CHAPTER 4: BUSINESS-LEVEL STRATEGY

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 a specific product market.
Customers are the foundation of successful business level strategies: firms must continue creating value for their customer if they are
to retain them.
In terms of customer, when selecting a business level strategy, the firm determines
1. Who will be served,
2. What needs those target customers have that it will satisfy, and
3. How those needs will be satisfied.

A. Customers: Their Relationship with Business-Level Strategies

Strategic competitiveness results only when the firm satisfies a group of customers by using its competitive advantages as the basis
for competing in individual product markets.
"Customers are the lifeblood of all organizations"
1. Effectively Managing Relationship with Customers - Firms strengthen their relationships with customers by delivering superior
value to them.
2. Reach, Richness, and Affiliation - The reach dimension of relationships with customers revolves around the firm's access and
connection to customers.
➢ Reach is an especially critical dimension for social networking sites such as Facebook in that the value these firms
create for users is to connect them with others.
➢ Richness, the second dimension of firm's relationships with customers, concerns the depth and detail of the two-way
flow of information between the firm and customers.
➢ Affiliation, the third dimensions, is concerned with facilitating useful interactions with customers.
3. Who: Determining the Customers to Serve - Deciding who the target customer is the that firm intends to serve with its business-
level strategy is an important decision.
Companies divide customers into groups based on differences in customers' needs to make this decision.

Market segmentation - is the process of dividing customers into groups based on their needs.

Basic for Customer Segmentation

Consumer Markets
1. Demographic factors (age, income, sex, etc.)
2. Socioeconomic factors (social class, stage in the family life cycle)
3. Geographic factors (cultural, regional and national differences)
4. Psychological factors (lifestyle, personality traits)
5. Consumption patterns (heavy, moderate, and light users)
6. Perceptual factors (benefit segmentation, perceptual mapping)
Industrial Markets
1. End-use segments (identified by Standard Industrial Classification [SIC] code)
2. Product segments (based on technological differences or product economics)
3. Geographic segments (defined by boundaries between countries or by regional differences within them)
4. Common buying factor segments (cut across product market and geographic segments)
5. Customer size segments
6.
4. What: Determining Which Customer Needs to Satisfy - After the firm decides who it will serve, it must identify the targeted
customer group's needs that its products can satisfy.
In a general sense, needs (what) are related to a product's benefit and features. Successful firm learn how to deliver to customers what
they want, when they want it.
5. How: Determining Core Competencies Necessary to Satisfy Customer Needs - After deciding who the firm will serve and the
specific needs those customers have, the firm prepared to determine how to use it resources, capabilities, and competencies to develop
products that can satisfy its target customers' needs.

B. The Purpose of a Business-Level Strategy -

The purpose of a business-level strategy is to create differences between the firm's position and those of its competitors. To position
itself differently from competitors, a firm must decide if it intends to perform activities differently or if it will perform different
strategies.

C. Business Model and their Relationship with Business-Level Strategies

Business Model describes what a firm does to create, deliver, and capture value for its stakeholders.

D. Types of Business-Level Strategies

Five Business-Level Strategies
1. Cost Leadership
2. Differentiation
3. Focused Cost Leadership
4. Focused Differentiation, and
5. Integrated Cost Leadership / Differentiation
Each business-level strategy can help firm establish and exploit a competitive advantage (either lowest cost or distinctiveness)
as the basis for how it will create value for customers within a particular competitive scope (broad market or narrow market). How
firms integrate the activities they complete within each business level strategy demonstrates how they differ from one another.

1. Cost Leadership
- The cost leadership strategy is an integrated set of actions taken to produce products with features that are acceptable to
customers at the lowest cost, relative to that of competitors.
Five Forces explain how firms seek to earn above-average returns by implementing the cost leadership strategy.
1. Rivalry with Existing Competitors - Having the low cost position is valuable when dealing with rivals. Because of the cost
leader's advantageous position, rivals hesitate to compete on the price variable, especially before evaluating the
potential outcomes of such competition.
2. Bargaining Power of Buyers (Customers) - Powerful customers (e.g., those purchasing a significant amount of the focal
firm's output) can force a cost leader to reduce its prices.
3. Bargaining Power of Suppliers - When an industry faces substantial increases in the cost of its supplies, only the cost
leader may be able to pay the higher prices and continue to earn either average or above average returns.
Alternatively, a powerful cost leader may be able to force its suppliers to hold down their prices, which would
reduce the suppliers' margins in the process.
4. Potential Entrants - Through continues efforts to reduce costs to levels that are lower than those against whom it competes,
a cost leader becomes highly efficient.
5. Product Substitutes - When faced with possible substitutes, the cost leader has more flexibility than do its competitors. To
retain customers, it often can reduce its product price. With still lower prices and competitive levels of
differentiation, the cost leader increases the probability that customers will continue to prefer its product rather than
a substitute.
Competitive Risks of the Cost Leadership Strategy
The cost leadership strategy is not risk-free. One risk is that the processes used by the cost leader to produce and distribute its
product could become obsolete because of competitors' innovation.

