Business Strategy

Business-Level Strategies
WILLIAM T. SUCUAHI, CPA, DBA(DW)

Levels of Strategy
 It is important that all managers at all levels participate

and understand the firm’s strategic plan to help ensure:
 coordination
 facilitation, and
 commitment,
while avoiding:
 inconsistency,
 inefficiency, and
 miscommunication.
David, F., David, F. 2017, 16th Ed. Strategic Management A Competitive Advantage Approach, Concepts and Cases
Levels of Strategy
Business-Level Strategy
 It refers to the overarching competitive theme of a company

in a given market.
 At its most basic, business-level strategy is about:

 whom a company decides to serve (which customer segments),
 what customer needs and desires the company is trying to
satisfy, and
 how the company decides to satisfy those needs and desires.
Hill, C., Schilling, M., Jones, G. 2016 12th Ed., Strategic Management Theory An Integrated Approach
Business-Level Strategy
 It focuses on improving the competitive position of a

company’s or business unit’s products or services within the
specific industry or market segment that the company or
business unit serves.
 Business strategy can be:
 Competitive - battling against all competitors for advantage;
and/or
 Cooperative - working with one or more companies to gain
advantage against other competitors.
Business strategy asks how the company or its units should
compete or cooperate in each industry.
Wheelen, T., Hunger, J., Hoffman, A., Bamford, C. 2018 15th Ed. Strategic management and business policy _
globalization, innovation, and sustainability
Business Model
 It is a company’s method for making money in the current

business environment.
 It includes the key structural and operational characteristics
of a firm—how it earns revenue and makes a profit.
 A business model is usually composed of five elements:
 Who it serves;
 What it provides;
 How it makes money;
 How it differentiates and sustains competitive advantage;
 How it provides its product/service.
Examples of Business Models
 Customer solutions model: IBM uses this model to make money not
by selling IBM products, but by selling its expertise to improve its
customers’ operations. This is a consulting model.
 Profit pyramid model: General Motors offers a full line of automobiles

in order to close out any niches where a competitor might find a
position. The key is to get customers to buy in at the low-priced, low-
margin entry point (Chevrolet Spark— manufacturer’s suggested retail
price US $13,485)20 and move them up to high- priced, high-margin
products (Cadillac and Buick) where the company makes its money.
 Multicomponent system/installed base model: Gillette invented this

classic model to sell razors at break-even pricing in order to make
money on higher-margin razor blades. HP does the same with printers
and printer cartridges. The product is thus a system, not just one
product, with one component providing most of the profits.
 Advertising model: Similar to the multicomponent system/installed base

model, this model offers its basic product free in order to make money on
advertising. Originating in the newspaper industry, this model is used heavily in
commercial radio and television. Many web-based firms offer freemium
versions to users in order to expose them to the basics and then hope to sell
premium features to a smaller set of customers.
 Switchboard model: In this model, a firm acts as an intermediary to connect

multiple sellers to multiple buyers. Financial planners juggle a wide range of
products for sale to multiple customers with different needs. This model has
been successfully used by eBay and Amazon.com.
 Time model: Product R&D and speed are the keys to success in the time
model. Being the first to market with a new innovation allows a pioneer such as
Google to earn extraordinary returns. By the time the rest of the industry
catches up, Google has moved on to a newer, more innovative approach to
keep people coming back.
 Efficiency model: In this model, a company waits until a product

becomes standardized and then enters the market with a low-priced,
low-margin approach that appeals to the mass market. This model is
used by Spirit Airlines, KIA Motors, and Vanguard.
 Blockbuster model: In some industries, such as pharmaceuticals and

motion picture studios, profitability is driven by a few key products.
The focus is on high investment in a few products with high potential
payoffs—especially if they can be protected by patents.
 Profit multiplier model: The idea of this model is to develop a concept

that may or may not make money on its own but, through synergy, can
spin off many profitable products. Walt Disney invented this concept
by using cartoon characters to develop high-margin theme parks,
merchandise, and licensing opportunities.
 Entrepreneurial model: In this model, a company offers

specialized products/ services to market niches that are too small to
be worthwhile to large competitors but have the potential to grow
quickly. Small, local brew pubs have been very successful in a
mature industry dominated by AB InBev and MillerCoors. This
model has often been used by small high-tech firms that develop
innovative prototypes in order to sell off the companies (without
ever selling a product) to bigger players.
 De facto industry standard model: In this model, a company
offers products free or at a very low price in order to saturate the
market and become the industry standard. Once users are locked
in, the company offers higher-margin products using this standard.
LinkedIn has used this approach very successfully while TurboTax
makes its most basic program free.
Value Chain
 It refers to the idea that a company is a chain of functional

