Universitas Muhammadiyah Jakarta

Business-Level Strategy

Dr. DJONIERI, SE, Ak, MBA, CA

Business Level Strategy

 A Business level strategy is 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.
 Market segmentation is a process used to
cluster people with similar needs into individu
al and identifiable groups.
Basis for Customer Segmentation
Consumer Markets
1. Demographic factors (age, income, sex, etc.)
2. Socioeconomic factors (social class, stage in the family life cycle)
3. Geographic factors (cultural, regional, and national differences)
4. Psychological factors (lifestyle, personality traits)
5. Consumption patterns (heavy, moderate, and light users)
6. Perceptual factors (benefit segmentation, perceptual mapping)

Industrial Markets
1. End-use segments (identified by SIC code)
2. Product segments (based on technological differences or production economics)
3. Geographic segments (defined by boundaries between countries or by regional
differences within them)
4. Common buying factor segments (cut across product market and geographic
segments)
5. Customer size segments
The Purpose of a Business-Level Strategy
 The purpose of a business-level strategy is to create
differences between the firm’s position and those of
its competitors.
 To position itself differently from competitors, a firm
must decide whether it intends to perform activities
differently or to perform different activities.
 Successful use of a business-level strategy results
only when the firm learns how to integrate the activi
ties it performs in ways that create superior value for
customers.
 Firms develop an activity map to show how they inte
grate the activities they perform (see Southwest Airli
nes’ activity map).
Southwest
No
Airlines Activity No
baggage
System meals Limited transfers
passenger
service
No
No Seat
Assignment connections
with other
airlines
Limited
use of
15-minu travel Standardiz
Frequent, gate agents ed fleet of
reliable turnarou 737 Short-haul ,
departures nds aircraft point-to-point
routes between
midsized cities
and secondary
Automatic airports
ticketing
High machines
compensa Lean, highly
tion of productive Very low
Employees ground and ticket
gate crews prices
“Southwest
, the low-
High fare
Flexible High level aircraft airline”
union of utilization
contracts employee
stock
ownership
Five 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
Types of Business-Level Strategies

 The cost leadership strategy is an integrated set of act

ions taken to produce goods or services with features
that are acceptable to customers at the lowest cost, re
lative to that of competitors. Firms using the cost lead
ership strategy commonly sell standardized goods or
services (but with competitive levels of differentiation)
to the industry’s most typical customers. Process
innovations, which are newly designed production and
distribution methods and techniques that allow the fi
rm to operate more efficiently, are critical successful u
se of the cost leadership strategy.
 Strategy
Cost Leadership

Relatively fet
Creating Activities
Examples of Value-

Cost-effective Simplified planning

Firm
Associated with the

cture
managerial layers in
Management practices to reduce
order to reduce

Infrastru
Information systems planning costs
overhead costs

Consistent policies Intense and effective training

Mgt.
to reduce turnover programs to improve worker

Human
Resource
costs efficiency and effectiveness

Easy-to-use Investments in technologies in

manufacturing order to reduce costs associated
with a firms’s manufacturing

Technology
technologies

Development
processes

Systems and procedures to find

Frequent evaluation
the lowest-cost (with acceptable
processes to monitor
quality) products to purchase as
suppliers’ performances

Procurement
raw materials
Margin

A small, Efficient
Highly Use of A delivery
highly and proper
efficient economies schedule
trained product
systems to of scale to that
sales force installations
link reduce reduces
in order to
suppliers’ procuction costs
Products reduce the
products costs
priced so as frequency
with the Selection of
to generate and
firm’s Constructio low-cost
significant severity of
production n of transportati
sales recalls
processes efficient- on carriers
volume
scale
production
facilities

