Business-Level Strategies

What is it?

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 specific product markets. It indicates the choices the firm has made about how it intends to compete in individual product markets. Namely, the choices are important because long-term performance is linked to a firm’s strategies. Given the complexity of successfully competing in the global economy, the choices about how the firm will compete can be difficult.

Moreover, 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 whether it intends to perform activities differently or to perform different activities. Strategy defines the path which provides the direction of actions to be taken by leaders of the organization.

The relationship between a firm’s customers and its business-level strategy in terms of who, what, and how and why is this relationship important

Customers are the foundation of successful business-level strategies and should never be taken for granted. Effectively managing customer relationships helps the firm answer questions related to the issues of who, what, and how. In terms of customers, when selecting a business-level strategy the firm determines who will be served, what needs those target customers have that it will satisfy, and how those needs will be satisfied. Moreover, firms must satisfy customers with their business-level strategy so that returns earned from relationships with customers are the lifeblood of all organizations. Furthermore, the most successful companies try to find new ways to satisfy current customers and/ or to meet the needs of new customers.

Deciding who the target customer is that the firm intends to serve with its business-level strategy is an important decision. Companies divide customers into groups based on differences in the customers’ needs to make this decision. Dividing customers into groups based on their needs is called market segmentation. Market segmentation is a process used to cluster people with similar needs into individual and identifiable groups.

After the firm decides who it will serve, it must identify the targeted customer group’s needs that its goods or services can satisfy. In a general sense, needs (what) are related to a product’s benefits and features. Successful firms learn how to deliver to customers what they want, when they want it.

After deciding who the firm will serve and the specific needs of those customers, the firm is prepared to determine how to use its capabilities and competencies to develop products that can satisfy the needs of its target customers. Core competencies are resources and capabilities that serve as a source of competitive advantage for the firm over its rivals. Firms use core competencies (how) to implement value-creating strategies, thereby satisfying customers’ needs.

The differences among the cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation business-level strategies

When selecting a business-level strategy, firms evaluate two types of potential competitive advantages: “lower cost than rivals or the ability to differentiate and command a premium price that exceeds the extra cost of doing so.” Having lower costs results from the firm’s ability to perform activities differently than rivals; being able to differentiate indicates the firm’s capacity to perform different (and valuable) activities. Thus, based on the nature and quality of its internal resources, capabilities, and core competencies, a firm seeks to form either a cost competitive advantage or a distinctiveness competitive advantage as the basis for implementing its business-level strategy.

Moreover, there are two types of target markets are broad market and narrow market segment(s). Firms serving a broad market seek to use their capabilities to create value for customers on an industry-wide basis. A narrow market segment means that firms intend to serve the needs of a narrow customer group. With focus strategies, the firm “selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.”

The cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors in broad market. On the other hand, the differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them in the broad market. Thirdly, focused cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, similar to cost leadership strategy. However, it is used when firms utilize their core competencies to serve the needs of a particular industry segment or niche to the exclusion of others. Fourthly, focused differentiation strategy is a type of differentiation strategy which is used in narrow market instead of broad market. Finally, integrated cost leadership/differentiation strategy which involves engaging in primary value-chain activities and support functions that allow a firm to simultaneously pursue low cost and differentiation. In addition to this, it stands on broad and narrow market together.

How can each of the business-level strategies be used to position the firm relative to the five forces of competition in a way that helps the firm earn above-average returns?

a. Cost Leadership Strategy

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 basis of price, especially before evaluating the potential outcomes of such competition.

Powerful customers can force a cost leader to reduce its prices, but not below the level at which the cost leader’s next-most-efficient industry competitor can earn average returns.

The cost leader generally operates with margins greater than those of competitors and often tries to increase its margins by driving costs lower. Among other benefits, higher gross margins relative to those of competitors make it possible for the cost leader to absorb its suppliers’ price increases. 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.

Through continuous efforts to reduce costs to levels that are lower than competitors, a cost leader becomes highly efficient. Because increasing levels of efficiency enhance profit margins, they serve as a significant entry barrier to potential competitors. New entrants must be willing to accept less than average returns until they gain the experience required to approach the cost leader’s efficiency.

Compared with its industry rivals, the cost leader also holds an attractive position relative to product substitutes.

b. Differentiation Strategy

Customers tend to be loyal purchasers of products differentiated in ways that are meaningful to them. As their loyalty to a brand increases, customers’ sensitivity to price increases is reduced. The relationship between brand loyalty and price sensitivity insulates a firm from competitive rivalry. Thus, reputations can sustain the competitive advantage of firms following a differentiation strategy.

The distinctiveness of differentiated goods or services reduces customers’ sensitivity to price increases. Customers are willing to accept a price increase when a product still satisfies their unique needs better than a competitor’s offering.

