Chapter 4
Business-Level Strategy
CHAPTER OVERVIEW
LEARNING OBJECTIVES
LECTURE NOTES
4-1 CUSTOMERS: THEIR RELATIONSHIP WITH BUSINESS-LEVEL
STRATEGIES
4-1a Effectively Managing Relationships with Customers
4-2 THE PURPOSE OF A BUSINESS-LEVEL STRATEGY
4-3 BUSINESS MODELS AND THEIR RELATIONSHIP WITH BUSINESS-
LEVEL STRATEGIES
ANSWERS TO REVIEW QUESTIONS
MINI-CASE: Hain Celestial Group: A Firm Focused on “Organic” Differentiation
Chapter 4: Business-Level Strategy
CHAPTER OVERVIEW
Armed with knowledge of its external environment as well as its internal resources,
capabilities, and core competencies, a firm is ready to make strategic choices. A business-
level strategy is an integrated and coordinated set of commitments and actions the firm
uses to gain a competitive advantage by exploiting core competencies in specific product
markets.
Firms seeking competitive advantage through the cost leadership strategy produce no-
frills, standardized products for an industry’s typical customer. Firms using this strategy
earn above-average returns when they learn how to lower their costs below those of their
competitors while providing differentiated features that are acceptable to their customers.
Competitive risks associated with the cost leadership strategy include a loss of competitive
advantage to newer technologies, failure to detect changes in customers’ needs, and the
ability of competitors to imitate the cost leader’s competitive advantage through their own
distinct strategic actions.
Chapter 4: Business-Level Strategy
Through the cost leadership and differentiated focus strategies, firms serve the needs of a
narrow market segment (e.g., a buyer group, product segment, or geographic area) in ways
Firms using the integrated cost leadership/differentiation strategy strive to provide
customers with relatively low-cost products that also have valued differentiated features.
Flexibility is required for firms to learn how to use primary value-chain activities and
LEARNING OBJECTIVES
1. Discuss the relationship between customers and business-level strategies in terms of who,
what, and how.
2. Explain the purpose of forming and implementing a business-level strategy.
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 is,
the firm will line up its resource commitments in a way that reinforces the direction of the
Chapter 4: Business-Level Strategy
OPENING CASE
Digital: An Increasingly Important Aspect of Strategy Choice and Strategy
Implementation
Innovation is a key part of firms’ efforts to achieve success with their strategies, which
means that information and technologies play vital roles. Firms must consider how
information and technology will affect each type of business-level strategy and develop a
digital strategy in relation to their business-level strategy. It’s important to note, however,
that a digital strategy “is the application of information and technology to raise human
performance.” Digital strategies, for example, allow firms to generate outcomes that
customers value and to improve products in ways that benefit consumers. Ultimately,
digital strategies allow leaders to assume a more viable competitive position in the future.
Teaching Note
Ask students to offer several examples of firms using technology to benefit consumers.
Can students articulate each firm’s digital strategy in these examples? Emphasize that a
BUSINESS-LEVEL STRATEGY
Business-level strategies represent integrated and coordinated sets of actions that are
taken to exploit core competencies and gain a competitive advantage. To be more specific,
strategies are purposeful, precede the taking of actions to which they apply, and
demonstrate a shared understanding of the firm’s vision and mission. An effectively
The firm’s core competencies should be focused on satisfying customer needs or preferences
through business-level strategies, which detail actions taken to provide value to customers and
Chapter 4: Business-Level Strategy
A customer focus requires that firms simultaneously evaluate or consider
• Who to serve,
4-1 CUSTOMERS: THEIR RELATIONSHIP WITH BUSINESS-
LEVEL STRATEGIES
Returns earned from relationships with customers (current and/or new) are the lifeblood of
all firms. To survive and achieve strategic competitiveness in the contemporary
competitive landscape, firms must:
• Identify who their customers are
4-1a Effectively Managing Relationships with Customers
Teaching Note
A number of companies have become skilled at managing all aspects of their
4-1b Reach, Richness, and Affiliation
In the Internet age, firms can maintain competitive advantage by:
• Thinking continuously about accessing and connecting with customers (reach)
Chapter 4: Business-Level Strategy
4-1c Who: Determining the Customers to Serve
The first step is to identify customers based on differences in needs or preferences (often
Table Note
It might be interesting to ask students which dimensions in this table help identify the
most promising market segments for which type of business.
TABLE 4.1
Basis for Customer Segmentation
Dimensions that can be used to identify potential customers include the following factors:
For consumer markets:
• Demographic factors
For industrial markets:
• End-use segments
It is imperative that firms pay careful attention to differences in customer needs among
customer groups and not arbitrarily “lump” them together because:
• Almost any identifiable human or organizational characteristic can be used to subdivide a
market into segments that differ from one another on a given characteristic.
Teaching Note
In the United States, 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.
4-1d 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; given the choice,
customers are most interested in purchasing products that both satisfy their needs and
provide value.
The most effective firms continuously strive to anticipate changes in customers’ needs.
Failure to do this results in the loss of customers to competitors that are offering greater
value in terms of product features and functionalities.
4-1e How: Determining Core Competencies Necessary to Satisfy Customer Needs
As explained in Chapters 1 and 3, core competencies are resources and capabilities that
serve as a source of competitive advantage for the firm over its rivals. Firms use core
competencies (how) to implement value-creating strategies and thereby satisfy customers’
Chapter 4: Business-Level Strategy
4-2 THE PURPOSE OF A BUSINESS-LEVEL STRATEGY
Business-level strategy creates differences between the firm’s position and those of its
4-3 BUSINESS MODELS AND THEIR RELATIONSHIP WITH
BUSINESS-LEVEL STRATEGIES
A business model describes what a firm does to create, deliver, and capture value for its
stakeholders. In a sense, a business model is a framework for how the firm will create,
deliver, and capture value, while a business-level strategy is the set of commitments and
actions that yields the path a firm intends to follow to gain a competitive advantage by
4-4 TYPES OF BUSINESS-LEVEL STRATEGIES
Business-level strategy is concerned with a firm’s position in an industry, relative to
competitors. A firm is challenged to select business-level strategies to position itself
favorably by performing activities differently or performing different activities as
Chapter 4: Business-Level Strategy
Figure Note
As illustrated in Figure 4.1, firms select their business-level strategies based on a
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).
Firms that choose to compete in narrow customer segments select a focus strategy, which
may be either a focused differentiation strategy (few segments, unique products) or a
focused cost leadership strategy (narrow segment, standardized products at the lowest
competitive price).
4-4a Cost Leadership Strategy
The cost leadership strategy is an integrated set of actions taken to produce goods or
services with features that are acceptable to customers at the lowest cost, relative to that of
competitors.
Chapter 4: Business-Level 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
Implementing and maintaining a cost leadership strategy means that a firm must consider
its value chain of primary and secondary activities (as discussed in Chapter 3) and
effectively link those activities, if it is to be successful (as illustrated in Figure 4.2).
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.
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:
Chapter 4: Business-Level Strategy
Rivalry with Existing Competitors
Achieving the lowest cost position means that a firm’s rivals will hesitate to compete
based on price because, in a price war, the low-cost firm will still earn profits even after its
competitors compete away all profits.
Bargaining Power of Buyers (Customers)
Achieving the low-cost position provides some protection against powerful customers
who attempt to drive down prices. If customers attempt to drive prices below the cost of
Bargaining Power of Suppliers
Because it has achieved the lowest cost position in the industry, the cost leadership
strategy enables a firm to absorb a greater amount of cost increases from powerful
Potential Entrants
Firms successfully following cost leadership strategies generally must produce and sell in
large volumes to earn above-average returns. And with a continuous focus on efficiency
and reducing costs, cost leadership firms create barriers to entry.
Chapter 4: Business-Level Strategy
Product Substitutes
The cost leader is in a more attractive position relative to substitute products than are other
Competitive Risks of the Cost Leadership Strategy
Despite the attractiveness of the cost leadership strategy, it is accompanied by risks such
as the following:
• Technological innovations by competitors could eliminate the cost leader’s cost
advantage.
4-4b Differentiation Strategy
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.
Chapter 4: Business-Level Strategy
Firms that follow a differentiation strategy concentrate or focus on product innovation and
Products can be differentiated in a number of ways to stand apart from standardized
products:
• Superior quality
• Unusual or unique features
Some examples of differentiation strategies include the following:
• Ralph Lauren differentiates its clothing lines through image.
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
Chapter 4: Business-Level Strategy
As suggested in Figure 4.3, the firm’s focus in its value chain activities and support
functions is on:
• Establishing the importance of quality
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 parity” comes from the
A firm that successfully implements a differentiation strategy can earn above-average
returns even when the five competitive forces are strong.
Rivalry with Existing Competitors
Achieving customer loyalty means differentiating products in ways that are meaningful to
Chapter 4: Business-Level Strategy
Bargaining Power of Buyers (Customers)
Through meaningful differentiation, firms develop products that are considered unique.
This uniqueness may insulate the firm from competitive rivalry and reduce customer
Bargaining Power of Suppliers
Because of the differentiator’s focus on product quality and responsiveness to customer
preferences, suppliers also may be forced to provide differentiators with higher-quality
Potential Entrants
The principal barrier to entry is customers’ loyalty to the uniquely differentiated brand.
This means that a potential entrant must either overcome (or surpass) the uniqueness of
Product Substitutes
Brand loyalty may insulate differentiated products from substitutes. Without brand
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
Chapter 4: Business-Level Strategy
• The firm’s means of differentiation no longer provide value to customers. For instance,
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 computer
• 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.
In the event of any of the above, differentiators are challenged to increase value to
4-4c 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 adopting a broad
competitive reach.
Alternatively, firms can choose to follow a focus strategy by seeking to use their core
Markets can be segmented by:
• Particular buyer group (e.g., youth or senior citizens)
Chapter 4: Business-Level Strategy
Firms may choose to follow a focus strategy because:
• They can serve a narrow segment more effectively than competitors that choose to
compete industry wide.
STRATEGIC FOCUS
The Differentiation Strategy—Can Macy’s Again Find Ways to Achieve Success by
Implementing this Strategy?
Founded in New York City in 1858, Macy’s built its success on a differentiation strategy.
The department store chain adopted many innovations that set it apart, from offering
private-label brands to stocking trendy products to hiring and training expert salespeople.
Teaching Note
Introduce the topic by asking students to share their impressions of department store
shopping. Lead them to recognize why it was essential for Macy’s to identify ways to
evolve its differentiation strategy. Then ask them to suggest specific tactics that would
support or extend Macy’s new North Star Strategy.
Focused Cost Leadership Strategy
Firms that compete by following cost leadership strategies to serve narrow market niches