Copyright 2020. Routledge. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 6 Business-level strategy Essential summary Business-level strategy is an organization’s fundamental approach for enabling a single business to sustain a competitive advantage within a given industry. A competing single business organization should choose only one generic strategy. Cost-leadership generic strategy is a single business strategy based on being the lowest-cost organization in an industry. Differentiation industry-wide generic strategy is a single business strategy based on a uniqueness that offers value for customers and returns that more than offset the costs of differentiation. Cost focus and differentiation focus generic strategy are single business strategies that apply to a particular part of an industry, such as a market segment or niche, where the business concerned is able to design a strategy that more closely meets the needs of customers than could be achieved by rivals. A value chain is an organizational framework for disaggregating and showing an organization’s strategically relevant activities, which is used to help understand and manage the behaviour of costs and the existing and potential sources of differentiation. Business models are conceptualizations of an organization’s critical areas or processes for the creation of the organization’s unique value for its customers. A business-level strategy is an organization’s fundamental approach for enabling a single business to sustain and develop its overall purpose. Typically, the strategy aims to sustain a competitive advantage within a given industry. EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 11/28/2021 7:15 PM via AMERICAN PUBLIC UNIVERSITY SYSTEM AN: 2239146 ; Barry J. Witcher.; Absolute Essentials of Strategic Management Account: s7348467.main.ehost 48 Business-level strategy COMPETITIVE ADVANTAGE Broad Target Lower Cost Differentiation Cost Leadership Differentiation Cost Focus Differentiation Focus COMPETITIVE SCOPE Narrow Target Figure 6.1 Four generic strategies Strategic management aims to provide a strong long-term competitive position that over time will benefit an organization’s stakeholders more lastingly than short-term profitability. It is likely that an external environment will be subject to sudden shocks as well as continuous change, so it is necessary to ensure that strategic priorities are constant and consistent so that the organization as a whole is clear about purpose and can adjust to change accordingly. There are four broad kinds of competitive strategy based on competitive advantage and competitive scope (see Figure 6.1). Michael Porter (1980) refers to these as generic strategies: when an organization targets a whole industry a strategy is either a cost leadership generic strategy or an industrywide differentiation generic strategy. When an organization targets a part of an industry, such as a market segment, generic strategy is focused on either cost or differentiation. The detail of a strategy will depend on an organization’s purpose and its industry; however, to be competitively effective it must conform to one of the four generic types. Cost-leadership generic strategy A cost-leadership generic strategy has lower costs per unit produced than competitors and any potential rivals can achieve in the industry. The term ‘leadership’ is important since this requires an organization to be the cost leader and not just one of several organizations competing on costs. If an EBSCOhost - printed on 11/28/2021 7:15 PM via AMERICAN PUBLIC UNIVERSITY SYSTEM. All use subject to https://www.ebsco.com/terms-of-use Business-level strategy 49 organization has a larger share of its industry’s markets than its rivals, it can achieve relatively greater economies of scale and scope. Economies of scale are obtained through cost savings that occur when higher volumes allow unit costs to be reduced. Economies of scope involve cost savings that are available as a result of separate products sharing the same facilities. The advantages of scale and scope are associated with the experience curve effect, an idea introduced by the founder of the Boston Consulting Group, Bruce Henderson (1974). He argued that when the accumulated production of an organization doubles over time, unit costs when adjusted for inflation have a potential to fall by 20–30 per cent. This is the result not just of scale but of a combined effect of learning, specialization, investment, and scale. The more an organization does, the lower the unit cost of doing it will be. When cumulative volume doubles, the extra costs, including those in administration, marketing, distribution, and manufacturing, fall by a constant and predictable percentage. The experience curve idea has encouraged organizations to try to gain a large market share quickly by investing heavily and aggressively downpricing products and services; the high initial costs can be recovered in the longer term once the organization has become the market leader. Organizations should certainly seek to learn and improve continuously before their competitors do so, but it is difficult to identify an experience curve effect in many industries as its exact nature is often difficult to understand. The sources of cost advantage are varied and include such things as proprietary knowledge and technology, preferential access to industry distribution channels and sources of supply, and effective cost management. Low-cost leaders often sell a standard or no-frills product and/or