Hitt Inst Manual 13e ch04 Final

Chapter 4
Business-Level Strategy
CHAPTER OVERVIEW
LEARNING OBJECTIVES
LECTURE NOTES
4-1 CUSTOMERS: THEIR RELATIONSHIP WITH BUSINESS-LEVEL
STRATEGIES
4-1a Effectively Managing Relationships with Customers
4-1b Reach, Richness, and Affiliation
4-1c Who: Determining the Customers to Serve
4-1d What: Determining Which Customer Needs to Satisfy
4-1e How: Determining Core Competencies Necessary to Satisfy Customer Needs
4-2 THE PURPOSE OF A BUSINESS-LEVEL STRATEGY
4-3 BUSINESS MODELS AND THEIR RELATIONSHIP WITH BUSINESS-
LEVEL STRATEGIES
4-4 TYPES OF BUSINESS-LEVEL STRATEGIES
4-4a Cost Leadership Strategy
4-4b Differentiation Strategy
4-4c Focus Strategies
4-4d Integrated Cost Leadership/Differentiation Strategy
ANSWERS TO REVIEW QUESTIONS
MINI-CASE: Hain Celestial Group: A Firm Focused on “Organic” Differentiation
ADDITIONAL QUESTIONS AND EXERCISES
INSTRUCTOR’S NOTES FOR MINDTAP
What Would You Do?
Video Quiz
Guided Case
You Make The Decision
Group Project
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Chapter 4: Business-Level Strategy
CHAPTER OVERVIEW
Armed with knowledge of its external environment as well as its internal resources,
capabilities, and core competencies, a firm is ready to make strategic choices. A business-
level strategy is an integrated and coordinated set of commitments and actions the firm
uses to gain a competitive advantage by exploiting core competencies in specific product
markets.
Customers are the foundation of successful business-level strategies. When considering

customers, a firm simultaneously examines three issues: who the firm intends to serve,
what needs those customers have that the firm seeks to satisfy, and how the firm will use
core competencies to satisfy customers’ needs. Increasing segmentation of markets
throughout the global economy creates opportunities for firms to identify more distinctive
customer needs that they can serve by implementing their chosen business-level strategy.
A business model, which describes what a firm does to create, deliver, and capture value
for stakeholders, is part of a firm’s business-level strategy. In essence, a business model is
a framework for how the firm will use processes to create, deliver, and capture value,
while a business-level strategy is the path the firm will follow to gain a competitive
advantage by exploiting its core competencies in a specific product market. There are
many types of business models including the franchise, freemium, subscription, and peer-
to-peer models. Firms may pair each type of business model with any one of the five
generic business-level strategies.
Firms seeking competitive advantage through the cost leadership strategy produce no-
frills, standardized products for an industry’s typical customer. Firms using this strategy
earn above-average returns when they learn how to lower their costs below those of their
competitors while providing differentiated features that are acceptable to their customers.
Competitive risks associated with the cost leadership strategy include a loss of competitive
advantage to newer technologies, failure to detect changes in customers’ needs, and the
ability of competitors to imitate the cost leader’s competitive advantage through their own
distinct strategic actions.
Through the differentiation strategy, firms provide customers with premium-priced

products that have different (and valued) features. Firms using this strategy seek to
differentiate their products from competitors’ products on as many dimensions as possible.
The less similarity to competitors’ offerings, the more buffered a firm is from competition
with its rivals. Risks associated with the differentiation strategy include a customer
group’s decision that the unique features provided by the differentiated product are no
longer worth a premium price, the ability of competitors to provide similar features at a
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lower cost, and the threat of counterfeit products.
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Through the cost leadership and differentiated focus strategies, firms serve the needs of a
narrow market segment (e.g., a buyer group, product segment, or geographic area) in ways
that exceed the value available from firms serving customers across the total market
(industry). The competitive risks of focus strategies include a competitor’s ability to use
its core competencies to “outfocus” the focuser by serving an even more narrowly defined
market segment, decisions by industry-wide competitors to focus on a customer group’s
specialized needs, and a reduction in differences of the needs between customers in a
narrow market segment and the industry-wide market.
Firms using the integrated cost leadership/differentiation strategy strive to provide

customers with relatively low-cost products that also have valued differentiated features.
Flexibility is required for firms to learn how to use primary value-chain activities and
support functions in ways that allow them to produce differentiated products at relatively
low costs. Flexible manufacturing systems and interconnectedness in information systems
within and between firms (buyers and suppliers) facilitate the flexibility that supports use
of the integrated strategy. Continuous improvements to a firm’s work processes as brought
about by a total quality management (TQM) system also facilitate use of the integrated
strategy. The primary risk of this strategy is that a firm might produce products that do not
offer sufficient value in terms of either low cost or differentiation.
LEARNING OBJECTIVES
1. Discuss the relationship between customers and business-level strategies in terms of who,
what, and how.
2. Explain the purpose of forming and implementing a business-level strategy.
3. Describe business models and explain their relationship with business-level strategies.
4. Explain the differences among five types of business-level strategies.
5. Use the five forces of competition model to explain how firms can earn above-average
returns when using each business-level strategy.
6. Discuss the risks associated with using each of the business-level strategies.
Lecture Notes
Chapter Introduction: Firms that perform well, even in very competitive industries, will
follow some pattern of decision making and execution that is internally consistent. That is,
the firm will line up its resource commitments in a way that reinforces the direction of the
enterprise. If these decisions are inconsistent, the outcome will be resource commitments
that work against one another and hinder the progress of the business. This chapter lays
out the basic strategy patterns that can lead to competitive advantage. Knowing these
patterns will help students understand how to make the most of the firm’s potential.
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OPENING CASE
Digital: An Increasingly Important Aspect of Strategy Choice and Strategy
Implementation
Innovation is a key part of firms’ efforts to achieve success with their strategies, which
means that information and technologies play vital roles. Firms must consider how
information and technology will affect each type of business-level strategy and develop a
digital strategy in relation to their business-level strategy. It’s important to note, however,
that a digital strategy “is the application of information and technology to raise human
performance.” Digital strategies, for example, allow firms to generate outcomes that
customers value and to improve products in ways that benefit consumers. Ultimately,
digital strategies allow leaders to assume a more viable competitive position in the future.
Teaching Note
Ask students to offer several examples of firms using technology to benefit consumers.
Can students articulate each firm’s digital strategy in these examples? Emphasize that a
digital strategy is designed to raise human performance; it must add value in order to be
worthwhile.
Discuss the relationship between customers and business-level

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strategies in terms of who, what, and how.
BUSINESS-LEVEL STRATEGY
Business-level strategies represent integrated and coordinated sets of actions that are
taken to exploit core competencies and gain a competitive advantage. To be more specific,
strategies are purposeful, precede the taking of actions to which they apply, and
demonstrate a shared understanding of the firm’s vision and mission. An effectively
formulated strategy marshals, integrates, and allocates the firm’s resources, capabilities,
and competencies so that it will be properly aligned with its external environment. A
properly developed strategy also rationalizes the firm’s vision and mission along with the
actions taken to achieve them. Determining the markets in which the firm will compete is
a question of corporate-level strategy and is discussed in Chapter 6. Competition in
individual product markets is a question of business-level strategy.
The firm’s core competencies should be focused on satisfying customer needs or preferences
through business-level strategies, which detail actions taken to provide value to customers and
gain a competitive advantage by exploiting core competencies in specific, individual product
or service markets. In other words, business-level strategies are developed based on a firm’s
core competencies and indicate how an organization chooses to compete in a particular market
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to gain a competitive advantage over competitors.
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A customer focus requires that firms simultaneously evaluate or consider

