What is a business-level strategy?
A business-level strategy is an integrated and coordinated set of commitments and actions that a firm uses to achieve competitive advantage by exploiting core competencies in a particular product market.
It refers to the choices a firm makes about how to compete in individual product markets.
Namely, choices matter because long-term performance is tied to the firm’s strategies.
Given the complexity of competing successfully in a global economy, making choices about how a firm will compete can be difficult.
Furthermore, business-level strategy aims to differentiate the firm’s position and its competitors.
To differentiate itself from competitors, a firm must decide whether to perform activities differently or perform different activities.
Strategy defines the course that provides direction for the actions to be taken by the organization’s leaders.
The relationship between a firm’s customers and its business-level strategy in terms of who, what, and how and why relationships matter
Customers are the foundation of successful business-level strategies and should never be taken for granted.
Effectively managing customer relationships helps answer questions related to who, what and how.
From a customer perspective, choosing a business-level strategy determines who the firm will serve, what needs of those target customers it will meet, and how those needs will be met.
Furthermore, companies must satisfy customers with their business-level strategy so that revenue from customer relationships is the lifeblood of all organizations.
Furthermore, the most successful companies strive to find new ways to satisfy existing customers and/or meet the needs of new customers.
Determining who the target customers a firm wants to serve is an important decision in its business-level strategy.
Companies divide customers into groups based on differences in customer 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 deciding whom a firm will serve, it must identify the needs of the target customer group that its goods or services can satisfy.
In a general sense, needs (what) are related to the product’s benefits and features.
Successful companies learn how to deliver what customers want, when they want it.
After determining who the firm will serve and the specific needs of those customers, the firm is ready to decide how to use its capabilities and capabilities to develop products that can meet the needs of its target customers.
Core capabilities are resources and capabilities that serve as a source of competitive advantage for a firm over its competitors.
Firms use core competencies (how) to implement value-creating strategies that satisfy customer needs.
Differences between cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation business-level strategies
In choosing a business-level strategy, companies evaluate two types of potential competitive advantages: “costs lower than competitors or the ability to command a price premium that exceeds the additional costs of doing so.”
Lower costs result from a firm’s ability to perform activities differently from competitors; Being able to differentiate refers to a firm’s ability 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 create either a cost competitive advantage or a distinctiveness competitive advantage as a basis for implementing its business-level strategy.
Moreover, there are two types of target market namely broad market and narrow market segment.
Firms serving broad markets seek to use their capabilities to create value for customers on an industry-wide basis.
A narrow market segment means that firms seek to satisfy the needs of a narrow customer group.
With a focus strategy, a firm “selects a segment or group of segments within an industry and tailors its strategy to serve them to the exclusion of others.”
A cost leadership strategy is a concerted set of actions taken to produce goods or services with characteristics that are acceptable to consumers at the lowest cost compared to competitors in the broader market.
On the other hand, a differentiation strategy is a concerted set of actions taken to create a good or service (at an acceptable price) that customers perceive to be different from the broader market in ways that are important to them.
Third, a focused cost leadership strategy is an integrated set of actions to produce goods or services with features acceptable to customers at the lowest possible cost, similar to a cost leadership strategy.
However, it is used when companies use their core competencies to meet the needs of a particular industry segment or to the exclusion of others.
Fourth, a focused differentiation strategy is a type of differentiation strategy that is used in a narrow market rather than a broad market.
Finally, an integrated cost leadership/differentiation strategy that includes primary value-chain activities and support functions allows the firm to simultaneously pursue low cost and differentiation.
Apart from this, it stands together in broad and narrow markets.
How can each of the business-level strategies be used to position the firm relative to the five forces of competition to help the firm achieve above-average returns?
Cost leadership strategy
Having a low cost position is valuable when dealing with competitors.
Because of the advantageous position of the price leader, competitors hesitate to compete on the basis of price, especially before assessing the potential consequences of such competition.
Powerful consumers can force the price leader to lower its prices, but not below the level at which the price leader’s next-most-efficient industry competitor can earn average returns.
A cost leader typically operates with higher margins than competitors and often tries to increase its margins by spending less.
Among other advantages, higher gross margins than competitors enable a price leader to absorb price increases from suppliers.
When an industry faces a substantial increase in the cost of its supplies, only a cost leader can charge higher prices and earn average or above returns.
A cost leader becomes highly efficient due to continuous efforts to reduce costs to a level lower than competitors.
As increasing levels of efficiency increase profit margins, they act as a significant entry barrier for potential competitors.
New entrants must be willing to accept below-average returns until they gain the experience necessary to move up to price leader performance.
Compared to its industry competitors, a cost leader also holds an attractive position relative to product alternatives.
Differentiation strategy
Customers are loyal buyers of products that are differentiated in ways that are meaningful to them.
As their brand loyalty increases, consumers become less sensitive to price increases.
The relationship between brand loyalty and price sensitivity differentiates a firm from competitive rivals. Thus, firms can sustain their competitive advantage by adopting a reputational differentiation strategy.
The uniqueness of differentiated goods or services reduces the sensitivity of consumers to price increases.
Customers are willing to accept a price increase when a product meets their unique needs better than a competitor’s offering.
