This document provides an overview of business-level strategy. It defines business-level strategy as an integrated set of commitments and actions a firm uses to gain a competitive advantage in specific product markets. The chapter discusses the relationship between customers and business-level strategies in terms of who the firm serves, what needs it satisfies, and how it satisfies those needs. It explains the differences between cost leadership, differentiation, and focused cost leadership/differentiation strategies. The risks and benefits of each strategy are also described.

1. CHAPTER 4
Business-Level Strategy
4–1

2. “Competitive strategy is about
being different. It means
deliberately choosing to perform
activities differently or to perform
different activities than rivals to
deliver a unique mix of value.”
Michael E. Porter

3. K NOWLEDGE O BJECTIVES
Studying this chapter should provide you with the strategic
management knowledge needed to:
1. Define business-level strategy.
2. Discuss the relationship between customers and
business-level strategies in terms of who, what, and
how.
3. Explain the differences among business-level
strategies.
4. Use the five forces of competition model to explain how
above-average returns can be earned through each
business-level strategy.
5. Describe the risks of using each of the business-level
strategies.
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4. Business-Level Strategy (Defined)
• 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.
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5. Strategy and Competitive Advantage
• Competitive advantage exists when a firm’s
strategy gives it an edge in
 Attracting customers and
 Defending against competitive forces
Key to Gaining a Competitive Advantage
• Convince customers firm’s product / service
offers superior value
 A good product at a low price
 A superior product worth paying more for
 A best-value product

6. What Is Competitive Strategy?
• Deals exclusively with a company’s business
plans to compete successfully
 Specific efforts to please customers
 Offensive and defensive moves
to counter maneuvers of rivals
 Responses to prevailing market conditions
 Initiatives to strengthen its market position
• Narrower in scope than business strategy

7. Core Competencies and Strategy
Resources and superior capabilities that are
Core
sources of competitive advantage over a
Competencies
firm’s rivals
An integrated and coordinated set of
Strategy actions taken to exploit core competencies
and gain competitive advantage
Providing value to customers and gaining
Business-level
competitive advantage by exploiting core
Strategy
competencies in individual product markets
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8. Customers: Their Relationship to Business-
Level Strategies
Who will be
served?
Key Issues
in What needs will
Business-level be satisfied?
Strategy
How will those
needs be satisfied?
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9. Effectively Managing Relationships with
Customers
• Firms must manage all aspects of their
relationship with customers.
 Reach: firm’s success and connection to customers
 Richness: depth and detail of two-way flow of
information between the firm and the customer
 Affiliation: facilitation of useful interactions with
customers
4–9

10. Who: Determining the Customers to Serve
• Market segmentation
 A process used to cluster people with similar needs
into individual and identifiable groups.
All Customers
Consumer Industrial
Markets Markets
4–10

11. Market Segmentation
• Consumer Markets • Industrial Markets
 Demographic factors  End-use segments
 Socioeconomic factors  Product segments
 Geographic factors  Geographic segments
 Psychological factors  Common buying factor
segments
 Consumption patterns
 Customer size
 Perceptual factors
segments
4–11

12. TABLE 4.1 Basis for Customer Segmentation
Consumer Markets
• Demographic factors (age, income, sex, etc.)
• Socioeconomic factors (social class, stage in the family life cycle)
• Geographic factors (cultural, regional, and national differences)
• Psychological factors (lifestyle, personality traits)
• Consumption patterns (heavy, moderate, and light users)
• Perceptual factors (benefit segmentation, perceptual mapping)
Industrial Markets
• End-use segments (identified by SIC code)
• Product segments (based on technological differences or
production economics)
• Geographic segments (defined by boundaries between countries or
by regional differences within them)
• Common buying factor segments (cut across product market and
geographic segments)
• Customer size segments
4–12