service. They place considerable emphasis on taking advantage of scale but are also likely to take advantage of any other opportunities to lower costs. A low-cost leader does not necessarily have to lower its prices below those of its rivals. It may do this to win more customers and to reap more economies of scale, but if its costs are lower than the industry’s average, all it has to do to earn above-average returns is to command prices at or near the industry average. Price competition can be dangerous if it sparks a long price war and discounting eats into profits, but if the leader has a large share of the industry’s market it can usually outstay a war that lasts over the shorter term, and lower prices are likely to increase its market share. Differentiation industry-wide generic strategy A differentiation industry-wide generic strategy offers unique value for an industry’s customers in a way that more than offsets the costs of differentiation, which enables an organization to earn above-average profits for the EBSCOhost - printed on 11/28/2021 7:15 PM via AMERICAN PUBLIC UNIVERSITY SYSTEM. All use subject to https://www.ebsco.com/terms-of-use 50 Business-level strategy industry. This may involve a capacity to be able to offer product and service attributes that are offered differently and are different from those of other participants in the industry, such as special qualities; delivery and reliability features; corporate and brand images; advanced technological, service, and support arrangements, and so on. The organization concerned will seek to reduce its costs but only in a way that does not affect the sources of differentiation and the value it creates. The ‘industry-wide’ position is important since it involves coverage of the whole industry and its markets. Unlike cost-leadership, there can be more than one successful industry-wide differentiation competitive position in an industry. This happens when there are significantly different and distinctive customer groups that value product and service attributes in contrasting ways. The development of an industry’s markets over time tends to favour differentiation, especially if the industry is associated with consumers with preferences that change frequently and who are affluent. In general, as consumers become more affluent, lower prices may be considered secondary to quality and branding. Cost focus and differentiation focus generic strategy A focus generic strategy is based narrowly on a particular part of an industry, such as a market segment or niche, where an organization can design its strategy to meet the needs of customers more closely than its competitors. A focuser does not have an overall industry competitive advantage, but it is able to achieve one in its target segment based on a low-cost base or differentiation. Both these strategies depend on the perception that a target segment is different from others in the industry. The implication of a focus generic strategy is that more broadly-targeted competitors cannot deliver a comparable value to the focuser’s target customers. This may be because they are unable to meet the more specialized needs of a segment or are likely bearing a relatively high cost in serving a segment; both conditions mean that returns in the segment are likely to compare unfavourably with those of a focused competitor. There is normally room for a number of focus strategies within an industry if the focusers choose different target segments. Generic strategies are mutually exclusive The essential thing about the four generic strategies is that an organization must choose one only in its industry. An organization that chooses a generic strategy that is a combination of cost and differentiation is called a straddler EBSCOhost - printed on 11/28/2021 7:15 PM via AMERICAN PUBLIC UNIVERSITY SYSTEM. All use subject to https://www.ebsco.com/terms-of-use Business-level strategy 51 when it resembles a ‘Jack of all trades, master of none’. Being all things to all people is a recipe for strategic mediocrity and below-average performance because, in the view of Michael Porter, an organization will have no competitive advantage at all. Different generic strategies have different resource needs, and divided attention to different kinds of strategies leads to costly trade-offs between different kinds of resources that eat into profitability. Organizations should concentrate on providing value that its rivals in the industry cannot match. The value chain A value chain is an organizational framework for disaggregating and showing an organization’s strategically relevant activities in order to understand the behaviour of costs and the existing and potential sources of differentiation. The role of a value chain is to identify those strategy relevant activities in the core areas of the organization to assess how they interact together to sustain a chosen strategy. An organization sustains its competitive advantage by performing these strategically important activities more cheaply or better than its competitors. Value is represented by the amount customers are willing to pay for an organization’s products and services. Porter (1985) stresses the importance of activities in adding value, rather than functions, such as departments. Value is shown in the value chain as a margin, which is gross revenue (the aggregated value created for customers) minus costs – or the net margin received by the producer as gross profit (see Figure 6.2). The value-creating activities are shown broadly as primary