2. Differentiation Strategy
- The differentiation strategy is an integrated set of actions taken to produce products (at an acceptable cost) that customer
perceive as being different in ways that are important to them.

Five Forces explain how firms using the differentiation strategy can successfully position themselves in terms of competition to
earn above average returns.
 1. Rivalry with Existing Competitors - Customers tend to be loyal purchasers of products differentiated in ways that are
meaningful to them.
2. Bargaining Power of Buyers (Customer) - Customer are willing to accept a price increase when a product still satisfies
their unique needs better than does a competitor's offering.
3. Bargaining Power of Suppliers - Because the firm using the differentiation strategy charges a premium price for its
products, supplies must provide high quality components, driving up the differentiator's cost.
4. Potential Entrants - Customer loyalty and the need to overcome the uniqueness of a differentiated product create
substantial barriers to potential entrants.
5. Product Substitutes - Firms selling brand name products to loyal customers hold an attractive position relative to product
substitutes.
Competitive Risks of the Differentiation Strategy
One risk of the differentiation strategy is that customer may decide that the price differential between the differentiator's product and
cost leader's product is too large

Focus Strategies - The focus strategy is an integrated set of actions taken to produce products that serve the needs of a particular
segment of customers.

Market segments firms may choose to serve by implementing a focus strategy include the following:
a. a particular buyer group (e.g., youth or senior citizens),
b. a different segment of a product line (e.g., products for professional painters or the do-it-yourself group), or
c. a different geographic market (e.g., northern or southern Italy)

3. Focused Cost Leadership Strategy

- Demonstrating the low cost part of the firm's strategy is it commitment to strive constantly "to reduce costs without
compromising quality"

4. Focused Differentiation Strategy

- Other firms implement the focused differentiation strategy. For example, some of the new generation of food
trucks populating cities such as Los Angeles use the focused differentiation strategy, serving, for example, organic food that
often trained chefs and well known restaurateurs prepare.
With a focus strategy, firms must be able to complete various primary value chain activities and support functions in a
competitively superior manner to develop and sustain a competitive advantage and earn above average returns.
Competitive Risks of Focus Strategy - With either focus strategy, the firm faces same set of general risks the company
using the cost leadership or the differentiation strategy on an industry wide basis faces.

5. Integrated Cost Leadership / Differentiation Strategy

- The integrated cost leadership / differentiation strategy finds a firm engaging simultaneously in primary value
chain activities and support functions to achieve a low cost position with some product differentiation.
Three sources of flexibility that help them implement the integrated cost leadership / differentiation strategy
successfully
1. Flexible Manufacturing Systems (FMS) - Using a flexible manufacturing system (FMS), firms integrate human, physical,
and information resources to create somewhat differentiated products and to sell them to consumers at a relatively low price.
2. Information Networks - By linking companies with their suppliers, distributors, and customers, information network
provide another source of flexibility. Those networks, when used effectively, help the firm satisfy customer expectations in
terms of product quality and delivery speed.

3. Total Quality Management (TQM) Systems - Total quality management (TQM) involves the implementation of
appropriate tools/techniques to provide products and services to customers with best quality.
Firms develop and use TQM systems to
1. Increase customer satisfaction,
2. Cut cost, and
3. Reduce the amount of time required to introduce innovative product to the marketplace. Thus, an effective TQM system
helps the firm develop the flexibility needed to identify opportunities to increase its product's differentiated features and to
reduce costs simultaneously.
Competitive Risks of the Integrated Cost Leadership / Differentiation Strategy
- The potential to earn above average returns by using the integrated cost leadership / differentiation strategy successfully appeals to
some leaders and their firms. However, it is a risky strategy in that firms find it difficult to perform primary value chain activities and
support functions in ways that allow them to produce relatively inexpensive products with levels of differentiation that create value for
the target customer.

