Business-Level Strategy:

An organization's core competencies should be focused on satisfying customer needs or preferences in

order to achieve above average returns. This is done through Business-level strategies. Business level
strategies detail actions taken to provide value to customers and gain a competitive advantage by exploiting
core competencies in specific, individual product or service markets. Business-level strategy is concerned
with a firm's position in an industry, relative to competitors and to the five forces of competition.

Customers are the foundation or essence of an organization's business-level strategies. Who will be served,
what needs have to be met, and how those needs will be satisfied are determined by the senior
management?

Who are the customers?

Demographic, geographic, lifestyle choices (tastes and values), personality traits, consumption patterns
(usage rate and brand loyalty), industry characteristics, and organizational size.

What are the goods and/or services that potential customers need?

Knowing one’s customers is very import in obtaining and sustaining a competitive advantage. Being able
to successfully predict and satisfy future customer needs is important. (Perhaps one of Compaq's mistakes
was not understanding who their real customer was and what that customer -- end user -- wanted.)

How to satisfy customer needs?

Organizations must determine how to bundle resources and capabilities to form core competencies and then
use these core competencies to satisfy customer needs by implementing value-crating strategies.

Business-Level Strategies

There are four generic strategies that are used to help organizations establish a competitive advantage over
industry rivals. Firms may also choose to compete across a broad market or a focused market. We also
briefly discuss a fifth business level strategy called an integrated strategy.

1. Cost Leadership – Organizations compete for a wide customer based on price. Price is based on internal
efficiency in order to have a margin that will sustain above average returns and cost to the customer so that
customers will purchase your product/service. Works well when product/service is standardized, can have
generic goods that are acceptable to many customers, and can offer the lowest price. Continuous efforts to
lower costs relative to competitors is necessary in order to successfully be a cost leader.

This can include:

 Building state of art efficient facilities (may make it costly for competition to imitate)
 Maintain tight control over production and overhead costs
 Minimize cost of sales, R&D, and service.
Porter's 5 Forces Model

Earlier we discussed Porter's Model. A cost leadership strategy may help to remain profitable even with:
rivalry, new entrants, suppliers' power, substitute products, and buyers' power.

 Rivalry – Competitors are likely to avoid a price war, since the low-cost firm will continue to earn
profits after competitors compete away their profits (Airlines).
 Customers – Powerful customers that force firms to produce goods/service at lower profits may exit
the market rather than earn below average profits leaving the low-cost organization in a monopoly
position. Buyers then loose much of their buying power.
 Suppliers – Cost leaders are able to absorb greater price increases before it must raise price to
customers.
 Entrants – Low cost leaders create barriers to market entry through its continuous focus on
efficiency and reducing costs.
 Substitutes – Low cost leaders are more likely to lower costs to entice customers to stay with their
product, invest to develop substitutes, purchase patents.

How to Obtain a Cost Advantage?

 Determine and Control Cost

 Reconfigure the Value Chain as Needed

Risks

 Technology
 Imitation
 Tunnel Vision

Value Chain – A framework that firms can use to identify and evaluate the ways in which their resources
and capabilities can add value. The value of the analysis lays in being able to break the organization's
operations or activities into primary (such as operations, marketing & sales, and service) and support (staff
activities including human resources management & procurement) activities. Analysing the firm's value-
chain helps to assess your organizations to what you perceive your competitors’ value-chain, uncover ways
to cut costs, and find ways add value to customer transactions that will provide a competitive advantage.

2. Differentiation - Value is provided to customers through unique features and characteristics of an

organization's products rather than by the lowest price. This is done through high quality, features, high
customer service, rapid product innovation, advanced technological features, image management, etc.
(Some companies that follow this strategy: Rolex, Intel, Ralph Lauren)

Create Value by:

 Lowering Buyers' Costs – Higher quality means less breakdowns, quicker response to problems.
  Raising Buyers' Performance – Buyer may improve performance, have higher level of enjoyment.
 Sustainability – Creating barriers by perceptions of uniqueness and reputation, creating high
switching costs through differentiation and uniqueness.