13. What: Determining Which Customer
Needs to Satisfy
• Customer needs are related to a product’s
benefits and features.
• Customer needs are neither right nor wrong,
good nor bad.
• Customer needs represent desires in terms of
features and performance capabilities.
4–13

14. How: Determining Core Competencies
Necessary to Satisfy Customer Needs
• Firms use core competencies to implement value
creating strategies that satisfy customers’ needs.
• Only firms with capacity to continuously improve,
innovate and upgrade their competencies can
expect to meet and/or exceed customer
expectations across time.
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15. The Purpose of a Business-Level Strategy
• Business-Level Strategies
 Are intended to create differences between the firm’s
position relative to those of its rivals.
• To position itself, the firm must decide whether it
intends to:
 Perform activities differently or
 Perform different activities as compared to its rivals.
4–15

16. Types of Potential Competitive Advantage
• Achieving lower overall costs than rivals
 Performing activities differently (reducing process
costs)
• Possessing the capability to differentiate the
firm’s product or service and command a
premium price
 Performing different (more highly valued) activities.
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17. FIGURE 4.1 The External Environment
4–17

18. Competitive Scope
• Broad Scope
 The firm competes in many
customer segments.
• Narrow Scope
 The firm selects a segment or
group of segments in the
industry and tailors its strategy
to serving them at the
exclusion of others.
4–18

19. Types of Business-Level Strategies
Competitive Advantage
Cost Uniqueness
Broad Cost Leadership Differentiation
Target
Integrated Cost
Competitive
Leadership/
Scope Differentiation
Narrow Focused Cost Focused
Target Leadership Differentiation
4–19

20. FIGURE 4.2 Five Business-Level Strategies
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21. Low-Cost Provider Strategies
Keys to Success
• Make achievement of meaningful lower costs
than rivals the theme of firm’s strategy
• Include features and services in product
offering that buyers consider essential
• Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match
Low-cost leadership means low overall costs, not
just low manufacturing or production costs!

22. Translating a Low-Cost Advantage into Higher
Profits: Two Options
Option 1: Use lower-cost edge to
under-price competitors and attract
price-sensitive buyers in enough
numbers to increase total profits
Option 2: Maintain present price, be
content with present market share,
and use lower-cost edge to earn a
higher profit margin on each unit sold,
thereby increasing total profits

23. Approaches to Securing
a Cost Advantage
Approach 1
Do a better job than rivals of
performing value chain activities
efficiently and cost effectively
Approach 2
Control
Revamp value chain to bypass costs!
cost-producing activities that add little
By-pass
value from the buyer’s perspective costs!

24. Approach 1: Controlling the Cost Drivers
• Capture scale economies; avoid scale diseconomies
• Capture learning and experience curve effects
• Control percentage of capacity utilization
• Pursue efforts to boost sales and spread costs such as
R&D and advertising over more units
• Improve supply chain efficiency
• Substitute use of low-cost for high-cost raw materials
• Use online systems and sophisticated software to
achieve operating efficiencies
• Adopt labor-saving operating methods
• Use bargaining power to gain concessions from suppliers
• Compare vertical integration vs. outsourcing

25. Approach 2: Revamping the Value Chain
• Use direct-to-end-user sales/marketing methods
• Make greater use of online technology
applications
• Streamline operations by eliminating low-value-
added or unnecessary work steps
• Relocate facilities closer to suppliers or
customers
• Offer basic, no-frills product/service
• Offer a limited product/service as opposed to a
full product/service line

26. Wal-Mart’s Approach to
Managing Its Value Chain
Institute extensive information sharing with vendors via online
Institute extensive information sharing with vendors via online
systems
systems
Pursue global procurement of some items and centralize most
Pursue global procurement of some items and centralize most
purchasing activities
purchasing activities
Invest in state-of-the-art automation at its distribution centers
Invest in state-of-the-art automation at its distribution centers
Strive to optimize the product mix and achieve greater sales
Strive to optimize the product mix and achieve greater sales
turnover
turnover
Install security systems and store operating procedures that lower
Install security systems and store operating procedures that lower
shrinkage rates
shrinkage rates
Negotiate preferred real estate rental and leasing rates with real
Negotiate preferred real estate rental and leasing rates with real
estate developers and owners of its store sites
estate developers and owners of its store sites
Manage and compensate its workforce in a manner to yield lower
Manage and compensate its workforce in a manner to yield lower
labor costs
labor costs

