Chapter 8
Business level strategy
Compiled by Jess Co
Chapter 11: Strategic Leadership
Chapter contents
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Learning outcomes
Introduction
The business level strategies
Models for aiding strategy selection
Reflecting on business level strategy
Discussion questions
Closing case study: Cost-cutting alone
is not a winning strategy
Chapter 8: Business level strategy
Learning outcomes
After reading this chapter, you should be able
to:
• distinguish the five competitive strategies
• justify the conditions that determine each competitive
strategy will be appropriate
• demonstrate the ability to complete a Strategic
Position and Action Evaluation (SPACE) Matrix
• demonstrate grasp of the theories discussed in this
chapter by providing appropriate practical examples
to illustrate any strategic management principle or
concept
• provide a strategic management solution related to
any of the above outcomes.
Chapter 8: Business level strategy
8.1 Introduction
• An organization’s competitive strategy
deals entirely with its plans for
competing successfully:
– its specific efforts to please customers
– its offensive and defensive moves to
counter the actions of rivals
– its replies to existing market conditions,
and
– its schemes to strengthen its market
position.
Chapter 8: Business level strategy
8.1 Introduction (cont.)
• An organization has competitive
advantage whenever it has an edge
over rivals in attracting buyers and
coping with competitive forces.
Chapter 8: Business level strategy
8.2 Business level strategies
• Because each organization’s strategic
approach consists partly of customdesigned actions to fit its own
circumstances and industry
environment, there are countless
variations in the competitive strategies
that organizations employ.
Chapter 8: Business level strategy
8.2 Business level strategies
(cont.)
– Assuming that products or services of
businesses are more or less equally
available, customers may choose to
purchase from one source rather than
another because either
• the price of the product or service is lower than
a competitors or
• the product or service is perceived by the
customer to provide better ‘added value’ or
benefits than that available elsewhere.
Chapter 8: Business level strategy
8.2.1 ‘No frills’ strategy (route 1)
Figure 8.1: Business level strategies: the strategy clock
Source: Adapted from Bowman, C. & Faulkner, D., 1996.
Chapter 8: Business level strategy
8.2.1 “No frills” strategy (route 1)
(cont.)
– This strategy combines a low price, low
perceived added value and a focus on a
price-sensitive market segment.
– It can be viable because there may well be a
segment of the market which, while
recognizing that the quality of the product or
service might be low, cannot or chooses not
to afford to buy better-quality goods.
Chapter 8: Business level strategy
8.2.2 Low price strategy (route 2)
• This strategy, seeks to achieve a lower
price than competitors whilst trying to
maintain similar value product or service to
that offered by competitors.
• An organization achieves competitive
advantage through a low price strategy by
either:
– identifying and focusing on a market segment
which is unattractive to competitors to avoid
competitive pressures to erode price below levels
which would achieve acceptable returns
– reducing prices
Chapter 8: Business level strategy
8.2.3 Hybrid strategy (route 3)
• This strategy seeks simultaneously to
achieve differentiation and a price lower than
that of competitors.
• The success of the strategy depends on:
– the ability to understand and to deliver enhanced
value in terms of customer needs, and
– having a cost base that permits low prices and is
sufficient for reinvestment to maintain and develop
bases of differentiation.
Chapter 8: Business level strategy
8.2.4 Added value or
differentiation strategies (route 4)
• This strategy seeks to provide products or
services unique or different from those of
competitors in terms of dimensions widely
valued by buyers.
• The aim is to achieve higher market share than
competitors (which, in turn, could yield cost
benefits) by offering better products or services
at the same price; or enhanced margins by
pricing slightly higher.
Chapter 8: Business level strategy
8.2.4 Added value or
differentiation strategies (route 4)
(cont.)
• This strategy may be achieved through
the following:
– uniqueness or improvements in products
– marketing-based approach
– competence-based approaches
Chapter 8: Business level strategy
8.2.5 Focused differentiation
strategy (route 5)
• A focused strategy based on differentiation
aims at securing a competitive advantage by
offering niche members a product they
perceive as well suited to their own unique
tastes and preferences.
• Successful use of a focused differentiation
strategy depends on the existence of a buyer
segment that is looking for special product
attributes or seller capabilities and on an
organization’s ability to stand apart from rivals
competing in the same target market niche.
Chapter 8: Business level strategy
8.2.6 Failure strategies (routes 6,
7 & 8)
• Route 6 suggests increasing price without increasing
value to the customer. This is, of course, the very
strategy that monopoly organizations are accused of
following. However, unless the organization is
protected by legislation, or high economic barriers to
entry, competition is likely to erode the market share.
• Route 7 is an even more disastrous extension of route
6, involving the reduction in value of a product or
service, while increasing the relative price.
• Route 8, reduction in value while maintaining price, is
also dangerous. There is a high risk that competitors
will increase their share substantially.
Chapter 8: Business level strategy
8.3 The strategic position and action
evaluation (SPACE) matrix: an aid to
strategy selection
• Its four-quadrant framework indicates whether
aggressive, conservative, defensive, or
competitive strategies are most appropriate for
a given organization.
• The axes of the SPACE Matrix represent two
internal dimensions (financial strength [FS] and
competitive advantage [CA]) and two external
dimensions (environmental stability [ES] and
industry strength [IS]).
• These four factors are the most important
determinants of an organization’s overall
strategic position.
