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whole or part.
Chapter 8
Business Strategy
Chapter Summary
Managers in single-product-line business units examine their business’s value chain to identify
existing or potential activities around which they can create sustainable competitive advantages.
Managers in single- or dominant-product/service businesses face two interrelated issues: (1) They
must choose which grand strategies make best use of their competitive advantages. (2) They must
ultimately decide whether to diversify their business activity. Twelve grand strategies are
identified in this chapter along with three frameworks that aid managers in choosing which grand
strategy.
Learning Objectives
1. Determine why a business would choose a low-cost, differentiation, or speed-based
strategy.
2. Explain the nature and value of a market focus strategy.
Lecture Outline
I. Introduction
A. Strategic analysis and choice is the phase of the strategic management process in which
1. Their starting point is to evaluate and determine which competitive advantages
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whole or part.
2. Businesses with a dominant product or service line must also choose among
addressed with two basic issues:
1. What strategies are most effective at building sustainable competitive advantages
2. Should dominant-product/service businesses diversify to build value and
II. Evaluating and Choosing Business Strategies: Seeking Sustained Competitive Advantage
A. Business managers evaluate and choose strategies that they think will make their
1. The two most prominent sources of competitive advantage can be found in the
2. Businesses that create competitive advantages from one or both of these sources
usually experience above-average profitability within their industry.
a) Businesses that lack a cost differentiation advantage usually experience
b) Two well-recognized studies found that businesses that do not have either
form of competitive advantage perform the poorest among their peers, while
3. Initially, managers were advised to evaluate and choose strategies that emphasized
one type of competitive advantage.
a) Often referred to as generic strategies, firms were encouraged to become
b) In so doing, it was logical that organizational members would develop a clear
4. The studies mentioned here, and the experience of many other businesses, indicate
that the highest profitability levels are found in businesses that possess both types
of competitive advantage at the same time.
a) In other words, businesses that have one or more sources/capabilities that let
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b) So the challenge for today’s business managers is to evaluate and choose
c) Exhibit 8.1, Top Global Strategist, shows how Facebook founder Mark
B. Evaluating Cost Leadership Opportunities
1. Business success built on cost leadership requires the business to be able to
provide its product or service at a cost below what its competitors can achieve.
a) Through the skills and resources identified in Exhibit 8.2, Evaluating a
Business’s Cost Leadership Opportunities, a business must be able to
b) Exhibit 8.2 provides examples of such low-cost strategies.
c) Strategists examining their business’s value chain for low-cost leadership
2. Low-cost activities that are sustainable and that provide one or more of these
a) Low-cost advantages that reduce the likelihood of pricing pressure from
buyers
(1) When key competitors cannot match prices from the low-cost leader,
b) Truly sustained low-cost advantages may push rivals into other areas
(1) Intense, continued price competition may be ruinous for all rivals, as
c) New entrants competing on price must face an entrenched cost leader without
(1) easyJet, a British startup with a Southwest Airlines copycat strategy,
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whole or part.
(2) Analysts caution for some time that, British Airways, KLM’s no-frills
offshoot Buzz, and Virgin Express will simply match fares onf easyJet’s
d) Low-cost advantages should lessen the attractiveness of substitute products
(1) A serious concern of any business is the threat of a substitute product in
(2) Low-cost advantages allow the holder to resist this happening because it
e) Higher margins allow low-cost producers to withstand supplier cost increases
and often gain supplier loyalty over time
(1) Sudden, particularly uncontrollable increases in the costs suppliers face
(2) Once managers identify opportunities to create cost advantage-based
f) Many cost-saving activities are easily duplicated
(1) Computerizing certain order entry functions among hazardous waste
(2) Rivals quickly adapted, adding similar capabilities with similar effects
g) Exclusive cost leadership can become a trap
(1) Firms that emphasize lowest price and can offer it via cost advantages
(2) Particularly with commodity-type products, the low-cost leader seeking
h) Obsessive cost cutting can shrink other competitive advantages involving key
product attributes
key attribute of the original products.
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whole or part.
i) Cost differences often decline over time
(1) As products age, competitors learn how to match cost advantages.
(2) Absolute volumes sold often decline.
3. Once business managers have evaluated the cost structure of their value chain,
determined activities that provide competitive cost advantages, and considered
their inherent risks, they start choosing the business’s strategy. Those managers
a) Evaluating differentiation opportunities
(1) Differentiation requires that the business have sustainable advantages
that allow it to provide buyers with something uniquely valuable to
them.
