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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
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Core Competencies and
Strategy
The resources and capabilities that have
been determined to be a source of
competitive advantage for a firm over its
rivals
An integrated and coordinated set of
actions taken to exploit core competencies
and gain a competitive advantage
Actions taken to provide value to customers
and gain a competitive advantage by
exploiting core competencies in specific,
individual product markets
Business-level
strategy
Strategy
Core
competencies
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Strategy
Fundamental constraints
Scope
What good or service to offer, to which
customers
Value chain
How and where to create the good or
service
How to distribute the good or service in the
marketplace(s)
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Recall our value
creation model
Costs represent
specific investment
choices that
generate value
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Consumer Markets
Demographic
Consumer
Markets
Socioeconomic
Geographic
Psychological
Consumption patterns
Perceptual factors
Dem.
Soc.
Geo. Psy.
Con.
Per.
Broad or narrow scope?
Implications for configuration of
value chain??
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Business Markets
Industrial
Markets
End-use
Product segments
Geog segments
Common buying factors
Customer size segments
End
Pro.
Geo.
Buy.
Size
Broad or narrow scope?
Implications for configuration of
value chain??
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Source of competitive
advantage - Value chains
Strategies create differences between the
firms position and its rivals
Sources of differences? - perform activities
differently; perform different activities
Two value-adding configurations (Porter,
1985)
Low cost
Differentiated

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Comparing Scope and Source
of Advantage
Competitive Advantage
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Cost Uniqueness
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Cost Leader Differentiator
Focused
Cost
Focused
Differentiator
Integrated
Cost
Leader/
Differentiator
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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
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Cost Leadership Strategy
Cost saving actions required by this strategy:
building efficient 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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Discretionary decisions
Product features,
performance
Mix & variety of
products
Service levels
Small vs. large buyers
Process technology
Wage levels
Product features
Hiring, training,
motivation
Cost Drivers
Major Cost Drivers
Economies of scale
Learning/Spillovers
Capacity utilization
Integration
Vertical Linkages
Timing
Location
Political/regulatory
Interrelationships
(corporate)

Implications?
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Value-Chain example:
Cost Leader
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Questions Leading to
Lower Costs
1. How can an activity be performed
differently, eliminated, externalized?
2. How can linked value activities be
regrouped or reordered?
3. How can upstream/downstream
collaboration lower costs?
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Implementation Pitfalls
Exclusive focus on Mfg
Misunderstand drivers (ABC useful)
Failure to recognize/exploit
linkages (e.g., across the board cost
reductions)
Contradictions (e.g., gain mkt share
through ES but allow product clutter; cross
subsidies)
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Cost Leadership and the
Five Forces
Rivalry - competitors avoid price wars with
cost leaders
Buyers shift demand to you, increase
market power
Suppliers increased market power,
absorb cost increases (low cost position)
Entrants entry barriers (scale, learning)
Substitutes reinvest econ profit to
maintain advantage

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Major Risks of Cost
Leadership Strategy
There can only be one cost leader
Technological change can eliminate
cost advantage
Spillovers lead to imitation
Efficiency focus may create blind
spots re: customer preferences
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Differentiation Strategy
An integrated set of actions designed by a
firm to produce or deliver goods or
services that customers perceive as
adding value
price may exceed what the firms target
customers are willing to pay
Non-commodity products
customers value differentiated features
more than they value low cost
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Some Differentiation Themes
Unique taste
Dr. Pepper
Multiple features
Microsoft Windows and Office
Wide selection and one-stop shopping
Home Depot and Amazon.com
Reliable, superior service
FedEx, Ritz-Carlton
Spare parts availability
Caterpillar
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Themes
Prestige
Rolex
Quality manufacturing, few defects
Honda, Toyota
Technological leadership
3M Corporation, Intel
Top-of-the-line image
Ralph Lauren, Kiton

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Differentiation Strategy
Add downstream value
lower buyer cost
raise buyer performance
Cost
Add value to buyers value: reduce
downstream processing time, search time,
transaction costs, defect rates, direct costs,
learning curves, labor, space, installation,
etc. (e.g., CRM software)
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Factors That Drive
Differentiation
Value: Increase performance of buyers
value chain (or consumer perception)
Unique features, performance
Downstream channels (e.g., Catepillar dealer
network)
New technologies
Quality of inputs
Skill or know-how
Information
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Differentiation Strategy
Some differentiation actions required by
this strategy:
develop new systems and processes
signal and shape buyer perceptions
quality focus
capability in R&D
Implication - maximize human capital
contributions
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Value-Chain example:
Differentiation
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Differentiation and the
Five Forces
Rivalry - brand loyalty to differentiated
products reduces price competition
Buyers differentiated products less price
elastic
Suppliers absorb price increases (higher
margins), pass along higher prices (buyer
loyalty)
Entrants must surpass proven products or
be equivalent at lower price
Substitutes diff raises switching costs

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Pitfalls of Differentiation
Strategies
Differentiating on characteristics not
valued by buyers (e.g., HP)
Over-differentiating
Price premium is too high
Failing to signal value
Focusing on product instead of entire
value chain
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Focused Business-Level
Strategies
A focus strategy must exploit a narrow
targets 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
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Factors Driving
Focus Strategies
Large firms 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
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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
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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
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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 leaders price)
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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
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Rate of Profit
in Excess of the
Competitive Level
Industry
Attractiveness
Competitive
Advantage
Differentiation
Advantage
Cost
Advantage
Vertical Power
(buyer/seller)
Rivalry
Barriers to Entry
Brands
Product technology
Marketing
capabilities
Process technology
Plant size
Low-cost inputs
Firm size
Financial resources
Substitutability
Patents
Brands
Retaliatory
capability
Summary: Industry and Firm
Effects on Profit