CHAPTER 5: COMPETITIVE RIVALRY AND COMPETITIVE DYNAMICS

Introduction
• Competitive rivalry is the ongoing set of competitive actions and competitive responses occurring between
competitors as they compete against each other for an advantageous market position.
• Competitors are firms operating in the same market, offering similar products, and targeting similar customers.
• Competitive behavior is the set of competitive actions and competitive responses the firm takes to build or defend its
competitive advantages and to improve its market position.
• Multimarket competition occurs when firms compete against each other in several product or geographic markets.
• Competitive dynamics refer to all competitive behaviors— that is, the total set of actions and responses taken by all
firms competing within a market.

Model of Competitive Rivalry

Competitive Analysis
• is the first step the firm takes to be able to predict the extent and nature of its rivalry with each competitor. it also
help the firm understand its competitors and this understanding result from studying competitors future objectives,
current strategies, assumptions, and capabilities.
• Two Key Factors
➢ Market commonality is concerned with the number of markets with which the firm and a competitor are
jointly involved and the degree of importance of the individual markets to each.
➢ Resource similarity is the extent to which the firm’s tangible and intangible resources are comparable to a
competitor’s in terms of both type and amount.

Drivers of Competitive Behavior

• Awareness refers to the extent to which competitors recognize the degree of their mutual interdependence that results
from market commonality and resource similarity.
• Motivation which concerns the firm’s incentive to take action or to respond to a competitor’s attack, relates to
perceived gains and losses.
• Ability relates to each firm’s resources and the flexibility they provide.
Resource Dissimilarity “the greater is the resource imbalance between the acting firm and competitors or potential responders, the
greater will be the delay in response.”

Competitive Rivalry
• Competitive Actions is a strategic or tactical action the firm takes to build or defend its competitive advantages or
improve its market position.
• Competitive Response is a strategic or tactical action the firm takes to counter the effects of a competitor’s
competitive action.
• Strategic Action and Strategic Response is a market-based move that involves a significant commitment of
organizational resources and is difficult to implement and reverse.
• Tactical Action and Tactical Response is a market-based move that is taken to fine-tune a strategy; it involves
fewer resources and is relatively easy to implement and reverse.

Likelihood of Attack
• First Mover is a firm that takes an initial competitive action in order to build or defend its competitive advantages or
to improve its market position.
• Second Mover is a firm that responds to the first mover’s competitive action, typically through imitation.
• Last Mover is a firm that responds to a competitive action, but only after considerable time has elapsed after the first
mover’s action and the second mover’s response.

Organization’s Size - affects the likelihood that it will take competitive actions as well as the types of actions it will take and
their timing.
Quality - exists when the firm’s goods or services meet or exceed customers’ expectations.

Likelihood of Response
• The success of a firm’s competitive action is affected by the likelihood that a competitor will respond to it as well as
by the type (strategic or tactical) and effectiveness of that response.
• Firm is likely to respond to competitor’s action when:
1) the action leads to better use of the competitor’s capabilities to gain or produce stronger competitive
advantages or an improvement in its market position,
2) the action damages the firm’s ability to use its capabilities to create or maintain an advantage, or
3) the firm’s market position becomes less defensible.

• Three other factors to predict how a competitor is likely to respond to competitive actions:
1) Types of Competitive Actions - Competitive responses to strategic actions differ from responses to tactical
actions. These differences allow the firm to predict a competitor’s likely response to a competitive action that
has been launched against it. In general, strategic actions receive strategic responses and tactical actions
receive tactical responses.
2) Actor’s Reputation - the context of competitive rivalry, an actor is the firm taking an action or a response
while reputation is “the positive or negative attribute ascribed by one rival to another based on past
competitive behavior.
3) Dependence on the Market - It denotes the extent to which a firm’s revenues or profits are derived from a
particular market. In general, firms can predict that competitors with high market dependence are likely to
respond strongly to attacks threatening their market position.

Competitive Dynamics
• Different Market Cycle
1) Slow-cycle markets are those in which the firm’s competitive advantages are shielded from imitation
commonly for long periods of time and where imitation is costly.
2) Fast-cycle markets are markets in which the firm’s capabilities that contribute to competitive advantages
aren’t shielded from imitation and where imitation is often rapid and inexpensive.
3) Standard-cycle markets are markets in which the firm’s competitive advantages are moderately shielded
from imitation and where imitation is moderately costly.