Mastering Strategic Management

Chapter 5
Selecting Business-Level Strategies

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SWOT – Your Public Library

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Learning Objectives
Understanding the four main generic strategies, and their
limitation
• Advantages & disadvantages of a cost leadership or
best-cost strategy, & economies of scale
• Differentiation, focussing on a target market
• Describe the nature of focused cost leadership and
focused differentiation
• Combining – A Best-Cost Strategy
• What does it mean to be ‘Stuck in the middle’?

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4

Made-to-Measure
Suit Sale!!

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Is understanding your Strategy
really important?
“Would you tell me, please,
which way I ought to go from
here?” said Alice.
“That depends a good deal on
where you want to get to,” said
the Cheshire cat.
“I don’t much care care where…”
said Alice.
‘Then it doesn’t matter which
way you go,” said the cat.
- Lewis Carroll’s Alice in Wonderland
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5.1 Generic Strategies
A general way of positioning a firm’s business level
strategy within an industry
• Focusing on generic strategies allows executives to
concentrate on the core elements of firms’ business-
level strategies
• Builds on the strategic resources available to the firm
• The most popular set of generic strategies is based on
the work of Professor Michael Porter HBR

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Strategies
Strategy - a road map of the actions an entrepreneur
draws up to achieve a company’s mission, goals, and
objectives. It is the company’s game plan for gaining a
competitive advantage.
• Three basic strategies:
Cost leadership

Strategy? Differentiation

Focus

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Beer Strategies…

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Generic Bus Strategies
Two competitive dimensions are key:
• Source of competitive advantage
• keep costs down or
• offer something unique in market
• Scope of operations
• target all possible customers or
focus on a smaller segment or
sub-section of market

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Economics In Action
What is your favorite restaurant?
What’s their strategy? cost leadership or niche

Effective strategy must offers low prices, provides

satisfactory quality, & attract enough customers to be
profitable.

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Key Takeaways
Business-level strategies examine how firms compete in
a given industry
• Generic strategies based on source of competitive
advantage - price or differentiation, &
• Scope of operations targets a broad or narrow market

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 Section 5.2 Cost
Leadership

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Cost Leadership
• Cost leadership: Generic strategy that offers products
or services with acceptable quality and features to a
broad set of customers at a low price
• Economies of scale: Exists when the costs of offering
goods and services decreases as the firm is able to sell
more items
• Expenses are distributed across a greater number of items

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From Theory to Reality
(Porter)
Cost Leadership
• Become the low cost producer in its industry
• Sources of cost advantage are varied and depend on
the structure of the industry, may include pursuit of
economies of scale, proprietary technology, preferential
access to raw materials and other factors
• Low cost producer must find and exploit all sources of
cost advantage to achieve and sustain overall cost
leadership
• Leads to above average performance in its industry
• Assuming can set prices at or near industry average
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Overall Cost Leadership
Integrated tactics
• Aggressive construction of efficient-scale facilities
• Vigorous pursuit of cost reductions from experience
• Tight cost and overhead control
• Avoidance of marginal customer accounts
• Cost minimization in all activities in the firm’s value
chain, such as R&D, service, sales force, and
advertising

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Cost Leadership gone bad -
Remembering the Yugo…
• How do you make a Yugo go faster? A towtruck
• What do you call a Yugo’s shock absorbers? Passengers
• How can you get a Yugo to do 60 miles an hour? Push it over a
cliff
• The new Yugo has an air bag. When you sense an impending
accident, start pumping real fast.
• A friend went to a dealer the other day
and said, "I'd like a gas cap for my
Yugo." The dealer replied, "Okay.
Sounds like a fair trade.”
• Two guys in a Yugo were arrested last
night in Oakland following a push-by
shooting incident
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Cost Leadership & Economics
Economics tells use cost leadership less effective when
• Small percentage of consumer’s overall budget (salt)
• Low volume of purchases (i.e. PSE)
• Few alternatives (gasoline)
• Higher search costs

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You (generally) get what you
pay for!!

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Economics In Action
Think of three industries where a cost leadership
strategy would be very difficult to develop or implement

agriculture, arms industry, and nuclear industry.

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Key Takeaways
Cost leadership is an effective business-level strategy to
the extent that a firm offers low prices, provides
satisfactory quality, and attracts enough customers to be
profitable.