activities that transforms inputs into outputs.1
 The value chain identifies where the value is added in the process
and links it with the main functional parts of the organization. It
then attempts to make an assessment of the contribution that
each part makes to the overall added value of the business.2
 In a company with more than one product area, the analysis should
be conducted at the level of product groups, not at corporate
strategy level. 2
1Hill,
C., Schilling, M., Jones, G. 2016 12th Ed., Strategic Management Theory An Integrated Approach
2Appa Rao, C. Paravathiswara Rao, B., Sivaramakrishna, R. 2011, Strategic Management, Lovely
Professional University, New Delhi

Value
 It is the amount that buyers are willing to pay for what a

product provides them.
 A firm is profitable to the extent the value it receives exceeds

the total cost involved in creating its products.
 According to Porter, customer value is derived from three

basic sources:
 Activities that differentiate the product
 Activities that lower its costs
 Activities that meet the customer’s need quickly.
Appa Rao, C. Paravathiswara Rao, B., Sivaramakrishna, R. 2011, Strategic Management, Lovely
Value Chain Activities
2 Broad Categories of Value Chain Activities
 Primary Activities – include the design, creation, and

delivery of the product, the product’s marketing, and its
support and after-sales service.
 Support Activities - They provide inputs that allow the

primary activities to take place.
Primary Activities
 Inbound Logistics - these activities focus on inputs. They include

material handling, warehousing, inventory control, vehicle scheduling,
and returns to suppliers of inputs and raw materials.
 Operations - these include all activities associated with transforming

inputs into the final product, such as production, machining, packaging,
assembly, testing, equipment maintenance etc.
 Outbound Logistics - these activities are associated with collecting,

storing, physically distributing the finished products to the customers.
They include finished goods warehousing, material handling and
delivery, vehicle operation, order processing and scheduling.
Primary Activities
 Marketing and Sales - these activities are associated with purchase

of finished goods by the customers and the inducement used to get
them buy the products of the company. They include advertising,
promotion, sales force, channel selection, channel relations and
pricing.
 Services - this includes all activities associated with enhancing and

maintaining the value of the product. Installation, repair, training,
parts supply and product adjustment are some of the activities that
come under services.
Support Activities
 Company infrastructure - is the companywide context

within which all the other value creation activities take place.
This includes:
 organizational structure,
 control systems,
 incentive systems, and
 organizational culture
—what we refer to as the organizational architecture of a
company.
 Human Resources - If the human resources are functioning well,

employee productivity rises (which lowers costs) and customer
service improves (which raises value to consumers), thereby
enabling the company to create more value.
Support Activities
 Procurement - activities associated with purchasing and

providing raw materials, supplies and other consumable
items as well as machinery, laboratory equipment, office
equipment etc.
 Technology Development - activities relating to product

R&D, process R&D, process design improvements,
equipment design, computer software development etc.
Conducting a Value Chain Analysis
1. Identify activities and group them into primary and secondary

activities.
2. allocate costs to each activity using activity-base costing.
3. Identify the activities that differentiate the firm.
4. Examine the value chain to identify the activities that are

critical to buyer satisfaction and market success.
Michael Porter’s 5 Generic Strategies
 Cost Leadership emphasizes producing standardized

products at a low per-unit cost for consumers who are price
sensitive.
Two Alternative Types of Cost Leadership Strategies
 Type 1 is a low-cost strategy that offers products or services

to a wide range of customers at the lowest price available on
the market.
 Type 2 is a best-value strategy that offers products or ser-

vices to a wide range of customers at the best price-value
available on the market.
 Differentiation (Type 3) - a strategy aimed at

producing products and services considered unique to
the industry and directed at consumers who are
relatively price insensitive..
 Focus means producing products and services that fulfill

the needs of small groups of consumers.
Two Alternative Types of Focus Strategies

