11/12/2022
STRATEGIC
MANAGEMENT
Lecturer in charge: Nguyễn Hiệp and Lê Gia Phúc
CHAPTER 4
Business-level Strategy
Strategic Management Process
Strategy
• Business-level • Earn above-average
strategy return
• External • Action and reactions • Outperform
• Internal • Corporate-level competitors
• Competitiveness strategy • Value for
• Diversification stakeholders
• International
strategy
Analysis • Cooperative strategy
Performance
• Organizational
structure
• Entrepreneurship
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LEARNING OBJECTIVES
Discuss the relationship between customers and business-level strategy in
terms of Who, What, and How
Explain the purpose of forming and implementing a business-level strategy
Describe business models and explain their relationship with business-level
strategies
Explain the differences among five types of business-level strategies
Use the five forces of competition model to explain how firms can earn
above-average returns when using each business-level strategy.
Discuss the risks associated with using each of the business-level strategies
What is Business-level Strategy
Resources and Capabilities are crucial to create
Core
competitive advantages for corporations to win the
competencies
competitors
A collection of actions that are conducted in concert to
Strategy utilize key skills and generate a competitive advantage.
Actions taken to provide value to customers and gain a
Business-level
competitive advantage by exploiting core competencies
strategy
in specific, individual product markets
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What is Business-level Strategy
In short, 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 a
specific product market
Customers and Business-level Strategies
When choosing the appropriate business-level
strategy, a firm needs to identify:
• WHO are company’s target customers?
• WHAT are the needs those target customers have that
company wants to serve?
• HOW does company satisfy these needs?
Managing relationship with customers
• Firms strengthen their relationships with customers by delivering
superior value to them.
• Delivering superior value often results in increased customer satisfaction.
In turn, customer satisfaction has a positive relationship with profitability
• A number of companies have become skilled at the art of managing all
aspects of their relationship with their
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Managing relationship with customers
Three dimensions that characterize firms’ relationships
with customers:
Reach
• the firm’s access and connection to customers
Richness
• the depth and detail of the two-way flow of information
between the firm and customers
Affiliation
• facilitating useful interactions with customers
Market Segmentation
Customers
Consumer Industrial
Markets Markets
Segmentation: Consumer Market
Per. Dem.
Con.
ConsumerSoc.
Markets
Psy. Geo.
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Segmentation: Industrial Market
Size End
Industrial
Buy. Markets Pro.
Geo.
Purpose of Business-level Strategies
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 activities. Strategy defines the path that provides the direction of
actions organizational leaders take to help their firm achieve success
Performing activities differently or performing different activities is the essence of a business-level
strategy. Thus, the firm’s business-level strategy is a deliberate choice about how it will perform the
value chain’s primary and support activities to create unique value.
Business Models and their Relationship
with Business-Level Strategies
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 exploiting its core competencies in a specific
product market
There is an array of different business models, such as:
Franchise business model
Subscription model
Freemium model
Advertising model
Peer-to-peer model
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Types of Business-level Strategies
Cost Leadership Strategy
An integrated set of actions designed to produce or deliver goods or
services at the lowest cost, relative to competitors with features that
are acceptable to customers
• Relatively standardized Products
• Features acceptable to many customers
• Lowest competitive price
Cost Leadership Strategy
Cost saving actions required by this strategy:
• Building efficient scale facilities
• Tightly controlling production costs and overhead
• Minimizing costs of sales, R&D and service
• Building efficient manufacturing facilities
• Monitoring costs of activities provided by outsiders
• Simplifying production processes
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Cost Leadership Strategy
How to obtain Cost Advantage
Determine and control Reconfigure, if needed
Cost Drivers Value Chain
• Alter production process • New raw material
• Change in automation • Forward integration
• New distribution channel • Backward integration
• New advertising media • Change location relative to
suppliers or buyers
Driving-cost factors
Economies of scale Product features
Asset utilization Performance
Capacity utilization pattern Mix & variety of products
• Seasonal, cyclical Service levels
Interrelationships Small vs. large buyers
Order processing Process technology
and distribution Wage levels
Value chain linkages Product features
• Advertising & sales Hiring, training, motivation
• Logistics & operations
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Cost Leadership and 5-force Model
Rivalry Among Competing Firms
Can use cost leadership strategy to
advantage since:
Five Forces of
Competition competitors avoid price wars with
cost leaders, creating higher profits
Bargaining Power
for the entire industry
of Suppliers
Cost Leadership and 5-force Model
Bargaining Power of Buyers
Can mitigate buyers’ power by:
Five Forces of driving prices far below competitors,
Competition
causing them to exit and shifting power
with buyers back to the firm
Bargaining Power
of Suppliers
Cost Leadership and 5-force Model
Bargaining Power of Suppliers
Can mitigate suppliers’ power by:
being able to absorb cost increases due to
Five Forces of
Competition low cost position
being able to make very large purchases,
Bargaining Power reducing chance of supplier using power
of Suppliers
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Cost Leadership and 5-force Model
Threat of New Entrants
Can frighten off new entrants due to:
their need to enter on a large scale in
Five Forces of
Competition order to be cost competitive
the time it takes to move down the
Bargaining Power learning curve
of Suppliers
Cost Leadership and 5-force Model
Threat of Substitute Products
Cost leader is well positioned to:
make investments to be first to create
Five Forces of
Competition substitutes
buy patents developed by potential substitutes
Bargaining Power lower prices in order to maintain value
of Suppliers
position
Risks of Cost Leadership Strategy
• Dramatic technological change could take away
your cost advantage
