©2004 by South-Western/Thomson Learning 1 Business-Level Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 5

©2004 by South-Western/Thomson Learning 1

Business-Level StrategyBusiness-Level Strategy

Robert E. Hoskisson

Michael A. Hitt

R. Duane Ireland

Chapter 5Chapter 5

2

Chapter 2Chapter 2Strategic LeadershipStrategic Leadership

Chapter 4Chapter 4The InternalThe InternalOrganizationOrganization

Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics

Chapter 9Chapter 9International StrategyInternational Strategy

Chapter 1Chapter 1Introduction toIntroduction to

Strategic ManagementStrategic Management

Chapter 3Chapter 3The ExternalThe ExternalEnvironmentEnvironment

Chapter 5Chapter 5Business-LevelBusiness-Level

StrategyStrategy

Chapter 8Chapter 8Acquisition andAcquisition and

Restructuring StrategiesRestructuring Strategies

Chapter 11Chapter 11Corporate GovernanceCorporate Governance

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy

Chapter 10Chapter 10Cooperative StrategyCooperative Strategy

Chapter 12Chapter 12Strategic EntrepreneurshipStrategic Entrepreneurship

StrategicAnalysis

StrategicThinking

CreatingCompetitiveAdvantage

MonitoringAnd CreatingEntrepreneurialOpportunities

The Strategic Management ProcessThe Strategic Management Process

Chapter 5Chapter 5Business-LevelBusiness-Level

StrategyStrategy

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Discussion QuestionsDiscussion Questions1. What role does the organization’s

concern for customers play in shaping its strategy?

2. What is business level strategy? What are some types of business level strategy?

3. What type of customers are necessary to pursue a cost leadership strategy? How is a cost leadership strategy developed?

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Discussion Questions (cont.)Discussion Questions (cont.)4. How does establishing the cost leadership

position deal with the five competitive forces? What are the risks of pursuing cost leadership?

5. What type of customers are necessary to pursue a differentiation strategy? How is a differentiation strategy developed?

6. How does establishing differentiation help a firm fend off threats from the five forces? What are the risks of pursuing differentiation?

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Discussion Questions (cont.)Discussion Questions (cont.)

7. When should a focus strategy be implemented? What are the risks of a focus strategy?

8. What is the integrated low-cost differentiation strategy? What are the arguments as to why it is increasing in importance? What are the risks associated with the integrated strategy?

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Discussion Question 1Discussion Question 1

What role does the organization’s concern for customers play in shaping its strategy?

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Managing Relationships With Managing Relationships With CustomersCustomers Customer relationships are strengthened by Customer relationships are strengthened by

offering them superior valueoffering them superior value– help customers to develop a new competitive help customers to develop a new competitive

advantageadvantage– enhance the value of existing competitive enhance the value of existing competitive

advantagesadvantages

Successful companies chart new Successful companies chart new competitive space in order to serve new competitive space in order to serve new customers as they simultaneously try to customers as they simultaneously try to find new ways to better server existing find new ways to better server existing customerscustomers

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Managing Relationships With Managing Relationships With CustomersCustomers Establish a competitive advantage along Establish a competitive advantage along

these dimensions:these dimensions:

ReachReach– the firm’s access and connection to customersthe firm’s access and connection to customers

RichnessRichness– the depth and detail of the two-way flow of the depth and detail of the two-way flow of

information between the firm and customersinformation between the firm and customers

AffiliationAffiliation– facilitating useful interactions with customersfacilitating useful interactions with customers

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The Central Role of CustomersThe Central Role of Customers

In selecting a business-level In selecting a business-level strategy, the firm determinesstrategy, the firm determines1. 1. whowho it will serve it will serve

2.2. whatwhat needs those target customers needs those target customers have that it will satisfyhave that it will satisfy

3.3. howhow those needs will be satisfied those needs will be satisfied

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CustomersCustomers

Basis for Customer SegmentationBasis for Customer Segmentation

ConsumerConsumerMarketsMarkets

IndustrialIndustrialMarketsMarkets

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Market Segmentation: Market Segmentation: Consumer MarketsConsumer Markets

Demographic factorsDemographic factors

ConsumerConsumerMarketsMarkets

Socioeconomic factorsSocioeconomic factors

Geographic Geographic factorsfactorsPsychological factorsPsychological factors

Consumption patternsConsumption patterns

Perceptual factorsPerceptual factors

Dem.

