This document discusses business-level and functional strategies. It explains Porter's Five Forces model for analyzing industry competition and describes generic business-level strategies of low cost, differentiation, and focus. Global versus multi-domestic strategies are compared. Functional strategies for areas like marketing, finance, operations, and quality management are outlined. The risks of different business-level strategies are also summarized.

1. Chapter 5
Business and
Functional
Level Strategy

2. Learning Objectives
• After studying this chapter, you should be
able to explain:
– Porter’s Five Forces model.
– Business-level strategies.
– Global versus multi-domestic strategies.
– Functional strategies.
– Quality management.

3. Porter’s Five Forces Model
• Business-level strategy refers to how a
specific business will operate in order to
succeed in that specific marketplace.
• Porter’s Five Forces model is a tool
used to get an understanding of what
forces determine the profits in an industry.

4. Porter’s Five Forces Model
• The Five Forces Model is based on
Industrial Organization (IO) economics.
• Industrial Organization economics
argues that all firms in a particular industry
face forces within their industry that
significantly affect profitability.

6. Porter’s Five Forces Model
• Bargaining power of buyers
– The characteristics that determine if the
bargaining power of buyers is high include
concentration of buyers, ability to switch
among different suppliers in the industry, and
impact of goods from the industry on buyer’s
output.

7. Porter’s Five Forces Model
• Bargaining power of suppliers
– The factors that make suppliers powerful are
demand for suppliers products, whether
quality and performance of inputs are
differentiated, and ability of the industry to
vertically integrate.

8. Porter’s Five Forces Model
• New entrants
– Ease of entry into an industry comes from the
industry structure. The structural
characteristics include:
• Obtaining economies of scale.
• The relationship between size and capital costs.
• Discouraging industries having many differentiated
products.
• Limitation on access to distribution channels.
• Patents and proprietary knowledge also limits
entry.

9. Porter’s Five Forces Model
• Substitute products
– Factors impacting the power of substitutes
include:
• Ability of customers to compare quality,
performance, and price of one product with
another.
• Ability of a product to bring good-enough
performance criteria to the customer.
• The cost of switching from one product to another
similar product.

10. Porter’s Five Forces Model
• Rivalry and complementors
– One of the key factors affecting rivalry is
differentiation.
– The other factors include number of
competitors, growing demand for the product,
increasing payoff from successful strategic
moves, and exit barriers.
– Complementors are products which sell well
with another product or those that
complement a product to make it easier to
buy or use.

11. Business-Level Strategies
 Business-level strategy can be viewed by
using a two-by-two matrix, which
describes four generic business-level
strategies.
 The generic-strategies matrix is useful for
analyzing firms that are competing in the
same product-market in a relevant
geographic domain.

13. Business-Level Strategies
• Cost and uniqueness
– Low-cost strategy is where a business
seeks to sell a product at or near the lowest
possible price in the firm’s chosen market
segment.
– Differentiation strategy provides some
aspect of a product or service that differs from
that of competitors, such as higher quality, to
increase the likelihood of customers paying a
premium price for the product.

14. Business-Level Strategies
• Competitive scope
– Competitive scope is the breadth of the
market a firm will target, such as the range of
customers and/or distributors sold to, and the
geographic region the firm covers.
– The key to understanding competitive scope
is, if a firm tries to serve a broad range of
customers with a broad range of needs, or
targets a particular distributor, customer
group, or geographic regions.

15. Business-Level Strategies
• Connecting low cost/differentiation and
competitive edge
– Firms may choose to pursue either a low-cost
or differentiation strategy, employing a more
narrow scope, sometimes also known as a
‘‘focus strategy.’’
– With a focused strategy, a firm will try to serve
a particular type of customer, a particular
distribution channel, and a geographic region,
often with only one product.

