Chapter 5Business-Level Strategy

Chapter 5: Business-Level Strategy

CHAPTER SUMMARY
This chapter begins with a discussion of the economic logic and customer focus that
drives the selection of a business-level strategy, which in turn determines who will be served,
what needs will be satisfied, and how.
Organizational structures are related to business-level strategy, and each of the five basic
business-level strategies is discussed.
An analysis of each type of strategy describes how the strategy is used to favorably
position the firm competitively, the organizational structures linked with successful use of the
strategy, and different risks that may be encountered when using the strategy.
Also, the value chain is used to illustrate activities needed to implement each type of
business-level strategy.

CHAPTER OUTLINE
Economic Logic and Business-Level Strategy
Types of Business-Level Strategy
Serving Customers
Strategy and Structure
Cost Leadership Strategy
Successful Execution of the Cost Leadership Strategy
Using the Functional Structure to Implement the Cost Leadership Strategy
Competitive Risks of the Cost Leadership Strategy
Differentiation Strategy
Successful Execution of the Differentiation Strategy
Using the Functional Structure to Implement the Differentiation Strategy
Competitive Risks of the Differentiation Strategy
Focus Strategies
Focused Cost Leadership Strategy
Focused Differentiation Strategy
Using the Functional Structure to Implement Focus Strategies
Competitive Risks of Focus Strategies
Integrated Cost Leadership/Differentiation Strategy
Successful Execution of the Integrated Cost Leadership/Differentiation Strategy
Using a Flexible Structure to Implement the Integrated Cost Leadership/Differentiation
Strategy
Competitive Risks of the Integrated Cost Leadership/Differentiation Strategy
Summary

KNOWLEDGE OBJECTIVES
1. Define business-level strategies.
2. Discuss the relationship between customers and business-level strategies in terms of who,
what, and how.
3. Explain the differences among business-level strategies.
4. Describe the relationship between strategy and structure.

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5. Discuss the simple and functional structures used to implement business-level strategies.
6. Use the five-forces model of competition to explain how value can be created through each
business-level strategy.
7. Describe the risks of using each of the business-level strategies.

LECTURE NOTES
Business-Level Strategy - This opening section introduces the five basic approaches that
combine the scope of an organizations activities in the market (broad or narrow) with the
primary source of its competitive advantage (low cost or uniqueness). The context for Chapters
5-10 is outlined here in terms of the five elements of strategy described in Chapter 2 (arenas,
vehicles, differentiators, staging, and economic logic).
See slides 1-3.

Key Terms
Business-Level Strategy - integrated and coordinated set of
commitments and actions the firm uses to gain a competitive
advantage by exploiting core competencies in specific
product markets.

Economic Logic and Business-Level Strategy - This section maintains the idea that the firms
business-level strategy is a deliberate choice about how it will perform the value chains primary
and support activities in ways that create unique value. Sound strategic choices reduce
uncertainty, facilitate success, and depend upon continuously-updated competitive advantages to
achieve long-term success.

Types of Business-Level Strategy - This section introduces the five types of business-level
strategies that firms choose among to establish and defend their desired strategic position against
rivals.
See slide 4.
See Figure 5.1: Five
Business-Level
Strategies.

1.

What five business-level strategic options are available to firms?

a. Cost leadership
b. Differentiation
c. Focused cost leadership
d. Focused differentiation
e. Integrated cost leadership/differentiation

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See slide 5.

2.

What are some of the features of the five business-level

strategies?
a. They are generic and can be used in any business, in
any industry.
b. They represent two distinct types of competitive
advantage:
i. Lower cost than rivals
ii. Ability to differentiate and command a
premium price relative to the additional cost of
differentiating
c. They represent a choice of scope (the nature and size of
the customer group the firm will seek):
i. Broad scope serving multiple customer
segments in multiple geographic areas with
multiple products.
ii. Narrow scope (niche) serving one customer
segment, geographic area, or product.
d. The effectiveness of each strategy is contingent upon
the opportunities and threats in a firms external
environment and the possibilities provided by the firms
unique resources, capabilities, and core competencies.

Serving Customers - This section presents the necessity of managing all aspects of the firms
relationship with its customers to create superior value, secure customer loyalty, and increase
returns.
See slide 6.

Key Terms
Market Segmentation - process of clustering people with similar
needs into individual and identifiable groups to determine which
customer segments to target.

