BUS 499, Week 4: Business-Level Strategy, Competitive Rivalry, and Competitive
Welcome to Senior Seminar in Business Administration.
In this lesson, we will discuss Business-Level Strategy,
Competitive Rivalry, and Competitive Dynamics.
Upon completion of this lesson, you will be able to:
Identify various levels and types of strategy in a firm.
In order to achieve this objective, the following supporting
topics will be covered:
Customers: their relationship with business-level strategies;
The purpose of a business-level strategy;
Types of business-level strategies;
A model of competitive rivalry;
Drivers of competitive actions and responses;
Likelihood of attack;
Likelihood of response; and
Strategic competitiveness results only when the firm is able
to satisfy a group of customers by using its competitive
advantages as the basis for competing in individual product
markets. A key reason firms must satisfy customers with their
business-level strategy is that returns earned from
relationships with customers are the lifeblood of all
organizations. The most successful companies try to find new
ways to satisfy current customers and/or meet the needs of
The firm’s relationships with its customers are strengthened
when it delivers superior value to them. Strong interactive
relationships with customers often provide the foundation for
the firm’s efforts to profitably serve customers’ unique needs.
The reach dimension of relationships with customers is
concerned with the firm’s access and connection to
customers. Richness is concerned with the depth and detail of
the two-way flow of information between the firm and the
customer. Affiliation is concerned with facilitating useful
interactions with customers.
Deciding who the target customer is that the firm intends to
serve with its business-level strategy is an important decision.
Companies divide customers into groups based on
differences in the customers’ needs to make this decision.
Dividing customers into groups based on their needs is called
market segmentation, which is a process that clusters
people with similar needs into individual and identifiable
After the firm decides who it will serve, it must identify the
targeted customer group’s needs that its good 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 are related to a product’s benefits and features. Having
close and frequent interactions with both current and
potential customers helps firms identify those individuals’
and groups’ current and future needs.
As explained in previous lessons, core competencies are
resources and capabilities that serve as a source of
competitive advantage for the firm over its rivals. Firms use
core competencies 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.
Purpose of a
The purpose of a business-level strategy is to create
differences between the firm’s position and those of its
competitors. To position itself differently from competitors, a
firm must decide whether to perform activities differently or
to perform different activities. Thus, the firm’s business-level
strategy is a deliberate choice about how it will perform the
value chain’s primary and support activities to create unique
Firms develop an activity map to show how they integrate the
activities they perform. Positions built on systems of
activities are far more sustainable than those built on
Most firms choose from among five business-level strategies
to establish and defend their desired strategic position against
competitors. These competitive advantages are:
Focused cost leadership;
Focused differentiation; and
Integrated cost leadership or differentiation.
Based on the nature and quality of its internal resources,
capabilities, and core competencies, a firm seeks to form
either a cost competitive advantage or a uniqueness
competitive advantage as the basis for implementing its
There are also two types of competitive scopes: broad and
narrow target. As the name implies, a broad target market
seeks to use their competitive advantage on an industry-wide
basis while a narrow competitive advantage intends to serve
the needs of a narrow target customer group. As shown in the
figure above, a firm could also strive to develop a combined
None of the five business-level strategies shown 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 strengths
and weaknesses derived from the firm’s resource portfolio.
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. Firms using the cost leadership strategy
commonly sell standardized goods or services to the
industry’s most typical customers.
Cost leaders’ goods and services must have competitive
levels of quality that create value for customers. At the
extreme, concentrating only on reducing costs could result in
the firm efficiently producing products that no customer
wants to purchase. In fact, such extremes could lead to
limited potential for innovation, employment of lower-skilled
workers, poor conditions on the production line, accidents,
and a poor quality of work-life for employees.
The differentiation strategy is an integrated set of actions
taken to produce goods or services that customers perceive as
being different in ways that are important to them. While cost
leaders serve a typical customer in an industry, differentiators
target customers for whom value is created by the manner in
which the firm’s products differ from those produced and
marketed by competitors.
Firms must be able to produce differentiated products at
competitive costs to reduce upward pressure on the price that
customers pay. When a product’s differentiated features are
produced at noncompetitive costs, the price for the product
can exceed what the firm’s target customers are willing to
When the firm has a thorough understanding of what its
target customers value, the relative importance they attach to
the satisfaction of different needs, and for what they are
willing to pay a premium, the differentiation strategy can be
Firms choose a focus strategy when they intend to use their
core competencies to serve the needs of a particular industry
segment or niche to the exclusion of others. Examples of
specific market segments that can be targeted by a focus
A particular buyer group;
A different segment of product line; or
A different geographic market.