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 Section 5.3
Differentiation

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Differentiation
Differentiation strategy: A generic strategy that attempts
to convince customers to pay a premium price for its
good or services by providing unique and desirable
features
• Using a differentiation strategy firm compete based on
uniqueness, rather than price (only)
• Success depends on offering unique features that
CUSTOMERS value!
• and communicating this enhanced value to the
potential customers

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Colman Stove

Differentiation strategy:
• 7 Decades, same basic
design!
• Higher quality, & higher price
• Value includes reduced risk of
• failure… (1 moving part!)
• Part branding/marketing
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Differentiation
Seeks to be unique
in its industry along
some dimension(s)
that are widely
valued by buyers
Typically, firm
identify & improves
this aspect of
product & Markets
and sells at a price
premium

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Differentiation
Differentiation can take many forms
• Prestige/brand BMW, Roots, Holt Renfrew
• Quality Toyota, President’s Choice
• Technology Martin Guitars, North Face camping
• Innovation Medtronic (medical) 3M, Cirque Soleil
• Features Honda Mountain Equipment Coop
• Customer service Nordstrom, Four Season hotel
• Dealer network Lexus Caterpillar, Canadian Tire

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Missed Opportunity!!

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Tilley – A Canadian Success
Story
• Adventurer clothing
• Hats sold by
2,000+ retailers
around the world, &
1,500 USA retailers

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Differentiation

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Potential Pitfalls of
Differentiation Strategies
• Uniqueness/differentiation that add little valuable
• Too much differentiation
• Too high a price premium
• Differentiation that is easily imitated
• Dilution of brand identification through product-line
extensions, especially reduced price extensions of
brands (i.e. levis jeans at Walmart)
• Failing to focus on Buyers perceptions of value (not the
sellers)
• Feature creep (too complex)

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The Internet
How has the arrival of the Internet created many new
low-cost options?
How has it changed the low-cost game?

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Key Takeaways
Differentiation can be an effective business-level strategy
to the extent that a firm offers unique features that
convince customers to pay a premium for their goods
and services.

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For teaching in two 90-
minute classes/wk,
possible break point

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 Section 5.4
Focused Cost
Leadership &
Focused Differentiation

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Focused Cost Leadership and
Focused Differentiation
• Focus strategies: The generic focus strategy rests on
competing (only) within a sub-section of the potential
buyers instead of across all consumers within an
industry.
• Firms select a target population in the industry and
tailors its strategy to serving them to the (possible)
exclusion of others
• Focused cost leadership: competing based on price, but
only within a narrow market
• Focused differentiation: offering unique features that fulfill
the demands of a sub-group of consumers

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Focussed Cost Leadership

Not cheapest
everywhere, just
cheapest here…

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Focused Cost Leadership
Firms that charge relatively low prices for a sub-group
of the overall marketplace. Could be based on
geography, demographics, channel (internet only) or
features
• Difficult to execute - Creating unique features and
communicating to customers why these features are
useful generally raises a firm’s costs of doing business
• Similar to overall Cost Leadership lower overhead
costs and economies of scale useful
• Depending on niche, may be open to duplication by
competitors

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Focused Cost Leadership
Could be based on:
• Demographics (young women)
• Geographic (small communities)
• Service (Drive through, no seating)
• Degree of Consumer involvement (Ikea self-assembly)
• Sales Channels (Home purchase – Avon, Mary Kay)
• Price level marketing (Dollar Stores)

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(For clarity), Generic vrs
Focused Cost Leadership
• Key difference between overall Cost Leadership &
Focused Cost Leadership is that while both groups use
price as primary source of competitive advantage,
• Focused cost leadership strategy requires competing
based on price only within a narrow or limited
marketplace
• A firm following this strategy does not necessarily charge the
lowest prices in industry
• Instead, it charges low prices relative to the other firms that
compete within narrow target market
• Nature /size of target market varies across market segment
targeted

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Focused Differentiation
Leadership
Focused differentiation strategy requires offering
unique features that fulfill demands of a narrow market
• While a differentiation strategy involves offering unique
features that appeal to a variety of customers, the need
to satisfy the desires of a narrow market means that
the pursuit of uniqueness is often take to the proverbial
“next level” by firms using a focused differentiation
strategy.
• The unique features provided by firms following a
focused differentiation strategy are often very
specialized

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Focused Differentiation
Leadership
Could be based on:
• Higher quality product/service
• Extensive R&D
• Demographics (late middle age men)
• Geographic (‘warm’ retirement communities)
• Buying experience (Financial Services, Cadillac)
• Degree of Consumer Sophistication (high end stereo)
• After-sales support (Nordstrom's, HOG)

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Focused Differentiation
Strategies
• Advantages:
• Higher prices can be charged
• Firms often develop tremendous expertise about niche
products (camping gear), & reputation (MEC)
• Disadvantages:
• Limited demand available within niche may limit growth
• Once its target market is being well served, expansion may
require developing new skills / products / markets
• Niche could disappear or be taken over by competitors
• Damaging attacks may come not only from larger firms but
smaller ones that adopt an even narrower focus

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Lights!
You are selling lights.
What are 3 different
demographics that
firms might target to
establish a focused
strategy?
Now, think of 3 different
target or niche markets
that your firm could
focus on that use lights
(i.e. airport landing
strips)
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Worth Noting…
No business level strategy can overcome a product or
service which is poorly designed FOR THE MARKET IT
WISHES TO SERVE or COMPETE IN…..