(a) A successful differentiation strategy allows the business to provide
(b) The buyer feels the additional cost to buy the product or service is
(2) Differentiation usually arises from one or more activities in the value
chain that create a unique value important to buyers.
imitation by competitors.
(3) Exhibit 8.3, Evaluating a Business’s Differentiation Opportunities,
provides examples of the types of key skills and resources on which
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strategy.
b) Rivalry is reduced when a business successfully differentiates itself
3. Managers examining differentiation-based advantages must take potential risks
a) Imitation narrows perceived differentiation, rendering differentiation
c) The cost difference between low-cost competitors and the differentiated
(1) Buyers may begin to choose to sacrifice some of the features, services,
C. Evaluating Speed as a Competitive Advantage
1. Speed-based strategies, or rapid response to customer requests or market and
a) Speed is certainly a form of differentiation, but it is more than that.
b) Speed involves the availability of a rapid response to a customer by
c) While low cost and differentiation may provide important competitive
d) Exhibit 8.4, Strategy in Action, describes how Michael O’Leary built
with speed-based competitive advantage.
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whole or part.
2. Speed-based competitive advantages can be created around several activities:
a) Customer responsiveness
customer loyalty quickly.
c) Product or service improvements
cannot do this.
d) Speed in delivery or distribution
(1) Firms that can get you what you need when you need it, even when that
e) Information Sharing and Technology
(1) Speed in sharing information that becomes the basis for decisions,
businesses.
(2) Telecommunications, the Internet, and networks are but a part of a vast
3. These rapid response capabilities create competitive advantages in several ways.
a) They create a way to lessen rivalry because they have availability of
b) It can allow the business to change buyers more, engender loyalty, or
c) Particularly where impressive customer response is involved, businesses can
d) Finally, substitute products and new entrants find themselves trying to keep
4. While the notion of speed-based competitive advantage is exciting, it has risks
managers must consider.
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a) First, speeding up activities that haven’t been conducted in a fashion that
b) Second, some industries—stable, mature ones that have very minimal levels
c) Customers in such settings may prefer the slower pace or the lower costs
D. Evaluating Market Focus as a Way to Competitive Advantage
1. Small companies, at least the better ones, usually thrive because they serve narrow
market niches.
a) This is usually called market focus, the extent to which a business
b) The narrow focus may be geographically defined, or defined by product type
2. Market focus allows some businesses to compete on the basis of low cost,
differentiation, and rapid response against much larger businesses with greater
resources.
a) Focus lets a business “learn” its target customers—their needs, special
b) Low costs can also be achieved, filling niche needs in a buyer’s operations
c) Cost advantage often centers around the high level of customized service the
d) And perhaps the greatest competitive weapon that can arise is rapid response.
f) Often the needs of that narrow set of customers represent a large part of the
g) Exhibit 8.6, Top Global Strategist, illustrates how China’s Zhang Rumin
3. The risk of focus is that you attract major competitors who have waited for your
business to “prove” the market.
a) Domino’s proved that a huge market for pizza delivery existed and now faces
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c) And perhaps the greatest risk of all is slipping into the illusion that it is focus
4. Managers evaluating opportunities to build competitive advantage should link
strategies to resources, capabilities, and value chain activities that exploit low
cost, differentiation, and rapid response competitive advantages.
a) When advantageous, they should consider ways to use focus to leverage
E. Stages of Industry Evolution and Business Strategy Choices
1. The requirements for success in industry segments change over time.
a) Strategists can use these changing requirements, which are associated with
of these stages.
2. Competitive Advantage and Strategic Choices in Emerging Industries
a) Emerging industries are newly formed or re-formed industries that typically
(1) Emerging industries of the last decade have been the Internet browser,
b) From the standpoint of strategy formulation, the essential characteristic of an
emerging industry is that there are no “rules of the game.”
(1) The absence of rules presents both a risk and an opportunity—a wise
c) Business strategies must be shaped to accommodate the following
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whole or part.
(1) Technologies that are most proprietary to the pioneering firms and
(2) Competitor uncertainty because of inadequate information about
(3) High initial costs but steep cost declines as the experience curve takes
effect.
(4) Few entry barriers, which often spurs the formation of many new firms.
d) For success in this industry setting, business strategies require one or more of
these features:
(1) The ability to shape the industry’s structure based on the timing of
entry, reputation, success in related industries or technologies, and role
in industry associations.