See slide 7.

3.

See Table 5.1: Basis

for Customer
Segmentation
(slide 8).

4.

What decisions need to be made about relationships with

customers?
a. Who (which customers) will be served - Market
segmentation.
b. What customer needs will be satisfied - Low cost vs.
differentiation.
c. How those needs will be satisfied - Core competencies.
What factors aid in segmenting consumer markets?
a. Demographic factors
b. Socioeconomic factors
c. Geographic factors

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5.

See Additional Notes

Below.

d. Psychological factors
e. Consumption patterns
f. Perceptual factors
What dimensions are used to define industrial customers
to serve?
a. End-use segments
b. Product segments
c. Geographic segments
d. Common buying factors
e. Customer size

Additional Discussion Notes for Managing Relationships with

Customers - These notes include additional materials that cover Reach,
Richness, and Affiliation in the transfer of information from the firm to
its customers. An example of Automotive Information Systems
illustrates the concept of Affiliation.
Reach, Richness and Affiliation (pp. 137138)
Some view information as the glue that holds value chains and supply
chains together (Evans and Wurster, 2000, p. 13) and argue that the
transfer of information is a trade-off between richness and reach
(Evans & Wurster, 2000, p. 23). Newspaper advertisements reach a
wide range of possible customers; but, have limited, static content.
Direct mail or telemarketing are a bit richer in customization and
interactivity, but are much more expensive, and therefore have to be
targeted. A sales representative giving his or her pitch offers the highest
level of customization, dialogue, and empathy, but only with one
customer at a time (Evans and Wurster, 2000, p. 37). However, with
the advent of powerful information and communication technologies,
this historic trade-off between Rich and Reachin general the greater
the reach, the less the richness, and vice-versamay no longer apply. It
is now possible to have the benefits of both Reach and Rich. This
change in strategic possibilities has come through greater connectivity
through electronic networks and, increasingly, the adherence to
standards for transmitting and receiving information in a digital format.
Connectivity and standards have led to the deconstruction of business
structures and the disintermediation of traditional intermediaries (Evans
and Wurster, 2000, p. 69). Thus, firms try to establish a competitive
advantage through relationship with customers along reach (access and
connection to customers.), richness (the depth and detail of the
information between the firm and the customer), and affiliation
(facilitating useful interactions with customers).
Affiliation: Automotive Information Systems (AIS)
While it is intuitively simple to grasp the meaning and applications of
Reach and Richness, the notion of Affiliation is a bit more complex.
Hence, what follows is an example of Affiliation.

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Of the 45 million automobiles sold in the U.S. last year, 34

million of them were previously owned. Through pairing with
Automotive Information Systems (AIS), Microsofts MSN Autos helps
Internet users with all phases of their automotive research and shopping.
To be more precise, determining vehicle reliability is an exacting task
that requires skills, knowledge, and a wealth of information. That is why
MSN Autos affiliates with AIS for reliability data on all listed
automobiles. AISs Identifix is a large source of automotive repair
data on vehicle parts that break, model lines affected, and how best to
make repairs. AIS operates primarily as a technical support service for
professional automotive technicians. Subscribers telephone AISs
specialists for assistance when stumped by any automotive diagnostic or
repair problem. Thirty-one automotive specialists make up the core AIS
staff. Each is a factory-trained Certified Master Technician with
years of professional field experience performing vehicle diagnostics
and repairs.
Operations
The growing complexity of automobiles has created a niche for
information companies like AIS. Todays vehicles require a technician
to have access to over a million pages of manufacturers technical
reference materials, says Jeff Sweet, the companys CEO. In 1980,
you would have needed 19 inches of shelf space for the shop manuals of
a single GM model year. Today youd 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 pagesthe most
complete onsite library of automobile manufacturers 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 companys
beginning, it has helped technicians perform over one million
automotive repairs.

Strategy and Structure - This section describes the reciprocal and influential relationship
between strategy and organizational structure. Three major types of organizational structures
used to implement strategies are also defined.

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See slides 9-10.

Key Terms
Organizational Structure - specifies the firms formal reporting
relationships, procedures, controls, and authority and decisionmaking processes.
Simple Structure - structure in which the owner-manager makes
all major decisions and monitors all activities while the staff
serves as an extension of the managers supervisory authority.
Functional Structure - structure consisting of a chief executive
officer and a limited corporate staff, with functional line
managers in dominant organizational areas.
Multi-divisional Structure - structure consisting of operating
divisions, each representing a separate business or profit center
in which the top corporate officer delegates responsibilities
for day-to-day operations and business-unit strategy to
division managers.

