SMJ #4
Student name: __________________
Chapter 4 Business-level strategy
− How to win or survive competition?
The external analysis points to the direction of opportunity that an organization might be able to
seize and generate profit. The internal analysis further assess the match of the organizational
capability to see if it is realistic for the organization to pursue the particular opportunity. In the
case discussion of Amazon Kindle Fire (Hitt et al., 2017, page C-13), we further assess the
business opportunities and how Kindle Fire needs to formulate an effective business-level
strategy to take advantage of the emerging market of reading digital content. Internal analysis
reveals that Amazon has superior capabilities in its supply chain management function, which
has contributed to its success in implementing cost-leadership strategy, which is defined as “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” (Hitt et al, 2017, p. 118). However,
such core competence is not a guarantee for sustainable competitive advantage because the
competitors are able to either imitate the business model, such as Barnes & Noble’s Nook device,
using the same large-scale delivery to capitalize on the profit margin of digital content; or find
substitutable strategic alternatives such as Apple’s superior capability in producing a better
device, iPad. Apple is a prime example to illustrate differentiation strategy, which refers to “an
integrated set of actions taken to produce goods or services (at an acceptable costs) that
customers perceive as being different in ways that are important to them” (Hitt et al., 2017, p.
122).
− How do we decide on business-level strategy?
Both cost-leader strategy and differentiation strategy are taking a customer-centric approach.
Successful firms need to be able to identify and satisfy a sizable customer base whose decisions
to purchase are the lifeblood of all business organizations. Hence, the formulation of business
level strategy should be based on identifying the target market. A successful firm actively
manages relationship with the customers to identify 1) who will be served, 2) what needs those
target customers have that it will satisfy, and 3) how those needs will be satisfied.
Sometimes, corporations may find its unique competitive advantage in serving the needs of a
competitive segments and utilize focus strategy (Hitt et al., 2017, p. 127). Examples of specific
market segments include 1) a particular buyer group (e.g. youths or senior citizens), 2) a different
segment of a product line (e.g. products for professional painters or the do-it-yourself group), or
3) a different geographic market (e.g. northern or southern Italy by using a foreign subsidiary).
Once a unique market segment is identified, the firm will further decide on whether using
focused cost leadership or focused differentiation strategy (Hitt et al., 2017, p. 117).
Reference Amazon Kindle Fire Case, what are the potential target markets? Which target market
will be most ideal for Amazon’s cost-leadership strategy? Why?
____________________________________________________________________________
1
SMJ #4
_____________________________________________________________________________
____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
____________________________________________________________________________
_____________________________________________________________________________
− Based on Porter’s Five Force model, what are the major advantages and disadvantages of
using cost leadership and differentiation strategies (Hitt et al., 2017, p. 118-125)?
____________________________________________________________________________
_____________________________________________________________________________
____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
____________________________________________________________________________
_____________________________________________________________________________
____________________________________________________________________________
_____________________________________________________________________________
____________________________________________________________________________
_____________________________________________________________________________
Since there are pros and cons associated with each generic strategy, a firm may potentially
maximize the benefit of both strategies by adopting an integrated cost-leadership and
differentiation strategy. However, such strategy requires complex organizational capabilities
which strive to maintain low cost through efficient production as well as creating unique value
through differentiation.
Reference: Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2017). Strategic management cases:
competitiveness and globalization. Cengage Learning.
2
PART THREE: STRATEGY FORMULATION
Chapter 4
Business-Level Strategy
MGT431 Spring 2018
Learning Objectives
1. Define business-level strategy.
2. Market segmentation
• Discuss the relationship between customers and
business-level strategies in terms of who, what, and
how.
3. Explain the differences among business-level strategies.
• Use the five forces of competition model to explain how
above-average returns can be earned through each
business-level strategy.
• Describe the risks of using each of the business-level
strategies.
4–2
Business-Level Strategy (Defined)
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.
4–3
Customers Oriented
Business-Level Strategies
Who will be
served?
Key Issues
in
B usiness-level
S tra teg y
Wha t needs will
be sa tisfied?