Soc.

Geo.Psy.

Con.

Per.

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Market Segmentation: Market Segmentation: Industrial MarketsIndustrial Markets

IndustrialIndustrialMarketsMarkets

End-use segmentsEnd-use segments

Product segmentsProduct segments

Geographic segmentsGeographic segments

Common buying factor Common buying factor segmentssegments

Customer size segmentsCustomer size segments

End

Pro.

Geo.

Buy.

Size

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What is business level strategy? What are some types of business level strategy?

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Core Competencies and StrategyCore Competencies and StrategyThe 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

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-levelBusiness-levelstrategystrategy

StrategyStrategy

CoreCorecompetenciescompetencies

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Business-Level StrategyBusiness-Level Strategy

Business-level strategyBusiness-level strategy: an integrated and : an integrated and coordinated set of commitments and actions coordinated set of commitments and actions the firm uses to gain a competitive the firm uses to gain a competitive advantage by exploiting core competencies advantage by exploiting core competencies in specific product marketsin specific product markets

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Key Issues of Business-Level Key Issues of Business-Level StrategyStrategy What good or service to offer customersWhat good or service to offer customers How to manufacture or create the good or How to manufacture or create the good or

serviceservice How to distribute the good or service in How to distribute the good or service in

the marketplacethe marketplace

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Types of Business-Level StrategiesTypes of Business-Level Strategies Business-level strategies are intended to Business-level strategies are intended to

create differences between the firm’s create differences between the firm’s position relative to those of its rivalsposition relative to those of its rivals

To position itself, the firm must decide To position itself, the firm must decide whether it intends to perform activities whether it intends to perform activities differently or to perform different activities differently or to perform different activities as compared to its rivalsas compared to its rivals

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Five Generic StrategiesFive Generic StrategiesCompetitive AdvantageCompetitive Advantage

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CostCost UniquenessUniqueness

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Cost Cost LeadershipLeadership

DifferentiationDifferentiation

Focused Cost Focused Cost LeadershipLeadership

Focused Focused DifferentiationDifferentiation

Integrated CostIntegrated CostLeadership/Leadership/

DifferentiationDifferentiation

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What type of customers are necessary to pursue a cost leadership strategy? How is a cost leadership strategy developed?

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Cost Leadership StrategyCost Leadership Strategy

An integrated set of actions designed to An integrated set of actions designed to produce or deliver goods or services at the produce or deliver goods or services at the lowest costlowest cost, , relative to competitorsrelative to competitors with with features that are acceptable to customersfeatures that are acceptable to customers

– relatively standardized productsrelatively standardized products– features acceptable to many customersfeatures acceptable to many customers– lowest competitive pricelowest competitive price

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Cost Leadership StrategyCost Leadership Strategy

Cost saving actions required by this 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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How to Obtain a Cost AdvantageHow to Obtain a Cost Advantage

Cost DriversCost Drivers Value ChainValue Chain

Determine and Determine and controlcontrol

Reconfigure, if Reconfigure, if neededneeded

• Alter production process• Alter production process• Change in automation• Change in automation• New distribution channel• New distribution channel

• Direct sales in place of indirect sales

• Direct sales in place of indirect sales

• New advertising media• New advertising media

• New raw material• New raw material

• Backward integration• Backward integration• Forward integration• Forward integration

• Change location relative to suppliers or buyers

• Change location relative to suppliers or buyers

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Product features Performance Mix & variety of

products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training,

motivation

Factors That Drive CostsFactors 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

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Questions Leading to Lower CostsQuestions Leading to Lower Costs

1.1. How can an activity be performed How can an activity be performed differently or even eliminated?differently or even eliminated?