 Type 4 - is a low- cost focus strategy that offers products or services
to a small range (niche group) of customers at the lowest price
available on the market.
 Type 5 – (focused differentiation) is a best-value strategy; offers

products and services to a niche group at higher prices but loaded
with features so the offerings are perceived as the best value.
 Examples: Bed-and-breakfast inns and local retail boutiques
Both Type 4 and Type 5 focus strategies target a small market.
Conditions Best for
Cost Leadership Strategy
 A Type 1 or Type 2 cost leadership strategy can be

especially effective under the following conditions:
 Price competition among rival sellers is especially
vigorous.
 Products of rival sellers are essentially identical and
supplies are readily available from any of several
eager sellers.
 There are few ways to achieve product differentiation
that have value to buyers.
Conditions Best for
Cost Leadership Strategy
Cont….
 Most buyers use the product in the same ways.
 Buyers incur low costs in switching their purchases
from one seller to another.
 Buyers are large and have significant power to
bargain down prices.
 Industry newcomers use introductory low prices to
attract buyers and build a customer base.
Risks of Cost Leadership Strategy
 Cost leadership may not be sustained

 If competitors imitate
 If technology changes
 If other bases for cost leadership erode.
 Proximity in differentiation is lost.
 Cost focusers achieve even lower costs in segments.
Differentiation Strategy
A product can be differentiated in many ways, such as by:
 superior reliability (it breaks down less often, or not at all),
 better design,
 superior functions and features,
 better point-of-sale service and after- sales service and

support .
Differentiation Strategy
Examples:
 A Rolex watch is differentiated from a Timex watch
by superior design, materials, and reliability;
 A Toyota car is differentiated from a General Motors
car by superior reliability ;
 Apple differentiates its iPhone from rival offerings
through superior product design, ease of use,
excellent customer service at its Apple stores, and
easy synchronization with other Apple products, such
as its computers, tablets, iTunes, and iCloud.
2 Advantages of Differentiation
 It can allow the company to charge a premium price for its

good or service, should it chose to do so.
 It can help the company grow overall demand and capture

market share from its rivals.
Example: Apple has reaped both of these benefits

through its successful differentiation strategy. Apple charges
more for its iPhone than people pay for rival smartphone
offerings, and the differential appeal of Apple products has led
to strong demand growth.
Conditions Best for
Type 3 Differentiation Strategy
A type 3 differentiation strategy can be especially effective

under the following four conditions :
 There are many ways to differentiate the product or
service and many buyers perceive these differences
as having value.
 The buyer’s needs and uses are diverse.
 Few rival firms are following a similar differentiation
approach.
 Technological change is fast paced and competition
revolves around rapidly evolving product features.
Risks of Differentiation Strategy
 Differentiation may not be sustained

 If competitors imitate.
 If features of differentiation become less
important to buyers.
 Cost proximity is lost.
 Firms that follow focus strategy may achieve even
greater differentiation in segments.
 Dilution of brand identification through product-line.
Conditions Best for
Type 4 & Type 5 Focus Strategy
A low-cost (Type 4) or best-value (Type 5) focus strategy
can be especially attractive under these conditions:
 The target market niche is large, profitable, and

growing;
 Industry leaders do not consider the niche to be crucial

to their own success.
 Industry leaders consider it too costly or difficult to

meet the specialized needs of the target market niche
while taking care of their mainstream customers.
Conditions Best for
Type 4 & Type 5 Focus Strategy
 The industry has many different niches and segments,

thereby allowing a focuser to pick a competitively
attractive niche suited to its own resources.
 Few, if any, other rivals are attempting to specialize in

the same target segment.
Risks of Focus Strategy
 The competitive risks of focus strategy are similar to

those previously noted for cost leadership and
differentiation strategies, with the following additions:
 Focus strategy is not sustained if competitors imitate
it.
 The target segment may become structurally
unattractive.
 if structure erodes.
 if demand disappears.
Risks of Focus Strategy
 Competitors may successfully focus on an even smaller

segment of the market, out focusing 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 need.
 Preferences and needs of the narrow segment may
become more similar to the broad market, reducing or
eliminating the advantage of focusing.
Functional-Level Strategies
JACQUELINE LESLIE S. IGNACIO, MBA, CPA, REB, REA
Functional-Level Strategies
 These are actions that managers take to improve the

efficiency and effectiveness of one or more of value creation
activities.
 A firm can use functional-level strategies to build valuable

resources that enable it to attain superior:
 efficiency,
 quality,
 innovation, and
 customer responsiveness .
Efficiency
Efficiency = outputs/inputs
 The more efficient a company, the fewer the inputs required

to produce a given output, and therefore the lower its cost
structure.
 Put another way, an efficient company has higher

productivity and therefore lower costs than its rivals.
How to Achieve Efficiency
(Definition of Terms)
 Economies of Scale are unit cost reductions associated with

large-scale output.
 Learning Effects are cost savings that result from “learning by