 Who to serve,
 What customer needs will be satisfied, and
 How those needs will be satisfied through the strategy selected.
4-1 CUSTOMERS: THEIR RELATIONSHIP WITH BUSINESS-

LEVEL STRATEGIES
Returns earned from relationships with customers (current and/or new) are the lifeblood of
all firms. To survive and achieve strategic competitiveness in the contemporary
competitive landscape, firms must:
 Identify who their customers are
 Determine customer needs or preferences
 Focus on satisfying the needs of some group of customers
 Determine how to compete (select a strategy) that enables them to satisfy customer
needs
The firm’s relationships with its customers are strengthened when it delivers superior
value to them.
4-1a Effectively Managing Relationships with Customers

Teaching Note
A number of companies have become skilled at managing all aspects of their
relationship with their customers. For example, Amazon.com is known for the quality
of information it maintains about its customers, the service it renders, and its ability to
anticipate customers’ needs. It has a strong reputation for being able to successfully do
this.
4-1b Reach, Richness, and Affiliation

In the Internet age, firms can maintain competitive advantage by:
 Thinking continuously about accessing and connecting with customers (reach)
 Maintaining information with depth and detail for (and from) customers (richness)
 Facilitating useful interactions with customer (affiliation)
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4-1c Who: Determining the Customers to Serve

The first step is to identify customers based on differences in needs or preferences (often
called market segmentation). This enables the firm to have a better grasp on what might
be important to customers because of the lack of any in-depth insights relevant for
decision making that are provided by central tendencies (averages) of the market in
general.
Table Note
It might be interesting to ask students which dimensions in this table help identify the
most promising market segments for which type of business.
TABLE 4.1
Basis for Customer Segmentation
Dimensions that can be used to identify potential customers include the following factors:
For consumer markets: For industrial markets:

 Demographic factors  End-use segments
 Socioeconomic factors  Product segments
 Geographic factors  Geographic segments
 Psychological factors  Common buying factor segments
 Consumption patterns  Customer size segments
 Perceptual factors
It is imperative that firms pay careful attention to differences in customer needs among
customer groups and not arbitrarily “lump” them together because:
 Almost any identifiable human or organizational characteristic can be used to
subdivide a market into segments that differ from one another on a given characteristic.
 Customer characteristics are often combined to segment markets into specific groups
that have unique needs.
 Demographic factors can also be used to segment markets into generations with
unique interests and needs.
Teaching Note
In the United States, the teenage market segment is a competitively relevant customer
group. Generate discussion by asking students about their assessments of the size,
growth, and spending-related characteristics of this market segment.
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4-1d What: Determining Which Customer Needs to Satisfy

As noted in Chapter 3, one challenge for firms is to identify ways in which they can
bundle their resources and capabilities to create value for customers; given the choice,
customers are most interested in purchasing products that both satisfy their needs and
provide value.
After the firm decides who it will serve, it must identify the targeted customer group’s
needs that its goods or services can satisfy. Successful firms learn how to deliver to
customers what they want and when they want it.
In a general sense, needs (wants) are related to a product’s benefits and features. Having
close and frequent interactions with both current and potential customers helps the firm
identify those individuals’ and groups’ current and future needs. From a strategic
perspective, a basic need of all customers is to buy products that create value for them.
The most effective firms continuously strive to anticipate changes in customers’ needs.
Failure to do this results in the loss of customers to competitors that are offering greater
value in terms of product features and functionalities.
In any given industry, there is great variety among consumers in terms of their needs (e.g.,
high-quality, lower-cost with acceptable quality, quick delivery).
Target, a retail store and online marketer, has been successful analyzing its many sources
of data through online sources of many customer demographics. It utilizes this information
to develop its promotion and marketing strategies.
4-1e How: Determining Core Competencies Necessary to Satisfy Customer Needs

As explained in Chapters 1 and 3, core competencies are resources and capabilities that
serve as a source of competitive advantage for the firm over its rivals. Firms use core
competencies (how) to implement value-creating strategies and thereby satisfy customers’
needs. Only those firms with the capacity to continuously improve, innovate, and upgrade
their competencies can expect to meet and hopefully exceed customers’ expectations
across time.
Companies draw from a wide range of core competencies to produce goods or services
that can satisfy customers’ needs. One such method employed by companies such as the
large pharmaceutical firm Merck and the software company SAS Institute is to invest
heavily in R&D to sustain competitive advantage in their industries.
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Explain the purpose of forming and implementing a business-

2
level strategy.
4-2 THE PURPOSE OF A BUSINESS-LEVEL STRATEGY

Business-level strategy creates differences between the firm’s position and those of its
competitors. To position itself differently from competitors, a firm must decide whether it
intends to perform activities differently or to perform different activities.
Describe business models and explain their relationship with

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business-level strategies.
4-3 BUSINESS MODELS AND THEIR RELATIONSHIP WITH

BUSINESS-LEVEL STRATEGIES
A business model describes what a firm does to create, deliver, and capture value for its
stakeholders. In a sense, a business model is a framework for how the firm will create,
deliver, and capture value, while a business-level strategy is the set of commitments and
actions that yields the path a firm intends to follow to gain a competitive advantage by
exploiting its core competencies in a specific product market. The chosen business model
may change over time in response to shifts in the external or internal environments.
Explain the differences among five types of business-level

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strategies.
Use the five forces of competition model to explain how firms

5 can earn above-average returns when using each business-
level strategy.
Discuss the risks associated with using each of the business-

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level strategies.
4-4 TYPES OF BUSINESS-LEVEL STRATEGIES

Business-level strategy is concerned with a firm’s position in an industry, relative to
competitors. A firm is challenged to select business-level strategies to position itself
favorably by performing activities differently or performing different activities as
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compared to its rivals. Thus, the firm’s business-level strategy is a deliberate choice about
how it will perform the value chain’s primary and support activities in ways that create
unique value.
Figure Note
As illustrated in Figure 4.1, firms select their business-level strategies based on a
combination of competitive (market) scope and competitive advantage (product
uniqueness or low cost).
FIGURE 4.1
Five Business-Level Strategies
Firms can choose one of five strategies from the generic strategy matrix based on the
source of competitive advantage (uniqueness or cost) and breadth of competitive scope
(broad or narrow).
A firm choosing to compete across a broad market determines that it should compete in a
number of customer segments. Competitive advantage is achieved either by offering
unique products—a differentiation strategy—or by establishing a low-cost position and
providing standardized products at the lowest competitive price—a cost leadership
strategy.
Firms that choose to compete in narrow customer segments select a focus strategy, which
may be either a focused differentiation strategy (few segments, unique products) or a
focused cost leadership strategy (narrow segment, standardized products at the lowest
competitive price).
An integrated cost leadership/differentiation incorporates both of these emphases.
None of the five business-level strategies shown in Figure 4.1 is inherently or universally
superior to the others. The effectiveness of each strategy is contingent both on the
opportunities and threats in a firm’s external environment and on the possibilities provided
by the firm’s unique resources, capabilities, and core competencies. It is critical, therefore,
for the firm to select a business-level strategy that is based on a match between the
opportunities and threats in its external environment and the strengths of its internal
environment as shown by its core competencies.
4-4a Cost Leadership Strategy

