1. Chapter 4
Business-Level Strategy
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4–1
1
Studying this chapter should provide you with
the strategic management knowledge needed to:
Learning Objectives
Define business-level strategy.
Discuss the relationship between customers and business-level
strategies in terms of who, what, and how.
Explain the differences among business-level strategies.
Use the five forces of competition model to explain how above-
average returns can be earned through each business-level
strategy.
Describe the risks of using each of the business-level strategies.
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4–2

2. 2
Business-Level Strategy (Defined)
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.
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4–3
3
4–4
Core Competencies and Strategy
Resources and superior capabilities that are sources of
competitive advantage over a firm’s rivals
Providing value to customers and gaining competitive advantage
by exploiting core competencies in individual product markets
Core Competencies
Strategy
Business-level Strategy
An integrated and coordinated set of actions taken to exploit
core competencies and gain competitive advantage
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3. 4
Customers: Their Relationship
with Business-Level Strategies
4–5
Key Issues
in
Business-level
Strategy
Who will be
served?
What needs will
be satisfied?
How will those
needs be satisfied?
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5
Effectively Managing Relationships
with Customers
Firms must manage all aspects of their relationship with

4. customers.
Reach: firm’s access and connection to customers
Richness: depth and detail of two-way flow of information
between the firm and the customer
Affiliation: facilitation of useful interactions with customers
4–6
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6
Who: Determining the Customers
to Serve
Market segmentation
A process used to cluster people with similar needs into
individual and identifiable groups.
4–7
All Customers
Industrial
Markets
Consumer
Markets
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5. 7
Market Segmentation
1–8
Consumer Markets
Demographic factors
Socioeconomic factors
Geographic factors
Psychological factors
Consumption patterns
Perceptual factors
Industrial Markets
End-use segments
Product segments
Geographic segments
Common buying factor segments
Customer size segments
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Market Segmentation (cont’d)
1–9
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6. What: Determining Which
Customer Needs to Satisfy
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.
4–10
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10
How: Determining Core Competencies Necessary to Satisfy
Customer Needs
Firms must decide:
who to serve, what customer needs to meet, and how to use core
competencies to implement value creating strategies that satisfy
target 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.
4–11
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7. 11
The Purpose of a
Business-Level Strategy
Business-Level Strategies:
are intended to create differences between the firm’s
competitive position and those of its competitors.
To position itself, the firm must decide whether it intends to:
perform activities differently or
perform different activities as compared to its rivals.
4–12
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12
Types of Potential
Competitive Advantage
Achieving lower overall costs than rivals
Performing activities differently (reducing process costs)
Possessing the capability to differentiate the firm’s product or
service and command a premium price
Performing different (more highly valued) activities.
4–13
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13
Competitive Scope
Broad Scope
The firm competes in many customer segments.
Narrow Scope
The firm selects a segment or group of segments in the industry
and tailors its strategy to serving them at the exclusion of
others.
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4–14
14
Business Level Strategies
4–15
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9. classroom use.
15
Cost Leadership Strategy
An integrated set of actions taken to produce goods or services
with features that are acceptable to customers at the lowest cost,
relative to that of competitors.
Product Characteristics
Relatively standardized (commoditized) products
Features broadly acceptable to many customers
Lowest competitive price
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4–16
16
Cost Leadership Strategy
Cost saving actions required by this strategy
Building efficient scale facilities
Tightly controlling production costs and overhead
Minimizing costs of sales, R&D and service
Building efficient manufacturing facilities
Monitoring costs of activities provided by outsiders
Simplifying production processes
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4–17
17
4–18
How to Obtain a Cost Advantage
Determine
and control
Cost Drivers
Reconfigure Value Chain if needed
Alter production process
Change in automation
New distribution channel
New advertising media
Direct sales in place of indirect sales
New raw material
Forward integration
Backward integration
Change location relative to suppliers or buyers
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18