Risks of Using a Differentiation Strategy

 Uniqueness
 Imitation
 Loss of Value

Porter's Five Forces Model – Effective differentiators can remain profitable even when the five forces
appear unattractive.

 Rivalry – Brand loyalty means that customers will be less sensitive to price increases, as long as the
firm can satisfy the needs of its customers (audio files).
 Suppliers – Because differentiators charge a premium price they can more afford to absorb higher
costs and customers are willing to pay extra too.
 Entrants – Loyalty provides a difficult barrier to overcome. Substitutes (trans. 4-26) – Once again
brand loyalty helps combat substitute products.

3. Focused Low Cost- Organizations not only compete on price, but also select a small segment of the
market to provide goods and services to. For example, a company that sells only to the U.S. government.

4. Focused Differentiation - Organizations not only compete based on differentiation, but also select a
small segment of the market to provide goods and services.

Focused Strategies - Strategies that seek to serve the needs of a particular customer segment (e.g., federal
gov't).

Companies that use focused strategies may be able serve the smaller segment (e.g. business travellers)
better than competitors who have a wider base of customers. This is especially true when special needs
make it difficult for industry-wide competitors to serve the needs of this group of customers. By serving a
segment that was previously poorly segmented an organization has unique capability to serve niche.

Risks of Using Focused Strategies:

 Maybe out focused by competitors (even smaller segment)

 Segment may become of interest to broad market firm(s)

5. Using an Integrated Low-Cost/Differentiation Strategy

This new strategy may become more popular as global competition increases. Firms that use this strategy
may see improvement in their ability to:

 Adaptability to environmental changes.

 Learn new skills and technologies
  More effectively leverage core competencies across business units and products lines which should
enable the firm to produce produces with differentiated features at lower costs.

Thus, the customer realizes value based both on product features and a low price. Southwest airlines is one
example of a company that does uses this strategy.

However, organizations that choose this strategy must be careful not to: becoming stuck in the middle i.e.,
not being able to manage successfully the five competitive forces and not achieve strategic
competitiveness. Must be capable of consistently reducing costs while adding differentiated features.

Functional Level Strategy:

Definition: Functional Level Strategy can be defined as the day to day strategy which is formulated to
assist in the execution of corporate and business level strategies. These strategies are framed as per the
guidelines given by the top-level management.

Functional Level Strategy is concerned with operational level decision making, called tactical decisions,
for various functional areas such as production, marketing, research and development, finance, personnel
and so forth.

As these decisions are taken within the framework of business strategy, strategists provide proper direction
and suggestions to the functional level managers relating to the plans and policies to be opted by the
business, for successful implementation.

Role of Functional Strategy:

 It assists in the overall business strategy, by providing information concerning the management of
business activities.
 It explains the way in which functional managers should work, so as to achieve better results.

Functional Strategy states what is to be done, how is to be done and when is to be done are the functional
level, which ultimately acts as a guide to the functional staff. And to do so, strategies are to be divided into
achievable plans and policies which work in tandem with each other. Hence, the functional managers can
implement the strategy.

Functional Areas of Business

There are several functional areas of business which require strategic decision making, discussed as under:
 functional level strategy

Marketing Strategy: Marketing involves all the activities concerned with the identification of customer
needs and making efforts to satisfy those needs with the product and services they require, in return for
consideration. The most important part of a marketing strategy is the marketing mix, which covers all the
steps a firm can take to increase the demand for its product. It includes product, price, place, promotion,
people, process and physical evidence.

For implementing a marketing strategy, first of all, the company’s situation is analysed thoroughly by
SWOT analysis. It has three main elements, i.e. planning, implementation and control.

There are a number of strategic marketing techniques, such as social marketing, augmented marketing,
direct marketing, person marketing, place marketing, relationship marketing, Synchro marketing,
concentrated marketing, service marketing, differential marketing and demarketing.