Cost Leadership Strategy - This section introduces an analysis of the strategy of low cost
leadership that seeks cost advantages while serving a broad customer segment.
See slide 11.

Key Terms
Cost Leadership Strategy - integrated set of actions designed to
produce or deliver goods or services with features that are
acceptable to customers at the lowest cost relative to
competitors.

Successful Execution of the Cost Leadership Strategy - This section discusses the activities
and policies that have shown success in the use of the cost leadership strategy. The value chain
analysis (presented in Chapter 4) proves to be a critical tool for firms implementing a low cost
strategy. Each of the five forces of competition is then discussed as it relates to a cost leadership
strategy.
See slide 12.

See Figure 5.2:

Examples of ValueCreating Activities
Associated with the
Cost Leadership
Strategy (slide 13).

6.

In what ways can firms successfully implement a cost

leadership strategy?
a. Sell no-frills, standardized goods that minimally offer
qualities and features acceptable to customers.
b. Use the value chain analysis to continuously identify
ways of reducing the costs of activities in the value
chain, while retaining important product/service
features.
i. If a firm is unable to link the activities shown in
Figure 5.2, it probably lacks the resources,
capabilities, and core competencies needed to
successfully use the cost leadership strategy.

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Chapter 5Business-Level Strategy

See slide 14.

7.

ii. Logistics can be a significant portion of a firms

activities costs and offers cost reduction
opportunities for firms using the cost leadership
strategy.
Discuss the cost leadership strategy in terms of the five-forces
model of competition.
a. A low cost position is a valuable defense against rivals.
b. Powerful customers can demand reduced prices, but
only to the point of driving competitors out of the
market, at which point they would lose their power.
c. Costs leaders are in a position to absorb supplier price
increases and relationship demands. Alternatively, due
to volumes, cost leaders can often force suppliers to
hold down their prices.
d. Ever-improving levels of efficiency and cost reduction
can be difficult to replicate and serve as a significant
entry barrier to potential competitors unless they are
willing to accept below-average returns.
e. Cost leaders hold an attractive position in terms of
product substitutes, with the flexibility to lower prices
to retain customers. However, when the features and
characteristics become attractive to the customers,
lower prices may not be an incentive to stay with the
lower-priced product.

Using the Functional Structure to Implement the Cost Leadership Strategy - This section
presents the structural dimensions that support a strategic approach and describes the
characteristics of a functional structure for a firm using the cost leadership strategy.
See slide 15.

8.

See Figure 5.3:

Functional Structure
for Implementation
of a Cost Leadership
Strategy (slides
16-17).

9.

What are three important characteristics of organizational

structure that help define a firms structure in terms of its
competitive strategy?
a. Specialization - type and number of jobs required to
complete work.
b. Centralization - degree to which decision-making
authority is retained at higher managerial levels.
c. Formalization - degree to which formal rules and
procedures govern work.
Describe the characteristics of a functional structure for a firm
using the cost leadership strategy.
a. Simple reporting relationships.
b. Few layers in the decision-making and authority
structure.
c. Centralized corporate staff.

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d. Strong focus on process improvements through

operational functions.
e. Establishes a low-cost culture.
f. Decision-making authority is centralized in a staff
function to maintain a cost-reducing emphasis within
each organizational function.
g. Jobs are highly specialized, with work divided into
homogenous subgroups, to allow increased efficiencies.
h. Highly formalized rules and procedures emanate from a
centralized staff to guide the work.

Competitive Risks of the Cost Leadership Strategy - This section defines some of the risks
faced by firms that select a cost leadership strategy.
See slide 18.

10.

What are some of the risks faced by firms that select a cost
leadership strategy?
a. Processes can become obsolete.
b. Focus on cost reductions can be at the expense of
understanding customer perceptions and needs.
c. Strategy could be imitated, requiring the firm to
increase the value offered to retain customers.

Differentiation Strategy - This section introduces an analysis of the strategy of differentiation

that pursues a fairly broad competitive scope while serving a broad customer segment.
See slide 19.

Key Terms
Differentiation Strategy - 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.

