1. Business-Level Strategy
Chapter 5
Business-Level Strategy
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
Business-Level Strategy
According to Michael Porter, the essence of business-level strategy is “to perform activities
differently or to perform different activities than rivals.” The who, what, and how of
selecting a business-level strategy are determined when a firm establishes (1) who will be
served; (2) what needs those target customers have that it will satisfy; and (3) how those
needs will be satisfied. The instructor notes for this chapter discuss the following strategies:
• Reach, Richness, and Affiliation
• Cost leadership
• Differentiation
• Focused cost leadership
• Focused differentiation
• Integrated cost leadership/differentiation
Instructor notes begin on the following slides:
• Managing Relationships with Customers
• Five Generic Strategies
• Cost Leadership Strategy
• Differentiation Strategy
• Structure for Differentiation Strategy
©2004 by South-Western/Thomson Learning

2. The Strategic Management Process
Chapter 1
Introduction to
Strategic Management
Chapter 2
Strategic Leadership
Strategic
Thinking
Chapter 3
The External
Environment
Chapter 4
The Internal
Organization
Strategic Intent
Strategic Mission
Strategic
Analysis
Chapter 5
Business-Level
Strategy
Chapter 5
Business-Level
Strategy
Chapter 6
Competitive Rivalry and
Competitive Dynamics
Chapter 7
Corporate-Level Strategy
Creating
Competitive
Advantage
Chapter 8
Acquisition and
Restructuring Strategies
Chapter 9
International Strategy
Chapter 10
Cooperative Strategy
Monitoring
And Creating
Entrepreneurial
Opportunities
Chapter 11
Corporate Governance
Chapter 12
Strategic Entrepreneurship

3. Core Competencies and Strategy
The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals
Core
competencies
An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage
Strategy
Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets
Business-level
strategy

4. Business-Level Strategy
Intended to create differences between the firm’s position relative to those of its rivals
In selecting a business-level strategy, a firm determines:
who will be served
what needs those target customers have that it will satisfy
how those needs will be satisfied

5. Who Will be Served Market segmentation (see Table 5.1) Consumer
Industrial
Markets
Customers
Basis for Customer Segmentation
Reach, Richness and Affiliation (discussed on pp ) (cont.)
Operations
The growing complexity of automobiles has created a niche for information companies
like AIS. “Today’s vehicles require a technician to have access to over a million pages of
manufacturers’ technical reference materials,” says Jeff Sweet, the company’s CEO. “In
1980, you would have needed 19 inches of shelf space for the shop manuals of a single
GM model year. Today you’d need eleven feet!” Out of necessity, most automotive shops
rely on repair manuals and CD-ROMs containing information consolidated from the vast
amount available. But AIS works with the original source documents. That means over
5,200 factory service manuals totaling some 1.5 million pages—the most complete onsite
library of automobile manufacturer’s service information in the nation. AIS also examines
new cars in their own diagnostics garage. Moreover, since factory service manuals
contain inaccuracies (modifications seldom find their way back to the manuals), AIS
gathers information from its callers and corrects its manuals.
Products and Services
The products and services AIS offers include technical hotlines serving 30,000 enrolled
automotive shops; aftermarket technical service bulletins distributed through an automated
voice retrieval system; documents containing over 40,000 automotive wiring diagrams;
and consulting services to automotive equipment manufacturers. On average, AIS
fields 250,000 calls per year, and since the company’s beginning, it has helped technicians
perform over one million automotive repairs.

