Chapter 4: Business-Level Strategy
4-16
Focused Cost Leadership Strategy
Firms that compete by following cost leadership strategies to serve narrow market niches
generally target the smallest buyers in an industry. They look for those who purchase in such
small quantities that industry-wide competitors cannot serve them at the same low cost.
Focused Differentiation Strategy
Firms following focused differentiation strategies produce customized products for small
market segments.
They can be successful when either the quantities involved are too small for industry-wide
competitors to handle economically, or when the extent of customization (or differentiation)
requested is beyond the capabilities of the industry-wide competitors. The text uses the new
generation of lunch trucks offering high-end fare prepared by highly trained chefs and often
owned by well-known restaurants to illustrate this strategy.
Chapter 4: Business-Level Strategy
4-17
Chapter 4: Business-Level Strategy
4-18
Teaching Note: Students will undoubtedly be familiar with the company profiled in the
Strategic Focus. Ask students to speculate about what information the innovation decisions
were based on? Ask them to identify other companies’ innovations in the same market and
speculate about what drove these innovations. The discussion should address how conditions
in the external environment created opportunities to provide customer value.
Integrated Cost Leadership/Differentiation Strategy
This hybrid strategy may become even more important – and more popular – as global
competition rises.
Compared to firms relying on a single generic strategy, firms that integrate the generic
strategies may position themselves to improve their ability to adapt quickly to environmental
changes.
Flexible Manufacturing Systems
Information Networks
Chapter 4: Business-Level Strategy
Customer relationship management (CRM) is one form of an information-based network
process that firms use to better understand customers and their needs. An effective CRM
system provides a 360-degree view of the company’s relationship with customers,
function to another. Integrating data across parties that are involved with detailing
product specifications and then manufacturing those products and distributing them in
ways that are consistent with customers’ unique needs enable the firm to respond with
flexibility to customer preferences relative to cost and differentiation.
Chapter 4: Business-Level Strategy
4-20
Firms develop and use TQM systems in order to (1) increase customer satisfaction, (2) cut
costs, and (3) reduce the amount of time required to introduce innovative products to the
marketplace.
if the firm provides the resources, tools, and training necessary and management
listens to their ideas).
• Since organizations are systems of highly interdependent parts, decision processes
must be integrated and include participation from all affected functional areas.
• Responsibility for effective TQM rests with top-level managers who must support
TQM processes and appropriately design the firm so that employees can function
effectively.
Competitive Risks of the Integrated Cost Leadership/Differentiation Strategy
4-21
Chapter 4: Business-Level Strategy
Cost Leadership
Lowest cost with a level of product features or
characteristics acceptable to the most typical
customers in the industry
Differentiation
Product’s unique attributes and characteristics that are
valued by a broad group of customers
Focused Cost Leadership
Lowest cost with a level of product features or
characteristics targeted to a particular customer group
or segment in an industry
Focused Differentiation
Product’s unique attributes and characteristics that are
valued by a particular customer group (niche) or
segment in an industry
Integrated Cost Leadership/
Differentiation
Products have attributes of both relatively low cost and
unique attributes, characteristics, or features; the level
of product differentiation is less than the pure
differentiator while cost is higher than that of the low-
cost leader
4. How can each one of the business-level strategies be used to position the firm relative
to the five forces of competition in a way that helps the firm earn above-average
returns?
