Chapter Four and Five

Business-level Strategy &

Department of Management
Hang Seng University
 Last Week Review
According to RBV, how do firms achieve above-average
returns?
 A firm's unique sets (bundling and leveraging) of superior resources
and capabilities (core competencies) which create additional value
as the basis for competitive advantage over a long period of time
(sustainable).
How do we know what are the core competenc(ies)?
 Valuable, Rare, costly-to-Imitate, and Non-substitutable
 Value chain analysis

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 Learning Objectives
 Define business-level strategy.
 Discuss the relationship between customers and business-level strategies in terms
of who, what, and how.
 Explain the differences among business-level strategies.
 Use the five forces of competition model to explain how above-average returns can
be earned through each business-level strategy.
 Describe the risks of using each of the business-level strategies.
 Define competitors, competitive rivalry, competitive behaviour, and competitive
dynamics.
 Describe market commonality and resource similarity as the building blocks of a
competitor analysis.
 Discuss factors affecting the likelihood a competitor will take competitive actions.
 Explain competitive dynamics in slow-cycle, in fast-cycle, and in standard-cycle
markets.
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 Analysis

Strategic
formulation

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
What is business-level strategy?

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 Nestlé
Business-
 Business-level strategy 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 Corporate-
markets. level strategy

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Photo Sources: www.comentarium.com.br
 Business-level Strategy

 Who will be served? (Market segmentation)

 What needs will be satisfied? (Product’s benefit & features)

 How will those needs be satisfied? (Core competencies)

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 Business-level Strategy
 Business-level strategy and RBV
 Providing value to customers and gaining competitive advantage by
exploiting core competencies in individual product markets
 A firm must decide whether it intends to:
 Perform activities differently (lower overall costs than rivals); or
 Perform different activities as compared to its rivals
(differentiating product or service at a premium price).

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Types of Business-level Strategy
Competitive Advantage
Cost Uniqueness

(customer segments)
Competitive Scope

Broad Cost Leadership Differentiation

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 Cost Leadership Strategy
 An integrated set of actions taken to produce goods or
services with acceptable features to customers at the
lowest cost, relative to that of competitors.
 Standardised products
 Features broadly acceptable to
many customers
 Lowest competitive price

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 Cost Leadership Strategy
 How to obtain a cost advantage
 Determine and Average
control cost drivers Cost Leader
Competitor
(continuous improving
efficiency and cost Profit Profit
reduction)
Cost Cost
 Reconfigure value advantage
chain activities
Cost
if needed
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 Cost Leadership Strategy
 Sources of Cost Advantages
 Economies of scale
 Learning curve economies
 Differential input access
 Technology independent of scale
 Policy choices

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Photo Sources: wikipedia
 Cost Leadership and Five Forces
New
Suppliers Buyers Substitutes Competitors
Entrants
 Economies  Being the  Less Low price  Rivals’
of scale and significant efficient as high hesitation
other cost customer rivals being switching in price
advantages and/or high forced out of cost against competition
as high entry margins the market substitutes
barriers absorbing first
increase in
costs

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 Cost Leadership and Sustainable CA
 VRIN?
 Competitive Risks
 Processes used to produce and distribute good or service may
become obsolete due to competitors’ innovations.
 Too much focus on cost reductions may occur at expense of
customers’ perceptions of differentiation.
 Competitors, using their own core competencies, may successfully
imitate the cost leader’s strategy.