6. What Needs to Satisfy
Create value for customers. 2 generalized forms of value:
Low cost products with acceptable features
Highly differentiated product features with acceptable cost
Value for industrial customers includes being a source of the customers’ competitive advantage

7. Types of Business-Level Strategies
To position itself, the firm must decide whether it intends to:
perform activities differently (to achieve lower cost), or
to perform different activities as compared to its rivals (to differentiate products and command a premium price exceeding the marginal cost of differentiation)

8. Five Generic Strategies
Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differentiation
Broad target
Integrated Cost
Leadership/
Differentiation
Competitive Scope
Five Generic Strategies
Business-Level Strategy (p. 141)
Firms choose from among five business-level strategies (see Figure 5.1 in the text) to establish
and defend their desired strategic position against rivals:
• Cost leadership
• Differentiation
• Focused cost leadership
• Focused differentiation
• Integrated cost leadership/differentiation
Examples of cost leadership and differentiation strategies are discussed on later slides.
Narrow target
Focused Cost Leadership
Focused Differentiation

9. Cost Leadership Strategy
An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers
relatively standardized products
features acceptable to many customers
lowest competitive price
Cost Leadership Strategy: The Vanguard Group uses a cost leadership strategy. Portraying fees and costs as evil and extolling efficiency, the corporate culture encourages employees’ commitment to controlling costs while designing and completing their work. Vanguard’s performance outcomes demonstrate the firm’s low-cost position. In 1999, for example, the firm incurred average operating costs of 0.27 percent of its assets—less than one-fourth of the estimated average operating costs of 1.31 percent for the mutual fund industry. Other cost-saving activities include Vanguard’s low trading levels and its policy of discouraging customers from rapid buying and selling—activity that drives up costs. The firm also searches for the least costly, yet still effective, means of providing customer service and of marketing its products. Vanguard’s low-cost position for many investment products suggests the quality of its cost control efforts.

10. 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

11. Cost Leadership Strategy and the Five Forces of Competition
Rivalry Among Competing Firms
Can use cost leadership strategy to advantage since:
competitors avoid price wars with cost leaders, creating higher profits for the entire industry
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

12. Cost Leadership Strategy and the Five Forces of Competition
Bargaining Power of Buyers
Can mitigate buyers’ power by:
driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

13. Cost Leadership Strategy and the Five Forces of Competition
Bargaining Power of Suppliers
Can mitigate suppliers’ power by:
being able to absorb cost increases due to low cost position
being able to make very large purchases, reducing chance of supplier using power
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

14. Cost Leadership Strategy and the Five Forces of Competition
Threat of New Entrants
Can frighten off new entrants due to:
their need to enter on a large scale in order to be cost competitive
the time it takes to move down the learning curve
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

15. Cost Leadership Strategy and the Five Forces of Competition
Threat of Substitute Products
Cost leader is well positioned to lower prices in order to maintain value position
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

16. Strategy and Structure
Organization structure specifies a firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes
3 structural characteristics:
Specialization (type and number of jobs required to complete work)
Centralization (decision-making authority)
Formalization (rules and procedure)

17. Structure for Cost Leadership Strategy
Operations is main function
Process engineering is emphasized over R&D
Large centralized staff
Formalized procedures
Structure is mechanical, job roles highly structured
Office of the President
Centralized Staff
Engineering
Operations
Accounting
Marketing
Personnel

18. Risks of Cost Leadership Strategy
Processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors’ innovations
Too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers’ perceptions of “competitive levels of differentiation
Competitors may learn how to successfully imitate the cost leader’s strategy