27. Keys to Success in Achieving
Low-Cost Leadership
• Scrutinize each cost-creating activity, identifying cost drivers
• Use knowledge about cost drivers to manage
costs of each activity down year after year
• Find ways to restructure value chain to eliminate
nonessential work steps and low-value activities
• Work diligently to create cost-conscious corporate cultures
 Feature broad employee participation in continuous cost-
improvement efforts and limited perks for executives
 Strive to operate with exceptionally small corporate staffs
• Aggressively pursue investments in resources and capabilities that
promise to drive costs out of the business

28. Characteristics of a Low-Cost Provider
• Cost conscious corporate culture
• Employee participation in cost-control efforts
• Ongoing efforts to benchmark costs
• Intensive scrutiny of budget requests
• Programs promoting continuous cost
improvement
Successful low-cost producers champion
frugality but wisely and aggressively
invest in cost-saving improvements !

29. When Does a Low-Cost
Strategy Work Best?
• Price competition is vigorous
• Product is standardized or readily available
from many suppliers
• There are few ways to achieve
differentiation that have value to buyers
• Most buyers use product in same ways
• Buyers incur low switching costs
• Buyers are large and have
significant bargaining power
• Industry newcomers use introductory low prices
to attract buyers and build customer base

30. Pitfalls of Low-Cost Strategies
• Being overly aggressive in cutting price
• Low cost methods are easily imitated by rivals
• Becoming too fixated on reducing costs
and ignoring
 Buyer interest in additional features
 Declining buyer sensitivity to price
 Changes in how the product is used
• Technological breakthroughs open up cost
reductions for rivals

31. Cost Leadership Strategy
• 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 with features that
are acceptable to customers.
 Relatively standardized products
 Features acceptable to many customers
 Lowest competitive price
4–31

32. Cost Leadership Strategy
• Cost saving actions required by this strategy:
 Building efficient scale facilities
 Tightly controlling production costs and overhead
 Minimizing costs of sales, R&D and service
 Building efficient manufacturing facilities
 Monitoring costs of activities provided by outsiders
 Simplifying production processes
4–32

33. How to Obtain a Cost Advantage
Determine Reconfigure
and control Value Chain
Cost Drivers if needed
 Alter production process  New raw material
 Change in automation  Forward integration
 New distribution channel  Backward integration
 New advertising media  Change location relative
 Direct sales in place of to suppliers or buyers
indirect sales
4–33

34. FIGURE 4.3 Examples of Value-Creating Activities Associated
with the Cost Leadership Strategy
4–34

35. Value-Creating Activities for Cost Leadership
• Cost-effective MIS • Monitor suppliers’
performances
• Few management layers
• Link suppliers’ products to
• Simplified planning
production processes
• Consistent policies
• Economies of scale
• Effecting training
• Efficient-scale facilities
• Easy-to-use manufacturing
• Effective delivery schedules
technologies
• Low-cost transportation
• Investments in technologies
• Highly trained sales force
• Finding low cost raw materials
• Proper pricing
4–35

36. Cost Leadership Strategy: Competitors
Rivalry with • Due to cost leader’s
Existing Competitors advantageous position:
Threat of  Rivals hesitate to compete
new
entrants on basis of price.
Rivalry
among Bargaining
power of
 Lack of price competition
competing
firms suppliers leads to greater profits.
Threat of Bargaining
substitute power of
products buyers
4–36

