Video Notes: Business Level Strategy and Porter's Generic Strategies
Quiz and Exam Context
This week's quiz is in essay format, different from the usual multiple-choice/true-false format.
You may use outside material on the quiz; the exam will have limited material.
The quiz will ask you to summarize the different business level strategies and provide examples.
Grading focus: general understanding of the concept (definition and characteristics) and application to a specific real-world example or past experience.
During preparation, think in two ways: understand the concept independently of examples, and then apply it to a concrete example or real-world scenario you are familiar with (work experience, news, etc.).
The horizon exam (future exams) will be posted on iLearn; the fifteenth is mentioned as release day, but it will be available this week if not yet posted.
Best study approach: use the key topics study guide document, which includes past exam questions and the style of questions; exams are essay-based with no multiple choice/true-false.
Study strategy: pull up the key topics document and draft example responses to each item, and time how long it takes to answer.
Administrative note on writing: the school emphasizes improving writing via Grammarly; students should use the premium version if available, otherwise the free version. After drafting, run through Grammarly and show a screenshot of the Grammarly output to demonstrate usage.
Practice tip: write your essay as if nothing unusual is happening, then capture a screenshot of the Grammarly feedback and include it.
Instructor mentions an upcoming exam: posted on iLearn, or will be posted this week to give you time to prepare.
Overall goal: connect concepts to practical, real-world applications and communicate that understanding clearly in essay form.
Core Concept: What is a Business Level Strategy?
Business level strategy is the plan to compete successfully in a specific product market and achieve above-average returns by exploiting core competencies.
It is the subset of strategy focused on a particular business unit or market segment, as opposed to corporate level strategy, which oversees a portfolio of businesses.
Core idea: gain a competitive advantage by either performing activities differently (process-based) or by performing different activities (product-based).
The ultimate objective is to create and capture value: superior value for customers and superior value capture for the firm (profitability).
A practical way to frame it: the business level strategy answers: who is the target, what needs are addressed, and how resources are organized to meet those needs.
Distinguishing Corporate vs. Business Level Strategy
Corporate level strategy asks how to manage a portfolio of businesses under a corporate umbrella (e.g., GM with Chevrolet, GMC, Cadillac).
Business level strategy asks what Chevrolet should do in its specific market space, independent of corporate directives.
The distinction matters for where decisions are made about resource deployment and competitive positioning within a market segment.
Two Fundamental Paths to Competitive Advantage
There are two main sources of competitive advantage at the business level:
Perform activities differently (process-based difference; e.g., how things are produced or delivered).
Perform different activities (product-based difference; e.g., selling a different product to a different market).
These differences enable above-average performance and help monetize value creation.
Foundational relation to strategy: leverage resources and capabilities to create superior customer value and superior firm value.
Who/What/How Framework (Market, Need, Resources)
Who: market segmentation – identifying and targeting distinct customer groups with similar needs.
What: understanding customer needs and using R&D to address those needs.
How: resource orchestration – acquiring, bundling, and leveraging resources to support the strategy.
The intersection of Who, What, and How is where business level strategy typically lies (a Venn diagram perspective).
Market segmentation examples: demographic, socioeconomic, geographic, psychological, life cycle stages, urban vs rural, regional differences, etc.
The purpose of segmentation: create targetable groups and tailor value propositions to meet their needs more effectively than competitors.
Important caveat: segmentation should be justifiable with actual business value (not differentiation for its own sake).
Value Creation and Marketing Role
A business level strategy must create superior customer value and communicate that value effectively.
Marketing is key to communicating value and building a positive customer relationship, which drives repeat business and word-of-mouth.
Branding, messaging, and perception influence the perceived utility of a product or service, especially for differentiated offerings.
Resource Orchestration and Examples
Resource orchestration framework: acquire, bundle, and leverage resources to exploit market opportunities.
Example: Disney acquisition of Pixar to supplement content capabilities and reach a new market segment (acquire core competencies, bundle them with existing capabilities, and leverage for new products like Toy Story and related properties).
Strategic HRM (human resource management) is relevant for ensuring the right people occupy the right roles to execute the strategy.
Business Models and Their Relationship to Strategy
Business model: the framework for creating, delivering, and extracting value; what the firm plans to do to satisfy stakeholders.