How will those
needs be sa tisfied?
4–4
Market Segmentation (Table 4.1)
Consumer Markets
1.Demographic factors (age, income, sex,
etc.)
2.Socioeconomic factors (social class, stage
in the family life cycle)
3.Geographic factors (cultural, regional,
and national differences)
4.Psychological factors (lifestyle,
personality traits)
5.Consumption patterns (heavy, moderate,
and light users)
6.Perceptual factors (benefit
segmentation, perceptual mapping)
Industrial Markets
1. End-use segments (identified by Standard
Industrial Classification [SIC] code)
2. Product segments (based on
technological differences or production
economics)
3. Geographic segments (defined by
boundaries between countries or by
regional differences within them)
4. Common buying factor segments (cut
across product market and geographic
segments)
5. Customer size segments
S M J 4: what are the potential target market segment for Amazon Kindle Fire?
Who? What needs? How will Amazon be able to satisfy the needs?
1–5
Amazon Kindle Fire SWOT
Strength
• Elastic Compute Cloud (EC2) and
Simple Storage Service (S3)
• Warehousing capability
• Amazon Prime membership
• Innovation capability of the device
Opportunity
• Media junkies
• Children & Mobil gamers
• Higher Education
• Revenue sources: content,
commerce, advertising, app
marketplace
Weakness
• Low profit margin: 5%
• Aggressive content pricing model:
$9.99 resulted in the publishers’
retaliation
• Can’t read e-books purchased
outside of Amazon
Threat
• The B&N Nook’s free Wii-Fi access
to read the entire B&N books
• iPad: the sweet spot for a media
device between smartphone and
laptop
• Google Android devices
Identification of strategic alternatives
Develop education gaming
Provide open source online learning
Pro: increase higher education market share
Con: R&D costs to increase processing speed
Pro: increase higher education market share
Con: partnership with other platforms
Prime membership promotion for educators and students
Pro: increase higher education market share
Con: bundled sales that further cut down profit margin
Competitive Scope
Broad Scope
The firm competes in many customer segments.
Narrow Scope
4–8
The firm selects a segment or group of segments in the
industry and tailors its strategy to serving them at the
exclusion of others.
Business Level Strategies
4–9
Cost Leadership Strategy
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.
Product Characteristics
Relatively standardized (commoditized) products
Features broadly acceptable to many customers
Lowest competitive price
Cost saving actions required by this strategy
4–10
As primary activities, inbound logistics and outbound logistics
often account for much of the total cost to produce some
goods and services.
Walmart’s Value-Creating Activities for Cost
Leadership
4–11
Cost Leadership Strategy: Advantages
Due to cost leader’s
advantageous position:
4–12
Rivalry with Existing Competitors
mitigate buyers’ power
mitigate suppliers’ power
Frighten off new entrants
Mitigate threat of substitutes
Valuable position
Investment in new features
buy intellectual property and patents
developed by potential substitutes
T hrea t of
new entra nts
Riva lry
a m ong
com peting
firm s
T hrea t of
substitute
products
B a rg a ining
power of
suppliers
B a rg a ining
power of
buyers
Cost Leadership Strategy: Risks
When the low-cost leader is challenged to increase value
to customers,
reducing prices
adding product features without raising prices.
Competitive Risks
4–13
Processes used to produce and distribute good or service may
become obsolete due to competitors’ innovations.
Too much focus on cost reductions may occur at expense of
customers’ perceptions of differentiation.
Competitors, using their own core competencies, may
successfully imitate the cost leader’s strategy.
Differentiation Strategy
An integrated set of actions taken to produce goods or
services (at an acceptable cost) that customers perceive
as being different in ways that are important to them.
4–14
Focus is on non-standardized products
Appropriate when customers value differentiated features
more than they value low cost
Apple’s Value-Creating Activities and
Differentiation
4–15
Differentiation Strategy: Advantages
T hrea t of
new entra nts
Riva lry
a m ong
com peting
firm s
T hrea t of
substitute
products
B a rg a ining
power of
suppliers
B a rg a ining
power of
buyers
4–16
brand loyalty to
differentiated product
offsets price competition
reduce customer sensitivity
to price increases
absorbing price increases
due to higher margins
new products must surpass
proven products at cheaper
price
brand loyalty increases
switching costs to
substitutes
Competitive Risks of Differentiation
The price differential between the differentiator’s product
and the cost leader’s product becomes too large.