2.2. How can a group of linked value activities How can a group of linked value activities be regrouped or reordered?be regrouped or reordered?

3.3. How might coalitions with other firms How might coalitions with other firms lower or eliminate costs?lower or eliminate costs?


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How does establishing the cost leadership position deal with the five competitive forces? What are the risks of pursuing cost leadership?

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Cost Leadership Strategy and the Cost Leadership Strategy and the Five Forces of CompetitionFive Forces of Competition

Rivalry Among Competing Rivalry Among Competing FirmsFirmsCan use cost leadership Can use cost leadership strategy to advantage since:strategy to advantage since:

competitors avoid price competitors avoid price wars with cost leaders, wars with cost leaders, creating higher profits for creating higher profits for the entire industrythe entire industry

Rivalry Among

Rivalry Among

Competing Firms

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Five Forces ofFive Forces ofCompetitionCompetition

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Bargaining Power of Bargaining Power of BuyersBuyersCan mitigate buyers’ power by:Can mitigate buyers’ power by:

driving prices far below driving prices far below competitors, causing them competitors, causing them to exit and shifting power to exit and shifting power with buyers back to the with buyers back to the firmfirm

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Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ power Can mitigate suppliers’ power by:by:

being able to absorb cost being able to absorb cost increases due to low cost increases due to low cost positionposition

being able to make very large being able to make very large purchases, reducing chance purchases, reducing chance of supplier using powerof supplier using power

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Threat of New EntrantsThreat of New EntrantsCan frighten off new entrants Can frighten off new entrants due to:due to: their need to enter on a large their need to enter on a large

scale in order to be cost scale in order to be cost competitivecompetitive

the time it takes to move the time it takes to move down the learning curvedown the learning curve

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Threat of Substitute Threat of Substitute ProductsProductsCost leader is well positioned Cost leader is well positioned to:to:

make investments to be make investments to be first to create substitutesfirst to create substitutes

buy patents developed by buy patents developed by potential substitutespotential substitutes

lower prices in order to lower prices in order to maintain value positionmaintain value position

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Structure for Cost Leadership Structure for Cost Leadership StrategyStrategy

Office of the PresidentOffice of the President

Centralized StaffCentralized Staff

MarketingMarketing PersonnelPersonnel

EngineeringEngineering OperationsOperations AccountingAccounting

• Operations is main functionOperations is main function

• Process engineering is Process engineering is emphasized over R&Demphasized over R&D

• Large centralized staffLarge centralized staff

• Formalized proceduresFormalized procedures

• Structure is mechanical, job Structure is mechanical, job roles highly structuredroles highly structured

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Risks of Cost Leadership StrategyRisks of Cost Leadership Strategy Processes used by the cost leader to Processes used by the cost leader to

produce and distribute its good or service produce and distribute its good or service could become obsolete because of could become obsolete because of competitors’ innovationscompetitors’ innovations

Too much focus by the cost leader on cost Too much focus by the cost leader on cost reductions may occur at the expense of reductions may occur at the expense of trying to understand customers’ perceptions trying to understand customers’ perceptions of “competitive levels of differentiationof “competitive levels of differentiation

Competitors may learn how to successfully Competitors may learn how to successfully imitate the cost leader’s strategyimitate the cost leader’s strategy


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What type of customers are necessary to pursue a differentiation strategy? How is a differentiation strategy developed?