Thus, the focus strategy is an integrated set of actions taken
to produce goods or services that serve the needs of a
particular competitive segment.
Firms operating in the same market, offering similar
products, and targeting similar customers are competitors.
Competitor rivalry is the ongoing set of competitive actions
and competitive responses that occur among firms as they
maneuver for an advantageous market position.
A sequence of firm-level moves, rivalry results from firms
initiating their own competitive actions and then responding
to actions taken by competitors. Competitive behavior is the
set of competitive actions and competitive responses the firm
takes to build or defend its competitive advantages and to
improve its market position.
Firms competing against each other in several product or
geographic markets are engaged in multimarket
All competitive behavior, that is, the total set of actions and
responses taken by all firms competing within a market, is
called competitive dynamics.
A Model of
Competitive rivalry evolves from the pattern of actions and
responses as one firm’s competitive actions have noticeable
effects on competitors, eliciting competitive responses from
them. This pattern suggests that firms are mutually
The competitive rivalry model as shown above, is a sequence
of activities commonly involved in competition between a
particular firm and each of its competitors. This model
presents a straightforward model of competitive rivalry at the
firm level; this type of rivalry is usually dynamic and
complex. Companies can use the model to understand how to
be able to predict competitors’ behavior and reduce the
uncertainty associated with competitors’ actions.
Next, we will describe each components of the model in
A competitor analysis is the first step the firm takes to be
able to predict the extent and nature of its rivalry with each
competitor. Market commonality and the resource similarity
of a firm determine the extent to which the firms are
competitors. Market commonality refers to the number of
markets in which firms compete against each other.
Firms sometimes compete against each other in several
markets that are in different industries. This situation finds
competitors coming into contact with each other several
times, a condition called market commonality. More
formally, market commonality is concerned with the
number of markets with which the firm and a competitor are
jointly involved and the degree of importance of the
individual markets to each.
Firms competing against one another in several or many
markets engage in multimarket competition.
Firms competing in several markets have the potential to
respond to a competitor’s actions not only within the market
in which the actions are taken, but also in other markets
where they compete with the rival.
Resource similarity is the extent to which the firm’s tangible
and intangible resources are comparable to a competitor’s in
terms of both type and amount. Firms with similar types and
amounts of resources are likely to have similar strengths and
weaknesses and use similar strategies.
When performing a competitor analysis, a firm analyzes each
of its competitors in terms of market commonality and
The drivers of competitive behavior as shown in the
competitive model are awareness, motivation and ability.
Market commonality and resource similarity influence these
drivers. In turn, the drivers influence the firm’s competitive
Awareness, which is a prerequisite to any competitive action
or response taken by a firm, refers to the extent to which a
firm competitors recognize the degree of their mutual
interdependence that results from market commonality and
resource similarity. A lack of awareness can lead to excessive
competition, resulting in negative effect on all competitors’
Motivation, which concerns the firm’s incentive to take
action or to respond to a competitor’s attack, relates to
perceived gains and losses. Thus, a firm may be aware of
competitors but may not be motivated to engage in rivalry
with them if it perceives that its position will not improve or
that its market position won’t be damaged if it doesn’t
And, in some instance, a firm may be aware of the markets it
shares with competitors and be motivated to respond to an
attack, but lack the ability to do so. Ability relates to each
firm’s resources and the flexibility they provide.
Firms use both strategic and tactical actions when forming
their competitive actions and competitive responses in the
course of engaging in competitive rivalry.
A competitive action is a strategic or tactical action the firm
takes to build or defend its competitive advantages or
improve its market position.
A competitive response is a strategic or tactical action the
firm takes to counter the effects of a competitor’s competitive
A strategic action or a strategic response is a market-based
move that involves a significant commitment of
organizational resources and is difficult to implement and
A tactical action or a tactical response is a market-based
move that is taken to fine-tune a strategy; it involves fewer
resources and is relatively easy to implement and reverse.
In addition to the competitive analysis, and the drivers of
competitive behavior, the likelihood of attack and response
affects competitive rivalry. Some of the factors for the
likelihood of attack are: first-mover incentives,
organizational size, and quality.
First-Mover Incentives is a firm that takes an initial
competitive action in order to build or defend its competitive
advantages or to improve its market position. In general, first
movers allocate funds for product innovation and
development, aggressive advertising, and advanced research
and development. Some of the benefits of being a first-mover
First. Earning above-average returns until its competitors
respond to its action.
