CHAPTER 4

STRATEGIC
ACTIONS:
STRATEGY
FORMULATION

PowerPoint Presentation by Charlie Cook

The University of West Alabama
2007 Thomson/South-Western.
All rights reserved.

Business-Level
Strategy
Strategic
Management

Seventh edition

Competitiveness and Globalization:

Concepts
Cases
Michael A. Hitt and
R. Duane
Ireland Robert E. Hoskisson

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.

2007 Thomson/South-Western. All rights reserved.

42

Customers: Their Relationship to

Business-Level Strategies
Who will be
served?

Key Issues
in
Business-level
Strategy

What needs will

be satisfied?

How will those

needs be satisfied?

2007 Thomson/South-Western. All rights reserved.

43

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
Markets

2007 Thomson/South-Western. All rights reserved.

Industrial
Markets

44

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
Source: Adapted from S. C. Jain, 2000, Marketing Planning and
Strategy, Cincinnati: South-Western College Publishing, 120.

2007 Thomson/South-Western. All rights reserved.

45

What: Determining Which

Customer Needs to Satisfy
Customer needs are related to a products
benefits and features.
Customer needs are neither right nor wrong,
good nor bad.
Customer needs represent desires in terms of
features and performance capabilities.

2007 Thomson/South-Western. All rights reserved.

46

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.

2007 Thomson/South-Western. All rights reserved.

47

The Purpose of a Business-Level

Strategy
Business-Level Strategies
Are intended to create differences between the firms
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.

2007 Thomson/South-Western. All rights reserved.

48

Types of Business-Level Strategies

Competitive Advantage

Broad
Target

Cost

Uniqueness

Cost Leadership

Differentiation

Competitive
Scope
Narrow
Target

2007 Thomson/South-Western. All rights reserved.

Integrated Cost
Leadership/
Differentiation
Focused Cost
Leadership

Focused
Differentiation

49

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

2007 Thomson/South-Western. All rights reserved.

410

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

2007 Thomson/South-Western. All rights reserved.

411

Cost Leadership Strategy: Competitors

Rivalry with
Existing Competitors

Rivals hesitate to compete

on basis of price.

Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Due to cost leaders

advantageous position:

Bargaining
power of
suppliers

Lack of price competition

leads to greater profits.

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

412

Cost Leadership Strategy: Buyers

Bargaining Power
of Buyers
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Bargaining
power of
suppliers

Can mitigate buyers

power by:
Driving prices far below
competitors, causing
them to exit, thus
shifting power with
buyers back to the firm.

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

413

Cost Leadership Strategy: Suppliers

Bargaining Power
of Suppliers
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Bargaining
power of
suppliers

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

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.

414

Cost Leadership Strategy: New Entrants

The Threat of
Potential Entrants
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Bargaining
power of
suppliers

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.

Bargaining
power of
buyers

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415

Cost Leadership Strategy: Substitutes

Product
Substitutes

Make investments to be
first to create substitutes.

Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Cost leader is well

positioned to:

Bargaining
power of
suppliers

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

Buy patents developed by

potential substitutes.
Lower prices in order to
maintain value position.

416

Cost Leadership Strategy (contd)

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 leaders strategy.

2007 Thomson/South-Western. All rights reserved.

417

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.

2007 Thomson/South-Western. All rights reserved.

418

Differentiation Strategy: Competitors

Rivalry with
Competitors
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Defends against
competitors because brand
loyalty to differentiated
product offsets price
competition.

Bargaining
power of
suppliers

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

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Differentiation Strategy: Buyers

Bargaining Power
of Buyers
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Can mitigate buyers power

because well differentiated
products reduce customer
sensitivity to price increases.

Bargaining
power of
suppliers

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

420

Differentiation Strategy: Suppliers

Bargaining Power
of Suppliers

Absorbing price increases

due to higher margins.

Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Can mitigate suppliers

power by:

Bargaining
power of
suppliers

Passing along higher

supplier prices because
buyers are loyal to
differentiated brand.

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

421

Differentiation Strategy: New Entrants

The Threat of
Potential Entrants

New products must surpass

proven products.

Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Can defend against new

entrants because:

Bargaining
power of
suppliers

New products must be at least

equal to performance of proven
products, but offered at lower
prices.

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

422

Differentiation Strategy: Substitutes

Product
Substitutes
Threat of
new
entrants
Rivalry
among
competing
firms
Threat of
substitute
products

Bargaining
power of
suppliers

Well positioned relative to

substitutes because:
Brand loyalty to a
differentiated product tends
to reduce customers testing
of new products or switching
brands.

Bargaining
power of
buyers

2007 Thomson/South-Western. All rights reserved.

423

Competitive Risks of Differentiation

The price differential between the differentiators product
and the cost leaders 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
firms products.

2007 Thomson/South-Western. All rights reserved.

424

Focus Strategies
An integrated set of actions taken to produce
goods or services that serve the needs of a
particular competitive segment.
Particular buyer groupyouths or senior citizens
Different segment of a product lineprofessional
craftsmen versus do-it-yourselfers
Different geographic marketsEast coast versus
West coast

2007 Thomson/South-Western. All rights reserved.

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Focus Strategies (contd)

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 aboveaverage returns.

2007 Thomson/South-Western. All rights reserved.

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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.

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Competitive Risks of Focus Strategies

A focusing firm may be outfocused by its competitors.
A large competitor may set its sights on a firms niche
market.
Customer preferences in niche market may change to
more closely resemble those of the broader market.

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428

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.

2007 Thomson/South-Western. All rights reserved.

429

Integrated Cost Leadership/

Differentiation Strategy (contd)
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

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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.

2007 Thomson/South-Western. All rights reserved.

431

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)

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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

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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.

2007 Thomson/South-Western. All rights reserved.

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