The cost leadership strategy is 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.
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Firms that choose a cost leadership strategy generally offer relatively standardized
products with characteristics or features that typical customers accept (but with
competitive levels of differentiation) at the lowest competitive price.
Firms that wish to be successful by following a cost leadership strategy must maintain
constant efforts aimed at lowering costs (relative to rivals’ costs) and creating value for
customers. Cost-reduction strategies can include:
 Building efficient-scale facilities
 Establishing tight control of production and overhead costs
 Minimizing the costs of sales, product research and development, and service
 Investing in state-of-the-art manufacturing technologies
Implementing and maintaining a cost leadership strategy means that a firm must consider
its value chain of primary and secondary activities (as discussed in Chapter 3) and
effectively link those activities, if it is to be successful (as illustrated in Figure 4.2).
As primary activities, inbound logistics and outbound logistics often account for much of
the total cost to produce some goods and services. Research suggests that a competitive
advantage in logistics creates more value with cost leadership strategies than with
differentiation strategies, prompting cost leaders to focus on these primary activities.
Cost leaders also carefully examine all support activities to find additional sources of
potential cost reductions.
Figure Note
Figure 4.2 points out that the critical focus in successfully implementing a cost
leadership strategy is on efficiency and cost reduction throughout the value delivery
system.
FIGURE 4.2
Examples of Value-Creating Activities Associated with the Cost Leadership Strategy
As suggested in Figure 4.2, the firm’s focus throughout each of its value chain activities
and support functions is on the following:
 Simplification of processes and procedures
 Achieving efficiency and effectiveness
 Reducing costs
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 Monitoring costs of activities provided by others that interface with the firm’s
inbound or outbound logistics
A firm that successfully implements a cost leadership strategy can earn above-average
returns even when the five competitive forces are strong.
Rivalry with Existing Competitors

Achieving the lowest cost position means that a firm’s rivals will hesitate to compete
based on price because, in a price war, the low-cost firm will still earn profits even after its
competitors compete away all profits.
Having the low-cost position is a valuable defense against rivals. For example, the
changes Walmart made to attract upscale customers created vulnerability in its low-cost
position to rivals. Amazon, Dollar Store, and other took advantage of the opportunity and
have siphoned off some of Walmart’s customers.
Bargaining Power of Buyers (Customers)

Achieving the low-cost position provides some protection against powerful customers
who attempt to drive down prices. If customers attempt to drive prices below the cost of
the next most efficient firm, that firm might choose to exit the market (rather than remain
and earn below-average profits), leaving the low-cost firm with a monopoly position. If
that happens, customers would lose any bargaining power as the monopoly firm would be
in a position to raise prices.
Bargaining Power of Suppliers

Because it has achieved the lowest cost position in the industry, the cost leadership
strategy enables a firm to absorb a greater amount of cost increases from powerful
suppliers before it must raise prices charged to customers. This may enable the firm to be
alone among its competitors in earning above-average returns.
In addition, a low-cost leader that also has a dominant market share may be in a position
to force suppliers to reduce prices or to hold down the level of price increases and thus
reduce the power of suppliers. Walmart is a good example of a firm that follows this
pattern.
Potential Entrants
Firms successfully following cost leadership strategies generally must produce and sell in
large volumes to earn above-average returns. And with a continuous focus on efficiency
and reducing costs, cost leadership firms create barriers to entry.
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New entrants must either enter the industry at a large scale (large enough to achieve the
same economies of scale as the next lowest cost firm) or be satisfied with average profits
until they move sufficiently far down the experience curve to match the efficiencies of the
low-cost leader.
Product Substitutes
The cost leader is in a more attractive position relative to substitute products than are other
firms in the industry. To retain customers, the cost leader can more easily reduce prices to
maintain the price-value relationship and retain customers.
Competitive Risks of the Cost Leadership Strategy

Despite the attractiveness of the cost leadership strategy, it is accompanied by risks such
as the following:
 Technological innovations by competitors could eliminate the cost leader’s cost
advantage.
 Overly focusing on process efficiency may cause the cost leader to overlook needed
differentiation features.
 Competitors may successfully imitate the low-cost leader’s value chain configuration.
In the event of any of the above, the low-cost leader is challenged to increase value to
customers. This may mean reducing prices or adding product features without raising
prices. However, if prices are reduced too low, it may be difficult for the firm to earn
satisfactory margins and customers may resist any price increases.
4-4b Differentiation Strategy

In contrast to the cost leadership strategy, implementation of a differentiation strategy
means that value is provided to customers through the unique features and characteristics
of a firm’s products rather than by the lowest price.
Because differentiated products satisfy customers’ unique needs or preferences, firms can
charge a premium price for differentiated products. But the premium cannot exceed what
customers are willing to pay.
For the firm to outperform its competitors and earn above-average returns, the price
charged for the differentiated product must exceed the cost of differentiation. In other
words, the price charged must exceed total product cost. Because of this, the differentiated
product’s premium prices generally exceed the low price of the standard product.
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Firms that follow a differentiation strategy concentrate or focus on product innovation and
developing product features that customers value rather than on maintaining the lowest
competitive price (the case for cost leadership strategy). Often, this strategy seeks to
differentiate the product/service on as many dimensions as possible.
Products can be differentiated in a number of ways to stand apart from standardized

products:
 Superior quality
 Unusual or unique features
 More responsive customer service
 Rapid product innovation
 Advanced technological features
 Engineering design and performance
 Additional features
 An image of prestige or status
Some examples of differentiation strategies include the following:

 Ralph Lauren differentiates its clothing lines through image.
 Lexus cars are differentiated by prestige and image.
 Apple products (iPod and iPhone) are differentiated by innovative design.
 McKinsey and Company offers differentiated consulting services.
Successfully implementing (and maintaining) a differentiation strategy requires a firm to

consider its value chain of primary and secondary activities and effectively link those
activities as illustrated in Figure 4.3.
Figure Note
Use Figure 4.3 to show that the critical focus in a successful differentiation strategy is
on quality and product innovation, regardless of the value-creating activity.
FIGURE 4.3
Examples of Value-Creating Activities Associated with the Differentiation Strategy
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As suggested in Figure 4.3, the firm’s focus in its value chain activities and support
functions is on:
 Establishing the importance of quality
 Maintaining accuracy, speed, and responsiveness
 Understanding and meeting customers’ unique preferences
 Monitoring the speed, reliability, and quality of activities provided by others that
interface with the firm’s inbound and outbound logistics
Teaching Note
The chapter mentions that firms following differentiation strategies cannot completely
ignore costs and the need for minimal spending on process-related innovations. Porter
refers to this as maintaining “parity” on the alternative dimension. When speaking of
cost leadership strategies, a useful example of “differentiation parity” comes from the
automobile manufacturing industry. Hyundai has been able to compete based on cost,
but it still produces a car that is “in the ballpark” on differentiation. Failed
manufacturer Yugo offered a very inexpensive car (introduced at a mere $1995 in the
early 1980s), but it was of such poor quality that buyers refused to purchase the vehicle
once news of its reliability problems got out. A car that will not run is not a value, even
if it sells for only a fraction of the price of all other available models! In a similar way,
a company that competes on differentiation must maintain “cost parity” so that the
differentiated features that customers want are not beyond the reach of their budget.
Consumers recognize the superior quality of Sony televisions, but the premium charged
is justifiable, given the quality of the product. Obviously, controlling costs plays an
important part in pricing possibilities.
A firm that successfully implements a differentiation strategy can earn above-average

returns even when the five competitive forces are strong.
Rivalry with Existing Competitors