11. Value-Creating Activities for Cost Leadership
4–19
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19
Value-Creating Activities for Cost Leadership
Cost-effective MIS
Few management layers
Simplified planning
Consistent policies
Effecting training
Easy-to-use manufacturing
technologies
Investments in technologies
Finding low-cost raw
materials
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4–20
Monitor suppliers’ performances
Link suppliers’ products to production processes
Economies of scale

12. Efficient-scale facilities
Effective delivery schedules
Low-cost transportation
Highly trained sales force
Proper pricing
20
Cost Leadership Strategy: Competitors
Due to cost leader’s advantageous position:
rivals hesitate to compete on basis of price.
lack of price competition leads to greater profits.
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4–21
Threat of new entrants
Bargaining power of suppliers
Rivalry
among competing firms
Bargaining power of buyers

13. Threat of substitute products
Rivalry with Existing Competitors
21
Cost Leadership Strategy: Buyers
Can mitigate buyers’ power by:
driving prices far below competitors, causing them to exit, thus
shifting power with buyers (customers) back to the firm.
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4–22
Threat of new entrants
Bargaining power of suppliers
Rivalry
among competing firms
Bargaining power of buyers
Threat of substitute products
Bargaining Power
of Buyers

14. 22
Cost Leadership Strategy: Suppliers
Can mitigate suppliers’ power by:
being able to absorb cost increases due to low cost position.
being able to make
very large purchases, reducing chance of supplier using power.
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4–23
Threat of new entrants
Bargaining power of suppliers
Rivalry
among competing firms
Bargaining power of buyers
Threat of substitute products
Bargaining Power
of Suppliers

15. 23
4–24
Cost Leadership Strategy: 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 industry learning curve.
Threat of new entrants
Bargaining power of suppliers
Rivalry
among competing firms
Bargaining power of buyers
Threat of substitute products
The Threat of
Potential Entrants
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16. 24
4–25
Cost Leadership Strategy: Substitutes
Cost leader is well positioned to:
lower prices in order to maintain its value position.
make investments to add features unavailable in substitutes.
buy intellectual property and patents developed by potential
substitutes.
Threat of new entrants
Bargaining power of suppliers
Rivalry
among competing firms
Bargaining power of buyers
Threat of substitute products
Product
Substitutes
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17. 25
Cost Leadership Strategy (cont’d)
Competitive Risks
Processes used to produce and distribute good or service may
become obsolete due to competitors’ innovations.
Too much focus on cost reductions may occur at expense of
customers’ perceptions of differentiation.
Competitors, using their own core competencies, may
successfully imitate the cost leader’s strategy.
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4–26
26
Differentiation Strategy
An integrated set of actions taken to produce goods or services
(at an acceptable cost) that customers perceive as being
different in ways that are important to them.
Focus is on non-standardized products
Appropriate when customers value differentiated features more
than they value low cost
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18. 4–27
27
How to Obtain a
Differentiation Advantage
4–28
Control
Cost Drivers if needed
Reconfigure Value Chain to maximize
Lower buyers’ costs
Raise performance of product or service
Create sustainability through:
customer perceptions of uniqueness
customer reluctance to switch to non-unique product or service
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28
Value-Creating Activities and Differentiation
4–29
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19. or service or otherwise on a password-protected website for
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29
Value-Creating Activities and Differentiation
Highly developed MIS
Emphasis on quality
Worker compensation for creativity/productivity
Use of subjective performance measures
Basic research capability
Technology
High quality raw materials
Delivery of products
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4–30
High quality replacement parts
Superior handling of incoming raw materials
Attractive products
Rapid response to customer specifications
Order-processing procedures
Customer credit
Personal relationships
30

20. 4–31
Differentiation Strategy: Competitors
Defends against competitors because customer’s brand loyalty
to differentiated product offsets price competition.
Threat of new entrants
Bargaining power of suppliers
Rivalry
among competing firms
Bargaining power of buyers
Threat of substitute products
Rivalry with
Existing Competitors
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31
4–32
Differentiation Strategy: Buyers
Can mitigate buyers’ power because well differentiated products

21. reduce customer sensitivity to price increases.
Bargaining Power
of Buyers
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Threat of new entrants
Bargaining power of suppliers
Rivalry
among competing firms
Bargaining power of buyers
Threat of substitute products
32
4–33
Differentiation Strategy: Suppliers
Can mitigate suppliers’ power by:
absorbing price increases due to higher margins.
passing along higher supplier prices because buyers are loyal to
a differentiated brand.

