Chapter 5
Business-Level Strategy
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
©2004 by South-Western/Thomson Learning
1
The Strategic Management Process
Strategic
Thinking
Chapter 1
Introduction to
Strategic Management
Chapter 2
Strategic Leadership
Strategic
Analysis
Chapter 3
The External
Environment
Chapter 4
The Internal
Organization
Strategic Intent
Strategic Mission
Chapter 5
Business-Level
Strategy
Chapter 6
Competitive Rivalry and
Competitive Dynamics
Chapter 7
Corporate-Level Strategy
Chapter 8
Acquisition and
Restructuring Strategies
Chapter 9
International Strategy
Chapter 10
Cooperative Strategy
Creating
Competitive
Advantage
Monitoring
And Creating
Entrepreneurial
Opportunities
Chapter 11
Corporate Governance
Chapter 12
Strategic Entrepreneurship
2
Managing Relationships With
Customers

Customer relationships are strengthened
by offering them superior value
– help customers to develop a new competitive
advantage
– enhance the value of existing competitive
advantages

Successful companies chart new
competitive space in order to serve new
customers as they simultaneously try to
find new ways to better server existing
customers
3
Managing Relationships With
Customers

Establish a competitive advantage along
these dimensions:
Reach
– the firm’s access and connection to customers
Richness
– the depth and detail of the two-way flow of
information between the firm and customers
Affiliation
– facilitating useful interactions with customers
4
The Central Role of Customers
In selecting a business-level
strategy, the firm determines
1. who it will serve
2. what needs those target customers
have that it will satisfy
3. how those needs will be satisfied
5
Basis for Customer Segmentation
Consumer
Markets
Customers
Industrial
Markets
6
Market Segmentation: Consumer Markets
Demographic factors
Per.
Dem.
Consumer
Con.
Soc.
Markets
Psy.
Socioeconomic factors
Geographic factors
Psychological factors
Geo.
Consumption patterns
Perceptual factors
7
Market Segmentation: Industrial Markets
End-use segments
Product segments
Geographic segments
Common buying factor
segments
Customer size segments
End
Size
Industrial
Buy.Markets Pro.
Geo.
8
Core Competencies and Strategy
Core
competencies
The resources and capabilities that have
been determined to be a source of
competitive advantage for a firm over its
rivals
Strategy
An integrated and coordinated set of
actions taken to exploit core competencies
and gain a competitive advantage
Business-level
strategy
Actions taken to provide value to customers
and gain a competitive advantage by
exploiting core competencies in specific,
individual product markets
9
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
10
Key Issues of Business-Level
Strategy

What good or service to offer customers
 How to manufacture or create the good or
service
 How to distribute the good or service in
the marketplace
11
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
12
Five Generic Strategies
Broad
target
Cost
Uniqueness
Cost
Leadership
Differentiation
Integrated Cost
Leadership/
Differentiation
Narrow
target
Competitive Scope
Competitive Advantage
Focused Cost
Leadership
Focused
Differentiation
13
Cost Leadership Strategy
An integrated set of actions designed to
produce or deliver goods or services at the
lowest cost, relative to competitors with
features that are acceptable to customers
– relatively standardized products
– features acceptable to many customers
– lowest competitive price
14
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
15
How to Obtain a Cost Advantage
Determine and
control
Cost Drivers
•
•
•
•
•
Alter production process
Change in automation
New distribution channel
New advertising media
Direct sales in place of
indirect sales
Reconfigure, if
needed
Value Chain
•
•
•
•
New raw material
Forward integration
Backward integration
Change location
relative to suppliers or
buyers
16
Factors That Drive Costs



Economies of scale
Asset utilization
Capacity utilization
pattern
• Seasonal, cyclical
 Interrelationships
 Order processing
and distribution
 Value chain linkages
• Marketing & sales
• Logistics &
operations
• Service