Financial Strategy: All the areas of financial management, i.e. planning, acquiring, utilizing and
controlling the financial resources of the company are covered under a financial strategy. This includes
raising capital, creating budgets, sources and application of funds, investments to be made, assets to be
acquired, working capital management, dividend payment, calculating the net worth of the business and so
forth.

Human Resource Strategy: Human resource strategy covers how an organization works for the
development of employees and provides them with the opportunities and working conditions so that they
will contribute to the organization as well. This also means to select the best employee for performing a
particular task or job. It strategizes all the HR activities like recruitment, development, motivation,
retention of employees, and industrial relations.

Production Strategy: A firm’s production strategy focuses on the overall manufacturing system,
operational planning and control, logistics and supply chain management. The primary objective of the
production strategy is to enhance the quality, increase the quantity and reduce the overall cost of
production.

Research and Development Strategy: The research and development strategy focus on innovating and
developing new products and improving the old one, so as to implement an effective strategy and lead the
market. Product development, concentric diversification and market penetration are such business
strategies which require the introduction of new products and significant changes in the old one.

For implementing strategies, there are three Research and Development approaches:

1. To be the first company to market a new technological product.

2. To be an innovative follower of a successful product.
3. To be a low-cost producer of products.

Functional level strategies focus on appointing specialists and combining activities within the functional
area.

What is Porter’s 5 Forces Analysis?

Porter’s 5 forces analysis shows the competitive environment of a firm. It is a strategic watch to

avoid putting the competitive edge at risk and ensure the long-term profitability of products. For the

company, this vision is quite important because it allows the firm to orientate its innovations in

terms of choice of strategies and investments. The profitability of businesses within the industry

sector depends on the following forces:

 Competitive rivalry within the industry;„

 Threats of new entrants;
 Threats of substitutes products;
 Bargaining power of customers;
 Bargaining power of suppliers.

Golden Rules

 6th force = The model is often adjusted to include a 6th force, public authorities. They are
important because laws and norms can influence each of Porter’s 5 forces. „
 Key factors for success = The key success factors of the environment have to be identified.
To have a competitive advantage, some strategic elements should be controlled.

Structure of Porter’s 5 Forces Analysis

Competitive rivalry within the industry: The competition between firms determines the
attractiveness of a sector. Companies are struggling to maintain their power. The competition
changes based on sector development, diversity and the existence of barriers to enter. In
addition, it is an analysis of the number of competitors, products, brands, strengths and
weaknesses, strategies, market shares, etc. „

Threat of new entrants: It is in a company’s interest to create barriers to prevent its

competitors from entering its market. The competitors are either new companies or companies
which intend to diversify. This barrier can be legal (patent regulations, etc.) or industrial
(products or single brands, etc.), etc. The arrival of new entrants also depends on the size of
the market (economy of scale), the reputation of an already established company, the cost of
entry, access to raw materials, technical standards, cultural barriers, etc. „

Threat of substitute products: Substitute products can be considered as an alternative

compared to the current supply on the market. These products appear due when the current
state of technology or innovation evolves. The products of existing companies are thus
replaced by different products. These products often have a better price/quality relation and
come from sectors with higher profits. These substitute products can be dangerous and
companies should anticipate coping with this threat. „

Bargaining power of suppliers: The bargaining power of suppliers is very important in a

market. Powerful suppliers can impose their conditions in terms of price, quality and quantity.
On the other hand, if there are a lot of suppliers their influence is weaker. One has to analyse
the number of realised orders, the cost of changing the supplier, the presence of raw
materials, etc. „

Bargaining power of customers: If the bargaining power of customers is high, they influence
the profitability of the market by imposing their requirements in terms of price, service,
quality, etc. Choosing clients is crucial because a firm should avoid to be in a situation of
dependence. The level of concentration of customers gives them more or less power.
Generally, their bargaining power tends to be inversely proportional to that of the suppliers.