Because the firm using the differentiation strategy charges a premium price for its products, suppliers must provide high-quality components, driving up the firm’s costs. However, the high margins the firm earns in these cases partially insulate it from the influence of suppliers in that higher supplier costs can be paid through these margins.

Customer loyalty and the need to overcome the uniqueness of a differentiated product create substantial barriers to potential entrants. Entering an industry under these conditions typically demands significant investments of resources and patience while seeking customers’ loyalty.

Firms selling brand-name goods and services to loyal customers are positioned effectively against product substitutes. In contrast, companies without brand loyalty face a higher probability of their customers switching either to products which offer differentiated features that serve the same function (particularly if the substitute has a lower price) or to products that offer more features and perform more attractive functions.

c. Focused Cost Leadership Strategy

This strategy is used to position the firm relative to the five forces of competition in a way that helps the firm earn above-average returns similar to cost leadership strategy.

d. Focused Differentiation Strategy

This strategy is used to position the firm relative to the five forces of competition in a way that helps the firm earn above-average returns similar to differentiation strategy.

e. Integrated Cost Leadership/Differentiation Strategy

Flexibility is required for firms to complete primary value-chain activities and support functions in ways that allow them to use the integrated cost leadership/differentiation strategy in order to produce somewhat differentiated products at relatively low costs. Flexible manufacturing systems, information networks, and total quality management systems are three sources of flexibility that are particularly useful for firms trying to balance the objectives of continuous cost reductions and continuous enhancements to sources of differentiation as called for by the integrated strategy.

Using a flexible manufacturing system (FMS), the firm integrates human, physical, and information resources to create relatively differentiated products at relatively low costs. A significant technological advance, the FMS is a computer-controlled process used to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention.

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.

Total quality management (TQM) is a managerial process that emphasizes an organization’s commitment to the customer and to continuous improvement of all processes through problem-solving approaches based on empowerment of employees. Firms develop and use TQM systems to increase customer satisfaction, to cut costs, and to reduce the amount of time required to introduce innovative products to the marketplace.

The specific risks associated with using each business-level strategy

a. Cost Leadership Strategy

First risk is that the processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors’ innovations. A second risk is that too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers’ perceptions of “competitive levels of differentiation.” Imitation is a final risk of the cost leadership strategy. Using their own core competencies, competitors sometimes learn how to successfully imitate the cost leader’s strategy.

b. Differentiation Strategy

One risk of the differentiation strategy is that customers might decide that the price differential between the differentiator’s product and the cost leader’s product is too large. Another risk of the differentiation strategy is that a firm’s means of differentiation may cease to provide value for which customers are willing to pay. A third risk of the differentiation strategy is that experience can narrow customers’ perceptions of the value of a product’s differentiated features. Counterfeiting is the differentiation strategy’s fourth risk. Counterfeits are products which are labeled with a trademark or logo that is identical to or indistinguishable from a legal logo owned by another party, thus infringing the rights of the legal owner. When a consumer purchases such a product and discovers the deception, regret creates distrust of the branded product and reduces differentiation.

c. Focused Cost Leadership Strategy

Focused Cost Leadership Strategy has all risks of Cost Leadership Strategy. In addition to these, first, a competitor may be able to focus on a more narrowly defined competitive segment and thereby “out-focus” the focuser. Second, a company competing on an industry-wide basis may decide that the market segment served by the firm using a focus strategy is attractive and worthy of competitive pursuit. The third risk is that the needs of customers within a narrow competitive segment may become more similar to those of industry-wide customers as a whole over time. As a result, the advantages of a focus strategy are either reduced or eliminated.

d. Focused Differentiation Strategy

Focused Differentiation Strategy has all risks of Differentiation Strategy. In addition to these, first, a competitor may be able to focus on a more narrowly defined competitive segment and thereby “out-focus” the focuser. Second, a company competing on an industry-wide basis may decide that the market segment served by the firm using a focus strategy is attractive and worthy of competitive pursuit. The third risk is that the needs of customers within a narrow competitive segment may become more similar to those of industry-wide customers as a whole over time. As a result, the advantages of a focus strategy are either reduced or eliminated.

e. Integrated Cost Leadership/Differentiation Strategy

First risk is 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. Secondly, to properly use this strategy across time, firms must be able to simultaneously reduce costs incurred to produce products (as required by the cost leadership strategy) while increasing product differentiation (as required by the differentiation strategy). Thirdly, firms that fail to perform the value-chain activities and support functions in an optimum manner become “stuck in the middle.” Being stuck in the middle means that the firm’s cost structure is not low enough to allow it to attractively price its products and that its products are not sufficiently differentiated to create value for the target customer. Fourthly, firms can also become stuck in the middle when they fail to successfully implement either the cost leadership or the differentiation strategy.

In this post, the book at below was used.

Software Development Team Lead, Technical Product Manager, MBA Candidate https://www.linkedin.com/in/batur-seker/

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