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Business-Level Strategy

Business-level strategy concerned with deciding how a firm should compete in the industries in

which it has elected to participate.

COMPETITIVE THEME: DIFFERENTIATION OR LOW COST?

Low-Cost Strategy 

A low-cost strategy is concerned with giving consumers value for money and focusing

managerial energy and attention on doing everything possible to lower the costs of the

organization.

Differentiation Strategy

A differentiation strategy is concerned with increasing the value of a product offering in the

eyes of consumers. A product can be differentiated by superior reliability (it breaks down less

often or not at all), better design, superior functions and features, better point-of-sale service,

better after-sales service and support, better branding, and so on.

Example: Rolex watch is differentiated from a Timex watch by superior design, functions,

features, and reliability.

The Low-Cost Value Cycle

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Options for Exploiting Differentiation

SEGMENTING THE MARKET

Markets are characterized by different types of consumers. Some are wealthy, some are not;

some are old, some are young; some are influenced by popular culture, some never watch TV;

some care deeply about status symbols, other do not; some place a high value on luxury, some

on value for money. Markets can be segmented by a variety of factors, common examples

being the income, demographics, preferences, and tastes of consumers. Moreover, different

enterprises can segment the same mark et in different ways, and various approaches might be

reasonable.

CHOOSING SEGMENTS TO SERVE

Having decided ho w to segment the mark et, managers must decide which segments to serve.

Some enterprises focus on a few segments or just one. Others serve a broad range of segments.

In the automobile industry.

Focus strategyServing a limited number of segments.

broad market strategy

Serving the entire market.

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SEGMENTATION AND STRATEGY

There are three dimensions to business-level strategy: the competitive theme managers

emphasize (low cost or differentiation), the way they choose to segment the market, and the

segments they serve. Taken together, these dimensions allow a variety of different ways to

compete in an industry. Figure 6.5 summarizes two of these dimensions—competitive themeand segments served. Also included in Figure 6.5 are some illustrative examples chosen from

the U.S. retail industry.

FIGURE 6.5

Types of Business-Level Strategy

THE LOW COST –DIFFERENTIATION FRONTIER

Low-cost positions and differentiated positions are two different ways of gaining competitive

advantage. The enterprise that is striving for the lowest costs does everything it can to cut costs

out of its operations, whereas the enterprise striving for differentiation necessarily has to bear

higher costs to achieve that differentiation. Put simply, a firm cannot simultaneously be Wal-

Mart and Nordstrom, Porsche and Kia, or Role x and Timex. Managers must choose between

these basic ways of attaining competitive advantage.

The efficiency frontier has a convex shape because of diminishing returns: When a firm already

has significant differentiation built into its product offering, increasing differentiation by a

relatively small amount requires significant additional costs. The converse also holds: When a

firm already has a lo w cost structure, it has to give up a lot of differentiation in its product

offering to get additional cost reductions.

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The Efficiency Frontier in Retail Apparel

value innovation

Using innovation to offer more value at a lower cost than competitors.

Example: Dell: Value innovation.

Pushing Out the Efficiency Frontier through Value Innovation

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Corporate-Level Strategy

Strategy concerned with deciding which industries a firm should compete in and how the firm

should enter or exit industries.

FOCUS ON A SINGLE BUSINESSFocusing on a single business makes sense if a firm is growing rapidly, consuming all available

capital resources and the time and energy of its managers. Almost all enterprises start out

focusing on a single industry. So long as that business continues to g row, they are often

advised to continue doing so. Expanding into other businesses becomes an option when the

growth rate in the core business is decelerating, as can occur when the market the firm serves

is saturated and overall industry growth has slowed down.

The strategic question managers must answer then is whether to enter new businesses or

simply return the cash generated by the existing business to shareholders in the form of higher

dividend payouts. This was the question managers at Microsoft were contemplating in 2004.

VERTICAL INTEGRATION

Vertical integration involves moving upstream into businesses that supply inputs to the firm’s

core business or downstream into businesses that use the outputs of the firm’s core business.

An example of upstream vertical integration would be for Dell Computer to enter the memory

chip business, making the memory chips that go into its personal computers (currently Dell

purchases these chips from independent suppliers).

An example of downstream vertical integration is the 2001 decision by Apple Computer to

enter the retail business with its Apple Store. The stores sell Apple products and third-party

products, and as of 2006 there were close to 150 of these stores.

DIVERSIFICATION

Entry into new business areas.

Related Diversification

Diversification into a business related to the existing business activities of an enterprise by

distinct similarities in one or more activities in the value chain.

Unrelated Diversification

Diversification into a business not related to the existing business activities of an enterprise by

distinct similarities in one or more activities in the value chain.

Internal governance skills: The ability of senior managers to elicit high levels of performance

from the constituent businesses of a diversified enterprise.

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INTERNATIONAL EXPANSION

International expansion is the final corporate strategy. International expansion can be a good

way to increase the performance of a firm. Historically managers have turned their attention to

international expansion after their business has become established in its home mark et. More

recently, however, with the emergence of global markets managers are starting to think aboutinternational expansion even at an early point in the development of their enterprise.

Nowadays even some small enterprises have a global presence.

SWOT ANALYSIS: FORMULATING STRATEGIES

Once managers have identified the strengths, weakness, opportunities, and threats that

confront their organization, they use a SWOT analysis to list these and then star t the process of

choosing strategies. The goal at this stage is to formulate strategies at the corporate, business,

and operating levels that build on organization strengths, correct weaknesses, use strengths toexploit opportunities in the environment, and block threats so the organization can execute its

mission, realize its vision, meet or beat its major goals, and do so in a manner that is consistent

with its values.

ACTION PLANS

Action plans specify precisely how corporate-level, business-level, and operating strategies will

be put into effect. Action plans should include sub goals, responsibilities, time lines, and

financial budgets. Consider again the case of Verizon Wireless. A key Verizon strategy has been

to differentiate its service by superior geographical coverage. To put this strategy into action,

Verizon had to build more cell towers than its competitors (so its wireless signal would cover a

larger geographical area, resulting in fewer dropped calls). An action item of this strategic plan

might therefore have given operations managers in Illinois.

IMPLEMENTATION

Once action plans have been drawn up and all members of the organization know what they

are supposed to do to execute the strategy, it is on to implementation. At the most basic level,

strategy implementation consists of putting action plans into effect. At a higher level of

abstraction, however, strategy implementation also requires that the enterprise have the right

kind of organization structure, incentives, control systems, and culture, as w ell as the right mixof people. Put differently, strategy is implemented by people, but the way that people work is

influenced by the internal organization of the enterprise.

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REVIEW AND ADJUSTMENTS

The final step in the strategic planning process is to periodically review actual performance

against the plan and make any needed adjustments. A plan can be vie wed as a control

mechanism. If parts of an organization (or the entire organization) do not reach the goals

outlined in the plan, senior managers will star t to ask questions and seek an explanation for thevariance between the plan and actual results.

Build to order strategy

Build to order (BTO) and sometimes referred to as make to order or made to order (MTO), is a

production approach where products are not built until a confirmed order for products is

received. BTO is the oldest style of order fulfillment and is the most appropriate approach used

for highly customized or low volume products.

"Made to order" products are also common in the food service industry, such as at restaurants.

This approach is considered good for highly configured products;

e.g. automobiles, bicycles, computer servers, or for products where holding inventories is very

expensive, e.g. aircraft.