Successful Execution of the Differentiation Strategy - This section discusses the activities and
policies that have shown success in the use of the differentiation strategy. The value chain
analysis (presented in Chapter 4) proves to be a critical tool for firms implementing a
differentiation strategy. Each of the five forces of competition is then discussed as it relates to a
differentiation strategy.
See slide 20.

11.

In what ways can firms successfully implement a differentiation

strategy?
a. Target customers who perceive that value is added by
the manner in which the firms products are

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See slide 21.

See Figure 5.4:

Examples of ValueCreating Activities
Associated with the
Differentiation
Strategy (slide 22).
See slide 23.

See Additional Notes

Below.

12.

differentiated.
b. Be able to produce non-standardized products at
competitive costs.
c. Have a thorough understanding of what their target
customers value, the relative importance they attach to
the satisfaction of different needs, and for what they are
willing to pay a premium.
d. Be different from competitors on as many dimensions
as possible. Examples of reducing product similarity to
provide a buffer from rivals include:
i. Unusual features
ii. Responsive customer service
iii. Rapid product innovations
iv. Technological leadership
v. Perceived prestige and status
vi. Different tastes
vii. Engineering design
viii. Performance
e. Use the value chain analysis to determine if the firm is
able to link the activities required to create value and
implement a differentiation strategy.
i. If a firm is unable to link the activities shown in
Figure 5.4, it probably lacks the resources,
capabilities, and core competencies needed to
successfully use the differentiation strategy.
Discuss how firms using the differentiation strategy can position
themselves in terms of the five-forces model of competition to
create value.
a. Customer loyalty (which reduces customer sensitivity to
price) provides the most valuable defense against rivals.
b. The uniqueness of differentiated products also reduces
customer sensitivity to raised prices when a product
continues to satisfy the customers perceived unique
needs.
c. High margins that can be charged for differentiated
products provide insulation from the influence of
suppliers. Higher supplier costs can be either absorbed
into the margin or passed along to willing customers.
d. Customer loyalty and a high level of product uniqueness
serve as significant entry barriers to potential
competitors unless they are willing to make significant
investments while seeking customers loyalty.
e. Again, firms with customers loyal to their products are
positioned effectively against product substitutes.

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Using the Functional Structure to Implement the Differentiation Strategy - This section
describes the characteristics and structural dimensions for a firm using a functional structure to
execute a differentiation strategy.
See Figure 5.5:
Functional Structure
for Implementation
of a Differentiation
Strategy (slides 2425).

13.

See Additional Notes

Below.

Describe the characteristics of a functional structure for a firm

using the differentiation strategy.
a. Relatively complex and flexible reporting relationships.
b. Frequent use of cross-functional product development
teams.
c. Strong focus on marketing and product R&D.
d. Establishes a development-oriented culture which
encourages frequent interaction to exchange ideas and
create value.
e. Decision-making responsibility is de-centralized to
ensure rapid response to cues from the external
environment.
f. Jobs are not highly specialized and include a large
number of tasks, to support creativity and the
continuous pursuit of differentiation.
g. Few formalized rules and procedures.

Competitive Risks of the Differentiation Strategy - This section defines some of the risks faced
by firms that select a differentiation strategy.
See slide 26.

14.

What are some of the risks faced by firms that select a

differentiation strategy?
a. Price differential for the differentiated product may be
perceived to be too large.
b. Firms means of differentiation may cease to provide
value for which customers are willing to pay,
particularly if rivals have successfully imitated the
firms strategy.
c. Experience can narrow the customers perceptions of
the value of a products differentiated features.
d. Counterfeit goods might appear in the marketplace.

Additional Discussion Notes for the Differentiation Strategy - These

notes include additional materials that discuss the concept of
differentiation, and the example of LVMH is used to illustrate these
principles. In addition, examples from the retailing and airline industries
are highlighted to demonstrate how to obtain a differentiation
advantage. Finally, additional material on organizational structure for
differentiation strategies uses General Motors as an illustration of

