Chapter 4 - Business-Level Strategy
Chapter 4: Business-Level Strategy – Comprehensive Notes
4-1 Understanding Business-Level Strategies
Strategy involves choosing among two or more alternatives.
A digital strategy uses digital technology to understand customers and their needs more clearly to develop innovations that create more value for those customers.
Information and the technologies to gather/analyze it are core to forming a digital strategy.
A digital strategy is developed and implemented in combination with other firm strategies.
By selecting and implementing one or more strategies, firms seek to:
gain strategic competitiveness
earn above-average returns
Characteristics of strategies:
purposeful
engage rivals in marketplace competition
reflect a shared understanding of the firm’s vision and mission
A strategy consistent with the external and internal environment marshals, integrates, and allocates resources, capabilities, and competencies to align with opportunities in the external environment.
4-2 Customers: Their Relationship with Business-Level Strategies
Strategic competitiveness occurs when the firm satisfies a group of customers using its competitive advantages in individual product markets.
Effective global competitors establish reach, richness, and affiliation with customers:
Reach: access and connection to customers
Richness: depth and detail of two-way information flow between firm and customers
Affiliation: ongoing customer interactions
Firms strengthen customer relationships by delivering superior value, which often leads to increased customer satisfaction.
Customer satisfaction is positively related to profitability because satisfied customers are more likely to be repeat customers and to refer others.
When devising a business-level strategy, managers emphasize:
who will be served (target customers)
what needs those target customers have that will be satisfied
how those needs will be satisfied
Who: Determining the Customers to Serve
A firm divides customers into groups based on differences in needs (market segmentation).
Market segmentation: process of clustering customers with similar needs into identifiable groups.
Firms can use a wide range of characteristics to segment markets (human or organizational).
Table 4.1 Basis for Customer Segmentation
Consumer Markets vs. Industrial Markets
Demographic factors (age, income, sex, etc.)
Socioeconomic factors (social class, stage in the family life cycle)
Geographic factors (cultural, regional, national differences)
Psychological factors (lifestyle, personality traits)
Consumption patterns (heavy, moderate, light users)
Perceptual factors (benefit segmentation, perceptual mapping)
End-use segments (identified by SIC code)
Product segments (based on technological differences or production economics)
Geographic segments (boundaries between countries or regional differences within them)
Common buying factor segments (cut across product market and geographic segments)
Customer size segments
Source: Jain (2009) Marketing Planning and Strategy
What: Determining Which Customer Needs to Satisfy
Needs (what) are related to a product’s benefits and features.
Successful firms learn how to deliver to customers what they want, when they want it, and recognize that consumer needs change.
Firms that fail to anticipate changing needs risk losing customers to competitors offering more value.
How: Determining Core Competencies to Satisfy Needs
Core competencies are resources and capabilities that serve as a source of competitive advantage.
Firms must consistently innovate and upgrade their competencies to meet/exceed customer expectations over time.
Strategic human resource management means HR practices reflect either best practice in the industry or best fit with environmental needs.
4-3 Business Models and Their Relationship with Business-Level Strategies
Business models are part of a comprehensive business-level strategy.
A business model influences strategy implementation through interdependent processes during execution.
A business model describes what the firm does to create, deliver, and capture value for stakeholders.
In short, a business model is a framework for creating/delivering/capturing value; a business-level strategy is the set of commitments and actions for competing and exploiting core competencies in a product market.
Why the distinction matters
The business model helps determine how to implement and adapt the strategy as conditions change.
If the business model is outdated, business-model innovation may be necessary, though this is difficult due to inertia.
Inertia: forces that resist organizational change.
Firms choose from many different business models (e.g., Freemium, Advertising, Peer-to-Peer, Franchise, Subscription, Digital Platform).
Adapting models to environment
Leaders should view business-model selection as one that may require adjustment as external conditions change.
Business-model innovation occurs when a current model is outdated and replaced with a newer one.
4-4 Cost Leadership Strategy
Definition: An integrated set of actions to produce products with features acceptable to customers at the lowest cost relative to competitors.
Characteristics:
Often sells standardized goods/services with competitive levels of differentiation to typical customers.
Process innovations are critical to achieving and maintaining cost leadership.
How cost leadership is executed
Firms strive to drive costs lower relative to competitors to offer low (or lowest) prices.
Focus on primary activities (inbound logistics, operations, outbound logistics) and explore all support activities for cost reductions.
Effective cost leadership allows earning above-average returns despite strong competitive forces.
Five Forces considerations for Cost Leadership
Rivalry with existing competitors: cost leaders can deter price competition due to cost advantage; rivalry influenced by: organizational size, rival resources, market dependence, location, prior interactions, and reach/richness/affiliation with customers.
Bargaining power of buyers (customers): powerful buyers can press for lower prices; price reductions typically limited to the cost leader’s next-most-efficient competitor’s level unless the leader pushes others out.
Bargaining power of suppliers: cost leaders often operate with wider margins; powerful leaders may press suppliers to lower prices.
Potential entrants: efficient cost leadership creates barriers; entrants may accept lower returns until gaining efficiency.
Product substitutes: cost leaders can reduce prices to retain customers and counter substitutes.
Competitive risks of cost leadership
Loss of competitive advantage to newer technologies.
Failure to detect changes in customer needs.
Imitation of the cost leadership advantage by competitors’ own strategies.
4-5 Differentiation Strategy
Definition: An integrated set of actions to produce products that customers perceive as different in meaningful ways.
Differentiators target customers who value unique features, not just low cost.
Product innovation is critical to successful differentiation.
