Ch 4: Business-Level Strategy
Junichi Yamanoi
Chuo University
Special Lecture (Strategy, Policy, and
Planning)
6/14/12
What IS the 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.
Sector, Industry, and Market
• Example 1
• Sector: Media /
entertainment
• Industry: Video rental
• Example 2
• Market: Mass commercial
• Sector: Media /
entertainment
• Industry: Filmed
entertainment
• Market: Short-term rental
• Companies: Blockbuster,
Hollywood Video, etc.
• Companies: Blockbuster,
Hollywood Video, etc.
Business-Level Strategy: Southwest
Three Dimensions of Firms’ Relationships
with Customers
• Firms must manage all aspects of their relationship
with customers.
▫ Reach: firm’s access and connection to customers (e.g.,
Amazon vs. Barnes & Noble).
▫ Richness: depth and detail of two-way flow of
information between the firm and customers (e.g.,
Amazon’s review system).
▫ Affiliation: facilitation of useful interactions with
customers (e.g., Amazon’s recommendation system).
Three Important Decisions of Business-Level
Strategy: Who Will Be Served?
• Market segmentation: Dividing customers into groups
based on their needs.
• Consumer Markets:
1. Demographic factors (age, income, sex, etc)
2. Socioeconomic factors (social class, stage in the family life cycle)
3. Geographic factors (cultural, regional, and national differences)
4. Psychological factors (lifestyle, personality traits)
5. Consumption patterns (heavy, moderate, and light users)
6. Perceptual factors (benefit segmentation, perceptual mapping)
• Industrial Markets:
1. End-use segments
2. Product segments
3. Geographic segments
4. Common buying factor segments
5. Customer size segments
Three Important Decisions of Business-Level
Strategy: What Do Customers Need?
• Customer needs are related to a product’s
benefits and features.
• Customer needs are neither right nor wrong,
good nor bad.
• Customer needs represent desires in terms of
features and performance capabilities.
• Value can be delivered by providing low cost or
differentiated features.
▫ Low cost with acceptable features versus
differentiated features with acceptable cost.
Three Important Decisions of Business-Level
Strategy: How Are the Customer Needs Satisfied?
• Firms use core competencies to implement value
creating strategies that satisfy customers’ needs.
• Only firms with capacity to continuously
improve, innovate and upgrade their
competencies can expect to meet and or exceed
customer expectations across time.
Five Generic Business-Level Strategies
Generic Strategies
• Cost Leadership Strategy
-Providing goods/services at the LOWEST cost.
• Differentiation Strategy
-Providing goods/services in DIFFERENT ways from
rivals.
• Focus Strategies
-Focused Cost Leadership Strategy
-Focused Differentiation Strategy
• Integrated Cost Leadership/Differentiation
Strategy
Cost Leadership Strategy
• Integrated set of actions taken to produce
goods/services with features that are acceptable to
customers at the lowest cost, relative to that of
competitors:
▫ Relatively standardized products.
▫ Features acceptable to many customers.
▫ Lowest competitive price.
• Achieving lowest overall activity costs to compete on
price (value) of standardized products offered to the
broadest market segment (“typical customer”).
Cost Leadership Strategy
• Which firms are adopting this strategy?
• Automobiles?
• General Merchandisers?
• Hotels?
-
Cost Leadership Strategy: Value Chain
Cost Leadership Strategy: Five Forces
New Entrants
• Can frighten off new entrants due to:
▫ Their need to enter on a large scale in order to be cost
competitive.
▫ The time it takes to move down the learning curve.
Suppliers
• Can mitigate suppliers’ power by being able to:
▫ Absorb cost increases due to low cost position.
▫ Make very large purchases, reducing chance of
supplier using power.
Cost Leadership Strategy:
Suppliers of Wal-Mart
Cost Leadership Strategy: Five Forces
Buyers
• Can mitigate buyers’ power by:
▫ Driving prices far below competitors, causing
them to exit, thus shifting power with buyers back
to the firm.
Substitutes
• Cost leader is well positioned to:
▫ Make investments to be first to create substitutes.
▫ Buy patents developed by potential substitutes.
▫ Lower prices in order to maintain value position.
Cost Leadership Strategy: Five Forces
Competitors
• Due to cost leader’s advantageous position:
▫ Rivals hesitate to compete on basis of price.
▫ Lack of price competition leads to greater profits.
Cost Leadership Strategy: Risks
• Processes used to produce and distribute a good
or service may become obsolete due to
competitors’ innovations.
• Focus on cost reductions may occur at the
expense of customers’ perceptions of
differentiation.