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different ways firms in the automobile industry use different structures

to support their differentiation strategies.
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
customers value. Commonly recognized differentiated goods include
Toyotas Lexus, Ralph Lauren clothing, and Caterpillars heavy-duty
earthmoving equipment.
To give some concrete examples, 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. Thats because LVMHthe worlds
largest, most successful purveyor of these and other luxury goods that
no one needsis a master of a differentiation strategy. LVMH has
differentiated itself in industries ranging from retailing and cosmetics to
jewelry, leather goods, and winesand in 2000 generated $10 billion.
What is the companys secret? LVMH uses a differentiation strategy.
LVMHs brands are simultaneously:
Timeless, eternal. Timelessness takes decades to develop.
However, you can create the impression of it sooner through
uncompromising qualityby 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.
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
Gallianos spirit. Later, when Dior manufactured dresses in
newspaper-printed fabric, they sold briskly.
Dont follow consumers. You wont generate breakthrough
products, and people wont 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

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its oddly shaped bottle and scentless signature flower, the

poppy. LMVH launched Flower anyway because the design
team believed in it. Kenzos sales rose 75% early in 2001,
largely on Flowers success.
Minimize risk. Dont 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 hasnt 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.

How to Obtain a Differentiation Advantage: Retailing and Airlines

- Other examples in two domains
Retailing: Discount
Wal-Mart says: Always low pricesCost
K-Mart says: Martha Stewart & low pricesMixed?
Target/Kohls say: Style, name brands (e.g., Mossimo, Liz
Lang, etc.), and not the warehouse ambianceDifferentiation
on value; the feel-good factor
JC Penney / Sears / Belks / Dillards say: We have been here
forever (What is their message?)Mixed?
Nordstroms/Saks 5th Avenue say: style, exceptional
serviceDifferentiation: service, upscale mystique, high-end
products
Ask
If you parachuted into the cosmetics section of a major department
store, could you immediately tell whether you were in Macys, Saks
Fifth Avenue, Bloomingdales, or one of their competitors? If the
product names were disguised, could you immediately distinguish the
Este Lauder counter from a dedicated Lancme counter? Put another
way, when was the last time you caught your breath as you walked past
the cosmetics counter in some big department store? When was the last
time you stopped, looked around, and thought, This is so cool?
Never? Well, thats no surprise. The way cosmetics are merchandised
and sold has hardly changed over the past couple of decades. It seems,
therefore, that many cosmetics companies are happy with the status quo
of mostly imitating each others incremental strategies.
Airlines
Southwest Airline says: low prices lead to freedom, airline
with personality, Clickn Save, the fun factor

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Differentiate on cost and fun ambiance

Midwest Express Airline says: the best care in the air, highquality travel experience, The best airline in the U.S.
(7 consecutive years), Most comfortable coach seat (10
consecutive years); typical meal: filet mignon with lobster, a roll
with butter, spinach, mandarin salad, and chocolate banana-split
cakeDifferentiate on prestige, comfort
United, US Airways, Delta, American Airlines, etc. says:
more flights to . . ., more schedule flexibility, and, if you
want low cost, you will need to be flexible on your schedule
Mixed
(For example, Deltas Fan Fares offer travel bargains to cities
hosting special sports events, concerts, exhibitions, etc., but
travel is restricted to this coming weekend. United offers
various specials from E-Fares, last minute fares, priced-to-go,
etc. Finally, American Airlines offers AAdvantage Net SAAver
Awards. Like their rivals, these are next weekend travel for
either fewer miles than normally required or for lower fare and
must be purchased by Friday.)

Ask
Assume that you were placed in one of the above airlines jets, but all
company logos and emblems were removed. Would be able to tell
whether you were seated in a United, American, or Delta Airlines
aircraft?
Structure for Differentiation Strategy - General Motors
Structure and Product Differentiation
Which structure is most efficient for a multi-product line company like
GM? Which structure is most effective? Consider the automobile
industry.
GM uses an M-Form Structure, which includes 12 automobile divisions.
Buick

a. Geographic reach: U.S., Canada, Israel, and China

b. Six models: mid-sized, luxury cars, and SUVs
emphasizing style and substance
c. Logo/Slogan: The Spirit of American Style
Chevrolet
a. Geographic reach: U.S., Canada, Mexico, Europe,
Middle East (Israel, Saudi Arabia, etc.), and Far East
(Japan, Taiwan and China)Most global brand
b. 22 models: small to mid-sized cars, trucks, vans, and
SUVs emphasizing style and substance
c. Logo/Slogan: Full ThrottleCharging Ahead
Cadillac
a. Geographic reach: U.S., Canada, Mexico, Europe,
Middle East (Israel, Saudi Arabia, etc.), and Far East
(Japan, Taiwan, and China)