Achieving customer loyalty means differentiating products in ways that are meaningful to
customers. Brand loyalty means that customers will be less sensitive to price increases. As
long as the firm satisfies the differentiated needs of loyal customers, it may be insulated
from price-based competition.
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Bargaining Power of Buyers (Customers)

Through meaningful differentiation, firms develop products that are considered unique.
This uniqueness may insulate the firm from competitive rivalry and reduce customer
sensitivity to price increases (similar to the insulation from rivalry with existing
competitors).
By satisfying customer preferences in ways that no competitor can, firms also are able to
charge higher prices (because there are no comparable product alternatives).
Bargaining Power of Suppliers

Because of the differentiator’s focus on product quality and responsiveness to customer
preferences, suppliers also may be forced to provide differentiators with higher-quality
materials, components, or services, which can drive up the firm’s per-unit costs.
Since the differentiator charges premium prices, it is somewhat insulated from suppliers’
price increases (as the differentiator can absorb a greater level of cost increases from
powerful suppliers through its higher margins). Alternatively, because of lower price
sensitivity by customers, differentiators may be able to raise prices to cover increased
supplier-related costs.
Potential Entrants
The principal barrier to entry is customers’ loyalty to the uniquely differentiated brand.
This means that a potential entrant must either overcome (or surpass) the uniqueness of
existing products or provide similarly differentiated products at a lower price to increase
customer value.
Product Substitutes
Brand loyalty may insulate differentiated products from substitutes. Without brand
loyalty, customers may switch to substitutes that offer similar features at a lower price or
to products with more attractive features at the same price.
Competitive Risks of the Differentiation Strategy

Like the cost leadership strategy, the differentiation strategy also carries risks such as the
following:
 Customers may decide that the cost of uniqueness is too high. In other words, the
price differential between the standardized and differentiated product is too high. Perhaps
the firm provides a greater level of uniqueness than customers are willing to pay for.
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 The firm’s means of differentiation no longer provide value to customers. For

instance, what is the value of prestige or exclusivity? And, how long will they last as
customers become more sophisticated?
 Customer learning may reduce the customer’s perception of the value of the firm’s
differentiation. Through experience, customers may learn that the extra price for a
differentiated good is no longer a value.
Teaching Note
This loss of value through customer learning or changes in customer perceptions can be
illustrated by the experiences of IBM. Initially, the IBM name on a personal computer
signaled value to customers; however, clones soon challenged IBM’s preeminent
position in the PC market. As customers learned that the clone machines offered similar
features at lower prices, the value attached to the IBM brand name diminished and
IBM’s sales suffered.
 A fourth risk is concerned with counterfeiting. Increasingly, counterfeit goods

(products that attempt to convey differentiated features to customers at significantly
reduced prices) are a concern for many firms using the differentiated strategy.
In the event of any of the above, differentiators are challenged to increase value to
customers. This may mean reducing prices, adding product features without raising prices,
or developing new efficiencies in its value chain of primary and secondary activities.
4-4c Focus Strategies

By implementing a cost leadership or differentiation strategy, firms choose to compete by
exploiting their core competencies on an industry-wide basis and adopting a broad
competitive reach.
Alternatively, firms can choose to follow a focus strategy by seeking to use their core
competencies to serve the needs of a particular customer group in an industry. In other
words, firms focus on specific, smaller segments (or niches) of customers rather than
across the entire market.
Markets can be segmented by:

 Particular buyer group (e.g., youth or senior citizens)
 Different segment of a product line (e.g., products for professionals or “do-it-
yourselfers”)
 Different geographic market (e.g., eastern or western United States)
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Firms may choose to follow a focus strategy because:

 They can serve a narrow segment more effectively than competitors that choose to
compete industry wide.
 The narrow segment’s needs are so special that industry-wide competitors choose not
to meet them.
 Certain narrow segments are being poorly served by industry-wide competitors.
Teaching Note
Emphasize again that focus strategies can be based either on cost leadership or
differentiation.
STRATEGIC FOCUS
The Differentiation Strategy—Can Macy’s Again Find Ways to Achieve Success by
Implementing this Strategy?
Founded in New York City in 1858, Macy’s built its success on a differentiation strategy.
The department store chain adopted many innovations that set it apart, from offering
private-label brands to stocking trendy products to hiring and training expert salespeople.
In recent years, however, Macy’s has lost market share to online retailers, discount
retailers, and specialty stores. Macy’s new North Star Strategy is a five-pronged approach
to once again differentiate itself from competitors in ways that add value to customers.
The main points of the strategy include offering desirable products and enjoyable
shopping experiences, highlighting its private-label brands that aren’t available anywhere
else, using technology to enhance customer service, reinvesting in innovations, and
staying abreast of consumer and technology trends in ways that will drive growth.
Teaching Note
Introduce the topic by asking students to share their impressions of department store
shopping. Lead them to recognize why it was essential for Macy’s to identify ways to
evolve its differentiation strategy. Then ask them to suggest specific tactics that would
support or extend Macy’s new North Star Strategy.
Focused Cost Leadership Strategy

Firms that compete by following cost leadership strategies to serve narrow market niches
generally target the smallest buyers in an industry. They look for those who purchase in
such small quantities that industry-wide competitors cannot serve them at the same low
cost.
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Global furniture retailer IKEA provides customers with “good design and function at low
prices” through use of the focused cost leadership strategy. IKEA does this by offering
low-cost, modular furniture (assembled by customers) and using self-service as an
alternative to having sales associates follow and pressure customers to buy. IKEA displays
its products in room-like settings so that customers can view different combinations of
furniture, eliminating the need for assistance from sales associates or decorators to
visualize the setting and reducing employee costs. Customers also pick up their own
purchases to reduce the firm’s costs. However, the company also differentiates somewhat.
For example, stores address the needs of shoppers (e.g., extended hours and in-store
playrooms for children) while they shop.
Focused Differentiation Strategy