Business models are structural and can be rigid; different models fit different products, processes, and markets.
Relationship to business level strategy: the strategy is the path or actions within the framework provided by the business model.
Examples of business model types (brief descriptions):
Freemium: basic free version, paid premium features (e.g., Dropbox).
Advertising model: revenue from advertisers using user data (e.g., Facebook, Google).
Peer-to-peer platforms: connect buyers and sellers (e.g., Uber, Lyft, Airbnb).
Franchise model: expand via franchising for a fee.
Subscription model: recurring revenue, predictable cash flow (e.g., Netflix).
Digital platform model: online platforms enabling independent transactions (e.g., eBay, Etsy).
Autonomous complementors: ecosystem-based models (briefly mentioned).
Note: The discussion intentionally avoids deep dives into every model; the focus is on understanding how business models frame value creation and capture.
Porter's Generic Strategies (Top Four + Add-On)
Porter’s generic strategies describe four primary avenues for competitive advantage within a given product market, plus an often-discussed integrated option.
Core dimensions:
Source of competitive advantage: cost leadership vs differentiation.
Scope of the market: broad market vs narrow (focused) market.
The matrix of positions (simplified):
Cost Leadership in a Broad Market
Differentiation in a Broad Market
Focus Cost Leadership in a Narrow Market
Focus Differentiation in a Narrow Market
Optional integrated Cost Leadership + Differentiation (hybrid, challenging to execute)
Importantly, there is no universally superior strategy; success depends on fit with internal strengths and external opportunities and threats.
Cost Leadership (Broad Market)
Definition: offer the lowest cost product in the market while ensuring the product remains acceptable (meets base customer needs).
Key characteristics:
Lowest cost position; acceptable product quality (not the best, but adequate).
Broad market focus (targets the middle majority of customers).
Emphasizes process innovations and operational efficiency (not product innovations).
Heavy focus on logistics and operations (inbound/outbound logistics) and manufacturing efficiency.
Economies of scale are central to sustaining cost advantages; high-volume production is a prerequisite.
Use of automation and standardized products to minimize costs (fewer SKUs, standardized lines).
Support activities tailored to reduce costs (e.g., outsourcing HR to minimize overhead).
Strengths: potential for high volume and market coverage; lower prices attract broad customer base.
Weaknesses/Risks:
Obsolescence risk if technology or consumer preferences shift.
If competitors imitate efficiencies or volumes decline, the cost advantage erodes.
Examples: Walmart (everyday low prices, massive volume, efficient logistics), Southwest Airlines (low-cost, high turnaround, point-to-point), IKEA (flat-pack, standardized products, cost-efficient operations).
Differentiation (Broad Market)
Definition: offer products/services with unique features valued by customers, justifying a premium price.
Key characteristics:
Broad market focus; emphasis on product innovation and branding.
Strong marketing to communicate the value proposition; high reliance on branding.
Continuous product development and feature enhancements to stay ahead of the market.
Higher perceived quality and additional value relative to competitors.
Strengths: ability to command premium margins; brand loyalty and customer perceptions can sustain higher prices.
Risks: customers may not value the differentiating features enough to pay a premium; features may fail to resonate with target segments; rapid imitation by competitors.
Examples: Coca-Cola's New Coke learning example (premium features that failed to resonate); Apple (premium devices with strong ecosystem and brand); Starbucks (ambience, customization, premium coffee experience); Tesla (differentiation via drivetrain and ecosystem; debate about breadth of market as it matures); Patagonia (focused differentiation in outdoor gear with sustainability ethos).
Focus Cost Leadership (Narrow Market)
Definition: target a narrow market segment with the lowest possible cost while meeting the segment’s needs.
Key characteristics:
Narrow scope; lower cost through high efficiency in a specific segment.
Fewer product variants; simplified operations; deep understanding of the segment’s needs.
Typically requires strong pricing strategy and selective distribution to maintain cost advantages.
Examples and illustrations:
ALDI (limited SKUs, private-label basics, cost-focused, rural/low-income targeting in some interpretations).
Budget airlines (e.g., Spirit, Frontier, Allegiant) focusing on short-haul routes and no-frills service.
Dollar General (focus on rural and lower-income areas with a smaller store footprint and limited range).
Risks: requires precise segmentation and efficient execution; competitive incursions by broader players into similar low-cost spaces can erode advantages.