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b. Six models: luxury cars, trucks and SUVs emphasizing

luxury and performance
c. Logo/Slogan: Heritage Reborn
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
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
Holden / Isuzu
Geographic reach: Australia
26 Models: small to mid-sized cars, trucks, vans, and SUVs,
emphasizing . . . ?
Logo/Slogan: What is their logo/slogan?
Hummer
Geographic reach: U.S.
Two models: SUVs, emphasizing uniqueness of rugged
style
Logo/Slogan: Like nothing else
Oldsmobile
Geographic reach: U.S. and Canada
Five models: Range of midsize cars and SUVs, emphasizing
driving performance
Logo/Slogan: No logo, brand being phased out
Opel
Geographic reach: Europe, Middle East (Israel, Saudi
Arabia, etc.), Far East (Japan, Taiwan & China)
10 Models: Range from small to midsize cars, trucks, vans,
and SUVs emphasizing performance
Logo/Slogan: Fresh ThinkingBetter Cars
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
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
Logo/Slogan: What is their logo/slogan?
Saturn

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Geographic reach: U.S., Canada

Five Models: Range small and midsize cars and wagons
emphasizing customer satisfaction and reliability
Logo/Slogan: What is their logo/slogan?

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: GMNA76.7%, GME17.7, GMLAAM
3.5%, GMAP3.1%
GM does plan to phase out Oldsmobile brand
GM is branded around a product, company structured around a
product line
Ask
Is GMs structure a hindrance to a customer-centric perspective? Are
GMs 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. 2000. Blown to Bits: How the new economics of information
transforms strategy. Boston: Harvard Business School Press; and Harvard Business Review. 2002
(March). The Perfect Paradox of Star Brands: An Interview with Bernard Arnault of LVMH. HBR
OnPoint Enhanced Edition.

Focus Strategies - This section introduces an analysis of the focus strategy that seeks to serve a
market niche through the core competencies of an organization.
See slide 27.

Key Terms
Focus Strategy - integrated set of actions designed to
produce or deliver goods or services to a narrow target
consumer based on specific differences in the market.

See slide 28.

15.

What are some examples of specific market segments that might

be targeted with a focus strategy?
a. A particular buyer group, such as youths or senior
citizens.
b. A particular product line segment, such as professional

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painters or do-it-yourselfers.
c. A different geographic market, such as the southeastern
U.S region or a local market.
See slide 29.

16.

See slide 30.

17.

See slide 31.

18.

Refer to Figures 5.2

and 5.4 (slides 13 and
21).
19.
See slide 32.

What are some of the reasons that firms choose a focus

strategy?
a. Large firms may overlook small niches.
b. Firms may lack resources to compete in the broader
market.
c. Firms may be able to serve a narrow market segment
more effectively than larger, industry-wide competitors.
d. Focus may allow the firm to direct resources to certain
value chain activities to build competitive advantage.
What are two types of focus strategies?
a. Focused cost leadership strategy
b. Focused differentiation strategy
Describe the use of the value chain analysis to identify activities
that the firm must perform in a competitively superior manner
to achieve and sustain a competitive advantage and create value
with a focus strategy.
a. Activities required to use the focused cost leadership
strategy are identical to those shown in Figure 5.2.
b. Activities required to use the focused differentiation
strategy are identical to those shown in Figure 5.4.
Discuss the focus strategy in terms of the five-forces model of
competition.
a. The manner in which each of the focus strategies allows
a firm to successfully position itself within the five
competitive forces model parallels the approaches
outlined above in the cost leadership and differentiation
strategy sections.

Focused Cost Leadership Strategy - This section provides examples of Ikea and Morgan Lynch
using focused cost leadership product and service strategies respectively.

Focused Differentiation Strategy - This section provides examples of Harley-Davidson and

LiveNation, Inc. (a spin off from Clear Channel Communications) using focused differentiation
product and service strategies respectively.

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Using the Simple or Functional Structures to Implement Focus Strategies - This section
describes the characteristics and structural dimensions for a firm using simple or functional
structures to execute a focus strategy.
See slides 33-34.

20.

Refer to Figures 5.3

and 5.5 (slides 16 and
24).