Firms following focused differentiation strategies produce customized products for small
market segments.
They can be successful when either the quantities involved are too small for industry-wide
competitors to handle economically, or when the extent of customization (or
differentiation) requested is beyond the capabilities of the industry-wide competitors. The
text uses the new generation of lunch trucks offering high-end fare prepared by highly
trained chefs and often owned by well-known restaurants to illustrate this strategy.
Teaching Note
Other examples of focused differentiators include the following:
 Upscale apartment buildings in various locations are being designed to serve the needs
of technologically savvy city dwellers, offering differentiated features such as high-
speed digital Internet access and other sophisticated telecommunications services.
 Manufacturers such as Ferrari, Aston Martin, and Lamborghini compete in the tiny
supercar category with prices starting at $150,000 and running as high as $600,000.
These cars are more than just transportation.
Just as was noted for industry-wide differentiators and low-cost producers, firms choosing
to focus must be particularly adept at completing primary and secondary value chain
activities in a superior way. Issues related to the five competitive forces are similar to
those discussed for the differentiation and cost leadership strategies; however, the
competitive scope of the focus is on a narrow segment rather than the industry. Students
should review Figure 4.3 (Value-Creating Activities) as well as the earlier discussion of
the five competitive forces for the cost leadership and differentiation strategies.
20
STRATEGIC FOCUS
What Type of Hamburger Would You Like to Buy and Eat Today?
It is surprising how many hamburger chains are using a differentiation strategy, given that
they’re all offering the same basic products—hamburgers and fries. However, as these
organizations demonstrate, there are many dimensions on which to differentiate. Not only
can burger organizations produce different products by using different tools and
ingredients, they can also distinguish themselves on size of the organization/number of
outlets, locations, market segmentation, and price.
Teaching Note
Students should be eager to participate in a discussion of the “best” burgers in their
area, which will easily lead into a discussion of the various ways hamburger producers
can find to differentiate themselves from competitors. Ask students to identify at least
four specific dimensions for differentiation.
Competitive Risks of Focus Strategies

The competitive risks of focus firms are similar to those previously noted for the cost
leadership and differentiation strategies with the following additions:
 Competitors may successfully focus on an even smaller segment of the market,
“outfocusing” the focuser, or focus only on the most profitable slice of the focuser’s
chosen segment.
Teaching Note
As an example, Confederate Motor Co. produces a highly differentiated motorcycle
that might appeal to some of Harley-Davidson’s customers. Obsessed with making a
“fiercely American motorcycle” (one that is even more American than Harley’s
products), Confederate produces its motorcycles entirely by hand labor. In fact, a full
week is required to make a single bike. Digital technology is used to design
Confederate’s products, which have a radical appearance. At a price of $62,000 or
more, the firm’s products appeal only to customers wanting to buy a truly differentiated
product such as the F113 Hellcat (which is receiving “rave reviews in the motorcycling
press”).
 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 needs.
 Preferences and needs of the narrow segment may become more similar to the
broader market, reducing or eliminating the advantages of focusing.
21
4-4d Integrated Cost Leadership/Differentiation Strategy

This hybrid strategy may become even more important—and more popular—as global
competition rises.
Compared to firms relying on a single generic strategy, firms that integrate the generic
strategies may position themselves to improve their ability to adapt quickly to
environmental changes.
Successfully pursuing the integrated cost leadership/differentiation strategy yields

additive benefits such as the following:
 Differentiation enables the firm to charge premium prices.
 Cost leadership enables the firm to charge the lowest competitive price.
 The firm is thus able to achieve a competitive advantage by delivering value to
customers based on both product features and low price.
 A variety of other factors also may enable firms to gain a competitive advantage and
earn above-average returns from an integrated cost leadership/differentiation strategy.
Flexible Manufacturing Systems

A flexible manufacturing system is a computer-controlled process used to produce a
variety of products in moderate, flexible quantities. It enables firms to achieve the
flexibility necessary to simultaneously respond to changes in customer needs and
preferences while maintaining the low-cost advantages of large-scale manufacturing. This
increases a firm’s ability to engage in an integrated low-cost/differentiation strategy.
Information Networks
Information networks enable a firm to coordinate interdependencies between internally
and externally performed value-creating activities to increase flexibility and
responsiveness. Examples include real-time linkages between manufacturers and suppliers
or subcontractors, or between retailers and suppliers. These linkages can improve time-to-
market of new products by coordinating design and production activities and reduce out-
of-stock occurrences by shortening the order-restock cycle.
Customer relationship management (CRM) is one form of an information-based network

process that firms use to better understand customers and their needs. An effective CRM
system provides a 360-degree view of the company’s relationship with customers,
encompassing all contact points, involving all business processes, and incorporating all
communication media and sales channels. The firm can then use this information to
22
determine the trade-offs its customers are willing to make between differentiated features
and low cost, which is vital for companies using the integrated cost
leadership/differentiation strategy.
Enterprise Resource Planning Systems: A Mini-Lecture

Enterprise resource planning (ERP) is an information system used to identify and
plan the resources required across the firm to receive, record, produce, and ship
customer orders. For example, salespeople for aircraft parts distributor Aviall use
handheld equipment to scan barcode labels on bins in customers’ facilities to
determine when parts need to be restocked. Data gathered through this procedure
are uploaded via the Web to the Aviall back-end replenishment and ERP system,
allowing the order fulfillment process to begin within minutes of scanning.
Growth in ERP applications such as the one used at Aviall has been significant.
Full installations of an ERP system are expensive, running into the tens of
millions of dollars for large-scale applications
Improving efficiency on a company-wide basis is a primary objective of using an
ERP system. Efficiency improvements result from the use of systems through
which financial and operational data are moved rapidly from one department to
another. The transfer of sales data from Aviall salespeople to the order entry point
at the firm’s manufacturing facility demonstrates the rapid movement of
information from one function to another. Integrating data across parties that are
involved with detailing product specifications and then manufacturing those
products and distributing them in ways that are consistent with customers’ unique
needs enable the firm to respond with flexibility to customer preferences relative
to cost and differentiation.
Total Quality Management Systems

Total quality management (TQM) systems have been established to improve product
quality (from a customer perspective) and to improve productivity in the performance of
the internal value-creating activities.
Firms develop and use TQM systems in order to (1) increase customer satisfaction, (2) cut
costs, and (3) reduce the amount of time required to introduce innovative products to the
marketplace.
Improving product quality focuses on product reliability, performance, and utility and
enables the firm to differentiate its products and charge higher prices, while lowering the
costs of manufacturing and service.
23
Teaching Note
Total quality management (TQM) systems are based on the following key assumptions:
 The costs of poor quality exceed the costs of developing processes that produce high-
quality products and services (in other words, it is less costly to do things right the first
time).
 Employees care about their work and will take the initiative to improve it (but only if
the firm provides the resources, tools, and training necessary and management listens
to their ideas).
 Since organizations are systems of highly interdependent parts, decision processes
must be integrated and include participation from all affected functional areas.
 Responsibility for effective TQM rests with top-level managers who must support
TQM processes and appropriately design the firm so that employees can function
effectively.
Competitive Risks of the Integrated Cost Leadership/Differentiation Strategy