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Differentiation StrategyDifferentiation Strategy

An integrated set of actions designed by a An integrated set of actions designed by a firm to produce or deliver goods or services firm to produce or deliver goods or services (at an acceptable cost) that customers (at an acceptable cost) that customers perceive as being different in ways that are perceive as being different in ways that are important to themimportant to them

– price for product can exceed what the firm’s price for product can exceed what the firm’s target customers are willing to paytarget customers are willing to pay

– nonstandardized productsnonstandardized products– customers value differentiated features more customers value differentiated features more

than they value low costthan they value low cost

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Differentiation StrategyDifferentiation Strategy Value provided by Value provided by unique features and unique features and

value characteristicsvalue characteristics Command premium priceCommand premium price High customer serviceHigh customer service Superior qualitySuperior quality Prestige or exclusivityPrestige or exclusivity Rapid innovationRapid innovation

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Differentiation StrategyDifferentiation Strategy

Differentiation actions required by this Differentiation actions required by this strategy:strategy:– developing new systems and processesdeveloping new systems and processes– shaping perceptions through advertisingshaping perceptions through advertising– quality focusquality focus– capability in R&Dcapability in R&D– maximize human resource contributions maximize human resource contributions

through low turnover and high motivationthrough low turnover and high motivation

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How to Obtain a Differentiation How to Obtain a Differentiation AdvantageAdvantage

Cost DriversCost Drivers Value ChainValue Chain

Control if Control if neededneeded

Reconfigure to Reconfigure to maximizemaximize

customer perceptions of uniquenesscustomer perceptions of uniquenesscustomer perceptions of uniquenesscustomer perceptions of uniquenesscustomer reluctance to switch to non-unique productcustomer reluctance to switch to non-unique productcustomer reluctance to switch to non-unique productcustomer reluctance to switch to non-unique product

• Raise performance of product or serviceRaise performance of product or service• Lower buyers’ costsLower buyers’ costs

• Create sustainability through:Create sustainability through:

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Factors That Drive DifferentiationFactors That Drive Differentiation Unique product featuresUnique product features Unique product performanceUnique product performance Exceptional services Exceptional services New technologiesNew technologies Quality of inputsQuality of inputs Exceptional skill or experienceExceptional skill or experience Detailed informationDetailed information Extensive personal relationships with Extensive personal relationships with

buyers and suppliersbuyers and suppliers

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Differentiation Strategy and the Differentiation Strategy and the Five Forces of CompetitionFive Forces of Competition

Rivalry Among Competing Rivalry Among Competing FirmsFirmsCan defend against Can defend against competition because:competition because:

brand loyalty to brand loyalty to differentiated product differentiated product offsets price competitionoffsets price competition

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How does establishing differentiation help a firm fend off threats from the five forces? What are the risks of pursuing differentiation?

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Bargaining Power of BuyersBargaining Power of BuyersCan mitigate buyer power Can mitigate buyer power because:because:

well differentiated products well differentiated products reduce customer sensitivity reduce customer sensitivity to price increasesto price increases

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Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ power Can mitigate suppliers’ power by:by:

absorbing price increases absorbing price increases due to higher marginsdue to higher margins

passing along higher passing along higher supplier prices because supplier prices because buyers are loyal to buyers are loyal to differentiated branddifferentiated brand

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Threat of New EntrantsThreat of New EntrantsCan defend against new Can defend against new entrants because:entrants because:

new products must surpass new products must surpass proven products or, proven products or,

new products must be at new products must be at least equal to performance least equal to performance of proven products, but of proven products, but offered at lower pricesoffered at lower prices

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Threat of Substitute Threat of Substitute ProductsProductsWell positioned relative to Well positioned relative to substitutes because:substitutes because:

brand loyalty to a brand loyalty to a differentiated product tends differentiated product tends to reduce customers’ testing to reduce customers’ testing of new products or of new products or switching brandsswitching brands

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OperationsOperations HumanHumanResourcesResources

Structure for Differentiation Structure for Differentiation StrategyStrategy

President andPresident andLimited StaffLimited Staff

MarketingMarketing

New ProductNew ProductR&DR&D

• Marketing is the main function for tracking new product ideasMarketing is the main function for tracking new product ideas• New product R&D is emphasizedNew product R&D is emphasized• Most functions are decentralizedMost functions are decentralized• Formalization is limited to foster change and promote new ideasFormalization is limited to foster change and promote new ideas• Overall structure is organic; job roles are less structuredOverall structure is organic; job roles are less structured