19. Differentiation Strategy
An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them
nonstandardized products
customers value differentiated features more than they value low cost
Differentiation Strategy
Rather than costs, a firm using the differentiation strategy tries to invest in and develop
features that differentiate its goods or services in ways that customers value. Commonly
recognized differentiated goods include Toyota’s Lexus, Ralph Lauren clothing, and Caterpillar’s
heavy-duty earthmoving equipment.
To give some concrete example, think of a $58,000 watch, dresses that look like
newspaper, or an eye-shadow called “Gangrene.” These are items no one really needs, yet
millions of consumers worldwide line up to buy them. That’s because LVMH—the
world’s largest, most successful purveyor of these and other luxury goods that no one
needs—is a master of a differentiation strategy. LVMH has differentiated itself in industries
ranging from retailing and cosmetics to jewelry, leather goods, and wines and in
2000 generated $10 billion. What is the company’s secret? LVMH uses a differentiation
strategy. LVMH’s brands are simultaneously:
• Timeless, eternal. Timelessness takes decades to develop. However, you can create
the impression of it sooner through uncompromising quality—by hiring dedicated
people with the brand “in their bones” and keeping them for a long time.
• Modern, edgy, fashionable, sexy. A modern brand is so new and unique that people
feel they must buy it.
• Fast growing. To show shareholders you have struck the right balance between timelessness
and fashion, and to allow you to charge premium prices.
• Profitable. Through disciplined, efficient, and rigorous manufacturing processes that
contrast sharply with freewheeling creativity.
(Continued on next slide.)

20. Differentiation Strategy
Value provided by unique features and value characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
Differentiation Strategy (cont.)
To execute a differentiated strategy, LVMH suggests these counterintuitive principles:
• Free creative people from financial and commercial concerns. Creative types freeze
whenever calculator-clutching managers hover nearby. So hire innovative types who
want to see their designs succeed “on the street” and then let them run wild. For example,
Dior designer John Galliano shocked the fashion world when he clad runway
models in newspaper dresses, yet LMVH never flinched. Blocking the plan would
have crushed Galliano’s spirit. Later, when Dior manufactured dresses in newspaperprinted
fabric, they sold briskly.
• Don’t follow consumers. You won’t generate breakthrough products, and people
won’t pay premium prices for something they expect. Instead, let creators drive innovation,
and listen to focus groups with only one ear. For example, focus groups responded
lukewarmly to the new Kenzo perfume, Flower, with its oddly shaped bottle
and scentless signature flower, the poppy. LMVH launched Flower anyway because
the design team believed in it. Kenzo’s sales rose 75% early in 2001, largely on
Flower’s success.
(Continued on next slide.)

21. Differentiation Strategy
Differentiation actions required by this strategy:
developing new systems and processes
shaping perceptions through advertising
quality focus
capability in R&D
maximize human resource contributions through low turnover and high motivation
Differentiation Strategy (cont.)
• Minimize risk. Don’t put your company at risk by introducing all new products all the
time. Let proven products carry you. LMVH made only several thousand innovative
Dior handbags ($1,800/each). The rest of the product line was less radical in fabric
and design, but the company made more of them and sold them for less, thus encouraging
creativity while minimizing risk.
• Give star brands time to grow. Star brands need great talent and heritage. Use incubation
time to learn. Although the highly creative Christian Lacroix fashion house
hasn’t been profitable since its 1991 launch, LMVH uses it as a laboratory, learning
how to start a brand from scratch and nurturing it until it has some history.
(Continued on next slide.)

22. Differentiation Strategy and the Five Forces of Competition
Rivalry Among Competing Firms
Can defend against competition because:
brand loyalty to differentiated product offsets price competition
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

23. Differentiation Strategy and the Five Forces of Competition
Bargaining Power of Buyers
Can mitigate buyer power because:
well differentiated products reduce customer sensitivity to price increases
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

24. Differentiation Strategy and the Five Forces of Competition
Bargaining Power of Suppliers
Can mitigate suppliers’ power by:
absorbing price increases due to higher margins
passing along higher supplier prices because buyers are loyal to differentiated brand
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

25. Differentiation Strategy and the Five Forces of Competition
Threat of New Entrants
Can defend against new entrants because:
new products must surpass proven products or,
new products must be at least equal to performance of proven products, but offered at lower prices
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

26. Differentiation Strategy and the Five Forces of Competition
Threat of Substitute Products
Well positioned relative to substitutes because:
brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