This is an appealing yet risky strategy, as it is difficult for firms to perform primary and
support activities in ways that allow them to produce relatively inexpensive products with
levels of differentiation that create value for the target customers. Moreover, to properly
use this strategy across time, firms must be able to simultaneously reduce costs incurred to
produce products (as required by the cost leadership strategy) while increasing products’
differentiation (as required by the differentiation strategy).
ANSWERS TO REVIEW QUESTIONS
1. What is a business-level strategy?
Business-level strategy (the focus of Chapter 4) is an integrated and coordinated set of

commitments and actions designed to provide value to customers and gain a competitive
advantage by exploiting core competencies in specific, individual product markets. Thus,
a business-level strategy reflects a firm’s belief about where and how it has an advantage
over its rivals, while guiding decisions to choose to perform activities differently or to
perform different activities than competitors.
Key issues the firm must address when choosing a business-level strategy are the good or
service to offer, how to manufacture or create it, and how to distribute it to the
marketplace. Once formed, the business-level strategy reflects where and how the firm
has an advantage over its rivals. The essence of a firm’s business-level strategy is
choosing to perform activities differently or to perform different activities from rivals.
24
2. What is the relationship between a firm’s customers and its business-level strategy
in terms of who, what, and how? Why is this relationship important?
The relationship between a firm’s customers and its business-level strategy is that, to
survive and achieve strategic competitiveness, firms must create value that satisfies some
group of customers’ needs. In other words, successful business-level strategies are
founded or based on customers’ needs.
Who represents the determination of specific customer groups to be served. The primary
focus here is market segmentation. What is concerned with customer needs that will be
satisfied. How represents the core competencies of the firm that can be used to satisfy
customers’ needs that have been identified.
Increasing segmentation of markets throughout the global economy creates opportunities
for firms to identify increasingly unique customer needs they can try to serve by using
one of the business-level strategies.
3. What is a business model and how do business models differ from business-level
strategies?
A business model describes what a firm does to create, deliver, and capture value for its
stakeholders. A business model is a framework for how the firm will create, deliver, and
capture value, while a business-level strategy is the set of commitments and actions that
yields the path a firm intends to follow to gain a competitive advantage by exploiting its
core competencies in a specific product market.
4. What are the differences among the cost leadership, differentiation, focused cost
leadership, focused differentiation, and integrated cost leadership/differentiation
business-level strategies?
Strategy Source(s) of Competitive Advantage

Cost Leadership Lowest cost with a level of product features or
characteristics acceptable to the most typical
customers in the industry
Differentiation Product’s unique attributes and characteristics that

are valued by a broad group of customers
25
Focused Cost Leadership Lowest cost with a level of product features or

characteristics targeted to a particular customer
group or segment in an industry
Focused Differentiation Product’s unique attributes and characteristics that

are valued by a particular customer group (niche)
or segment in an industry
Integrated Cost Leadership/ Products have attributes of both relatively low cost
Differentiation and unique attributes, characteristics, or features;
the level of product differentiation is less than the
pure differentiator while cost is higher than that of
the low-cost leader
5. How can firms use each of the business-level strategies to position themselves
favorably relative to the five forces of competition?
Strategy Dealing with the Five Forces of Competition

Cost Leadership Can compete against rivals on price
Can price below rivals to interest buyers
Can absorb price increases by suppliers better than
rivals
Discourages new entrants that can’t endure low profit
margins
Can reduce prices to maintain attractiveness over
substitutes
Differentiation Customers are loyal to firms offering differentiated

products
Uniqueness reduces sensitivity of buyers to price
increases
High margins shield the firm from losses to powerful
suppliers
Customer loyalty to differentiated products deters new
entrants
Unlikely to switch to substitutes when loyal to
products
Focused Cost Leadership An adaptation of the above
Focused Differentiation An adaptation of the above

26
Integrated Cost An adaptation and combination of the above

Leadership/Differentiation
6. What are the specific risks associated with using each business-level strategy?
Strategy Risk(s) of Selecting and Implementing

Cost Leadership Minimal investment in technology could result in
process obsolescence; firm misses change in
customers’ needs due to cost-only focus;
competitors imitate strategy
Differentiation Customers decide price differential between low-

cost producer and differentiator is too large; too
many features offered; product’s means of
differentiation no longer provides value to
customers; customer learning (experience) may
change their perception of the value of
differentiation; counterfeit products displace the
firm’s offerings
Focused Cost Leadership & Beyond the general risks noted for the low-cost
Focused Differentiation leader and the differentiator, focus strategies have
the following risks: competitor “outfocuses” the
focuser by defining a narrower segment; a firm
competing on an industry-wide basis may decide
that the segment served by the focus strategy firm is
attractive and pursue that segment; the needs of
customers within the narrow segment may become
more similar to all customers in the market,
reducing or eliminating the advantages of a focus
strategy
Integrated Cost Leadership/ Product features not sufficiently valued by

Differentiation customers; product is not sufficiently differentiated;
product is too expensive to compete with low-cost
leader’s products
27
MINI CASE
Hain Celestial Group: A Firm Focused on “Organic” Differentiation
Note: To prepare students for class discussion and to introduce them to the
fundamentals of the Strategic Management process, each chapter Mini-Case is
prepared as an auto-graded Guided Case Analysis activity in MindTap™. More
information below.
Hain Celestial Group has built strong capabilities in producing natural and organic foods
to take advantage of the changing consumer trend in the food business. The company grew
through a series of acquisitions of entrepreneurial start-ups. These acquisitions allowed
Hain Celestial to become the largest supplier to retailer Whole Foods Markets. The natural
food trend has allowed the company to sell its branded products to traditional grocery
store chains, accounting for about 60 percent of its U.S. sales. Meanwhile, large branded
food firms such as Kraft Foods, Campbell Soup Company, and J.M. Smucker Company
that have not focused as intensely on this natural segment have stalled their earnings, in
part because they have not focused on the natural and organic trend desired by consumers
as much as Hain Celestial. While larger brands seek to modify existing products by
removing less natural ingredients (Nestlé) or reducing the use of high fructose corn syrup
(Hershey Company and Mars, Inc.), these types of changes do not allow them to overcome
the problem of rapidly changing consumer tastes toward natural food. Grocery stores and
restaurants are also attempting to take advantage of the trend toward natural foods.
Teaching Note
Ask students to evaluate Hain Celestial’s strategy and what they would have done
differently to implement it. Ask them to identify Hain’s competitors and how these
companies differentiate themselves from one another. Students should realize that Hain
and its competitors have differentiated themselves on several dimensions and that to
grow in a saturated and highly competitive industry they need to offer value that
exceeds that of their competition. Ask students to identify other firms with a strong
competitive advantage that implemented strategies to attract customers following social
trends.
Answers to Case Discussion Questions