• Can include over developed for low-cost market…

• Poorly thought out niches; too broad, too narrow
• Value that consumer do not appreciate (with $$)
• Poor value proposition for consumers

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Key Takeaways
• Focus strategies can be effective business-level
strategies to the extent that a firm can match their
goods and services to specific niche markets

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 Section 5.5
Best-Cost Strategy

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Best-Cost Strategy
• A best-cost strategy can be an effective business level
strategy to the extent that a firm offers differentiated
goods and services at relatively low prices.
• This strategy difficult to execute in part because
creating unique features and communicating to
customers why these features are useful generally
raises a firm’s costs of doing business.
• Firms that manage to implement an effective best-cost
strategy are often very successful!

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Stuck in the Middle
• A situation where business level strategy
• does not offer features that are unique enough to motivate
consumers
• And, prices are too high to effectively compete on price
• Usually, firms become stuck in the middle not because
they lack a well-defined strategy But because firms are
simply outmaneuvered by rivals

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Key Takeaways
• When executing a business-level strategy, a firm must
not become stuck in the middle between viable generic
business-level strategies by neither offering unique
features nor competitive pricing.

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Stages of Industry Life
Cycle

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Stages of Industry Life Cycle

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Stages of Industry Life Cycle
Stage
Introduction Growth Maturity Decline
Factor

Generic Differentiation Differentiation Differentiation Overall cost

strategies Overall cost leadership
leadership Focus

Market Low Very large Low to Negative

growth rate moderate

Number of Very few Some Many Few

segments
Intensity of Low Increasing Very intense Changing
competition
Emphasis Very high High Low to Low
on product moderate
design

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Stages of Industry Life Cycle
Stage
Introduction Growth Maturity Decline
Factor

Emphasis Low Low to High Low

on process moderate
design
Major Research and Sales and Production General
functional Development marketing management
area(s) of and finance
concern

Overall Increase Create Defend Consolidate,

objective market share consumer market share maintain,
awareness demand and extend harvest, or
product life exit
cycles

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Strategies in Introduction
Stage
• Products are unfamiliar to consumers
• Market segments not well defined
• Product features not clearly specified
• Competition tends to be limited

Strategies
Develop product and get users to try it
Generate exposure so product becomes “standard”

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Strategies in the Growth Stage
• Characterized by strong increases in sales
• Attractive to potential competitors
• Primary key to success is to build consumer
preferences for specific brands

Strategies
Brand recognition
Differentiated products
Financial resources to support value-chain activities
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Strategies in the Maturity
Stage
• Aggregate industry demand slows
• Market becomes saturated, few new adopters
• Direct competition becomes predominant
• Marginal competitors begin to exit

Strategies
Efficient manufacturing operations and process
engineering
Low costs (customers become price sensitive)
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Strategies in the Decline Stage
• Industry sales and profits begin to fall
• Strategic options become dependent on the actions of
rivals

Strategies
Maintaining Harvesting
Exiting the market Consolidation

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Generic business strategies in
clothing industry?
1. Cost leadership strategy
• provide clothing at low prices with basic designs
2. Differentiation strategy
• provide clothes created by well-acclaimed designers, high
quality, high price
3. Focused cost leadership strategy
• Competing on price but narrow market – i.e. safety
4. Focused differentiating strategy
• unique features fulfill demands of narrow market – biking
5. Best Cost strategy
• Firms charge relatively low prices & still offer substantial
differentiation valued by consumers
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The Best Online Firm
(StellaService.com)

1. They make sure customers can reach a human

being easily: How easily? The average time to a live
agent for the highest-rated subset of the 100
companies is 23 seconds. Not minutes, seconds.
2. They respond to inbound messages with
lightning speed: Average time to reply to an email
for the best companies is 1 hour and 24 minutes.
"We'll make every effort to respond to you within 24-
48 hours" definitely doesn't cut it.

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The Best Online Firm
(StellaService.com)

3. They ship crazy fast: Average delivery time is is

less than 2 days from order to receipt. Before you say
"give me a break, we can't do that," the stat is
presumably skewed by Amazon Prime & Zappos'
legendary free overnight delivery. Clearly many, if not
most of us can't afford this, so a few more days isn’t
critical, But the best companies stress the critical
need for maximum speed.
4. They give money back as quickly as they take it:
Among the peak performers, the average time from
return initiation to processed refund is three days.
Customers don't want to wait for their money any
more than they want to wait for their orders.
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In Conclusion,
This chapter explained generic business-level strategies including
low-cost, differentiation, or a broad or narrow market focus strategy
Perhaps the best strategy, best cost, occurs when firms can offer
relatively low prices while still managing to differentiate goods or
services
Between Globalization and Internet, competition continues to
increase, which suggests that consistently sticking to their strategy
is a good predictor of firm success
Whatever the strategy, avoid being “stuck in the middle” by not
offering sufficiently unique features or competitive prices

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