Chapter 4: Business-Level Strategy
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Chapter 4
Business-Level Strategy
LEARNING OBJECTIVES
1. Define business-level strategy.
2. Discuss the relationship between customers and business-level strategies in terms of who,
what, and how.
3. Explain the differences among business-level strategies.
4. Use the five forces of competition model to explain how above-average returns can be
earned through each business-level strategy.
5. Describe the risks of using each of the business-level strategies.
CHAPTER OUTLINE
Opening Case: Hain Celestial Group: A Firm Focused on “Organic” Differentiation
CUSTOMERS: THEIR RELATIONSHIP WITH BUSINESS-LEVEL STRATEGIES
Effectively Managing Relationships with Customers
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LECTURE NOTES
Chapter Introduction: Firms that perform well, even in very competitive industries, will
follow some pattern of decision-making and execution that is internally consistent. That
The company grew through a series of acquisitions of entrepreneurial start-ups. These
acquisitions allowed Hain Celestial to become the largest supplier to natural food retailer
Whole Foods Markets. The natural food trend has allowed the company to sell their branded
products to traditional grocery store chains, accounting for about 60 percent of its U.S. sales.
Meanwhile, large branded food firms such as Kellogg’s, Kraft Foods Group, Campbell’s, and
companies differentiate themselves from one another. Aside from the dimensions listed
in the Opening Case, ask students to identify other ways that Hain’s achieves
differentiation. Students should come to realize that Hain’s and its competitors have
differentiated themselves on several dimensions and that to grow in a saturated and
highly competitive industry they need to offer value that exceeds that of its competition.
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1
Define business-level strategy.
BUSINESS-LEVEL STRATEGY
Business-level strategies represent integrated and coordinated sets of actions that are taken to
through business-level strategies, which detail actions taken to provide value to customers
and gain a competitive advantage by exploiting core competencies in specific, individual
product or service markets. In other words, business-level strategies are developed based on a
firm’s core competencies and indicate how an organization chooses to compete in a
particular market to gain a competitive advantage over competitors.
2
Discuss the relationship between customers and business-
level strategies in terms of who, what, and how.
CUSTOMERS: THEIR RELATIONSHIP WITH BUSINESS-LEVEL STRATEGIES
Chapter 4: Business-Level Strategy
• Focus on satisfying the needs of some group of customers
• Determine how to compete (select a strategy) that enables them to satisfy customer needs
The firm’s relationships with its customers are strengthened when it delivers superior value
to them.
Effectively Managing Relationships with Customers
Reach, Richness, and Affiliation
Who: Determining the Customers to Serve
Table Note
It might be interesting to ask students which of the dimensions in this table help
identify the most promising market segments for which type of business.
TABLE 4.1
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• Demographic factors
• Socioeconomic factors
• Geographic factors
• Psychological factors
• Consumption patterns
• Perceptual factors
• End-use segments
• Product segments
• Geographic segments
• Common buying factor segments
• Customer size segments
Teaching Note
In the US, the teenage market segment is a competitively relevant customer group.
Generate discussion by asking students about their assessments of the size, growth,
and spending-related characteristics of this market segment.
What: Determining Which Customer Needs to Satisfy
As noted in Chapter 3, one challenge for firms is to identify ways in which they can bundle
their resources and capabilities to create value for customers, because given the choice,
customers are most interested in purchasing products that both satisfy their needs and
provide value.
Chapter 4: Business-Level Strategy
Describe the risks of using each of the business-level
strategies.
In any given industry, there is great variety among consumers in terms of their needs, e.g.,
high-quality, lower-cost with acceptable quality, quick delivery.
Target, a retail store and online marketer, has been successful analyzing its many sources of
data through online sources of many customer demographics. It utilizes this information to
develop its promotion and marketing strategies.
How: Determining Core Competencies Necessary to Satisfy Customers’ Needs
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THE PURPOSE OF A BUSINESS-LEVEL STRATEGY
Business-level strategy creates differences between the firm’s position and those of its
competitors. To position itself differently from competitors, a firm must decide whether it
intends to perform activities differently or to perform different activities.