doing. Over time, management and labor accumulate valuable
process knowledge that leads to higher productivity.
 Experience Curve refers to the systematic lowering of the cost

structure, and consequent unit cost reductions, that have been
observed to occur over the life of a product.
 Flexible Production Technology - a range of technologies

designed to reduce setup times for complex equipment,
increase the use of machinery through better scheduling, and
improve quality control at all stages of the manufacturing
process.
 Research suggests that the adoption of flexible production
technologies may increase efficiency and lower unit costs
relative to what can be achieved by the mass production of a
standardized output, while at the same time enabling the
company to customize its product offering to a much greater
extent than was once thought possible.
 Customer Defection (or “churn rate”) is the percentage of a

company’s customers who defect every year to competitors.
 Just-in-time (JIT) Inventory System - is designed to economize
on inventory holding costs by scheduling components to arrive at
a manufacturing plant just in time to enter the production process,
or to have goods arrive at a retail store only when stock is almost
depleted.
 Supply Chain Management - the task of managing the flow of
inputs and components from suppliers into the company’s
production processes to minimize inventory holding and maximize
inventory turnover.
Quality
 High-quality products are reliable, do well the job for which they
were designed, and are perceived by consumers to have superior
attributes.
2 Advantages of Quality
 A strong reputation for quality allows a company to differentiate
its products from those offered by rivals, thereby creating more
value in the eyes of customers and giving the company the option
of charging a premium price for its products.
 Eliminating defects or errors from the production process reduces

waste, increases efficiency, lowers the cost structure of the
company, and increases its profitability.
How to Achieve Quality
How to Achieve Superior Innovation
How to Achieve Superior Innovation

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Business-Level Strategies

WILLIAM T. SUCUAHI, CPA, DBA(DW)

 It is important that all managers at all levels participate

 It refers to the overarching competitive theme of a company

 At its most basic, business-level strategy is about:

 It focuses on improving the competitive position of a

 It is a company’s method for making money in the current

 Profit pyramid model: General Motors offers a full line of automobiles

 Multicomponent system/installed base model: Gillette invented this

 Advertising model: Similar to the multicomponent system/installed base

 Switchboard model: In this model, a firm acts as an intermediary to connect

 Efficiency model: In this model, a company waits until a product

 Blockbuster model: In some industries, such as pharmaceuticals and

 Profit multiplier model: The idea of this model is to develop a concept

 Entrepreneurial model: In this model, a company offers

 It refers to the idea that a company is a chain of functional

Professional University, New Delhi

 It is the amount that buyers are willing to pay for what a

 A firm is profitable to the extent the value it receives exceeds

 According to Porter, customer value is derived from three

 Primary Activities – include the design, creation, and

 Support Activities - They provide inputs that allow the

 Inbound Logistics - these activities focus on inputs. They include

 Operations - these include all activities associated with transforming

 Outbound Logistics - these activities are associated with collecting,

 Marketing and Sales - these activities are associated with purchase

 Services - this includes all activities associated with enhancing and

 Company infrastructure - is the companywide context

 Human Resources - If the human resources are functioning well,

 Procurement - activities associated with purchasing and

 Technology Development - activities relating to product

1. Identify activities and group them into primary and secondary

2. allocate costs to each activity using activity-base costing.

3. Identify the activities that differentiate the firm.

4. Examine the value chain to identify the activities that are

 Cost Leadership emphasizes producing standardized

Two Alternative Types of Cost Leadership Strategies

 Type 1 is a low-cost strategy that offers products or services

 Type 2 is a best-value strategy that offers products or ser-

 Differentiation (Type 3) - a strategy aimed at

 Focus means producing products and services that fulfill

Two Alternative Types of Focus Strategies

 Type 5 – (focused differentiation) is a best-value strategy; offers

Both Type 4 and Type 5 focus strategies target a small market.

 A Type 1 or Type 2 cost leadership strategy can be

 Cost leadership may not be sustained

A product can be differentiated in many ways, such as by:

 superior reliability (it breaks down less often, or not at all),

 superior functions and features,

 better point-of-sale service and after- sales service and

 It can allow the company to charge a premium price for its

 It can help the company grow overall demand and capture

Example: Apple has reaped both of these benefits

A type 3 differentiation strategy can be especially effective

 Differentiation may not be sustained

 The target market niche is large, profitable, and

 Industry leaders do not consider the niche to be crucial

 Industry leaders consider it too costly or difficult to

 The industry has many different niches and segments,