Second. Gaining loyalty of customers who may become
committed to the goods or services that first made them
And, third. Gaining market share that can be difficult for
competitors to take during future competitive rivalry.
Being a first-mover carries some risk too. For example, it is
difficult to accurately estimate the returns and the cost to
develop a product innovation can be substantial, reducing the
slack available to support further innovation.
There are also second-movers that typically respond to first
mover’s through imitation and late-movers who respond a
significant amount of time after the first and second movers
An organization’s size also affects the likelihood it will take
competitive actions as well as the types and timing of those
actions. In general, small firms are more likely to launch
competitive actions and tend to do it more quickly while
large firms initiate limited number or types of actions along
with more strategic actions during a given period.
In addition, quality affects competitive rivalry. The firm
evaluating a competitor whose products suffer from poor
quality can predict declines in the competitor’s sales revenue
until the quality issues are resolved.
The success of a firm’s competitive action is affected by the
likelihood that a competitor will respond to it as well as by
the type and effectiveness of that response. In addition to
market commonality, resource similarity and awareness,
motivation, and ability, firms evaluate three other factors—
type of competitive action, reputation, and market
There are different types of competitive action. Competitive
responses to strategic actions differ from responses to tactical
actions. In general, strategic actions elicit fewer total
competitive responses because strategic responses involve a
significant commitment of resources and are difficult to
implement and reverse. In addition, the time needed to
implement a strategic action and to assess its effectiveness
can delay the competitor’s response to that action. In
contrast, a competitor likely will respond quickly to a tactical
The second factor is actor’s reputation. A reputation is a
positive or negative attribute ascribed by one rival to another
based on past competitive behavior. A positive reputation
may be a source of above-average returns, especially for
consumer goods producers. Thus, a positive corporate
reputation is of strategic value and affects competitive
And, lastly, market dependence affects the likelihood of a
firm’s response. Market dependence, denotes the extent to
which a firm’s revenues or profits are derived from a
particular market. In general, competitors with high market
dependence are likely to respond strongly to attacks
threatening their market position.
Whereas competitive rivalry concerns the ongoing actions
and responses between a firm and its competitors for an
advantageous market position, competitive dynamics concern
the ongoing actions and responses taking place among all
firms competing within a market for advantageous positions.
Competitive dynamics differ in slow-cycle, fast-cycle, and
standard-cycle markets. The sustainability of the firm’s
competitive advantages differs across the three market types.
Slow-cycle markets are those in which the firm’s
competitive advantages are shielded from imitation
commonly for long periods of time and where imitation is
costly. Thus, competitive advantages are sustainable in slowcycle markets.
Fast-cycle markets are markets in which the firm’s
capabilities that contribute to competitive advantages aren’t
shielded from imitation and where imitation is often rapid
and inexpensive. Thus, competitive advantages aren’t
sustainable in fast-cycle markets. Firms competing in fastcycle markets recognize the importance of speed.
Standard-cycle markets are markets in which the firm’s
competitive advantages are moderately shielded from
imitation and where imitation is moderately costly.
Competitive advantages are partially sustainable in standardcycle markets, but only when the firm is able to continuously
upgrade the quality of its capabilities, making the competitive
We have reached the end of this lesson. Let’s take a look at
what we have covered.
First, we discussed customer relationships. Strategic
competitiveness results only when the firm is able to satisfy a
group of customers by using its competitive advantages as
the basis for competing in individual product markets. A key
reason firms must satisfy customers with their business-level
strategy is that returns earned from relationships with
customers are the lifeblood of all organizations. The most
successful companies try to find new ways to satisfy current
customers and/or meet the needs of new customers.
Next we looked at the purpose of a business-level strategy.
Business-level strategy is created to by a firm to position
itself differently from competitors. At this point, a firm must
decide whether to perform activities differently or to perform
We also looked at five business-level strategies types which
are used to establish and defend a firm’s desired strategic
position against competitors. These competitive advantages
Focused cost leadership;
Focused differentiation; and
Integrated cost leadership or differentiation.
Next we discussed a model of competitive rivalry. This
model is a sequence of activities commonly involved in
competition between a particular firm and each of its
competitors. In this model, we looked at competitive
analysis, drivers of competitive behavior, inter-firm rivalry
We concluded the lesson with a discussion on types of
markets. These include slow-cycle, fast-cycle, and standardcycle markets.
This completes this lesson.
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