TYPES OF BUSINESS-LEVEL STRATEGIES
FIGURE 4.1
Five Business-Level Strategies
Firms can choose one of five strategies from the generic strategy matrix based on the source
of competitive advantage – uniqueness or cost – and breadth of competitive scope – broad or
narrow.
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by the firm’s unique resources, capabilities, and core competencies. It is critical, therefore,
for the firm to select a business-level strategy that is based on a match between the
opportunities and threats in its external environment and the strengths of its internal
environment as shown by its core competencies.
Cost Leadership Strategy
Firms that wish to be successful by following a cost-leadership strategy must maintain
constant efforts aimed at lowering costs (relative to rivals’ costs) and creating value for
customers. Cost-reduction strategies can include:
• Building efficient-scale facilities
• Establishing tight control of production and overhead costs
• Minimizing the costs of sales, product research and development, and service
• Investing in state-of-the-art manufacturing technologies
Figure Note
Figure 4.2 points out that the critical focus in successfully implementing a cost
leadership strategy is on efficiency and cost reduction throughout the value delivery
system.
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FIGURE 4.2
Examples of Value-Creating Activities Associated with the Cost Leadership Strategy
As suggested in Figure 4.2, the firm’s focus throughout each of its value chain activities and
support functions is on the following:
Rivalry with Existing Competitors
Bargaining Power of Buyers (Customers)
Bargaining Power of Suppliers
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Potential Entrants
Product Substitutes
Competitive Risks of the Cost Leadership Strategy
Despite the attractiveness of the cost leadership strategy, it is accompanied by risks such as
the following:
Differentiation Strategy
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In contrast to the cost leadership strategy, implementation of a differentiation strategy
means that value is provided to customers through the unique features and characteristics of a
firm’s products rather than by the lowest price.
differentiate the product/service on as many dimensions as possible.
Products can be differentiated in a number of ways so that they stand apart from standardized
products:
• Superior quality
• Unusual or unique features
Successfully implementing (and maintaining) a differentiation strategy requires a firm to
consider its value chain of primary and secondary activities and effectively link those
activities as illustrated in Figure 4.3.
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Figure Note
Use Figure 4.3 to show that the critical focus in a successful differentiation strategy is on
quality and product innovation, regardless of the value-creating activity.
FIGURE 4.3
Examples of Value-Creating Activities Associated with the Differentiation Strategy
Teaching Note
The chapter mentions that firms following differentiation strategies cannot
completely ignore costs and the need for minimal spending on process-related
innovations. Porter refers to this as maintaining “parity” on the alternative dimension.
When speaking of cost leadership strategies, a useful example of “differentiation
Rivalry with Existing Competitors
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long as the firm satisfies the differentiated needs of loyal customers, it may be insulated from
price-based competition.
Bargaining Power of Buyers (Customers)
STRATEGIC FOCUS
Apple vs. Samsung: Apple Differentiates and Samsung Imperfectly Imitates
Teaching Note
Bargaining Power of Suppliers
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Potential Entrants
Product Substitutes
Competitive Risks of the Differentiation Strategy
Like the cost leadership strategy, the differentiation strategy also carries risks such as the
following:
• Customers may decide that the cost of uniqueness is too high. In other words, the price
differential between the standardized and differentiated product is too high. Perhaps the
Teaching Note
This loss of value through customer learning or changes in customer perceptions can
be illustrated by the experiences of IBM. Initially, the IBM name on a personal
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• A fourth risk is concerned with counterfeiting. Increasingly, counterfeit goods (products
that attempt to convey differentiated features to customers at significantly reduced prices)
are a concern for many firms using the differentiated strategy.
Focus Strategies
By implementing a cost leadership or differentiation strategy, firms choose to compete by
exploiting their core competencies on an industry-wide basis and adopt a broad competitive
reach.
• Different segments of a product line (e.g., products for professionals or “do–it–
yourselfers”)
• Different geographic market (e.g., the eastern or western United States)
Firms may choose to follow a focus strategy because:
Teaching Note
Emphasize again that focus strategies can be based either on cost leadership or
differentiation.