BUSINESS LEVEL
STRATEGY
& 3 Types of Competitive
Advantage
(Overall Cost Leadership,
Differentiation and Focus)
Group IV
Francis Jr. B. Cadungog
John Rowel S. Canon
John Paul Mendoza
Alecs Zulueta
Business-level strategy: 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.
What? Who? How? • Basis of choosing a business level strategy by determining how well a
company can compete – What customer need will be satisfied? – Who is to be satisfied? – How
will the need be satisfied?
Core Competencies: The resources and capabilities that have been determined to be a
source of competitive advantage for a firm over its rivals.
Strategy: An integrated and coordinated set of actions taken to exploit core competencies
and gain a competitive advantage.
Business-Level Strategy: Actions taken to provide value to customers and gain a
competitive advantage by exploiting core competencies in specific, individual product
markets.
Three basic competitive approaches:
Cost Leadership- To outperform competitors by doing everything it can to produce goods
or services at the lowest possible cost.
Differentiation- The differentiated product has the ability to satisfy a customer’s need in
a way that competitors cannot.
Focus- Directed toward serving the needs of a limited customer group or segment.
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 saving actions required by this strategy: – building efficient 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
Cost Leadership and the Five Forces
• Rivalry - competitors avoid price wars with cost leaders
• Buyers – shift demand to you, increase market power
• Suppliers – increased market power, absorb cost increases (low cost position)
• Entrants – entry barriers (scale, learning)
• Substitutes – reinvest econ profit to maintain advantage
Major Risks of Cost Leadership Strategy
• There can only be one cost leader
• Technological change can eliminate cost advantage
• Spillovers lead to imitation
• Efficiency focus may create blind spots re: customer preferences
Differentiation Strategy
An integrated set of actions designed by a firm to produce or deliver goods or services
that customers perceive as adding value
– price may exceed what the firm’s target customers are willing to pay
– Non-commodity products
– customers value differentiated features more than they value low cost
Differentiation Strategy
• Add downstream value
– lower buyer cost
– raise buyer performance
• Cost
– Add value to buyer’s value: reduce downstream processing time, search time,
transaction costs, defect rates, direct costs, learning curves, labor, space, installation, etc.
(e.g., CRM software)
Some differentiation actions required by this strategy:
– develop new “systems” and processes
– signal and shape buyer perceptions
– quality focus
– capability in R&D
Implication - maximize human capital contributions
Differentiation and the Five Forces
• Rivalry - brand loyalty to differentiated products reduces price competition
• Buyers – differentiated products less price elastic
• Suppliers – absorb price increases (higher margins), pass along higher prices (buyer
loyalty)
• Entrants – must surpass proven products or be equivalent at lower price
• Substitutes – diff raises switching costs
Pitfalls of Differentiation Strategies
• Differentiating on characteristics not valued by buyers (e.g., HP)
• Over-differentiating
• Price premium is too high
• Failing to signal value
• Focusing on product instead of entire value chain
Focused Business-Level 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 Driving Focus Strategies
• Large firms 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
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
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
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)
Major 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