R&DR&D

FinanceFinanceMarketingMarketing

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Major Risks of Differentiation Major Risks of Differentiation StrategyStrategy Customers may decide that the price Customers may decide that the price

differential between the differentiated differential between the differentiated product and the cost leader’s product is product and the cost leader’s product is too largetoo large

Means of differentiation may cease to Means of differentiation may cease to provide value for which customers are provide value for which customers are willing to paywilling to pay

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Major Risks of Differentiation Major Risks of Differentiation StrategyStrategy Experience may narrow customer’s Experience may narrow customer’s

perceptions of the value of differentiated perceptions of the value of differentiated features of the firm’s productsfeatures of the firm’s products

Makers of counterfeit goods may attempt Makers of counterfeit goods may attempt to replicate differentiated features of the to replicate differentiated features of the firm’s productsfirm’s products


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When should a focus strategy be implemented? What are the risks of a focus strategy?

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Focused Business-Level Focused Business-Level StrategiesStrategies

A focus strategy must exploit a narrow A focus strategy must exploit a narrow target’s differences from the balance of target’s differences from the balance of the industry by:the industry by:– isolating a particular buyer groupisolating a particular buyer group– isolating a unique segment of a product isolating a unique segment of a product

lineline– concentrating on a particular concentrating on a particular

geographic marketgeographic market– finding their “niche”finding their “niche”

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Factors That May Drive Focused Factors That May Drive Focused StrategiesStrategies Large firms may overlook small nichesLarge firms may overlook small niches Firm may lack resources to compete in the Firm may lack resources to compete in the

broader marketbroader market May be able to serve a narrow market May be able to serve a narrow market

segment more effectively than can larger segment more effectively than can larger industry-wide competitorsindustry-wide competitors

Focus may allow the firm to direct Focus may allow the firm to direct resources to certain value chain activities resources to certain value chain activities to build competitive advantageto build competitive advantage

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Major Risks of Focused StrategiesMajor Risks of Focused Strategies Firm may be “outfocused” by competitorsFirm may be “outfocused” by competitors Large competitor may set its sights on Large competitor may set its sights on

your niche marketyour niche market Preferences of niche market may change Preferences of niche market may change

to match those of broad marketto match those of broad market


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What is the integrated low-cost differentiation strategy? What are the arguments as to why it is increasing in importance? What are the risks associated with the integrated strategy?

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Advantages of Integrated StrategyAdvantages of Integrated Strategy

A firm that successfully uses an A firm that successfully uses an integrated cost leadership/differentiation integrated cost leadership/differentiation strategy should be in a better position to:strategy should be in a better position to:– adapt quickly to environmental changesadapt quickly to environmental changes– learn new skills and technologies more learn new skills and technologies more

quicklyquickly– effectively leverage its core effectively leverage its core

competencies while competing against competencies while competing against its rivalsits rivals

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Benefits of Integrated StrategyBenefits of Integrated Strategy Successful firms using this strategy have Successful firms using this strategy have

above-average returnsabove-average returns Firm offers two types of values to Firm offers two types of values to

customerscustomers– some differentiated features (but less some differentiated features (but less

than a true differentiated firm)than a true differentiated firm)– relatively low cost (but now as low as relatively low cost (but now as low as

the cost leader’s price)the cost leader’s price)

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Using the Functional StructureUsing 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

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Major Risks of Integrated StrategyMajor Risks of Integrated Strategy An integrated cost/differentiation business An integrated cost/differentiation business

level strategy often involves compromises level strategy often involves compromises (neither the lowest cost nor the most (neither the lowest cost nor the most differentiated firm)differentiated firm)

The firm may become “stuck in the The firm may become “stuck in the middle” lacking the strong commitment middle” lacking the strong commitment and expertise that accompanies firms and expertise that accompanies firms following either a cost leadership or a following either a cost leadership or a differentiated strategydifferentiated strategy

Documents

©2004 by South-Western/Thomson Learning 1 Business-Level Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 5