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 Differentiation Strategy
 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.
 Non-standardised (customised)
products
 Appropriate when customers value
differentiated features more than
low cost

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 Differentiation Strategy
 How to obtain a differentiation advantage
 Control cost drivers Average Differentiation
if needed Competitor Leader
 Customise / Premium
reconfigure value
Profit Profit
chain activities to
maximise customers’
Cost Cost
value

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 Differentiation Strategy
 Sources of Differentiation Advantages
 Attributes of products and/or services (Product features,
complexity, timing of introduction, and location)
 Relationship with customers
(Customisation, brands)
 Linkages within or among
firms (product mix, distribution
channels, service and support)

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Photo Sources: wikipedia
 Differentiation and Five Forces
New
Suppliers Buyers Substitutes Competitors
Entrants
 Product  Premium  Buyers’  Brand  Limited
differentiation price and low price loyalty and rivalry due to
as high entry high margins sensitivity differentiation differentiated
barriers absorbing increasing as higher market
increase in willingness switching
costs of increase cost against
in price substitutes

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 Differentiation and Sustainable CA
 VRIN?
 Competitive Risks
 The price differences between the differentiator’s product and the
cost leader’s product becomes too large.
 Experience narrow customers’ perceptions of the value of
differentiated features.
 Counterfeit goods replicate the differentiated features of the firm’s
products.

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 Focus Strategy
 An integrated set of actions taken to produce goods or
services that serve the needs of a particular competitive
segment.
 Particular buyer group
 Different segment of a product line
 Different geographic markets

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 Focus Strategy
 Two types of focus strategies: focused cost leadership and
focused differentiation
 Factors driving focus strategy:
 Large firms overlooking small niches
 Limitation in resources and capabilities to compete in broader market
 Higher efficiency and building competitive advantage in narrow
segments

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 Focus Strategy and Sustainable CA
 VRIN?
 Competitive Risks
 A focusing firm may be “outfocused” by its competitors.
 A large competitor may set its sights on a firm’s niche market.
 Customer preferences in niche market may change to more closely
resemble those of the broader market.

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 Integrated Strategy
 A firm that successfully uses an integrated cost leadership /
differentiation strategy concentrating on both cost and
differentiation competitive advantages.
 Efficient productions of differentiated
products
 Adapting to new technology and
rapid environmental changes
 Two sources of strategic flexibility
(FMS,TQM)

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 Integrated Strategy and Sustainable CA
 VRIN?
 Competitive Risks
 Easily compromising and becoming ‘stuck-in-the-middle’ – lacking
the strong commitment and expertise that accompanies firms
following either a cost leadership or a differentiated strategy

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Photo Sources: wikipedia
A firm’s strategies are dynamic…

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 Model of Competitive Rivalry
 Mutual interdependence of firms
 A firm’s competitive actions have noticeable effects and elicit
competitive responses from its competitors
 Success of a strategy is a function of (i) the firm’s initial strategies;
(ii) how well it anticipates competitors’ responses to them; and (iii)
how well it responds to its competitors’ initial actions.

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 Competition Concepts
 Competitors
 Firms operating in the same market (i.e., industry), offering similar
products and targeting similar customers
 Competitive behaviour
 The set of competitive actions and competitive responses the firm
takes to build or defend its competitive advantages and to improve
its market position

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 Competition Concepts
 Competitive rivalry
 Competitive behaviours, i.e., the set of actions and responses,
occurring between an individual firm and its competitors, influencing
a firm’s ability to gain and sustain competitive advantages.
 It affects all types of strategies, and has a dominant influence on
firm’s business-level strategies.
 Competitive action (build or defend its competitive advantages or
improve its market position) versus competitive response (to counter
the effects of a competitor’s competitive action)

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 Competition Concepts

 Competitive dynamics
 Competitive behaviours taken by all firms competing within a market
 Multimarket competition
 Firms compete in several product or geographic market

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 Strategic Versus Tactical Behaviours
 Strategic action/response
 A market-based move that involves a significant commitment of
organisational resources and is difficult to implement and reverse.
 Tactical action/response
 A market-based move that is taken to fine-tune a strategy
 It usually involves fewer resources and is relatively easy to
implement and reverse.