27. Structure for Differentiation Strategy
President and
Limited Staff
R&D
Marketing
New Product
R&D
Marketing
Finance
Operations
Human
Resources
Organizational Structure & Business-level strategy (p. 142)
Structure and Product Differentiation
Which structure is most efficient for multi-product line company like GM?
Which structure is most effective? Consider the automobile industry.
General Motors
GM uses an M-Form Structure, which includes 12 automobile divisions
1. Buick
• Geographic reach: U.S., Canada, Israel, and China
• Six models: midsize and luxury cars and SUVs emphasizing style and substance
• Logo/Slogan: The Spirit of American Style
2. Chevrolet
• Geographic reach: U.S., Canada, Mexico, Europe, Middle East (Israel, Saudi Arabia, etc.), Far East (Japan, Taiwan and
China)—Most global brand
• 22 models: Ranges from small and midsize cars, trucks, vans, and SUVs emphasizing style and substance
• Logo/Slogan: Full Throttle—Charging Ahead
3. Cadillac
• Geographic reach: U.S., Canada, Mexico, Europe, Middle East (Israel, Saudi Arabia, etc.), Far East (Japan, Taiwan, and
China)
• Six models: luxury cars and SUV emphasizing luxury and performance
• Logo/Slogan: Heritage Reborn
4. EV1
• Geographic reach: U.S., California and Arizona only
• One model: Electric car emphasizing fuel efficiency and environment
• Logo/Slogan: An exceptional car. A different driving experience.
5. GMC Trucks
• Geographic reach: U.S., Canada, and Brazil
• Eight models: Trucks, vans, and SUVs emphasizing engineering strength
• Logo/Slogan: Discover the Advantages of Professional Grade Engineering
(Continued on next slide.)
Marketing is the main function for tracking new product ideas
New product R&D is emphasized
Most functions are decentralized
Formalization is limited to foster change and promote new ideas
Overall structure is organic; job roles are less structured

28. Major Risks of Differentiation Strategy
Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large
Means of differentiation may cease to provide value for which customers are willing to pay
General Motors (cont.)
6. Holden / Isuzu
• Geographic reach: Australia
• 26 Models: Range from small midsize cars, trucks, vans, and SUVs, emphasizing ?
• Logo/Slogan: What is their logo/slogan?
7. Hummer
• Geographic reach: U.S.
• Two models: SUVs, emphasizing uniqueness of rugged style
• Logo/Slogan: Like nothing else
8. Oldsmobile
• Geographic reach: U.S., Canada
• Five models: Range of midsize cars and SUVs, emphasizing driving performance
• Logo/Slogan: No logo, brand being phased out
9. Opel
• Geographic reach: Europe, Middle East (Israel, Saudi Arabia, etc.), Far East (Japan, Taiwan & China)
• Ten Models: Range from small to midsize cars, trucks, vans, and SUVs emphasizing performance
• Logo/Slogan: Fresh Thinking—Better Cars
10. Pontiac
• Geographic reach: U.S., Canada, and Mexico
• Seven models: Range of small to midsize cars, vans, and SUVs emphasizing the one-of-a-kind experience
• Logo/Slogan: Fuel for the Soul
11. Saab
• Geographic reach: U.S., Canada, Mexico, Europe, Middle East (Israel, Saudi Arabia, etc.), Far East (Japan, Taiwan &
China)—Most global brand
• 15 Models: Range of small and midsize cars, wagons, and vans emphasizing safety and driving performance
12. Saturn
• Geographic reach: U.S., Canada)
• Five Models: Range small and midsize cars and wagons emphasizing customer satisfaction and reliability
(Continued on next slide.)