Since a firm using a differentiation strategy charges a premium price for its products, suppliers must provide high-quality components, which increases the firm’s costs.
However, in these cases the higher margins that the firm earns partially offset the influence of suppliers because higher supplier costs can be covered by these margins.
Customer loyalty and the need to overcome differentiated product uniqueness create significant barriers to potential entry.
Entering an industry in this situation typically requires a significant investment of resources and patience while seeking customer loyalty.
Firms that sell brand-name goods and services to loyal customers are effectively positioned against product alternatives.
In contrast, companies without brand loyalty are more likely to offer similar services to their customers (especially
(if the cost of the substitute is low) or products that offer more features and perform more attractive functions have a higher probability of switching to products that offer different features.
Focused Cost Leadership Strategy
This strategy is used to position the firm relative to the five forces of competitors in a way that helps the firm earn above-average returns, similar to a cost leadership strategy.
Focused differentiation strategy
This strategy is used to position the firm relative to the five forces of the competitor in a way that helps the firm earn above-average returns, similar to the differentiation strategy.
Integrated cost leadership/differentiation strategy
Firms need the flexibility to perform primary value-chain activities and support functions to produce somewhat differentiated products at relatively low costs that allow them to use an integrated cost leadership/differentiation strategy.
Flexible production systems, information networks and total quality management systems.
There are three sources of flexibility that are particularly useful for companies trying to balance the goals of continuous cost reduction and continuous growth in sources of separation as demanded by an integrated strategy.
Using a flexible manufacturing system (FMS), a firm combines human, physical, and information resources to produce relatively differentiated products at relatively low costs.
A significant technological advance, FMS is a computer-controlled process used to manufacture a variety of products in medium, flexible quantities with minimal manual intervention.
Information networks provide another source of flexibility by connecting companies with their suppliers, distributors, and customers.
These networks, when used effectively, help the firm meet customer expectations in terms of product quality and delivery speed.
Total Quality Management (TQM) is a managerial process that emphasizes continuous improvement in all processes with a problem-solving approach based on an organization’s commitment to the customer and the empowerment of employees.
Companies develop and use TQM systems to increase customer satisfaction, reduce costs, and reduce time to market with innovative products.
Specific risks associated with using each business-level strategy
Cost leadership strategy
The first risk is that the processes used by the cost leader to produce and deliver its good or services may be rendered obsolete by competitors’ innovations.
Another risk is that a cost leader may focus too much on cost reduction while trying to understand customer perceptions of “levels of competitive differentiation”.
Imitation is the ultimate threat to a cost leadership strategy. By using their own core competencies, competitors sometimes learn how to successfully imitate the cost leader’s strategy.
Differentiation strategy
One danger of a differentiation strategy is that consumers may decide that the price difference between the product of the differentiation producer and the product of the price leader is too large.
Another risk of a differentiation strategy is that the firm’s means of differentiation may cease to provide value for which customers are willing to pay.
A third risk of a differentiation strategy is that experience may dilute customers’ perceptions of the value of the product’s differentiating features.
Counterfeiting is the fourth threat of discrimination policy.
Counterfeits are products that are labeled with a trademark or logo that is not identical or distinguishable from a legitimate logo owned by another party, thus infringing the rights of the legitimate owner.
When a consumer buys such a product and discovers the fraud, it unfortunately leads to distrust of the branded product and diminishes the margin.
Focused Cost Leadership Strategy
A focused cost leadership strategy has all the pitfalls of a cost leadership strategy.
In addition, first, a competitor may focus on a more narrowly defined competitive segment and thereby “out-focus” the focusser.
Second, a firm competing on an industry-wide basis may decide that a given market segment is attractive and worthy of competitive pursuit by the firm using a focus strategy.
A third risk is that the needs of customers in a narrow competitive segment may over time become the same as the needs of customers across the entire industry.
As a result, the benefits of the focus strategy are either reduced or eliminated.
Focused differentiation strategy
A focused differentiation strategy has all the risks of a differentiation strategy.
In addition, first, a competitor may be able to focus on a more narrowly defined competitive segment and thereby “out-focus” the focusser.
Second, a firm competing on an industry-wide basis may decide that a given market segment is attractive and worthy of competitive pursuit by the firm using a focus strategy.
A third risk is that the needs of customers in a narrow competitive segment may over time become the same as the needs of customers across the entire industry.
As a result, the benefits of the focus strategy are either reduced or eliminated.
Integrated cost leadership/differentiation strategy
The first risk is that firms find it difficult to perform primary value-chain activities and support functions in a way that allows them to produce relatively cheap products with a level of differentiation that creates value for the target customer.
Second, to use this strategy correctly over time, firms must simultaneously be able to reduce the cost of producing products (required by a cost leadership strategy) while increasing product differentiation (required by a differentiation strategy).
Third, firms that fail to perform value-chain activities and support functions optimally are “stuck in the middle”.
Being stuck in the middle means that the firm’s cost structure is not low enough to price its products attractively, and its products are not differentiated enough to create value for the target customer.
Fourth, companies can also get stuck in the middle when they fail to successfully implement a cost leadership or differentiation strategy.