37. Cost Leadership Strategy: Buyers
Bargaining Power • Can mitigate buyers’
of Buyers power by:
 Driving prices far below
Threat of
new competitors, causing
entrants
Rivalry
them to exit, thus
Bargaining
among
power of shifting power with
competing
firms suppliers buyers back to the firm.
Threat of Bargaining
substitute power of
products buyers
4–37

38. Cost Leadership Strategy: Suppliers
Bargaining Power • Can mitigate suppliers’
of Suppliers power by:
Threat of  Being able to absorb
new
entrants
cost increases due to
Rivalry
Bargaining
low cost position.
among
competing power of
firms suppliers  Being able to make very
large purchases,
Threat of
substitute
Bargaining
power of
reducing chance of
products buyers supplier using power.
4–38

39. Cost Leadership Strategy: New Entrants
The Threat of • Can frighten off new
Potential Entrants entrants due to:
Threat of  Their need to enter on a
new
entrants
large scale in order to be
Rivalry
Bargaining
cost competitive.
among
competing power of
firms suppliers  The time it takes to
move down the learning
Threat of
substitute
Bargaining
power of
curve.
products buyers
4–39

40. Cost Leadership Strategy: Substitutes
Product • Cost leader is well
Substitutes positioned to:
Threat of
 Make investments to be
new
entrants
first to create substitutes.
Rivalry
among Bargaining  Buy patents developed by
competing power of
firms suppliers potential substitutes.
Threat of Bargaining
 Lower prices in order to
substitute power of maintain value position.
products buyers
4–40

41. Cost Leadership Strategy (cont’d)
• Competitive Risks
 Processes used to produce and distribute good or
service may become obsolete due to competitors’
innovations.
 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.
4–41

42. Differentiation Strategies
Objective
• Incorporate differentiating features that cause
buyers to prefer firm’s product or service over
brands of rivals
Keys to Success
• Find ways to differentiate that create value for
buyers and are not easily matched or cheaply
copied by rivals
• Not spending more to achieve differentiation
than the price premium that can be charged

43. Benefits of Successful Differentiation
A product / service with unique,
appealing attributes allows a firm to
 Command a premium price and/or
Which
 Increase unit sales and/or hat is
unique?
 Build brand loyalty
= Competitive Advantage

44. Types of Differentiation Themes
• Unique taste – Dr. Pepper
• Multiple features – Microsoft Windows and Office
• Wide selection and one-stop shopping – Home Depot,
Amazon.com
• Superior service -- FedEx, Ritz-Carlton
• Spare parts availability – Caterpillar
• Engineering design and performance – Mercedes,
BMW
• Prestige – Rolex
• Product reliability – Johnson & Johnson
• Quality manufacture – Karastan, Michelin, Toyota
• Technological leadership – 3M Corporation
• Top-of-line image – Ralph Lauren, Starbucks, Chanel

45. Sustaining Differentiation:
Keys to Competitive Advantage
• Most appealing approaches to differentiation
 Those hardest for rivals to match or imitate
 Those buyers will find most appealing
• Best choices to gain a longer-lasting, more
profitable competitive edge
 New product innovation
 Technical superiority
 Product quality and reliability
 Comprehensive customer service
 Unique competitive capabilities

46. Where to Find Differentiation
Opportunities in the Value Chain
• Purchasing and procurement activities
• Product R&D and product design activities
• Production process / technology-related activities
• Manufacturing / production activities
• Distribution-related activities
• Marketing, sales, and customer service activities
Internally Activities, Costs,
Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins Strategic Partners

47. How to Achieve a
Differentiation-Based Advantage
Approach 1
Incorporate product features/attributes that
lower buyer’s overall costs of using product
Approach 2
Incorporate features/attributes that raise the
performance a buyer gets out of the product
Approach 3
Incorporate features/attributes that enhance buyer
satisfaction in non-economic or intangible ways
Approach 4
Compete on the basis of superior capabilities

