1. What is a business-level strategy?

Business-level strategies represent integrated and coordinated sets of actions that are
taken to exploit core competencies and gain a competitive advantage. To be more specific,
strategies are purposeful, precede the taking of actions to which they apply, and demonstrate a
shared understanding of the firm’s vision and mission. An effectively formulated strategy
marshals, integrates, and allocates the firm’s resources, capabilities, and competencies so that it
will be properly aligned with its external environment. A properly developed strategy also
rationalizes the firm’s vision and mission along with the actions taken to achieve them.

2. What is the relationship between a firm’s customers and its business-level strategy in terms of
who, what, and how? Why is this relationship important?
The firm’s core competencies should be focused on satisfying customer needs or
preferences through business-level strategies, which detail actions taken to provide
value to customers and gain a competitive advantage. Returns earned from
relationships with customers (current and/or new) are the lifeblood of all firms. The
firm’s relationships with its customers are strengthened when it delivers superior value
to them.
A customer focus requires that firms simultaneously evaluate or consider:
Who: Determining the Customers to Serve - The first step is to identify customers based
on differences in needs or preferences (often called market segmentation).
What: Determining Which Customer Needs to Satisfy - After the firm decides whom it
will serve, it must identify the targeted customer group’s needs that its goods or
services can satisfy. This is important in that successful firms learn how to deliver to
customers what they want and when they want it.
How: Determining Core Competencies Necessary to Satisfy Customers’ Needs - Firms
use core competencies (how) to implement value-creating strategies and thereby satisfy
customers’ needs.
Customers are the foundation of successful business level strategies. When considering
customers, a firm simultaneously examines three issues: who, what, and how. These issues,
respectively, refer to the customer groups to be served, the needs those customers have that
the firm seeks to satisfy, and the core competencies the firm will use to satisfy customers'
needs. Increasing segmentation of markets throughout the global economy creates
opportunities for firms to identify more distinctive customer needs that they can serve with one
of the business-level strategies.

3. What are the differences among the cost leadership, differentiation, focused cost leadership,
focused differentiation, and integrated cost leadership/differentiation business-level
strategies?
Firms can choose one of five strategies from the generic strategy matrix based
on the source of competitive advantage - uniqueness or cost - and breadth of
competitive scope - broad or narrow.
A firm choosing to compete across a broad market determines that it should
compete in a number of customer segments. The cost leadership strategy is 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. On the other
hand, the differentiation strategy is 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 in the broad market. Thirdly, focused cost leadership
strategy is an integrated set of actions taken to produce goods or services with features
that are acceptable to customers at the lowest cost, similar to cost leadership strategy.
However, it is used when firms utilize their core competencies to serve the needs of a
particular industry segment or niche to the exclusion of others. Fourthly, focused
differentiation strategy is a type of differentiation strategy which is used in narrow
market instead of broad market. Finally, integrated cost leadership/differentiation
strategy which involves engaging in primary value-chain activities and support functions
that allow a firm to simultaneously pursue low cost and differentiation. In addition to
this, it stands on broad and narrow market together.

4. How can each one of the business-level strategies be used to position the firm relative to the
five forces of competition in a way that helps the firm earn above-average returns?
A firm that successfully implements a differentiation strategy can earn above-
average returns even when the five competitive forces are strong.
Cost Leadership Strategy
Rivalry with Existing Competitors
Achieving the lowest cost position means that a firm’s rivals will hesitate to compete
based on price because, in a price war, the low cost firm will still earn profits even after its
competitors compete away all profits.
Bargaining Power of Buyers (Customers)
Achieving the low cost position provides some protection against powerful customers
who attempt to drive down prices.
Bargaining Power of Suppliers
Because they have achieved the lowest cost position in the industry, the cost leadership
strategy enables a firm to absorb a greater amount of cost increases from powerful suppliers
before it must raise prices charged to customers.
Potential Entrants.
And with a continuous focus on efficiency and reducing costs, cost leadership firms
create barriers to entry.

Product Substitutes

The cost leader is in a more attractive position relative to substitute products than are
other firms in the industry
Differentiation Strategy
Rivalry with Existing Competitors
Achieving customer loyalty means differentiating products in ways that are meaningful to
customers.
Bargaining Power of Buyers (Customers)
Through meaningful differentiation, firms develop products that are considered unique.
Bargaining Power of Suppliers
 Because of the differentiator’s focus on product quality and responsiveness to customer
preferences, suppliers also may be forced to provide differentiators with higher quality
materials, components, or services, which can drive up the firm’s per-unit costs.
Potential Entrants.
The principal barrier to entry is customers’ loyalty to the uniquely differentiated brand.

Product Substitutes

Brand loyalty may insulate differentiated products from substitutes.

Focused Cost Leadership Strategy and Focused Differentiation Strategy
These strategies are used to position the firm relative to the five forces of competition in a way
that helps the firm earn above-average returns similar to those discussed for the differentiation
and cost leadership strategies; however, the competitive scope of the focus is on a narrow
segment rather than the industry.
Integrated Cost Leadership/Differentiation Strategy
The firm is thus able to achieve a competitive advantage by delivering value to customers based
on both product features and low price.
Using a flexible manufacturing system (FMS), the firm integrates human, physical, and
information resources to create relatively differentiated products at relatively low costs. By
linking companies with their suppliers, distributors, and customers information networks
provide another source of flexibility. Firms develop and use TQM systems to increase customer
satisfaction, to cut costs, and to reduce the amount of time required to introduce innovative
products to the marketplace.

5. What are the specific risks associated with using each business-level strategy?

Competitive Risks of the Cost Leadership Strategy

• Technological innovations by competitors could eliminate the cost leader’s cost advantage.
• Overly focusing on process efficiency may cause the cost leader to overlook needed
differentiation features.
• Competitors may successfully imitate the low-cost leader’s value chain configuration.

Competitive Risks of the Differentiation Strategy

• Customers may decide that the cost of uniqueness is too high

• The firm’s means of differentiation no longer provides value to customers.
• Customer learning may reduce the customer’s perception of the value of the firm’s
differentiation.
• A fourth risk is concerned with counterfeiting. Increasingly, counterfeit goods are a concern for
many firms using the differentiated strategy.
Competitive Risks of Focus Strategies

• Competitors may successfully focus on an even smaller segment of the market, “outfocusing”
the focuser, or focus only on the most profitable slice of the focuser’s chosen segment.
• An industry-wide competitor may recognize the attractiveness of the segment served by the
focuser and mobilize its superior resources to better serve the segment’s needs.
• Preferences and needs of the narrow segment may become more similar to the broader market,
reducing or eliminating the advantages of focusing.

Competitive Risks of the Integrated Cost Leadership/Differentiation Strategy

This is an appealing yet risky strategy, as it is difficult for firms to perform primary and support activities
in ways that allow them to produce relatively inexpensive products with levels of differentiation that
create value for the target customers. These firms can only earn average profits when industry structure
is favorable or when other firms in the industry also are “stuck-in-the-middle.”