The firm aims to offer distinctive products that customers value more than the lower price; differentiation creates added value beyond price alone.
How differentiation is sustained
Continuously upgrade differentiated features that customers value.
Create new valuable features with minimal cost increases.
Firms attempt to differentiate on multiple dimensions and link activities in the value chain to support differentiation.
Value-chain linkage and competitive positioning
The firm uses the value chain to connect activities that create differentiated value for customers.
Differentiated products often command premium pricing due to perceived extra value.
Five Forces considerations for Differentiation
Rivalry with existing competitors: differentiated products foster brand loyalty, reducing price sensitivity and dampening rivalry.
Bargaining power of buyers: buyers may tolerate price increases if differentiated products meet distinctive needs at acceptable costs.
Bargaining power of suppliers: higher costs from suppliers can be absorbed by high margins or passed to customers.
Product substitutes: brand loyalty reduces the likelihood of switching to substitutes.
Potential entrants: loyalty and product uniqueness create barriers.
Competitive risks of differentiation
Customer groups may decide features are no longer worth a premium.
Differentiated features may fail to create the value needed to justify premium pricing.
Competitors may offer similar features at lower costs.
Counterfeiting can undermine differentiation.
Failure to meet customer expectations in differentiation efforts.
4-6 Focus Strategies
Definition: An integrated set of actions to produce products serving the needs of a particular customer segment.
Market segments served may include:
a particular buyer group (e.g., senior citizens)
a different segment of a product line (e.g., professional painters)
a different geographic market (e.g., northern vs southern regions)
a certain technology (e.g., AI or robotics)
How focus strategies succeed
Focus strategy succeeds when it serves a segment whose unique needs are so specialized that broad-based competitors do not serve them well.
Focus creates value for a segment that exceeds value created by industry-wide competitors.
The focus strategy can be implemented as:
focused cost leadership
focused differentiation
Focused cost leadership vs. focused differentiation
Activities for focused cost leadership closely mirror industry-wide cost leadership.
Activities for focused differentiation mirror industry-wide differentiation.
The approach to dealing with the five competitive forces is similar to the industry-wide variants.
Competitive risks of Focus Strategies
Competitor can “out focus” the focuser by targeting an even more narrowly defined market.
An industry-wide firm may deem the focused segment attractive and pursue it.
Over time, differences between narrow market needs and the broader market may diminish, reducing focus strategy effectiveness.
4-7 Integrated Cost Leadership/Differentiation Strategy
Definition: Firms engage simultaneously in primary value-chain activities and support functions to achieve both low cost and some product differentiation.
Goal: Produce relatively low-cost products with some differentiated features that customers value.
Firms using this strategy tend to adapt quickly to new technologies and rapid external changes.
Key components of the integrated strategy
Developing two sources of competitive advantage expands the set of primary value-chain activities and support functions in which the firm becomes competent.
Flexibility is required to learn how to combine low-cost operations with differentiated features.
Three sources of flexibility used to implement this strategy:
Flexible Manufacturing Systems (FMS)
Information networks
Total Quality Management (TQM) systems
Flexible Manufacturing Systems (FMS)
A computer-controlled process allowing production of a variety of products in moderate, flexible quantities with minimal manual intervention.
Goals:
eliminate the traditional “low cost vs. product variety” trade-off
allow quick changes between products
increase responsiveness to customer needs while retaining low-cost advantages and consistent quality
reduce lot sizes and increase capacity to serve narrow market segments
Information networks
Link firms with suppliers, distributors, and customers.
Customer Relationship Management (CRM) is a key information-network process used to manage customer relationships and expectations about quality and delivery speed.
Total Quality Management (TQM) systems
Involves implementing quality tools and techniques to deliver high-quality products/services.
TQM aims to:
increase customer satisfaction
cut costs
reduce time-to-market for innovations
Effective TQM supports flexibility to simultaneously increase differentiated features and reduce costs.
Competitive risks of Integrated Cost Leadership/Differentiation
The primary risk is producing products that do not offer sufficient value in either dimension, leading to a “stuck in the middle” situation.
Firms stuck in the middle tend to be at a competitive disadvantage and may earn only average returns.
Connections to Theory and Practice
All five business-level strategies are contingent on external opportunities and threats and internal strengths and weaknesses.
No single strategy is universally superior; suitability depends on the environment and firm resources.
The integrated approach is a balancing act between efficiency and uniqueness, requiring organizational flexibility and continuous innovation.
Practical Implications and Examples (Synthesized from Text)
Digital strategy is not standalone; it must integrate with the firm’s broader strategy and capabilities.
Firms should continuously assess customer reach, richness of information exchange, and affiliation to strengthen competitiveness.
When selecting a business model, leaders should anticipate possible need for evolution due to external changes (technology shocks, consumer behavior shifts).
In cost leadership, firms should focus on inbound/outbound logistics and supportive activities to uncover cost-cutting opportunities while maintaining quality.
In differentiation, ongoing product innovation and feature upgrades are essential to preserve perceived value and price premium.
Focus strategies require deep understanding of a narrow segment’s needs and the ability to outperform broad market competitors in that segment.
Integrated cost leadership/differentiation demands capabilities across the value chain and robust analytics to avoid “stuck in the middle.”
Closing Notes
The effectiveness of any business-level strategy depends on alignment with external opportunities/threats and internal resources/capacities (core competencies).
Successful firms learn to integrate activities to create superior customer value while managing costs and leveraging capabilities across the value chain.
Ethical and practical implications include responsible use of customer data in digital strategies, fair competitive practices, and sustainable innovation that aligns with stakeholder interests.