48. Importance of Perceived Value
• Buyers seldom pay for value that is not
perceived
• Price premium of a differentiation strategy
reflects
 Value actually delivered to the buyer
and
 Value perceived by the buyer
• Actual and perceived value can differ when
buyers are unable to assess their experience

49. Signaling Value as Well
as Delivering Value
• Incomplete knowledge of buyers causes them to
judge value based on such signals as
 Price
 Attractive packaging
 Extensive ad campaigns
 Ad content and image
 Seller facilities or professionalism and
personality of employees
 Having a list of prestigious customers
• Signals of value may be as important as
actual value when
 Nature of differentiation is hard to quantify
 Buyers are making first-time purchases
 Repurchase is infrequent
 Buyers are unsophisticated

50. For Discussion: Your Opinion
A low-cost provider strategy can defeat a
differentiation strategy when buyers are satisfied
with a basic product and don’t think “extra”
attributes are worth a higher price. True or false?
Explain.

51. 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.
 Focus is on nonstandardized products
 Appropriate when customers value differentiated
features more than they value low cost.
4–51

52. How to Obtain a Differentiation Advantage
Control Reconfigure
Cost Drivers Value Chain to
if needed maximize
 Lower buyers’ costs
 Raise performance of product or service
 Create sustainability through:
 Customer perceptions of uniqueness
 Customer reluctance to switch to non-
unique product or service
4–52

53. Figure 4.4 Examples of Value-Creating Activities Associated
with the Differentiation Strategy
4–53

54. Value-Creating Activities and Differentiation
• Highly developed MIS • High quality replacement parts
• Emphasis on quality • Superior handling of incoming
raw materials
• Worker compensation for
creativity/productivity • Attractive products
• Use of subjective performance • Rapid response to customer
measures specifications
• Basic research capability • Order-processing procedures
• Technology • Customer credit
• High quality raw materials • Personal relationships
• Delivery of products
4–54

55. Differentiation Strategy: Competitors
Rivalry with • Defends against
Competitors competitors because brand
loyalty to differentiated
Threat of product offsets price
new
entrants competition.
Rivalry
among Bargaining
competing power of
firms suppliers
Threat of Bargaining
substitute power of
products buyers
4–55

56. Differentiation Strategy: Buyers
Bargaining Power • Can mitigate buyers’ power
of Buyers because well differentiated
products reduce customer
Threat of sensitivity to price increases.
new
entrants
Rivalry
among Bargaining
competing power of
firms suppliers
Threat of Bargaining
substitute power of
products buyers
4–56

57. Differentiation Strategy: Suppliers
Bargaining Power • Can mitigate suppliers’
of Suppliers power by:
 Absorbing price increases
Threat of due to higher margins.
new
entrants  Passing along higher
Rivalry
among Bargaining supplier prices because
power of
competing
suppliers buyers are loyal to
firms
differentiated brand.
Threat of Bargaining
substitute power of
products buyers
4–57

58. Differentiation Strategy: New Entrants
The Threat of • Can defend against new
Potential Entrants entrants because:
 New products must surpass
Threat of proven products.
new
entrants  New products must be at least
Rivalry
among Bargaining equal to performance of proven
power of
competing
suppliers products, but offered at lower
firms
prices.
Threat of Bargaining
substitute power of
products buyers
4–58

59. Differentiation Strategy: Substitutes
Product • Well positioned relative to
Substitutes substitutes because:
 Brand loyalty to a
Threat of differentiated product tends
new to reduce customers’ testing
entrants
Rivalry
of new products or switching
Bargaining
among
power of
brands.
competing
firms suppliers
Threat of Bargaining
substitute power of
products buyers
4–59

60. Competitive Risks of Differentiation
• The price differential between the differentiator’s product
and the cost leader’s product becomes too large.
• Differentiation ceases to provide value for which
customers are willing to pay.
• Experience narrows customers’ perceptions of the value
of differentiated features.
• Counterfeit goods replicate differentiated features of the
firm’s products.
4–60

