Business-Level Strategy

Types and Scope of Competitive

Advantage

Rev Sept 18. 2007

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What is business-level strategy?

Business-Level Strategy
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
Key Issues of Business-Level Strategy
– What product (good or service) to offer
who (which customers)
– How to manufacture or create the good or
service
– How to distribute the good or service in
the marketplace
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The Central Role of Customers
 Choice of business strategy depends
on choice of customers to serve
 In selecting a business-level strategy,
the firm determines
1. Who it will serve (Scope)
2. What needs those target customers
have that it will satisfy (Value attributes)
3. How those needs will be satisfied (Types
of business and functional strategies)
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Five Generic Types of Business Strategy
Type of Competitive Advantage
Cost Uniqueness
Broad Cost Broad
Leadership Differentiation
Competitive Scope
Broad
target
Integrated Cost
Leadership/
Differentiation
Narrow
target

Narrow Cost Narrow

Leadership Differentiation 4
When should a narrowly-focused strategy be implemented?

NARROW Business-Level Strategies

A narrowly-focused strategy must exploit
a targeted segment’s differences from the
balance of the industry by:
– isolating a particular buyer group
– isolating a unique segment of a product
line
– concentrating on a particular
geographic market
– finding their “niche”
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What are some ways to segment product markets?

WHO? - Segmenting Consumer Markets

Demographic factors
Per. Dem. Socioeconomic factors
Consumer Geographic
Con. Soc.
Markets factors
Psychological factors
Psy. Geo.
Consumption patterns
Perceptual factors
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WHO? - Segmenting Industrial Markets

End-use segments
Product segments Size End

Geographic segments Industrial

Buy.Markets Pro.
Common buying factor
segments Geo.
Customer size segments

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Factors That May Drive
Narrowly-Focused Strategies
 Large firms may overlook small niches
 Firm may lack resources to compete in the
broader market
 May be able to serve a narrow market
segment more effectively than can larger
industry-wide competitors
 Narrowing scope may allow the firm to
concentrate focus --directing resources to
certain targeted value chain activities to
build competitive advantage
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What are the risks of a focus strategy?

Major Risks of Focused Strategies

 Firm may be “outfocused” by competitors
 Large competitor may set its sights on
your niche market
 Preferences of niche market may change
to match those of broad market

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What are the key differences between the two types of business-level strategy?

Two Types of Competitive Advantage

Cost Leadership & Differentiation

Cost Fatal
Leadership Differentiation
“Stuck
Benefits in Benefits
Middle”
Zone

Spend so much less money than Make people believe we have

anyone else giving most people most something they need and that they
of what they want that we can can only get from us, so we can
charge way less and still make a ton charge a premium price and make a
of money ton of money 10 10
What is the rationale behind different types of business level strategy?

Types of Business-Level Strategies

 Business-level strategies are intended to
create differences between the firm’s
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
 Different types of strategies emphasize
development of different competencies
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 Core Competencies and Strategy

Core The resources and capabilities that

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

Coherent actions taken to provide value to

Business-level customers and gain a competitive advantage
strategy by exploiting core competencies in
specific, individual product markets

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Generic Building Blocks of Competitive
Advantage: Competency Clusters
Customer
Customer
Responsiveness
Responsiveness

Higher Unit Prices

Innovation Quality

Lower Unit Costs

Efficiency
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On what does a cost-leadership strategy focus?

Cost-Leadership Strategy
An integrated set of actions designed to
produce or deliver goods or services at the
lowest cost structure, relative to
competitors with features that are
acceptable to customers
– relatively standardized products
– features acceptable to many customers
– lowest competitive price

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 Cost-Leadership Strategy
Cost saving actions required by this strategy:
– building efficient scale facilities
– tightly controlling production costs and overhead
– Continuously improving production efficiency
– monitoring costs of activities provided by
outsiders
– simplifying production processes
– minimizing costs of sales, R&D and service
– Seeking most efficient marketing mechanisms

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 Structure for Cost Leadership
Strategy
• Operations is main function Office of the President
• Process engineering is
emphasized over R&D
• Large centralized staff
• Formalized procedures Centralized Staff
• Structure is mechanistic, job
roles highly structured

Engineering Operations Accounting

Marketing Personnel
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What are the risks of pursuing cost leadership?

