segmentation of markets
throughout the global economy creates opportunities for firms to identify increasingly unique customer
needs they can try to serve by using one of the business-level strategies.

• Firms seeking competitive advantage through the cost leadership strategy produce no-frills,
standardized products for an industry’s typical customer. However, these low-cost products must be
offered with competitive levels of differentiation. Above-average returns are earned when firms
continuously drive their costs lower than those of their competitors, while providing customers with
products that have low prices and acceptable levels of differentiated features.

• Competitive risks associated with the cost leadership strategy include (1) a loss of competitive
advantage to newer technologies, (2) a failure to detect changes in customers’ needs, and (3) the ability
of competitors to imitate the cost leader’s competitive advantage through their own unique strategic
actions.

• Through the differentiation strategy, firms provide customers with products that have different (and
valued) features. Differentiated products must be sold at a cost that customers believe is competitive
given the product’s features as compared with the cost/feature combination available through
competitors’ offerings. Because of their uniqueness, differentiated goods or services are sold at a
premium price. Products can be differentiated along any dimension that some customer group values.
Firms using this strategy seek to differentiate their products from competitors’ goods or services along
as many dimensions as possible. The less similarity with competitors’ products, the more buffered a firm
is from competition with its rivals.

• Risks associated with the differentiation strategy include (1) a customer group’s decision that the
differences between the differentiated product and the cost leader’s good or service are no longer
worth a premium price, (2) the inability of a differentiated product to create the type of value for which
customers are willing to pay a premium price, (3) the ability of competitors to provide customers with
products that have features similar to those associated with the differentiated product, but at a lower
cost, and (4) the threat of counterfeiting, whereby firms produce a cheap “knockoff” of a differentiated
good or service.

• Through the cost leadership and the differentiated focus strategies, firms serve the needs of a narrow
competitive segment (e.g., a buyer group, product segment, or geographic area). This strategy is
successful when firms have the core competencies required to provide value to a narrow competitive
segment that exceeds the value available from firms serving customers on an industry-wide basis.

• The competitive risks of focus strategies include (1) a competitor’s ability to use its core competencies
to “outfocus” the focuser by serving an even more narrowly defined competitive segment, (2) decisions
by industry-wide competitors to focus on a customer group’s specialized needs, and (3) a reduction in
differences of the needs between customers in a narrow competitive segment and the industry-wide
market.

• Firms using the integrated cost leadership/differentiation strategy strive to provide customers with
relatively low-cost products that have some valued differentiated features. Flexibility is required for the
firm to learn how to use primary and support activities in ways that allow them to produce somewhat
differentiated products at relatively low costs. The primary risk of this strategy is that a firm might
produce products that do not offer sufficient value in terms of either low cost or differentiation. When
this occurs, the company is “stuck in the middle.” Firms stuck in the middle compete at a disadvantage
and are unable to earn more than average returns