When will a firm using a focus strategy choose a simple

organizational structure? A functional organizational structure?
a. A simple structure is matched with focus strategies
when firms offer a single product line in a single
geographic market.
b. As businesses grow and expand, a functional structure
is required. Depending on their focused cost leadership
or focused differentiation strategy, the functional
structures presented in Figures 5.3 and 5.5 apply.

Competitive Risks of Focus Strategies - This section defines some of the risks faced by firms
that select a focus strategy.
See slide 35.

21.

In addition to the cost leadership and differentiation strategy

risks, what are some of the risks faced by firms that select a
differentiation strategy?
a. A competitor may be able to focus on a more narrowly
defined competitive segment and outfocus the
focuser.
b. A company competing on an industry-wide basis may
decide that the market segment served by the focus
strategy firm is attractive and worthy of competitive
pursuit.
c. The needs of customers within a narrow competitive
segment may become more similar to those of industrywide customers as a whole.

Integrated Cost Leadership/Differentiation Strategy - This section introduces an analysis of

an integrated strategy rather than one dominant business-level strategy.
See slide 36.

Key Terms
Integrated Cost Leadership/Differentiation Strategy - 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.

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Chapter 5Business-Level Strategy

See slide 37.

22.

What advantages does an integrated strategy provide for a firm?

a. Improved speed of adapting to environmental changes.
b. Improved speed for learning new skills and
technologies.
c. Improved leverage of core competencies while
competing against rivals.

Successful Execution of the Integrated Cost Leadership/Differentiation Strategy - This

section discusses the value and difficulty of implementing an integrated strategy. The value chain
analysis (presented in Chapter 4) is used to explain this difficulty.
See slide 38.

23.

See slide 39.

24.

What are some of the benefits of implementing an integrated

strategy?
a. Evidence suggests a relationship between use of an
integrated strategy and achieving above-average returns.
b. Businesses that combine multiple forms of competitive
advantage in low-profit-potential industries are
shown to outperform businesses that compete with a
single form.
What does the value chain analysis explain about the difficulties
of successfully implementing an integrated strategy?
a. Cost leadership and differentiation strategies emphasize
different primary and support activities. Achieving a
successful balance when selecting the activities to
perform is a difficult challenge and requires a flexible
organizational structure.

Using a Flexible Structure to Implement the Integrated Cost Leadership/Differentiation

Strategy - This section describes the characteristics and structural dimensions for a firm using a
flexible structure to execute an integration strategy. Additionally, three useful tools for balancing
the conflicting objectives of continuous cost reductions and differentiation enhancements are
presented.
See slide 40.

25.

Describe the characteristics of a flexible structure for a firm

using an integrated strategy.
a. A commitment to strategic flexibility (see Chapter 1) is
necessary to effectively use the integrated strategy.
b. Decision-making patterns need to be flexible, partly
centralized and partly decentralized.
c. Jobs are less specialized than in a traditionally
functional structure so that workers are more sensitive
to the need for balance between low cost and
differentiation.

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Chapter 5Business-Level Strategy

See slide 41.

26.

d. Some use of modular structures to produce modular

goods creates differentiation and simultaneously holds
down costs.
What three system processes can facilitate strategic flexibility
for implementation of an integrated strategy?
a. Flexible manufacturing system - computer controlled
process used to produce a variety of products in
moderate, flexible quantities with a minimum of manual
intervention.
b. Information networks - links to suppliers, distributors,
and customers and a tool for establishing enterprise
resource planning (ERP) linking value-chain activities.
c. Total quality management (TQM) systems - working
quality (as defined by the customer) and accuracy into
processes throughout the value chain to eliminate the
costs of poor quality at their sources.

Competitive Risks of the Integrated Cost Leadership/Differentiation Strategy - This section

defines some of the risks faced by firms that select an integrated strategy.
See slide 42.

27.

What are some of the risks faced by firms that select an

integrated strategy?
a. Failure to establish a leadership position can result in a
firm being stuck in the middle and unable to create
value, and unable to earn above-average returns.

Ethical Questions - Recognizing the need for firms to effectively interact with stakeholders
during the strategic management process, all strategic management topics have an ethical
dimension. A list of ethical questions appears after the Summary section of each chapter in the
textbook. The topic of ethics is best covered throughout the course to emphasize its prevalence
and importance. We recommend posing at least one of these questions during your class time to
stimulate discussion of ethical issues relevant to the chapter material that you are covering. (See
slides 43-47.)

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