22. Bargaining Power
of Suppliers
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Threat of new entrants
Bargaining power of suppliers
Rivalry
among competing firms
Bargaining power of buyers
Threat of substitute products
33
4–34
Differentiation Strategy: 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.
The Threat of

23. Potential Entrants
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Threat of new entrants
Bargaining power of suppliers
Rivalry
among competing firms
Bargaining power of buyers
Threat of substitute products
34
4–35
Differentiation Strategy: Substitutes
Well-positioned relative to substitutes because:
brand loyalty to a differentiated product tends to reduce
customers’ testing of new products or switching brands.
Product
Substitutes
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Threat of new entrants
Bargaining power of suppliers
Rivalry
among competing firms
Bargaining power of buyers
Threat of substitute products
35
Competitive Risks of Differentiation
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 the differentiated features of the
firm’s products.
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4–36
36
Focus Strategies
An integrated set of actions taken to produce goods or services
that serve the needs of a particular competitive segment.
Particular buyer group—youths or senior citizens
Different segment of a product line—professional craftsmen
versus do-it-yourselfers
Different geographic markets—east coast versus west coast
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4–37
37
Focus Strategies (cont’d)
Types of focused strategies
Focused cost leadership strategy
Focused differentiation strategy
To implement a focus strategy, firms must be able to:
complete various primary and support activities in a

26. competitively superior manner, in order to develop and sustain a
competitive advantage and earn above-average returns.
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4–38
38
Factors That Drive Focused Strategies
Large firms may overlook small niches.
A firm may lack the resources needed to compete in the broader
market.
A firm is 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.
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4–39
39
Competitive Risks of Focus Strategies
A focusing firm may be “out focused” by its competitors.

27. A large competitor may set its sights on a firm’s niche market.
Customer preferences in a niche market may change to more
closely resemble those of the broader market.
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4–40
40
Integrated Cost Leadership/
Differentiation Strategy
A firm that successfully uses an integrated cost
leadership/differentiation strategy should be in a better position
to:
adapt quickly to environmental changes.
learn new skills and technologies more quickly.
effectively leverage its core competencies while competing
against its rivals.
4–41
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41

28. Integrated Cost Leadership/
Differentiation Strategy (cont’d)
Commitment to strategic flexibility is necessary for
implementation of integrated cost leadership/ differentiation
strategy.
Flexible manufacturing systems (FMS)
Information networks (CRM)
Total quality management (TQM) systems
4–42
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42
Flexible Manufacturing Systems
Computer-controlled processes used to produce a variety of
products in moderate, flexible quantities with a minimum of
manual intervention.
Goal is to eliminate the “low-cost-versus-wide product-variety”
tradeoff
Allows firms to produce large variety of products at relatively
low costs
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4–43

29. 43
Information Networks
Link companies electronically with their suppliers, distributors,
and customers.
Facilitate efforts to satisfy customer expectations in terms of
product quality and delivery speed
Improve flow of work among employees in the firm and their
counterparts at suppliers and distributors
Customer relationship management (CRM)
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4–44
44
Total Quality Management
(TQM) Systems
Emphasize total commitment to the customer through
continuous improvement using:
data-driven, problem-solving approaches.
empowerment of employee groups and teams.
Benefits
Increased customer satisfaction
Lower input and operating process costs
Reduced time-to-market for innovative products
4–45
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45
Risks of an Integrated Cost Leadership/ Differentiation Strategy
Often involves compromises
Becoming neither the lowest cost nor the most differentiated
firm
Becoming “stuck in the middle”
Lacking the strong commitment and expertise that accompanies
firms following either a cost leadership or a differentiated
strategy
4–46
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46