1. We note in the Mini-Case that Hain Celestial is implementing the differentiation strategy.
Provide some examples of the competitive dimensions on which this firm focuses while
implementing its differentiation strategy.
28
Perhaps the most important dimension in Hain Celestial’s differentiation strategy is the
quality of its food products, which are all natural and organic. Another interesting
dimension is its method of growth, which has focused on the acquisition of known brands
as opposed to the internal development of products. Because of the perceived value of
natural and organic foods among some consumers, Hain Celestial is also able to demand
premium prices.
2. On what environmental trends did Hain Celestial base its business-level strategy? What
environmental trends could have a negative effect on this firm’s strategy in the future?
Why?
Hain Celestial capitalized on many consumers’ emerging interest in living a healthier
lifestyle, specifically through the consumption of natural and organic foods. Because
these foods were not as readily available some years ago, the firm was able to demand
premium prices for its products. However, as these products become more common and
mainstream and are available from multiple producers, consumers may begin to view
these products as average, instead of premium, which would drive down the prices
they’re willing to pay for such products.
3. In years to come, should Hain try to grow primarily organically, through collaborative
strategies such as joint ventures and strategic alliances, or through mergers and
acquisitions? Explain your answer.
Hain Celestial has been very successful in growing through acquisitions, which may
prompt some students to recommend continuing with this approach. However, other
students may acknowledge that ongoing shifts in consumer preferences, the entry of new
competitors into the market, and other external and internal factors may lead the
organization to form strategic alliances or joint ventures in order to gain access to
resources and capabilities it doesn’t currently possess.
4. What are the most serious competitive challenges you anticipate Hain Celestial will face
over the next ten years? How should the firm respond to these challenges?
The organic and natural food market has already attracted a number of new competitors
and has inspired several traditional food producers to modify their products to better meet
the needs of health-conscious consumers. Increased competition and the greater
availability of healthy products will most likely drive down prices. Hain Celestial must
look for efficiencies in its own production and operations in order to guard itself on price,
while also continuing to seek out innovative products that differentiate it from rivals.
29
ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions

1. Students are customers of the university or college. What actions does your school take to
recognize and satisfy its students’ needs? Students should be prepared to discuss their
views.
2. Students should select a local firm, and based on interactions with this company,
determine which business-level strategy they think the firm is implementing. Ask what
evidence they can provide to support their opinions. Is the Internet affecting the firm’s
strategic actions? If so, how?
3. Assuming students have decided to establish and operate a restaurant in your local
community, ask them what market segment they intend to serve. What needs do these
customers have that the students could satisfy with their restaurant? How would they
satisfy those needs? They should be prepared to discuss their responses.
4. What business-level strategy do students think your school is implementing? What core
competencies are being used to implement this strategy?
5. Propose the following statement to the class: “It is impossible for a firm to produce a
relatively low-cost, yet somewhat highly differentiated product.” Is this statement true or
false? Ask students for the reasoning behind their answers.
6. Do students feel the Internet is potentially of more value for firms implementing either
the differentiation strategy or the focused differentiation strategy than for those using
either the cost leadership or focused cost leadership strategy? If so, why?
7. Is it possible for a traditional firm to become too reliant on the Internet? If so, why? If
not, why not?
Ethics Questions
1. Can a commitment to ethical conduct on issues such as the environment, product quality,
and fulfilling contractual agreements affect a firm’s competitive advantage? If so, how?
2. Is there more incentive for differentiators or cost leaders to pursue stronger ethical
conduct? Think of an example to support your answer.
3. Can an overemphasis on cost leadership or differentiation lead to ethical challenges (such
as poor product design and manufacturing) that create costly problems (e.g., product
liability lawsuits)?
30
4. Reexamine the assumptions about effective TQM systems presented in the chapter. Do
these assumptions urge top-level managers to maintain higher ethical standards than they
now have? If so, how?
5. As discussed in Chapter 3, a brand image is one way a firm can differentiate its good or
service. However, many questions are now being raised about the effect brand images
have on consumer behavior. For example, considerable concern has arisen about brand
images that are managed by tobacco firms and their effect on teenage smoking habits.
Should firms be concerned about how they form and use brand images? Why or why not?
6. What ethical issues do you believe are associated with use of the Internet to implement
the firm’s business-level strategy?
7. If ethical issues do exist regarding Internet use, who should be responsible for addressing
them: governments or companies themselves? Why?
INSTRUCTOR’S NOTES FOR MINDTAP

Cengage offers additional online activities, assessments and resources inside MindTap,
our online learning platform. Here is a comprehensive listing of the activities available
within each chapter of MindTap for Hitt, Ireland Hoskisson’s Strategic Management:
Competitiveness and Globalization, 13th edition:
Course Level Resource: Cornerstone to Capstone Diagnostic- features short quizzes in

the key business areas of: Finance, Marketing, Accounting, Management and Economics.
Averaging between 7-9 questions per topical area, these quizzes are designed to help
students review content from courses offered earlier in the business curriculum, so they
are prepared to succeed in the Strategic Management course.
Chapter Level Resources:

 What Would You Do Video
 MindTap Reader (eBook)
 Assignments:
o Multiple Choice Quiz
o Video Quiz
o Guided Case
o You Make the Decision (every other chapter)
o Group Project
 Student Study Tools:
o A+ Test Prep
o Concept Clip Videos (where applicable)
o Flashcards
Course Level Case Resources:
31
 Text Cases (Readings)

 Group Case Activities (Group Case Assignments)
 Supplemental Cases (Readings)
To view more information on each of these MindTap activities, along with the default
grading settings and additional support information, view or download the
“hitt_ins_manual_13e_ch00_mindTap Outline_final” file on the Instructor Companion
Site for this title.
ADDITIONAL INFORMATION FOR SELECT MINDTAP RESOURCES:
WHAT WOULD YOU DO? BURBERRY

This exercise introduces students to strategic decisions as they are made in the real world.
Students should come to class prepared to discuss this exercise, and why they chose the
answer they did. All answers are graded as correct – the point of the exercise is to engage
your student's interest.
Students watch a brief video about Burberry and are asked to say whether the company
should use a cost leadership strategy, a differentiation strategy, or a focus strategy. The
answer to the question points out that Burberry choose to use a combination of a
differentiation and a focus strategy. This question can lead to a good discussion about how
effective it is to try and implement more than one of Porter's three strategic approaches at
once. Students need to know that while it may be possible to combine differentiation and
focus, it will be much harder, if not impossible, to combine a differentiation and cost
leadership strategy.
VIDEO QUIZ: BURBERRY

The media quiz offers additional opportunities for students to apply the concepts in the
chapter to a real-world scenario as it is described in news reports.
Title: Burberry
RT: 3:34
Topic Key: Business-Level Strategy, Managing Relationships with Customers, Market
Segmentation, Differentiation Strategy, Five Forces of Competition
The video opens with a short survey of differing opinions of the clothing company
Burberry. Immediately, two distinct opinions emerge:
 Burberry is the height of luxury
 Burberry is only for ‘chavs’, a British term suggesting the brand is often worn by
less-than-upstanding people
32
Due to an unexpected change in price and loss of control of its image, Burberry has, in
recent years, been striving to recreate its former brand image of absolute luxury. In order
to do this, the company hired a new head designer and began holding regular fashion
33
shows featuring their newest designs. Burberry has also been updating their image by
holding events attended by celebrities who proudly wear and support the company’s
clothing. This has helped to change the image of the company over the last few years, as it
is once again seen as the luxury brand it once was and wishes to be.
Suggested Discussion Questions and Answers

 Describe Burberry’s business-level strategy.
Burberry has implemented a differentiation strategy by redefining their brand
image to more subtly incorporate their iconic ‘check’ clothing pattern.
 How is Burberry managing its relationship with customers?