Inbound Outbound Marketing Service

Operations
Logistics Logistics and sales
 Five strong competitive forces that must be considered pertaining to the cost
leadership strategy:
 Rivalry with existing competitors (having the low-cost position is valuable to deal
with rivals)
 Bargaining power of buyers (customers) (powerful customers can force a cost lead
er to reduce its prices, but not below the level at which the cost leader’s next-mos
t-efficient industry competitor can earn average return)
 Bargaining power of suppliers (the cost leader operates with margins greater than
those of competitors. Among other benefits, higher gross margins relative to those
of competitors make it possible for the cost leaser to absorb its supplier’s price inc
reases.
 Potential entrants (through continuous efforts to reduce costs to levels that are lo
wer than competitors’, a cost leader becomes highly efficient. This is a significant e
ntry barriers to potential competitors.
 Product substitutes (when faced with possible substitutes, the cost leader has mor
e flexibility than its competitors.
 Competitive risks of the cost leadership strategy
 Product obsolete because of competitor’s innovations (lower cost)
 Lower services due to reducing cost
 Imitation by rivals.
Types of Business-Level Strategies
 Differentiation strategy
 Differentiation strategy is an integrated set of actions taken to produce goo
ds or services (at an acceptable cost) that customers perceive as being differ
ent in ways that are important to them.
 Firms using the differentiation strategy can successfully position themselves
in terms of the five forces of competition to earn above-average returns.
 Rivalry with existing competitors
 Bargaining power of buyers (customers)
 Bargaining power of suppliers
 Potential entrants
 Product substitutes
 Competitive risks of the differentiation strategy
 The firm becomes vulnerable to competitors that are able to offer customers
a combination of feature and price that is more consistent with their needs.
 Imitation by rivals
 Experience with other products by customers that switch their needs.
 Counterfeiting product
 Strategy
Differentiation

Highly developed information A company-wide emphasis on

Creating Activities
Examples of Value-

Firm
Associated with the

cture
systems to better understand the importance of producing
customers’ purchasing high-quality products

Infrastru
preferences
Compensation Somewhat extensive
programs intended to use of subjective
Superior

Mgt.
encourage worker rather than objective Personnel

Human
Resource
creativity and performance Training
productivity measures

Strong capability in Investments in technologies that

basic research will allow the firm to produce highly

Technology
differentiated products

Development
Systems and procedures used to
Purchase of highest-
find the highest-quality raw
quality replacement parts
materials

Procurement
Margin

Superior Accurate Extensive Extensive

handling of and granting of buyer
incoming Consistent
responsive crediit training to
raw manufacturing
order- buying assure high-
materials of attractive
processing arragement quality
so as to products
procedures s for product
minimize customers installations
damage Rapid
Rapid and
and to responses to
timely Extensive Complete
improve customers’
product personal field stocking
the quality unique
deliveries relationship of
of the final manufacturing
to s with replacement
product specifications
customers buyers and parts
suppliers

Inbound Outbound Marketing Service

Operations
Logistics Logistics and sales
Focus Strategies

 Focus strategy is an integrated set of action taken to produce goods

or services that serve the need of a particular competitive segment.
 Firms can create value for customers in specific and unique market seg
ments by using the focused cost leadership strategy or the focus differ
entiation strategy.
 Focused cost leadership strategy
 Focused differentiation strategy
 Competitive risks of focus strategies
 A competitor may be able to focus on a more narrowly defined
competitive segment (young buyer interested in stylish furniture
at a low cost)
 A company competing on an industry-wide basis may decide that
the market segment served by the firm using a focus strategy is
attractive and worthy of competitive pursuit.
Integrated Cost Leadership/Differentiation Strategy
 The integrated cost leadership/differentiation strategy involves engaging in pri
mary and support activities that allow a firm to simultaneously pursue low cost
and differentiation.
 The integrated cost leadership/differentiation strategy must adopt the changing
environment quickly through:
 flexible manufacturing systems
 information networks, and
 total quality management systems (is a managerial innovation that emphasiz
es an organization’s total commitment to the customer and to continuous
improvement of every process through the use of data-driven, problem-solvi
ng approaches based on empowerment of employee groups and teams.
Those are three sources of flexibility that are particularly useful for firms trying
to balance the objective of continuous cost reductions and continuous enhance
ments to source of differentiation.
 Competitive risks of the integrated cost leadership/differentiation strategy
 Difficult to performs primary and support activities in ways that allow them
to produce relatively inexpensive products with levels of differentiation that
create value for the target customer.
 The integrated strategy is costly in that firms must pursue both low costs
and differentiation.