• Competitors, using their own core competencies,
may successfully imitate the cost leader’s
strategy.
Differentiation Strategy
• Integrated set of actions taken to produce goods or
services that customers perceive as being
unique/different in ways that are important to them.
▫ Non-standardized products.
▫ Customers value differentiated features more than
they value low cost.
• Price charged for differentiated product must exceed
cost of differentiation.
• Focus is on innovation related to product features
and uniqueness rather than on lowest competitive
price.
▫ Differentiate products/services on many dimensions.
Differentiation Strategy
• Which firms are adopting this strategy?
• Automobiles?
• General merchandisers?
• Hotels?
-
Differentiation Strategy
• Sustaining success with differentiation requires
ongoing upgrades and innovations without cost
increases.
• Companies using a differentiation strategy must
maintain a competitive parity on cost.
• Sources of Differentiation Strategy
-Superior quality, more responsive customer service, rapid
product innovation, advanced technological features,
engineering design….
-Social connections, emotional attachment….
Differentiation Strategy: Value Chain
Differentiation Strategy: Five Forces
New Entrants
• Can defend against new entrants because:
▫ New products must surpass proven products.
▫ New products must be at least equal to
performance of proven products, but offered at
lower prices.
Suppliers
• Can mitigate suppliers’ power by:
▫ Absorbing price increases due to higher margins.
▫ Passing along higher supplier prices because
buyers are loyal to differentiated brand.
Differentiation Strategy: Five Forces
Buyers
• Can mitigate buyers’ power because well differentiated
products reduce customer sensitivity to price increases.
Substitutes
• Well positioned relative to substitutes because:
▫ Brand loyalty to a differentiated product tends to
reduce customers’ testing of new products or switching
brands.
Competitors
• Defends against competitors because brand loyalty to
differentiated product offsets price competition.
Differentiation Strategy: Risks
• The price differential between the
differentiator’s product and the cost leader’s
product becomes too large.
• Differentiation ceases to provide value for which
customers are willing to pay.
• Experience narrows customers’ perceptions of
the value of differentiated features.
• Counterfeit goods replicate differentiated
features of the firm’s products.
Focus Strategies
• Focus Strategy
▫ An action plan to produce goods or services to serve the
needs of a specific market segment.
• Focused Cost Leadership Strategy
▫ An action plan to produce goods or services for a narrow
market segment at the lowest cost.
• Focused Differentiation Strategy
▫ An action plan to produce goods or services that a narrow
group of customers perceive as being unique in ways that
are important to them.
Focus Strategies: Benefits
• Large firms may overlook small niches.
▫ Flying under the radar screen of incumbents.
• Firms may lack the resources needed to compete in the
broader market.
• Firms are able to serve a narrow market segment more
effectively than can its larger industry-wide competitors.
• Focusing allows the firm to direct its resources to certain
value chain activities to build competitive advantage.
Focus Strategies: Risks
• A competitor may learn how to “outfocus” the
focusing firm.
• A company serving the broad target market may
decide that the target market being served by the
focusing firm is attractive.
• The needs of the narrow target customer may
change and become very similar to those of the
broad market.
Integrated Cost
Leadership/Differentiation Strategy
• Integrated Cost Leadership/Differentiation Strategy
▫ An action plan to produce goods or services with
strong emphasis on both differentiation and low cost.
 Products have differentiated features (but not as
many as offered by firms using the differentiation
strategy)
 Products are also produced at a low cost (but not at a
cost as low as those of the firm using the cost
leadership strategy).
▫ The risk of using the integrated cost leadership/
differentiation strategy is becoming “stuck in the
middle.”
Group Work
• Let’s analyze Google’s business-level strategy.
• What is Google’s main business? Which
companies are Google’s competitors?
• What is Google’s generic strategy? How does it
work relative to the competitors?
Take-Home Messages
• Five generic strategies: Cost leadership,
differentiation, focused cost leadership, focused
differentiation, and integrated cost
leadership/differentiation strategies.
• Each strategy has benefits and risks.
• The effectiveness of the strategy depends on the
firm’s core competencies and environment.
Sample Questions for Writing
Assignments
• Choose a firm. What is the generic strategy of the
firm? Considering the firm’s performance relative to
its competitors, do you think that the generic
strategy is effective? Why or why not? Please
mention the firm’s core competencies in your
answer.
• Choose two firms in the same industry. Identify
their generic strategies. Are their generic strategies
same or different? Which firm’s performance is
better? Can you explain the difference in firm
performance based on their generic strategies?