61. When Does a Differentiation
Strategy Work Best?
• There are many ways to differentiate a product
that have value and please customers
• Buyer needs and uses are diverse
• Few rivals are following a similar
differentiation approach
• Technological change and
product innovation are fast-paced

62. Pitfalls of Differentiation Strategies
• Appealing product features are easily copied by
rivals
• Buyers see little value in unique attributes of product
• Overspending on efforts to differentiate the product
offering, thus eroding profitability
• Over-differentiating such that product
features exceed buyers’ needs
• Charging a price premium
buyers perceive is too high
• Not striving to open up meaningful gaps in quality,
service, or performance features vis-à-vis rivals’
products

63. Focus / Niche Strategies
• Involve concentrated attention on a narrow piece
of the total market
Objective
Serve niche buyers better than rivals
Keys to Success
• Choose a market niche where buyers
have distinctive preferences, special
requirements, or unique needs
• Develop unique capabilities to serve
needs of target buyer segment

64. Approaches to Defining a Market Niche
• Geographic uniqueness
• Specialized requirements in
using product/service
• Special product attributes
appealing only to niche buyers

65. Examples of Focus Strategies
• Animal Planet and History Channel
 Cable TV
• Google
 Internet search engines
• Porsche
 Sports cars
• Cannondale
 Top-of-the line mountain bikes
• Enterprise Rent-a-Car
 Provides rental cars to repair garage customers
• Bandag
 Specialist in truck tire recapping

66. Focus / Niche Strategies
and Competitive Advantage
Approach 1
• Achieve lower costs than rivals in
serving a well-defined buyer segment –
Focused low-cost strategy
Approach 2 Which
hat is
unique?
• Offer a product appealing to unique
preferences of a well-defined buyer segment –
Focused differentiation strategy

67. What Makes a Niche
Attractive for Focusing?
• Big enough to be profitable and offers good
growth potential
• Not crucial to success of industry leaders
• Costly or difficult for multi-segment competitors
to meet specialized needs of niche members
• Focuser has resources and capabilities
to effectively serve an attractive niche
• Few other rivals are specializing in same niche
• Focuser can defend against challengers via
superior ability to serve niche members

68. Risks of a Focus Strategy
• Competitors find effective ways to match
a focuser’s capabilities in serving niche
• Niche buyers’ preferences shift towards product
attributes desired by majority of buyers – niche
becomes part of overall market
• Segment becomes so attractive it becomes
crowded with rivals, causing segment profits to
be splintered

69. Focus Strategies
• An integrated set of actions taken to produce
goods or services that serve the needs of a
particular competitive segment.
 Particular buyer group—youths or senior citizens
 Different segment of a product line—professional
craftsmen versus do-it-yourselfers
 Different geographic markets—East coast versus
West coast
4–69

70. Focus Strategies (cont’d)
• Types of focused strategies
 Focused cost leadership strategy
 Focused differentiation strategy
• To implement a focus strategy, firms must be
able to:
 Complete various primary and support activities in a
competitively superior manner, in order to develop
and sustain a competitive advantage and earn above-
average returns.
4–70

71. Factors That Drive Focused Strategies
• Large firms may overlook small niches.
• A firm may lack the resources needed to compete in the
broader market.
• A firm is able to serve a narrow market segment more
effectively than can its larger industry-wide competitors.
• Focusing allows the firm to direct its resources to certain
value chain activities to build competitive advantage.
4–71

72. Competitive Risks of Focus Strategies
• 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.
4–72

73. Best-Cost Provider Strategies
• Combine a strategic emphasis on low-cost
with a strategic emphasis on differentiation
 Make an upscale product at a lower cost
 Give customers more value for the money
Objectives
• Deliver superior value by meeting or exceeding
buyer expectations on product attributes and
beating their price expectations
• Be the low-cost provider of a product with good-
to-excellent product attributes, then use cost
advantage to underprice comparable brands

74. Competitive Strength of a
Best-Cost Provider Strategy
• A best-cost provider’s competitive advantage is
based on its capability to include upscale attributes
at a lower cost than rivals’ comparable products
• To achieve competitive advantage,
a company must be able to
 Incorporate attractive features at a lower cost than rivals
 Manufacture a good-to-excellent quality product at a
lower cost than rivals
 Develop a product that delivers good-to-excellent
performance at a lower cost than rivals
 Provide attractive customer
service at a lower cost than rivals

75. When Does a Best-Cost
Provider Strategy Work Best?
• Where buyer diversity makes
product differentiation the norm and
• Where many buyers are also
sensitive to price and value

76. Risk of a Best-Cost Provider Strategy
• A best-cost provider may get squeezed
between strategies of firms using low-cost and
differentiation strategies
 Low-cost leaders may be able to siphon
customers away with a lower price
 High-end differentiators may be able to
steal customers away with better product
attributes

77. Test Your Knowledge
Which of the following are distinguishing features of a best-
cost provider strategy (based on the comparisons of the five
generic competitive strategies shown in Figure 5.1)?
A. The strategic target is price-conscious buyers
B. A marketing emphasis on charging a slightly higher price
than rival brands having comparable features and
attributes
C. A product line that stresses wide selection, many product
variations, and emphasis on differentiating features
D. A competitive advantage based on more value for the
money
E. Using constant product innovation, excellent R&D skills,
and periodic technological breakthroughs to sustain the

78. Integrated Cost Leadership/
Differentiation Strategy
• A firm that successfully uses an integrated cost
leadership/differentiation strategy should be in a
better position to:
 Adapt quickly to environmental changes.
 Learn new skills and technologies more quickly.
 Effectively leverage its core competencies while
competing against its rivals.
4–78

79. Integrated Cost Leadership/
Differentiation Strategy (cont’d)
• Commitment to strategic flexibility is necessary
for implementation of integrated cost
leadership/differentiation strategy.
 Flexible manufacturing systems (FMS)
 Information networks
 Total quality management (TQM) systems
4–79

80. Flexible Manufacturing Systems
• Computer-controlled processes used to produce
a variety of products in moderate, flexible
quantities with a minimum of manual
intervention.
 Goal is to eliminate the “low-cost-versus-wide
product-variety” tradeoff.
 Allows firms to produce large variety of products at
relatively low costs.
4–80

81. Information Networks
• Link companies electronically with their
suppliers, distributors, and customers.
 Facilitate efforts to satisfy customer expectations in
terms of product quality and delivery speed.
 Improve flow of work among employees in the firm
and their counterparts at suppliers and distributors.
 Customer relationship management (CRM)
4–81

82. Total Quality Management (TQM) Systems
• Emphasize total commitment to the customer
through continuous improvement using:
 Data-driven, problem-solving approaches
 Empowerment of employee groups and teams
• Benefits
 Increased customer satisfaction
 Lower costs
 Reduced time-to-market for innovative products
4–82

83. Risks of the Integrated Cost Leadership/
Differentiation Strategy
• Often involves compromises
 Becoming neither the lowest cost nor the most
differentiated firm.
• Becoming “stuck in the middle”
 Lacking the strong commitment and expertise that
accompanies firms following either a cost leadership
or a differentiated strategy.
4–83

84. Deciding Which Generic
Competitive Strategy to Use
• Each positions a company differently in its market and
competitive environment
• Each establishes a central theme for how a company will
endeavor to outcompete rivals
• Each creates some boundaries for maneuvering as
market circumstances unfold
• Each points to different ways of experimenting with the
basics of the strategy
• Each entails differences in product line, production
emphasis, marketing emphasis, and means to sustain
the strategy
The big risk – Selecting a “stuck in the middle” strategy!
This rarely produces a sustainable competitive
advantage or a distinctive competitive position!