29. Major Risks of Differentiation Strategy
Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s products
Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s products
Organizational Structure & Business-level strategy (p. 142)
General Motors (cont.)
Strategic Alliances and Joint Ventures
• Fiat
• Subaru
• Suzuki
• Daewoo
Facts
• GM has multiple divisions beyond its auto division, including Hughes, GMAC (financing), etc.
• GM currently supports 17 global brands in 4 geographic arenas: (GMNA, GME, GMLAAM, GMAP)
Sales breakdown for automobile division: GMNA—76.7%, GME—17.7, GMLAAM—3.5%,
GMAP—3.1%
• GM does plan to phase out Oldsmobile brand
• GM is branded around a product, company structured around a product line
Ask
Is GM’s structure a hindrance to a customer-centric perspective? Are GM’s customers brand loyal, (i.e. to
Buick or Cadillac) or company loyal, (i.e. to GM)? How does that impact structure and strategy?
Assume that you were running Buick or another division of GM, what is your incentive to “share your
customer” with the other product lines. For example, moving a current Buick Regal customer to a say
Cadillac El Dorado? Where is the customer in this equation?
Sources: Evans, P. and Wurster, T.S Blown to Bits: How the new economics of information transforms
strategy. Boston: Harvard Business School Press; and Harvard Business Review (March). The
Perfect Paradox of Star Brands: An Interview with Bernard Arnault of LVMH. HBR OnPoint Enhanced
Edition.

30. Focused Business-Level Strategies
A focus strategy must exploit a narrow target’s differences from the balance of the industry by:
isolating a particular buyer group
isolating a unique segment of a product line
concentrating on a particular geographic market

31. Factors That May Drive Focused Strategies
Large firms may overlook small niches
Firm may lack resources to compete in the broader market
May be able to serve a narrow market segment more effectively than can larger industry-wide competitors

32. Structure for Focused Strategies
A simple structure for smaller firms
Owner-manager makes all major decisions and monitors all activities
A functional structure for larger firms
Organizational Structure & Business-level strategy (p. 142)
Structure and Product Differentiation
Which structure is most efficient for multi-product line company like GM?
Which structure is most effective? Consider the automobile industry.
General Motors
GM uses an M-Form Structure, which includes 12 automobile divisions
1. Buick
• Geographic reach: U.S., Canada, Israel, and China
• Six models: midsize and luxury cars and SUVs emphasizing style and substance
• Logo/Slogan: The Spirit of American Style
2. Chevrolet
• Geographic reach: U.S., Canada, Mexico, Europe, Middle East (Israel, Saudi Arabia, etc.), Far East (Japan, Taiwan and
China)—Most global brand
• 22 models: Ranges from small and midsize cars, trucks, vans, and SUVs emphasizing style and substance
• Logo/Slogan: Full Throttle—Charging Ahead
3. Cadillac
• Geographic reach: U.S., Canada, Mexico, Europe, Middle East (Israel, Saudi Arabia, etc.), Far East (Japan, Taiwan, and
China)
• Six models: luxury cars and SUV emphasizing luxury and performance
• Logo/Slogan: Heritage Reborn
4. EV1
• Geographic reach: U.S., California and Arizona only
• One model: Electric car emphasizing fuel efficiency and environment
• Logo/Slogan: An exceptional car. A different driving experience.
5. GMC Trucks
• Geographic reach: U.S., Canada, and Brazil
• Eight models: Trucks, vans, and SUVs emphasizing engineering strength
• Logo/Slogan: Discover the Advantages of Professional Grade Engineering
(Continued on next slide.)

33. Major Risks of Focused Strategies
Firm may be “outfocused” by competitors
Large competitor may set its sights on your niche market
Preferences of niche market may change to match those of broad market

34. Benefits of Integrated Strategy
Successful firms using this strategy have above-average returns
Firm offers two types of values to customers
some differentiated features (but less than a true differentiated firm)
relatively low cost (but not as low as the cost leader’s price)

35. Using the Functional Structure
The integrated form of the functional structure
must have decision-making patterns that are partially centralized and partially decentralized
will have semi-specialized jobs and rules and procedures that call for some formal and some informal job behavior
Strategic flexibility is obtained via
flexible manufacturing systems
information networks
total quality management systems

36. Major Risks of Integrated Strategy
An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm)
The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy