Business level strategy

Nuresh Eranda, PhD

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Lesson outline
 The meaning of business level strategy
 Business level strategy and understanding on
customer
 Competitive advantage
 Cost leadership strategy
 Differentiation strategy
 Focus strategies
 Best cost provider strategy

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Business Level Strategy
 What strategy should a business unit adopt in its
market?

 E.g.

 Restaurant: menus, décor, prices in line with rival

restaurants

 Elephant house ice cream: how to compete against

Cargills Magic ice cream on a range of dimensions
including flavors, pricing, distribution
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What is a Strategic Business Unit?
 A Strategic Business Unit (SBU) is a part of an
organization for which there is a distinct external market
for goods or services that is different from another SBU.

 A SBU supplies goods or services for a distinct domain of

activity

 SBUs refer to the distinct business within a large diversified

corporation

 Criteria to identify SBUs

 Market-based criteria
 Capabilities-based criteria

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Business (Competitive) Level Strategy

 Competitive strategy is concerned with how

a strategic business unit achieves
competitive advantage in its domain of
activity.
Johnson et al (2011, p. 119)

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Business (Competitive) Level Strategy and
Understanding of Customer
 Understanding customers is of paramount
importance in competitive/business unit level
strategy development.

 Identifying and understanding includes raising

questions such as
 Who will be served?
 What needs those target customers have that it
will satisfy?
 How those needs will be satisfied?
What is Competitive Advantage?
 Competitive advantage is about how an SBU creates value
for its users both greater than the costs of supplying them
and superior to that of rival SBUs.
Source: Johnson et al (2011)

 Features of competitive advantage

 Users see sufficient value that they are prepared to pay more
than costs of supply (to be competitive)
 SBU must create greater value than competitors (to have an
advantage)
 In the absence of competitive advantage SBU is vulnerable
to competitors’ attacks
 Means to achieve competitive advantage: cost leadership,
differentiation and focus (Porter’s three generic strategies) 7
 Generic Competitive Strategies
Competitive advantage

Lower cost Differentiation

Market target/Competitive scope

Broad
target Cost leadership Differentiation

Best-cost
Provider
Strategy

Narrow
target Focused cost leadership Focused differentiation

Adapted from: Porter (1998)

Cost Leadership Strategy
 Cost leadership strategy is all about produce
goods/services with features which are acceptable to
customers at the lowest cost, relative to that of
competitors (Hitt et al, 2003)

 Organizations employing a low-cost strategy are the

industry’s lowest-cost provider than rivals but not
necessarily the absolute lowest possible cost
(Thompson et al, 2006)

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Approaches to Secure a Cost leadership

Approach 1
Do a better job than rivals of
performing value chain activities
efficiently and cost effectively

Approach 2
Revamp (Renovate) value chain to bypass (avoid)
cost-producing activities that add little
value from the buyer’s perspective
Efficient and cost effective in Value
Chain Activities
 Use online and social media marketing

 Educate the target market rather than advertising

 Focus on customer retention

 Capture economies of scale

 Capture learning and experience curve effects

 Focus on relationship marketing

 Adoption of Artificial Intelligence (AI)

Revamping (Renovating) the
Value Chain
 Use of online technology applications (e.g. Pizza Hut)

 Streamline operations by eliminating low-value-added

unnecessary work steps (Outsourcing)
 Relocate facilities closer to target market

 Offer basic, no-frills product/service

 Offer a limited product/service as opposed to a full

product/service line
 Value chain activities common to cost leadership
Firm Infrastructure: cost effective AI, simplified planning, few management
layers
SUPPORTIVE
ACTIVITIES

HRM: training programs for improving efficiency, policies for reducing employee
turnover cost

Technology Development: easy to use manufacturing technologies, invest in

technologies to reduce production and operations costs
Procurement: purchase raw materials at lowest cost, monitor supplier performance
based on cost effectiveness

Outbound
Operations: Marketing and
Inbound logistics:
Use technology Sales:
Logistics: Low cost
to reduce Small trained sales Service:
Locate close to transport,
manufacturing force, price to sell Efficient
suppliers, efficient
cost, higher volume, installations,
efficient order sizes,
organizational mass scale outsourcing
systems to link reduce
learning on marketing service
with suppliers transport
efficiency promotions
time