Chapter 8: Business level strategy
8.3 The strategic position and action evaluation
(SPACE) matrix: an aid to strategy selection
(cont.)
Figure 8.2: The SPACE matrix
Source: Adapted from Rowe, Mason & Dickel, 1982:155
Chapter 8: Business level strategy
8.3 The strategic position and action evaluation
(SPACE) matrix: an aid to strategy selection
(cont.)
Table 8.2: Example factors that make up the SPACE matrix axes
Internal Strategic Position
External Strategic Position
Financial Strength (FS)
Environmental Stability (ES)
Return on investment
Technological changes
Leverage
Rate of inflation
Liquidity
Demand variability
Working capital
Price range of competing products
Cash flow
Barriers to entry into market
Ease of exit from market
Competitive pressure
Risk involved in business
Price elasticity of demand
Competitive Advantage (CA)
Industry Strength (IS)
Market share
Growth potential
Product quality
Profit potential
Product life cycle
Financial stability
Customer loyalty
Technological know-how
Competition's capacity utilization
Resource utilization
Technological know-how
Capital intensity
Control over suppliers and distributors
Ease of entry into market
Productivity, capacity utilization
Source: Adapted from Rowe, Mason & Dickel, 1982:155
Chapter 8: Business level strategy
8.3 The strategic position and action evaluation
(SPACE) matrix: an aid to strategy selection
(cont.)
Steps in developing a SPACE Matrix:
1. Select a set of variables to define financial strength (FS),
competitive advantage (CA), environmental stability (ES) and
industry strength (IS).
2. Assign a numerical value ranging from +1 (worst) to +6 (best) to
each of the variables that make up the FS and IS dimensions.
Assign a numerical value ranging from –1 (best) to –6 (worst) to
each of the variables that make up the ES and CA dimensions.
3. Compute an average score for FS, CA, IS and ES by summing
the values given to the variables of each dimension and then by
dividing by the number of variables included in the respective
dimension.
4. Plot the average scores for FS, IS, CA and ES on the
appropriate axis in the SPACE Matrix.
5. Add the two scores on the x-axis and plot the resultant point on
X. add the two scores on the y-axis and plot the resultant point
on Y. Plot the intersection of the new xy point.
Chapter 8: Business level strategy
8.3 The strategic position and action evaluation
(SPACE) matrix: an aid to strategy selection
(cont.)
Steps in developing a SPACE Matrix (cont.):
6.
Draw a directional vector from the origin of the SPACE
Matrix through the new intersection point. The vector
reveals the type of strategies recommended for the
organization: aggressive, competitive, defensive, or
conservative.
Some examples of strategy profiles that can emerge from a SPACE
analysis are shown in Figure 8.3. The directional vector associated
with each profile suggests the type of strategies to pursue:
aggressive, conservative, competitive, and defensive. When an
organization’s directional vector is located in the aggressive
quadrant (upper right quadrant) of the SPACE Matrix, an
organization is in an excellent position to use its internal strengths
to (1) take advantage of external opportunities, (2) overcome
internal weaknesses, and (3) avoid external threats. Therefore,
market penetration, market development, product development,
backward integration, forward integration, horizontal integration,
conglomerate diversification, horizontal diversification, or a
combination strategy can all be feasible.
Chapter 8: Business level strategy
8.3 The strategic position and action evaluation
(SPACE) matrix: an aid to strategy selection (cont.)
Figure 8.3:
Example of
strategy profiles
using the SPACE
Matrix
Chapter 8: Business level strategy
Source: Adapted from Rowe, Mason & Dickel, 1982:155
8.5 Reflecting on business level
strategy
Figure 8.1: Business level strategies: the strategy clock
Source: Adapted from Bowman, C. & Faulkner, D., 1996.
Chapter 8: Business level strategy
Discussion questions
1.
2.
3.
Why does each strategy require a different set of
product/market/ distinctive competency choices?
How can organizations pursuing a cost-leadership,
differentiation or focus strategy become stuck in the
middle? In what ways can they regain their
competitive advantage?
Give examples of organizations pursuing overall
cost leadership, broad differentiation, focused lowcost strategy, focused differentiation and best cost
provider strategy. In your opinion, are they
successful in implementing their strategies? Justify
your answer.
Chapter 8: Business level strategy
Discussion questions (cont.)
4. Upon what sources of competitive
advantage may differentiation
strategies be based? Give some
illustrative examples.
5. Why is it not advisable to pursue too
many strategies at once?
Chapter 8: Business level strategy
Closing case study: Cost-cutting
alone is not a winning strategy
1. Is cost leadership always the best strategy
to adapt? Explain your answer.
2. What happens when organizations select
the wrong strategy? Give an example to
illustrate your point.
3. Explain what is meant by the statement
‘Strategy is a product of insight, imagination
and implementation.’
Chapter 8: Business level strategy
Suggested websites
• African Bank
http://www.africanbank.co.za/presentations/
strategy_presentation.ppt
• Cosira Group International
http://www.cosira.com/P_industry.htm
• Cyber Pitstop
http://www.cyberpitstop.co.za/
• KwaZulu-Natal Tourism Authority Development
Strategy
http://www.kzn.org.za/invest/devstratweb/devstrat.htm
• Professional Management Review
http://www.pmrinet.com
• Transtel
http://www.transtel.co.za/transtel_role.shtml
Chapter 8: Business level strategy