Risks of Cost Leadership Strategy

 Competitors may learn how to successfully
imitate the cost leader’s strategy
 Processes used by the cost leader to
produce and distribute its good or service
could become obsolete because of
competitors’ innovations
 Loss of customer focus
– Too much focus by the cost leader on cost
reductions may occur at the expense of trying to
understand customers’ perceptions of
“competitive levels of differentiation
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On what does a differentiation strategy focus?

Differentiation Strategy
An integrated set of actions designed by a firm to
produce or deliver goods or services (at an acceptable
cost) that customers perceive as being different in ways
that are important to them
Nonstandardized products --Value provided by unique features and
value characteristics that command premium price
– High customer service
– Superior performance quality
– Prestige or exclusivity
– Rapid innovation (product styles, features)
Assumes
– customers value differentiated features more than they value low
price
– price for product does not exceed what the firm’s target customers
are willing to pay
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Differentiation Strategy
Differentiation actions required by
this strategy:
– quality & continuous innovation focus
– capability in R&D
– developing new systems and processes
– shaping perceptions through advertising
– maximize human resource value-added
contributions through development, low
turnover and high motivation

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 Structure for Differentiation
Strategy
President and
Limited Staff
R&D Marketing

New Product Marketing Finance

R&D
Operations Human
Resources
• Marketing is the main function for tracking new product ideas
• New product R&D is emphasized
• Most functions are decentralized
• Overall structure is organic; job roles are less structured
• Formalization is limited to foster change and promote new ideas 20
What are the major risks of pursuing differentiation?

Risks of Differentiation Strategy

 Poor value proposition --Customers may decide
that the price differential between the
differentiated product and the cost leader’s
product is too large
 Customer tastes may shift
– Means of differentiation may cease to provide value for
which customers are willing to pay
 Experience may narrow customer’s perceptions of the
value of differentiated features of the firm’s products
 Makers of counterfeit goods may attempt to replicate
differentiated features of the firm’s products

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What is the integrated low-cost differentiation strategy? What are the arguments
as to why it is increasing in importance?

Integrated/DUAL Business Strategy

 Firm aims to develop competency sets for BOTH
differentiation and cost leadership
 Firm offers to a high degree both types of value
to customers
– some fairly differentiated features (but slightly
less than a pure differentiator)
– relatively low cost-structure and pricing (but
not as low as the pure cost-leader’s
structure/price)
 Firms successfully using this challenging
strategy usually have above-average returns
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Advantages of Integrated Strategy
A firm that successfully uses an integrated cost-
leadership/differentiation strategy should be in a
better position to:
– effectively leverage its core competencies
while competing against its “purer” rivals
• Create largest NET VALUE ADDED
(biggest “Red Box”)
– adapt more quickly than “purer” rivals to
environmental changes that threaten either
differentiation or cost leadership
• Create greatest strategic flexibility 23
Structure for Integrated Strategy
 Uses a challenging integrated form of the
functional structure
– must have decision-making patterns that are
partially centralized and partially decentralized
– will have semi-specialized jobs and rules and
procedures that call for some formal and some
informal job behavior
 Synergy & strategic flexibility is obtained
via
– flexible manufacturing systems
– information networks
– total quality management systems 24
Integrated Business-Level Strategy
DUAL Cost Leadership and Differentiation
TQM, IT & Flexible
Manufacturing
Technologies

Cost
Combined Differentiation
Leadership
Benefits Benefits
Benefits

25 25
What are the risks associated with the integrated strategy?

Major Risks of Integrated Strategy

 An integrated cost/differentiation
business- level strategy involves multiple
costly investments and challenging
management compromises to develop
both differentiator and cost-leader
competencies
 The firm may become “stuck in the
middle,” lacking the strong focus,
commitment and expertise of firms
following either a purer cost-leadership or
differentiation strategy
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