Chapter 4 Business Level Strategy

Business level-strategy is 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. It also indicates the choices the firm has made about how it intends to compete in

Who will be
Key Issues
served?
in What needs will
be satisfied?
Business-level
How will those
Strategy
needs be satisfied?

individual

product

markets.

Customers are the foundation of

successful business level strategies
and should never be taken for
granted. In terms of customers,
when selecting a business level
strategy the firms determines figure
beside. Satisfying customers is the
foundation of successful business
strategies.

1) Effectively managing relationships with customers

2) Reach, richness and affiliation
3) Who: Determining the customers to serve
4) What: Determining which customer needs to satisfy
5) How: Determining core competencies necessary to satisfy customer needs
Purpose of Business Level Strategies
Business Level Strategies are intended to create differences between the firms position relative
to those of its rivals. To position itself, the firm must decide whether it intends to:

Perform activities differently

Perform different activities as compared to its rivals.

Types of Potential Competitive Advantage

Achieving lower overall costs than rivals is performing activities differently (reducing process
costs). Two types of competitive scope firms must choose between broad target and narrow
target. Possessing the capability to differentiate the firms product or service and command a
premium price is performing different (more highly valued) activities.

Types of Business-Level Strategies

Competitive Advantage
Cost

Broad
Target

Competitive
ScopeNarrow
Target

Uniqueness

Differentiation
Cost Leadership
Integrated Cost
Leadership/
Differentiation
Focused Cost
Leadership
Focused Differentiation

Cost Leadership Strategy

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 with features that are acceptable to
customers.

Relatively standardized products

Features acceptable to many customers

Lowest competitive price

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

Competitors

Cost Leadership Strategy

Due to cost leaders advantageous position :

Buyers

Rivals hesitate to compete on basis of price

Lack of price competition leads to greater profits

Can mitigate buyers power by :

Driving prices far below competitors, causing them to exit, thus shifting
power with buyers back to the firm

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

New

power
Can frighten off new entrants due to :

Entrants

Substitutes

The time it takes to move down the learning curve

Cost leader is well positioned to :

Their need to enter on a large scale in order to be cost competitive

Make investments to be first to create substitutes

Buy patents developed by potential substitutes

Lower prices in order to maintain value position

Competitive Risks of the cost leadership strategy

Processes used to produce and distribute good or service may become obsolete due to
competitors innovations.

Focus on cost reductions may occur at expense of customers perceptions of differentiation.

Competitors, using their own core competencies, may successfully imitate the cost leaders
strategy.

Differentiation Strategy
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

Competitors

Differentiation Strategy
Defends against competitors because brand loyalty to differentiated product

Buyers

offsets price competition

Can mitigate buyers power because well differentiated products reduce

Suppliers

customer sensitivity to price increases

Can mitigate suppliers power by:

New Entrants

Substitutes

Absorbing price increases due to higher margins

Passing along higher supplier prices because buyers are loyal to

differentiated brand
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

Well positioned relative to substitutes because :

Brand loyalty to a differentiated product tends to reduce customers testing

of new products or switching brands

Competitive Risks of Differentiation

The price differential between the differentiators product and the cost leaders 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 firms products.

Focus Strategies
Integrated set of actions taken to produce goods or services that serve the needs of a particular
competitive segment.

Particular buyer groupyouths or senior citizens

Different segment of a product lineprofessional craftsmen versus do-it-yourselfers

Different geographic marketsEast coast versus West coast

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 competitively superior manner, in order to develop and sustain a competitive
advantage and earn above-average returns.
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 industrywide competitors.
Focusing allows the firm to direct its resources to certain value chain activities to build
competitive advantage
Competitive Risks of Focus Strategies

A focusing firm may be out-focused by its competitors.

A large competitor may set its sights on a firms niche market.

Customer preferences in niche market may change to more closely resemble those of the
broader market.

Integrated Cost Leadership or 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

Commitment to strategic flexibility is necessary for implementation of integrated cost

leadership/differentiation strategy.

Flexible manufacturing systems (FMS)

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

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)

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

Risks of the Integrated Cost Leadership/ Differentiation Strategy

Often involves compromises and becoming neither the lowest cost nor the most differentiated
firm. Becoming stuck in the middle is lacking the strong commitment and expertise that
accompanies firms following either a cost leadership or a differentiated strategy.

CASE SINGAPORE AIRLINES BALANCING ACT

SIA has won the Worlds Best Airline award from Conde Nast Traveler 21 out of the 22 times
it has been awarded and Skytraxs Airline of the Year award three times over the past decade.
Whats not well known, Singapore Airline is one of the industrys most cost effective operators.
From 2001 to 2009, SIA costs per available seat kilometers (ASK) were just : 4,58 cents,
meanwhile the others industry average 7 to 16 cents. The SIAs strategy is unusual, successfully
execute dual strategies offers world class service and a cost leader also since its founding in
1972, never posting annual loss. SIA successfully by managing:

Providing service excellence cost effectively

Innovating in both centralized and decentralized manner
Being a technology leader and a follower
Achieving standardization and personalization in its process
SIA manages two main assets include planes and people. It lead SIA achieving service

excellence cost-effectively.
Key Area of SIA strategy
Buying new aircraft
Depreciating aircraft
Training
Labor costs on flights
Innovation

Consequences
Price per aircraft
Fuel maintenance and repair
Salaries
Sales and administration
Back office technologies

The How-to of Dual Strategies

1. Harness the power of your people and culture
2. Make good use of technology
3. Utilize the power of business ecosystems

4. Make investment decisions strategically

Executing Dual strategies is difficult thats what make the approaches so valuable. By
being different in ways that customers like, companies that do so rise from the pits of
commoditization and make profits even in highly competitive industries.