Strategy Dealing with the Five Forces of Competition
Cost Leadership
Can compete against rivals on price
Can price below rivals to interest buyers
Can absorb prince increases by suppliers better than
rivals
Discourages new entrants that can’t endure low profit
margins
Can reduce prices to maintain attractiveness over
substitutes
Differentiation
Customers are loyal to firms offering differentiated
Chapter 4: Business-Level Strategy
increases
High margins shield the firm from losses to powerful
suppliers
Customer loyalty to differentiated products deters new
entrants
Unlikely to switch to substitutes when loyal to
products
Focused Cost Leadership
An adaptation of the above
Focused Differentiation
An adaptation of the above
Integrated CL/Differentiation
An adaptation and combination of the above
5. What are the specific risks associated with using each business-level strategy?
Strategy Risk(s) of Selecting and Implementing
Cost Leadership
Minimal investment in technology could result in
process obsolescence; firm misses change in customers’
needs due to cost-only focus; competitors imitate
strategy
Differentiation
Customers decide price differential between low cost
producer and differentiator is too large; too many
features offered; product’s means of differentiation no
longer provides value to customers; customer learning
(experience) may change their perception of the value
of differentiation; counterfeit products displace the
firm’s offerings
Focused Cost Leadership &
Focused Differentiation
Beyond the general risks noted for the low-cost leader
and the differentiator, focus strategies have the
following risks: competitor “outfocuses” the focuser by
defining a narrower segment; a firm competing on an
industry-wide basis may decide that the segment served
Chapter 4: Business-Level Strategy
Chapter 4: Business-Level Strategy
4-25
Chapter 4: Business-Level Strategy
4-26
3. Can an overemphasis on cost leadership or differentiation lead to ethical challenges (such
as poor product design and manufacturing) that create costly problems (e.g., product
liability lawsuits)?
4. Reexamine the assumptions about effective TQM systems presented in the chapter. Do
these assumptions urge top-level managers to maintain higher ethical standards than they
now have? If so, how?
5. As discussed in Chapter 3, a brand image is one way a firm can differentiate its good or
service. However, many questions are now being raised about the effect brand images
have on consumer behavior. For example, considerable concern has arisen about brand
images that are managed by tobacco firms and their effect on teenage smoking habits.
Should firms be concerned about how they form and use brand images? Why or why not?
6. What ethical issues do you believe are associated with use of the Internet to implement the
firm’s business-level strategy?
7. If ethical issues do exist regarding Internet use, who do you believe should be responsible
for addressing them: governments or companies themselves? Why?
INSTRUCTOR’S NOTES FOR MINDTAP
Cengage offers additional online activities, assessments and resources inside MindTap, our
online learning platform. The following activities can be assigned within MindTap for
students to complete.
INSTRUCTOR’S NOTES FOR EXPERIENTIAL EXERCISES
Hitting the Target: Understanding Customer Needs With Market
Segmentation
Chapter 4: Business-Level Strategy
4-27
INSTRUCTOR’S NOTES FOR BRANCHING EXERCISE
TESLA MOTORS
Tesla is a 10-year-old company that specializes in electric power technology. The firm sells
its powertrain components to other car companies. At the same time, it is selling a high-
performance electric Roadster and the Model S and Model X luxury cars. The company is
serving two customers at the same time, both with a Focused Differentiation Strategy.
However, Tesla Motors founder Elon Musk believes that electric cars should be available for
everyone. Students will be shown how this is a potential conflict of interest, and must make a
decision which strategy the company should pursue moving forward to align itself with the
founder’s beliefs.
The ideal path that earns a perfect score is the following:
Chapter 4: Business-Level Strategy
4-28
INSTRUCTOR’S NOTES FOR VIDEO EXERCISES
The media quiz offers additional opportunities for students to apply the concepts in the
chapter to a real-world scenario as it is described in news reports.
Title: Differentiation Strategy: Value Creation At Burberry
RT: 3:34
Topic Key: Business-Level Strategy, Managing Relationships with Customers, Market
Segmentation, Differentiation Strategy, Five Forces of Competition
The video opens with a short survey of differing opinions of the clothing company Burberry.
Immediately, two distinct opinions emerge:
Chapter 4: Business-Level Strategy
4-29
Suggested Discussion Questions and Answers
1. Describe Burberry’s business-level strategy.
2. How is Burberry managing its relationship with customers?
3. Is the differentiation strategy appropriate for Burberry? Why or why not? Now or in
the future?