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 Model of Competitive Rivalry

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 Competitor Analysis
 A firm is better able to understand competitors and predict
their behaviours when forming its competitive actions and
responses (avoiding competitive blind spots).
 Future objectives, current strategies, assumptions, and capabilities
 The extents of direct competitions depends on the two
components: market commonality and resource similarity
 Direct competitors: high market commonality and resource similarity

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 Competitor Analysis
 Market commonality (intensity of rivalry)
 Number of markets (both product and geographic regions) with
which the firm and competitors are jointly involved; and the degree of
importance of the individual markets to each competitors
 Resource similarity (similarity of strategy)
 The extent to which the type and amount of resources of a firm are
comparable to that of competitors

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 Competitor Analysis

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Model of Competitive Rivalry

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 Likelihood of Attack: Timing
 First mover benefits
 First mover takes an initial competitive action in order to build or
defend its competitive advantages or to improve its market position.
 It is more likely to earn above-average returns (albeit temporary); to
gain the loyalty of customers who may become committed to the
firm’s products, as well as the market share that can be difficult for
competitors to take during future competitive rivalry.
 First mover must have readily available resources, and allocate
funds for product innovation, R&D, and aggressive advertisement.
Any drawbacks?
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 Likelihood of Attack: Timing
 Second mover benefits
 Second mover responds to the first mover’s competitive action,
typically through imitation.
 More cautious than first movers, second movers studies customers’
reactions to product innovations; identifies and avoids mistakes and
huge spending the first mover made; and develop more efficient
processes and technologies (e.g. blueprints from first mover).

Any drawbacks?

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 Likelihood of Attack: Timing
 Late mover incentives
 Late mover responds to a competitive action only after considerable
time has elapsed.
 Any success achieved will be slow in coming and much less than
that achieved by first and second movers.
 Despite substantially reduced risks and returns, late mover can only
earn average returns and delays its understanding of how to create
value for customers.

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 First vs Second Mover
 First mover is better than second mover when:
 it achieves absolute cost advantage and/or high switch costs; or
 its reputation and image advantages are costly-to-imitate.
 Second mover is better than first mover when:
 fast-follower can leapfrog the first mover by rapid technology; or
 first-mover costs outweigh the first-mover advantages.

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Photo Sources: Wikipedia
 Likelihood of Attack: Size
 Large firms are more likely to initiate more competitive
actions as well as strategic actions.
 Large firms commonly have the slack resources required to launch a
larger number of total competitive actions.
 Tend to rely on a limited variety of competitive actions, which can
ultimately reduce their competitive success.

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 Likelihood of Attack: Size
 Small firms are more likely and quickly to launch competitive
actions.
 Small firms are perceived as nimble and flexible competitors.
 Relying on speed and surprise to defend competitive advantages or
develop new ones while engaged in competitive rivalry.
 Having the flexibility needed to launch a greater variety of
competitive actions.

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 Competitive Dynamics: Market Speed
 Slow-cycle market: markets in which the firm's competitive
advantages are shielded from imitation for long periods of
time, and in which imitation is costly
 Competitive advantages are sustainable.
 All firms concentrate on competitive
behaviours to protect, maintain and
extend proprietary competitive advantage.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Competitive Dynamics: Market Speed
 Fast-cycle market: Markets in which the firm's capabilities that
contribute to competitive advantages are not shielded from
imitation and where imitation is often rapid and inexpensive
 Competitive advantages are not sustainable – reverse engineering to
quickly imitate the firm’s product
 Firms should avoid loyalty to single products, possibly cannibalising
their own current products to launch new ones; and should learn how
to rapidly and continuously develop new competitive advantages
before competitors can imitate them.

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 Competitive Dynamics: Market Speed

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Competitive Dynamics: Market Speed
 Standard-cycle market: Markets where firm’s competitive
advantages are moderately shielded from imitation and where
imitation is moderately costly
 Competitive advantages partially sustained as quality is continuously
upgraded.
 Firms should seek to serve many customers and gain a large market
share; and gain brand loyalty through brand management; and
carefully control operations.

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