Focus Differentiation (Narrow Market)
Definition: target a narrow market segment with a differentiated offering that is highly valued by that segment.
Key characteristics:
High-quality, customized, or specialized products tailored to a specific sub-market.
Premium pricing justified by uniqueness, exclusivity, or superior performance.
Examples: Lululemon (athleisure with strong branding and product differentiation), Patagonia (outdoor gear with ecological/societal emphasis), focused luxury or niche brands.
Risks: competition from other niche players can erode differentiation; if the market segment contracts or the offer is no longer seen as unique, the advantage can vanish.
Integrated Cost Leadership and Differentiation (Hybrid)
Definition: attempting to achieve both low costs and some level of differentiation simultaneously.
Practical challenge: requires flexible capabilities and efficient operations across both cost discipline and product innovation.
Common critique: many firms struggle to avoid being stuck in the middle (neither cost leader nor differentiated well enough).
Example often cited: Target (attempts to blend cost efficiency with differentiated offerings, though execution varies by period).
Risks: resource constraints can lead to lukewarm performance across both axes; the Parks and Recreation anecdote (Leslie Knope) illustrates the risk of trying to do two big things at once.
Key Takeaways and Practical Implications
There is no one-size-fits-all strategy; fit matters: internal strengths, external opportunities, and market dynamics.
The best strategy depends on the firm’s capabilities and the structure of the market; attempt to match your strengths to the most valuable sources of advantage.
Avoid being “stuck in the middle” by overcommitting to both cost leadership and differentiation without a clear execution plan.
Use the Who/What/How framework to align market targeting, customer needs, and resource orchestration with the chosen strategy.
In practice, firms often blend strategies to some extent (e.g., Target) but must manage the trade-offs carefully.
Quick Reference: Key Terms and Formulas (LaTeX)
Sources of competitive advantage: ext{Competitive advantage}
i egin{cases} ext{Cost leadership} \ ext{Differentiation} \[2mm] ext{(or a focused variant)} \[2mm] ext{Integrated cost leadership and differentiation (hybrid)} \ ext{(hybrid is difficult to sustain)} \ ext{Broad vs Narrow scope} \[2mm] ext{Scope}
i egin{cases} ext{Broad} \ ext{Narrow} \ ext{(for focus strategies)} \ ext{(matrix positioning)} \ ext{Position grid:} ext{ see matrix below} \ ext{Product/Process distinction:} ext{ ext{process-based vs product-based differences}} \ ext{Economies of scale:} ext{ key driver for cost leadership} \ ext{R&D intensity and branding:} ext{ drivers for differentiation} \ ext{Market segmentation:} ext{ Who, What, How } \ ext{Resource orchestration:} ext{ Acquire, Bundle, Leverage} \ ext{Value and cost trade-offs:} ext{ value capture vs value creation} \ \ \ egin{array}{c|cc} & ext{Cost Leader} & ext{Differentiator} \ ext{Broad market} & ext{Cost Leadership} & ext{Differentiation} \ ext{Narrow market} & ext{Focus Cost Leadership} & ext{Focus Differentiation} \ \end{array}Core strategy definition (simplified): ext{Strategy} = ext{Integrated, coordinated commitments and actions to gain a competitive advantage by exploiting core competencies in a specific product market.}
Study and Exam Preparation Notes
Focus on the four main Porter's generic strategies and the integrated hybrid as a higher-risk option.
Memorize examples for each strategy and understand why the example fits (cost structure, differentiation drivers, and market scope).
Practice drafting essay responses that explain both the concept and its practical application with a concrete example.
Review the key topics study guide for past exam questions and typologies of questions you may encounter.
Prepare to discuss the role of marketing in differentiation, the importance of value communication, and how segmentation informs strategy.
Be ready to discuss risks associated with each strategy (e.g., imitation, shifts in customer preferences, niche competition, or being outfocused).
For the exam, plan to deliver a coherent essay that defines the strategy, explains the source of advantage, illustrates with a real-world example, and analyzes risks and fit with the market context.
Closing Reminder
If the key topics document is not visible, notify the instructor so it goes live for practice.
The exam timing, format, and content emphasis are designed to test both understanding and practical application of business level strategies.
Reach out with questions about any concept or example to ensure clear understanding before the exam.