Burberry holds fashion shows to showcase their newest clothing, and hosts events
attended by celebrities who both wear Burberry clothing and share with the media
their favorable opinions of the company.
 Is the differentiation strategy appropriate for Burberry? Why or why not? Now or in
the future?
Providing high luxury clothing products at luxury prices has worked well for
Burberry in the past; it helped to build the company’s brand image that is now in
the process of being restored. At the moment, the strategy seems to be working for
the company, as it did in the past. In the future, an economic downturn may result
in a steep drop in Burberry clothing prices, once again resulting in the clothing
being sold at low costs, tarnishing the brand’s luxury image.
GUIDED CASE: HAIN CELESTIAL

This auto-graded activity asks students to read the short end-of-chapter case on Hain
Celestial, and answer questions in the areas of Analysis, Strategy, and Implementation
& Performance.
Hain Celestial Group has built strong capabilities in producing natural and organic foods
and has built its strategy to take advantage of the changing consumer trend in the food
business. The company grew through a series of acquisitions of entrepreneurial start-ups.
These acquisitions allowed Hain Celestial to become the largest supplier to natural food
retailer Whole Foods Markets. The natural food trend has allowed the company to sell its
branded products to traditional grocery store chains, accounting for about 60 percent of its
U.S. sales. While larger brands seek to modify existing products by removing less natural
ingredients (Nestlé) or reducing the use of high fructose corn syrup (Hershey Company
and Mars, Inc.), these types of changes do not allow them to overcome the problem of
rapidly changing consumer tastes toward natural food.
34
In answering the Guided Case Questions, students will review these concepts:
 Business models
 Market segmentation
 Business-level strategies
 Five forces of competition
YOU MAKE THE DECISION: TESLA

You Make the Decision branching exercises are real-world activities that allow each
student to work through challenges by choosing from different decision-making options.
These exercises provide students with the opportunity to practice strategic management in
a business scenario utilizing company case studies. Students are placed in the role of a
decision maker and asked to consider the needs and priorities of stakeholders as they
determine strategy recommendations for a company.
Tesla is a 10-year-old company that specializes in electric power technology. The firm sells its
powertrain components to other car companies. At the same time, it is selling a high-
performance electric Roadster and the Model S and Model X luxury cars. The company is
serving two customers at the same time, both with a focused differentiation strategy.
However, Tesla Motors founder Elon Musk believes that electric cars should be available
for everyone. Students will see how this is a potential conflict of interest and must decide
which strategy the company should pursue to align itself with the founder’s beliefs.
Students will be asked to analyze the situation and then decide whether they, as members
of the company, should make the decision to sell only cars to end-user consumers or to
continue selling both cars and their technology to competitors. After the initial decision is
made, students will be presented with several more opportunities to make decisions that
will include identifying and handling different types of competitive forces and choosing a
business-level strategy based on the effects of competitive forces.
Students will review these concepts:

 Types of business-level strategies
 Risks associated with each type of business-level strategy
 Relationship between customers and business-level strategy
 Supplier bargaining power
 Customer bargaining power
35
The ideal path that earns a perfect score is the following:

 Choose to continue selling both cars and technology to competitors
 Continue in our differentiation strategy. We need to continue to invest in R&D to
make our batteries even better, extending our mileage range, so that the car manufacturers
have to choose our batteries and equipment to satisfy their customers’ needs.
 Customer bargaining power
 Our focus must be on extending the range of our batteries. We have the best
equipment and that’s the only way we can justify the premium price. Manufacturers will
have to come back to us if we have the only battery that truly meets drivers’ needs.
Correct Answer: Components: We stayed focused on our R&D for electric cars and proved
that we can build the best EV components in the business. With our differentiation of longer
battery usage and efficiency, we’ve been able to justify a premium price for our components.
GROUP PROJECT: HITTING THE TARGET:

UNDERSTANDING CUSTOMER NEEDS WITH MARKET
SEGMENTATION
By asking students to identify the business-level strategy of various companies, this

exercise provides students the opportunity to identify how market segmentation is used by
firms to craft advertising campaigns that target a specific customer base. The instructor
should encourage students to clearly identify the strategy employed by the brand, and how
the poster is a visual representation of that strategy at work.
 The instructor may also challenge the students to discuss how to build brand loyalty
using different business-level strategies.
36

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What are the different types of business-level strategies discussed in the document?

What are the different types of business-level strategies discussed in the document?

What are some of the risks associated with using a cost leadership strategy?

What are some of the risks associated with using a cost leadership strategy?

Chapter 4

Customers are the foundation of successful business-level strategies. When considering

Through the differentiation strategy, firms provide customers with premium-priced

lower cost, and the threat of counterfeit products.

Firms using the integrated cost leadership/differentiation strategy strive to provide

Discuss the relationship between customers and business-level

to gain a competitive advantage over competitors.

A customer focus requires that firms simultaneously evaluate or consider

4-1 CUSTOMERS: THEIR RELATIONSHIP WITH BUSINESS-

4-1a Effectively Managing Relationships with Customers

4-1b Reach, Richness, and Affiliation

4-1c Who: Determining the Customers to Serve

For consumer markets: For industrial markets:

4-1d What: Determining Which Customer Needs to Satisfy

4-1e How: Determining Core Competencies Necessary to Satisfy Customer Needs

Explain the purpose of forming and implementing a business-

4-2 THE PURPOSE OF A BUSINESS-LEVEL STRATEGY

Describe business models and explain their relationship with

4-3 BUSINESS MODELS AND THEIR RELATIONSHIP WITH

Explain the differences among five types of business-level

Use the five forces of competition model to explain how firms

Discuss the risks associated with using each of the business-

4-4 TYPES OF BUSINESS-LEVEL STRATEGIES

An integrated cost leadership/differentiation incorporates both of these emphases.

4-4a Cost Leadership Strategy

Rivalry with Existing Competitors

Bargaining Power of Buyers (Customers)

Bargaining Power of Suppliers

Competitive Risks of the Cost Leadership Strategy

4-4b Differentiation Strategy

Products can be differentiated in a number of ways to stand apart from standardized

Some examples of differentiation strategies include the following:

Successfully implementing (and maintaining) a differentiation strategy requires a firm to

A firm that successfully implements a differentiation strategy can earn above-average

Rivalry with Existing Competitors

Bargaining Power of Buyers (Customers)

Bargaining Power of Suppliers

Competitive Risks of the Differentiation Strategy

 The firm’s means of differentiation no longer provide value to customers. For

 A fourth risk is concerned with counterfeiting. Increasingly, counterfeit goods

4-4c Focus Strategies

Markets can be segmented by:

Firms may choose to follow a focus strategy because:

Focused Cost Leadership Strategy

Focused Differentiation Strategy

Competitive Risks of Focus Strategies

 An industry-wide competitor may recognize the attractiveness of the segment served

4-4d Integrated Cost Leadership/Differentiation Strategy

Successfully pursuing the integrated cost leadership/differentiation strategy yields

Flexible Manufacturing Systems

Customer relationship management (CRM) is one form of an information-based network

Enterprise Resource Planning Systems: A Mini-Lecture

Total Quality Management Systems

Competitive Risks of the Integrated Cost Leadership/Differentiation Strategy

ANSWERS TO REVIEW QUESTIONS