16. • Connecting low cost/differentiation and
competitive edge (cont.):
– Narrow positioning can be adopted with either
the low-cost or the differentiation strategy.
Business-Level Strategies

17. • Changing business strategy
– Changing the business-level strategy of a firm
is difficult and should be done only with full
consideration of the difficulties that can arise.
– Business-level strategy is often easier to
change when a firm faces a difficult
competitive setting.
Business-Level Strategies

18. • Low-cost strategy risks
– Competitors may figure out how to offer the
same product at a lower cost.
– Customers are willing to pay more for a high-
quality product.
Business-Level Strategies

19. • Differentiation strategy risks
– The differentiation may be matched or
surpassed by competitors that predict the next
technological change or shift in market
preference.
– A low-cost competitor can figure out an
inexpensive way of adding new features to its
product.
– Differentiation may no longer be valued to the
same degree by consumers who are no
longer willing to pay the premium associated
with the product.
Business-Level Strategies

20. • Focus-based strategy risks
– Focuser may be attacked by a more broadly
positioned firm that is able to serve a range of
market segments effectively.
Business-Level Strategies

21. • Business-level strategies – Global versus
Multi-domestic
– Global Strategy is used when a firm chooses
to compete in the same manner in all the
countries.
– This strategy helps maintain the quality image
of the firm and its products, and obtain
maximum benefits from economies of scale.
– Economies of scale occur when a firm enjoys
declining unit costs as production increases
over a relevant range of time.
Business-Level Strategies

22. • Business-level strategies (cont.):
– Multi-domestic strategy is used when a
parent company allows each market to adapt
to local conditions and pursue the strategy
they choose best in that local market.
– The benefits of this strategy include greater
ability to match the needs of each market and
hire locals to do key advertising and related
activities.
Business-Level Strategies

23. • Choosing a global or multi-domestic
strategy
– A global strategy is useful when a firm makes
its initial expansion overseas.
– Use of global strategy allows strong control
over the expansion and ensures that the
expansion occurs in a desired manner.
– A firm may find that strong control limits its
ability to gain market share.
Business-Level Strategies

24. • Choosing a global or multi-domestic
strategy (cont.):
– One way of solving the limits issue is to allow
some degree of variation in each given
market.
– The firm implements the transnational
strategy, a strategy that combines aspects of
a multi-domestic and global strategy.
– A firm pursuing a transnational strategy will
determine how much flexibility is to be
allowed in a given nation.
Business-Level Strategies

25. Functional Strategies
• Functional Strategies - Strategies that
direct what occurs in individual functional
areas like marketing, finance, and
accounting.
• Strategic tactics - Strategic actions that
help implement a strategy such as a new
promotion program that implements a
focus on differentiation business strategy.

26. Functional Strategies
• Marketing
– Involves designing the firm’s marketing
program that encompasses the “4Ps”.
– Marketing to businesses is very systematic
and focuses on what the given product does
and its benefits.
– Marketing to consumers is heavily influenced
by local culture.

27. Functional Strategies
• Accounting
– Concerned with maintaining information about
the financial status of the firm.
– Provides important performance measures on
whether a firm is meeting concerns like
profitability and inventory turnover.

28. Functional Strategies
• Accounting (cont.):
– Valuable in helping a firm understand how
efficient and effective it is being in different
aspects of its business.
– Transfer pricing is the pricing of goods and
services within a multi-divisional organization
that are supplied to other divisions or foreign
subsidiaries.
– The determination of the transfer prices is
governed by the accounting method used and
the accounting and tax regulations.

29. Functional Strategies
• Finance
– The functional finance strategy of a firm
principally concerns the means in which the
firm funds its chosen activities.
– Financing must be consistent with the
strategy chosen.
– The financing strategy should help a firm
identify key areas that can be done more
efficiently or cheaply.

30. Functional Strategies
• Operations/Production
– Should be consistent with the chosen
business strategy.
– A firm implements turnkey operation when
setting up an operation or production in a
foreign country.
– Turnkey operations is an approach where
one part of the company is responsible for
setting up the plant and equipment while
another operates the plant.

31. Functional Strategies
• Research and development
– Concerned with ensuring that research is
creative, and flow of information happens
throughout the organization.
– There must be strong control of the
information produced.

32. Functional Strategies
• Supply chain management – Focuses on:
– Inputs to a firm and where the firm ships its
output.
– How the firm manages and works with its
suppliers.

33. Functional Strategies
• Quality management
– Considered to be a functional concern and is
not limited to a single department.
– Dr. W. Edwards Deming is one of the
founder’s of the quality movement.