• Competitors may learn how to imitate value chain
• Focus on efficiency could cause cost leader to
overlook changes in customer preferences
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Differentiation Strategy
An integrated set of actions designed by a 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
• Price for product can exceed what the firm’s target customers are
willing to pay
• Nonstandardized products
• Customers value differentiated features more than they value low
cost
Differentiation Strategy
• Value provided by unique features and value characteristics
• Command premium price
• High customer service
• Superior quality
• Prestige or exclusivity
• Rapid innovation
Differentiation Strategy
Differentiation actions required by this strategy:
• Developing new systems and processes
• Shaping perceptions through advertising
• Quality focus
• Capability in R&D
• Maximize human resource contributions through low turnover
and high motivation
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How to obtain Differentiation Advantage
Control if needed Reconfigure to maximize
Cost Drivers Value Chain
• Lower buyers’ costs
• Raise performance of product or service
• Create sustainability through:
Customer perceptions of uniqueness
Customer reluctance to switch to non-
unique product
Differentiation-driving Factors
• Unique product features
• Unique product performance
• Exceptional services
• New technologies
• Quality of inputs
• Exceptional skill or experience
• Detailed information
Differentiation and 5-force Model
Rivalry Among Competing Firms
Can defend against competition because:
Five Forces of
Competition Brand loyalty to differentiated product
offsets price competition
Bargaining Power
of Suppliers
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Differentiation and 5-force Model
Bargaining Power of Buyers
Can mitigate buyer power because:
Five Forces of well differentiated products
Competition
reduce customer sensitivity to
price increases
Bargaining Power
of Suppliers
Differentiation and 5-force Model
Bargaining Power of Suppliers
Can mitigate suppliers’ power by:
absorbing price increases due to higher
Five Forces of margins
Competition
passing along higher supplier prices
because buyers are loyal to differentiated
Bargaining Power
of Suppliers brand
Differentiation and 5-force Model
Threat of New Entrants
Can defend against new entrants because:
new products must surpass proven
products or,
Five Forces of
Competition new products must be at least equal to
performance of proven products, but
Bargaining Power
offered at lower prices
of Suppliers
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Differentiation and 5-force Model
Threat of Substitute Products
Well positioned relative to substitutes
Five Forces of
because:
Competition brand loyalty to a differentiated product
tends to reduce customers’ testing of new
Bargaining Power products or switching brands
of Suppliers
Value-Creating Activities Associated with the
Cost Leadership Strategy
Risks of Differentiation Strategy
• Customers may decide that the price differential between the
differentiated product and the cost leader’s product is too large
• Means of differentiation may cease to provide value for which
customers are willing to pay
• Experience may narrow customer’s perceptions of the value of
differentiated features of the firm’s products
• Makers of counterfeit goods may attempt to replicate differentiated
features of the firm’s products
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Value-Creating Activities Associated with the
Differentiation Strategy
Focused Strategies
A focus strategy must exploit a narrow target’s differences from the
balance of the industry by:
Isolating a particular buyer group
Isolating a unique segment of a product line
Concentrating on a particular geographic market
Finding their “niche”
Factors That May Drive Focused Strategies
• Large firms may overlook small niches
• Firm may lack resources to compete in the broader market
• May be able to serve a narrow market segment more effectively
than can larger industry-wide competitors
• Focus may allow the firm to direct resources to certain value
chain activities to build competitive advantage
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Major Risks of Focused Strategies
• Firm may be “outfocused” by competitors
• Large competitor may set its sights on your niche
market
• Preferences of niche market may change to match
those of broad market
Integrated Cost Leadership/Differentiation Strategy
A number of firms engage in primary value-chain activities and
support functions that allow them to pursue low cost and
differentiation simultaneously
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.
Advantages of Integrated Strategy
A firm that successfully uses an integrated cost
leadership/differentiation strategy should be in a better position to:
• Adapt quickly to environmental changes
• Learn new skills and technologies more quickly
• Effectively leverage its core competencies while competing against its
rivals
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Benefits of Integrated Strategy
• Successful firms using this strategy have above-average
returns
• Firm offers two types of values to customers
• Some differentiated features (but less than a true differentiated
firm)
• Relatively low cost (but now as low as the cost leader’s price)
Risks of Integrated Strategy
• An integrated cost/differentiation business level strategy often
involves compromises (neither the lowest cost nor the most
differentiated firm)
• The firm may become “stuck in the middle” lacking the strong
commitment and expertise that accompanies firms following
either a cost leadership or a differentiated strategy
Flexible Manufacturing Systems
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.
A significant technological advance, an FMS is a computer-controlled process that firms
use to produce a variety of products in moderate, flexible quantities with a minimum of
manual intervention
A flexible manufacturing system gives manufacturing firms an advantage to quickly
change a manufacturing environment to improve process efficiency and thus lower
production cost
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Information Networks
By linking companies with their suppliers, distributors, and customers, information
networks provide another source of flexibility. These networks, when used effectively, help
the firm satisfy customer expectations in terms of product quality and delivery speed
Customer relationship management (CRM) is one form of an information-based network
process firms use for this purpose
Customer relationship management (CRM) is one form of an information-based network
process firms use for this purpose
Total Quality Management 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 costs
3. Reduce the amount of time required to introduce innovative
products to the marketplace
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