and support activities. SUPPORT ACTIVITIES Firm infrastructure uman res urce mana ement ec n e e r curement I ment MARGIN M PRI AR ACTIVITIES Figure 6.2 The value chain EBSCOhost - printed on 11/28/2021 7:15 PM via AMERICAN PUBLIC UNIVERSITY SYSTEM. All use subject to https://www.ebsco.com/terms-of-use 52 Business-level strategy Primary activities add value through the transformation of resources into products and services through the following stages: 1 2 3 4 5 inbound logistics: activities bringing in inputs operations: activities turning inputs into outputs outbound logistics: activities getting finished products to customers marketing and sales: activities enabling customers to buy and receive products service: activities maintaining and enhancing value Conventionally, these are associated with the line functions of a business. However, a value chain is concerned only with those attributes and activities that are strategically relevant and how these interact and can be integrated as a whole system – not in isolation from the perspective of any one functional part of the organization. Support activities add value by facilitating and assisting the primary activities. Conventionally, support activities are typically staff functions and the responsibility of a dedicated department, although they are normally cross-functional in orientation. The figure shows a simplified picture of four functions, but it is possible to have more, such as quality management. The four shown have the following activities associated with them: 1 2 3 4 firm infrastructure: activities such as planning, legal affairs, and finance and accounting, which support the general management of the primary activities human resource management: activities that support the employment and development of people technology development: activities providing expertise and technology, including research and development, which support the production and delivery process procurement: activities to support buying Senior managers must look for strategic linkages to help them coordinate and optimize resources that promote and sustain competitive advantage. The way of managing an activity in one area of an organization is likely to have spillover and trade-off effects for other areas; for example, lowering costs in one department may be suboptimal if it works to raise costs elsewhere. Coordination is necessary to promote common ways of working in line with the needs of the competitive strategy. A distinctive customer relationship management approach requires attention to every part of those activities that influence the customer experience. A value chain for cost leadership is shown in Figure 6.3. This is an example for a general insurance company that offers low-price policies and EBSCOhost - printed on 11/28/2021 7:15 PM via AMERICAN PUBLIC UNIVERSITY SYSTEM. All use subject to https://www.ebsco.com/terms-of-use Business-level strategy 53 SUPP S EXPLOITIVE LE TOP TE I EI I O O O TIO TE E E T OLO IE TO P O OTE E O O I E O E T LI E TE E I O LO E T LE OT O P S Figure 6.3 Cost leadership SUPPORT ACTIVITIES EXPLORATIVE LEARNING INFORMATION SYSTEMS OTTOM TE P MANAGEMENT NOLOGIES TO PROMOTE INNOVATION EVOLVE S R M YING AR I M M PRI AR ACTIVITIES Figure 6.4 Differentiation aims to achieve economies of scale through taking a large market share. Its internal organization is formally organized and geared up for productivity and efficiency. The value chain tasks are to coordinate and optimize costs subject to continuous improvement. The value chain in Figure 6.4 is an electronics engineering company that supplies office equipment to industrial customers. It offers relatively high prices in its industry but with a good and responsive maintenance service. Its organizational culture is collegial and informal, and there is a strong tradition of innovation. It takes a relatively large market share, which is based on providing its business clients with a customized service. The value chain tasks are to coordinate and optimize the effectiveness of activities that support a customized service that is superior to other industry participants. EBSCOhost - printed on 11/28/2021 7:15 PM via AMERICAN PUBLIC UNIVERSITY SYSTEM. All use subject to https://www.ebsco.com/terms-of-use 54 Business-level strategy Generic strategy and the resource-based view The rise of Japanese competition during the last quarter of the twentieth century seemed to call into question the exclusivity of choosing only one generic strategy, as Japanese organizations offered differentiation while simultaneously achieving lower costs than those of their Western rivals. They did this largely through superior organizational capabilities, such as lean production and associated business methodologies and philosophies, including business process and lean management (see chapter 4). They seemed to follow a hybrid, or a best-cost differentiation, generic strategy (see Figure 6.5). A best-cost differentiation strategy aims to offer superior value to customers by meeting their expectations on key product and service attributes while also exceeding their expectations on price. Best-cost differentiation generic strategy fits well into the resource-based view of strategy. The resource-based view has been contrasted in opposition to Porter’s ideas about generic strategy. His defence is to explain Japanese strategy as operational effectiveness, not real strategy. This being so, it is still possible to use the value chain concept for the management of a bestcost differentiation