Differentiation ceases to provide value for which
customers are willing to pay.
4–17
Experience narrows customers’ perceptions of the value of
differentiated features.
Counterfeit goods replicate the differentiated features of the
firm’s products.
Homework
SMJ4
Business Case Analysis Clinic on Friday
Voluntary : Send draft by Thursday 12 pm
Receive confirmation and appointment for Dr. Liou’s one-onone consultation at JS330
Business Case Analysis Essay (50 points) due Friday
midnight
Focus Strategies
An integrated set of commitment and actions taken to
produce goods or services that serve the needs of a
particular competitive market segment.
Particular buyer group: youths or senior citizens
Different segment of a product line: professional craftsmen vs. do-ityourselfers
Different geographic markets—east coast vs. west coast
Focused differentiation strategy
4–19
Focused cost leadership strategy
Focus Strategies (cont’d)
Factors
Large firms may overlook small niches.
A firm may lack the resources needed to compete in the
broader market.
Focusing allows the firm to direct its resources to certain value
chain activities to build competitive advantage.
Risks
4–20
“out focused” by its competitors.
A large competitor may set its sights on a firm’s niche market.
Customer preferences in a niche market converge with broad
market
Integrated Cost Leadership/
Differentiation Strategy
Pros
adapt quickly to
environmental changes.
learn new skills and
technologies more quickly.
effectively leverage its core
competencies while
competing against its rivals.
4–21
Cons
• Becoming neither the lowest
cost nor the most differentiated
firm and becoming “stuck in the
middle” e.g. Radio Shack,
• Lacking the strong commitment
and expertise that accompanies
firms following either a cost
leadership or a differentiated
strategy e.g. JC Penny
Capabilities required to implement the
integrated strategy
Commitment to strategic flexibility
Flexible manufacturing systems (FMS)
Computer-controlled, modularized processes used to produce a flexible
quantities with a minimum of manual intervention
eliminate the “low-cost-versus-wide product-variety” tradeoff
Information networks (CRM)
Link companies electronically with their suppliers, distributors, and customers.
Customer relationship management (CRM)
Total quality management (TQM) systems
continuous improvement using
4–22
data-driven, problem-solving approaches.
empowerment of employee groups and teams.
More effective in production cost reduction than differentiation
Ch. 4 Key Terms
Business-level strategy
Market segmentation
Cost-leadership strategy
Differentiation strategy
Focused cost-leadership strategy
Focused differentiation strategy
Integrated cost-leadership/integration strategy
Homework
SAP Q&A 1: Feb. 20-22
List 15-20 questions relation to:
Vision/mission
Current market segmentation
Key market dimensions?
broad vs. narrow?
Value chain activities including HR, Finance, Operation, Marketing, etc.
Milestone 4 International analysis Due March 4 (Sunday)
midnight
Topic 4 Current Event due on Feb. 21 (Wednesday)
midnight
Milestone 4 Internal Analysis
Value Chain Analysis
Assessment of Sustainable Competitive Advantage
What is your overall assessment of the firm’s key resources and capabilities? Do they provide the firm
with a sustainable competitive advantage? What are the firm’s weaknesses?
Financial Statement Analysis
Are the functional areas of the firm well organized? Is there effective communication among them? Are
human resource strategies in place to provide for continual training and development of personnel?
What is the nature of the firm’s performance appraisal systems? Do employees seem happy?
Based on the financial reports in the past two years, report the relevant financial ratios, such as profit
margin, return on investment, asset turnover, current ration, etc. Does the firm’s performance over the
past few years reflect a well-formulated and implemented strategy?
Summary of Strength and Weakness
How effectively is the current strategy exploiting the firm’s strengths in resources and capabilities and
defending against its weaknesses?
Purchase answer to see full
attachment