PRIMARY ACTIVITIES
Adapted from: Porter, M. E. (1998)
Limitations of Cost Leadership
 Being overly aggressive in cutting price
 Low cost methods are easily imitated by rivals
 Technological breakthroughs open up cost reductions
for rivals
 Higher dependence on reducing costs and ignoring
 Buyer interest in additional features (Quality and
superiority)
 Declining buyer sensitivity to price

 Changes in how the product is used

Differentiation Strategy
 This is an integrated set of actions designed by
firm to produce or deliver goods or services (at an
acceptable cost) that customers perceive as being
different in ways that are important to them (Hitt
et al, 2003)

 Differentiation involves uniqueness along some

dimension that is sufficiently valued by customers
to allow a price premium (Johnson et al, 2011)
Benefits of Successful Differentiation
 A product/service with unique, appealing
attributes allows a firm to:
 Command a premium price and/or

 Increase unit sales and/or

 Build brand loyalty

= Competitive Advantage
Relevant Points of Differentiation (POD) Vary
Between Markets
 Clothing retail: store size, locations, fashion
 Cars: safety, style, fuel efficiency
 Restaurants: taste, location, menu
 Different types of differentiation in a market

Sportier image Conservative values 17

Drivers of Differentiation Strategy in
the Modern Market Place
 Unique product features

 Unique product performance

 Exceptional services

 New technologies

 Quality of inputs

 Exceptional skills or experience

 Detailed information
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Differentiation Opportunities in the
Value Chain
 Marketing, sales, and customer service activities

 Purchasing and procurement activities

 Product R&D and product design activities

 Production process (technology-related activities)

 Manufacturing (production activities)

 Distribution-related activities
Differentiation on Ethical Grounds

• Free of child labor

• Free of forced labor
• Free of discrimination
• Free of sweatshop practices

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Focus Strategies
 Focus strategy targets a narrow segment of domain of activity
and tailors its products or services to the needs of that
specific segment to the exclusion of others
(Johnson et al, 2011)

 Approaches to define a market niche

 Particular buyer group
E.g. Youth

 Different segment of a product line

E.g. products for “Do-it-yourselfers”

 Different geographic market

E.g. South India, East coast of China

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Types of Focus Strategies
Type 1
 Achieve lower costs than rivals in serving a well-
defined buyer segment –
Focused Cost Leadership strategy

Type 2
 Offer a product appealing to unique preferences of a
well-defined buyer segment –
Focused differentiation strategy
Focused Cost Leadership Strategy

 Market segment: Young buyers desiring style at a low

cost

 Low cost strategy applies to all activities in the firm

 How does IKEA achieve low cost?

 Do not depend on third party manufacturers, firm
manufacture the products for assembly by customers
 Position products in ‘Room-like’ settings
 Do not provide delivery service to customers
Focused Differentiation Strategy

“Porsche doesn’t simply build sports cars. Porsche

is more. Much more. And Porsche is different”
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Successful focus strategies depend on:
 Distinct customer needs
 Erosion of segment distinctiveness becomes hard to defend
against broader competitors
 E.g. Loss of BlackBerry phones to Apple

 Distinct value chains

 Distinctive value chains should be available which are difficult
or costly for rivals to imitate
 E.g. Dilmah ethical tea initiative based on ethical practices in
the value chain

 Viable segment economics

 Changing economies of scale and higher competition may
convert focus players to broader players

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Best Cost Provider Strategy
 Combine a strategic emphasis on low-cost with a
strategic emphasis on differentiation

 Advantages:
 Adapt quickly to environmental changes
 Learn new skills & technologies more quickly
 Effectively leverage its core competencies while
competing against rivals

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Best Cost Provider Strategy
 To achieve competitive advantage, a company must be
able to:
 Incorporate attractive features at a lower cost than rivals

 Manufacture a good-to-excellent quality product at a

lower cost than rivals

 Develop a product that delivers good-to-excellent

performance at a lower cost than rivals

 Provide attractive customer service at a lower cost than

rivals
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 Best Cost Provider Example

Lower cost Differentiation

 Use a single aircraft model  Focus on customer

(Boeing 737) satisfaction
 Use secondary airports  High level of employee
 Fly short routes dedication
 No meals  New flight services for
 15 minute turnaround time business travelers
 Point-to-point (city-to-city)
 No reserved seats
service
 No travel agent reservation
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The shifting source of competitive advantage

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Summary
 The meaning of business level strategy
 Business level strategy and understanding on
customer
 Competitive advantage
 Cost leadership strategy
 Differentiation strategy
 Focus strategies
 Best cost provider strategy

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