Product features
Performance
Mix & variety of
products
 Service levels
 Small vs. large buyers
 Process technology
 Wage levels
 Product features
 Hiring, training,
motivation
17
Questions Leading to Lower Costs
1. How can an activity be performed
differently or even eliminated?
2. How can a group of linked value activities
be regrouped or reordered?
3. How might coalitions with other firms
lower or eliminate costs?
18
Cost Leadership Strategy and the
Five Forces of Competition
Rivalry Among Competing
Firms
Five Forces of
Competition
Bargaining Power
of Suppliers
Can use cost leadership
strategy to advantage since:
 competitors avoid price
wars with cost leaders,
creating higher profits for
the entire industry
19
Cost Leadership Strategy and the
Five Forces of Competition
Bargaining Power of
Buyers
Five Forces of
Competition
Bargaining Power
of Suppliers
Can mitigate buyers’ power by:
 driving prices far below
competitors, causing them
to exit and shifting power
with buyers back to the
firm
20
Cost Leadership Strategy and the
Five Forces of Competition
Bargaining Power of
Suppliers
Five Forces of
Competition
Bargaining Power
of 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
21
Cost Leadership Strategy and the
Five Forces of Competition
Threat of New Entrants
Five Forces of
Competition
Bargaining Power
of Suppliers
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
22
Cost Leadership Strategy and the
Five Forces of Competition
Threat of Substitute
Products
Five Forces of
Competition
Bargaining Power
of Suppliers
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
23
Structure for Cost Leadership
Strategy
• Operations is main function
• Process engineering is
•
•
•
Office of the President
emphasized over R&D
Large centralized staff
Formalized procedures
Structure is mechanical, job
roles highly structured
Engineering
Centralized Staff
Accounting
Operations
Marketing
Personnel
24
Risks of Cost Leadership Strategy

Processes used by the cost leader to
produce and distribute its good or service
could become obsolete because of
competitors’ innovations
 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
 Competitors may learn how to successfully
imitate the cost leader’s strategy
25
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
– price for product can exceed what the firm’s
target customers are willing to pay
– nonstandardized products
– customers value differentiated features more
than they value low cost
26
Differentiation Strategy






Value provided by unique features and
value characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
Rapid innovation
27
Differentiation Strategy
Differentiation actions required by this strategy:
– developing new systems and processes
– shaping perceptions through advertising
– quality focus
– capability in R&D
– maximize human resource contributions
through low turnover and high motivation
28
How to Obtain a Differentiation
Advantage
Control if
needed
Reconfigure to
maximize
Cost Drivers
Value Chain
• Lower buyers’ costs
• Raise performance of product or service
• Create sustainability through:
customer perceptions of uniqueness
customer reluctance to switch to non-unique product
29
Factors That Drive Differentiation








Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
Extensive personal relationships with
buyers and suppliers
30
Differentiation Strategy and the
Five Forces of Competition
Rivalry Among Competing
Firms
Five Forces of
Competition
Bargaining Power
of Suppliers
Can defend against
competition because:
 brand loyalty to
differentiated product
offsets price competition
31
Differentiation Strategy and the
Five Forces of Competition
Bargaining Power of Buyers
Five Forces of
Competition
Can mitigate buyer power
because:
 well differentiated products
reduce customer sensitivity
to price increases
Bargaining Power
of Suppliers
32
Differentiation Strategy and the
Five Forces of Competition
Bargaining Power of
Suppliers
Five Forces of
Competition
Bargaining Power
of 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
33
Differentiation Strategy and the
Five Forces of Competition
Threat of New Entrants
Five Forces of
Competition
Bargaining Power
of Suppliers
Can defend against new
entrants because:
 new products must surpass
proven products or,
 new products must be at
least equal to performance
of proven products, but
offered at lower prices
34
Differentiation Strategy and the
Five Forces of Competition
Threat of Substitute
Products
Five Forces of
Competition
Bargaining Power
of Suppliers
Well positioned relative to
substitutes because:
 brand loyalty to a
differentiated product tends
to reduce customers’ testing
of new products or
switching brands
35
Structure for Differentiation
Strategy
President and
Limited Staff
R&D
New Product
R&D
Marketing
Marketing
Operations
Finance
Human
Resources
• Marketing is the main function for tracking new product ideas
• New product R&D is emphasized
• Most functions are decentralized
• Formalization is limited to foster change and promote new ideas
• Overall structure is organic; job roles are less structured
36
Major Risks of Differentiation
Strategy

Customers may decide that the price
differential between the differentiated
product and the cost leader’s product is
too large
 Means of differentiation may cease to
provide value for which customers are
willing to pay
37
Major Risks of Differentiation
Strategy
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

38
Focused Business-Level Strategies
A focus strategy must exploit a narrow
target’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”
39
Factors That May Drive 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
 Focus may allow the firm to direct
resources to certain value chain activities
to build competitive advantage
40
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

41
Advantages of Integrated 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
42
Benefits of Integrated Strategy

Successful firms using this strategy have
above-average returns
 Firm offers two types of values to
customers
– some differentiated features (but less
than a true differentiated firm)
– relatively low cost (but now as low as
the cost leader’s price)
43
Using the Functional Structure

The 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

Strategic flexibility is obtained via
– flexible manufacturing systems
– information networks
– total quality management systems
44
Major Risks of Integrated Strategy

An integrated cost/differentiation business
level strategy often involves compromises
(neither the lowest cost nor the most
differentiated firm)
 The firm may become “stuck in the
middle” lacking the strong commitment
and expertise that accompanies firms
following either a cost leadership or a
differentiated strategy
45