generic strategy. In Figure 6.6 an example is given for an automobile company. While it aims to minimize its costs through economies of scale, lean production and just-in-time management facilitate a demand-pull rather Best-Cost Differentiation Competitive Advantage Lower Cost Broad Target Differentiation Cost Leadership Differentiation Best-Cost Differentiation Hybrid Competitive Scope Cost Focus Narrow Target Differentiation Focus Figure 6.5 Best-cost differentiation EBSCOhost - printed on 11/28/2021 7:15 PM via AMERICAN PUBLIC UNIVERSITY SYSTEM. All use subject to https://www.ebsco.com/terms-of-use Business-level strategy 55 SUPPORT ACTIVITIES DYNAMIC CAPABILITIES C E C MPETENCES A ILE TEC N L IES S PPLY C AIN MANA EMENT PDCA P C AR I L PRI AR ACTIVITIES Figure 6.6 Best-cost differentiation than a supply-push approach for creating value. Senior managers use topdown strategic priorities that encourage bottom-up operational strategies that are designed to achieve both productivity improvements and continuous improvement in customer value. The value chain tasks, following the principles of lean working, are to coordinate and optimize activities that continuously improve value for customers. The value chain for a best-cost differentiation generic strategy is concerned with strategic resources that support the primary activities, as shown in Figure 6.6. Extending the value chain into the supply chain The value chain concept can be extended beyond the boundaries of an organization to include those strategic related activities in distribution and the supply chain. This can be envisaged as a series of linked value chains across relevant distributors and suppliers. The idea is that suppliers – particularly firsttier suppliers that supply inputs that are crucial to an industrial customer’s creation of value – should manage their activities in ways that are consistent with the business strategy of their customers. Synergies are sought between an industrial customer’s core competencies and those of upstream suppliers and between its downstream distributors and customers. The greater the possibilities for an organization to manage a sequence of processes both internal and external, the more difficult it is for rivals to emulate its activities. However, the extent to which a business strategy and value chains of independent suppliers can be influenced to support an industrial customer is problematic. For small and specialized suppliers there is always a fear of losing bargaining power when a large part of their production is tailored towards the needs of a big customer. EBSCOhost - printed on 11/28/2021 7:15 PM via AMERICAN PUBLIC UNIVERSITY SYSTEM. All use subject to https://www.ebsco.com/terms-of-use 56 Business-level strategy Business models A business model is a description of an organization’s core business areas (and CSFs) and processes for achieving the overall purpose of the organization, especially how the organization captures value (Chesbrough and Rosenbloom, 2002). A model may illustrate how the organization delivers a unique customer proposition and a competitive difference. Business models and strategy are often used interchangeably, but a business model is typically stable and based on an established mission. A strategy that aims to bring about a radical change, such as one to move the organization to a new visionary position (as for the strategic balanced scorecard), can work to change the underlying business model. In other words, a business model is based on mission, while a change strategy is based on changing that model. Nevertheless, a generic competitive strategy should be stable over time – Porter suggests decades; otherwise, the strategy will lack the consistency to enable an organization to continuously improve and sustain its competitive position in an industry over time. The trajectory of strategic resources and development of core competencies also take time to develop. In this light, a strategy designed to effect strategic change is best considered as a strategic programme to further sustain purpose that would not otherwise be achieved given an existing generic strategy and business model. A strategy imposes discipline, be it in the form of a business model or a strategy to manage change. A successful strategy is as much about not doing things that dilute effort and impact as it is about doing things that focus effort and impact. A clear strategy requires understanding by everybody and having the necessary discipline to carry it out and not waste effort on irrelevant activities. Managers at every level are under constant pressure to compromise – to trade-off longer-term strategically relevant activities for shorter-term concerns needing urgent attention. It is the task of strategic leaders to teach others in an organization about a chosen strategy, especially in how to guide priorities in daily management decision-making. References Chesbrough, H., & Rosenbloom, R. (2002), The role of the business model in capturing value from innovation: Evidence from Xerox corporation’s technology, Industrial and Corporate Change, 11, 529–555. Henderson, B. D. (1974), The experience curve reviewed, Perspectives, the Boston Consulting Group, //www.bcg.com Porter, M. E. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, Boston, MA: Free Press. Porter, M. E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, New York: Free Press. EBSCOhost - printed on 11/28/2021 7:15 PM via AMERICAN PUBLIC UNIVERSITY SYSTEM. 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