Chapter 4 Business level strategy
Strategy is concerned with relating a firm to its environment in order to successfully meet long-
term objectives. As both the business environment and individual firms are dynamic systems,
constantly in flux, achieving a fit between the two is an ongoing challenge. Strategists are
continuously looking for new ways to align the current, and potential, strengths and weaknesses
of the organization with the current, and potential, opportunities and threats in the
environment.
4.1 The issue of competitive advantage
Whether a firm has a competitive advantage depends on the business model that it has
developed to relate itself to its business environment. A business model is the configuration of
resources (input), activities (throughput) and product/service offerings (output) intended to
create value for customers. It’s the way a firm conducts its business.
Competitive advantage can be achieved only if a business model creates superior value for
buyers. The elements in a successful business model:
1. A superior ‘value proposition’. A firm must be able to supply a product or service more
closely fitted to client needs than rival firms (e.g. price, availability, reliability, technical
specifications, image, colour, taste, etc.).
2. The ability to actually develop and supply the superior product offering. It needs to have
the capability to perform the necessary value-adding activities in an effective and
efficient manner (such as R&D, HR, production, logistics, marketing and sales)
3. The resource base required to perform the value-adding activities (such as data, know-
how, patents, facilities, money, brands and relationships).
4.1.1 Product offering
For sales to be achieved a firm must have a competitive value proposition - a cluster of physical
goods, services or additional attributes with a superior fit to customer needs. For the
strategizing manager the key question is which products should be developed and which
markets should be served.
Companies that do not focus on a limited set of product-market combinations run the risk of
encountering a number of major problems:
● Low economies of scale
● Slow organizational learning
● Unclear brand image
● Unclear corporate image
● High organizational complexity
● Limits to flexibility
For these reasons, companies need to focus on a limited number of businesses and within each
business on a limited group of customers and a limited set of products. Determining a focus
starts by looking for the ‘boundaries’ of a business. How can managers draw meaningful
, delineation lines in the environment, distinguishing one arena of competition from another, so
that they can select some and ignore others? To explore how a business can be defined, it is first
necessary to specify how a business differs from an ‘industry’ and a ‘market’.
Delineating industries
An industry is defined as a group of firms making a similar type of product or employing a similar
set of value-adding processes or resources - supply side similarity. The simplest way to draw an
industry boundary is to use product similarity as the delineation criterion. An industry can also
be defined on the basis of value chain similarity (consulting industry, mining industry) or
resource similarity (information technology industry, oil industry). As creating a competitive
advantage often comes from doing things differently, rethinking the definition of an industry can
be a powerful way to develop a unique product offering. (Example Swatch: watch industry and
fashion industry).
Segmenting markets
In the business world a market is usually defined as a group of customers with similar needs -
demand side similarity. The first group of segmentation criteria is based on buyer attributes that
are frequently thought to be important predictors of actual buying criteria and buyer behaviour.
Instead of using byer attributes as indirect – predictive – measures of what clients probably
want, segments can also be directly defined on the basis of buying criteria employed or buyer
behaviours exhibited. However, it is very difficult to gather and interpret the information. For
strategists, one of the key challenges is to look at existing categorizations of buyers and wonder
whether a different segmentation would offer new insights and new opportunities for developing
a product offering specifically tailored to their needs.
Defining and selecting businesses
The term ‘business’ refers neither to a set of producers nor a group of customers, but to the
domain where the two meet. A business is narrower than the entire industry and the set of
markets served is also limited. Companies must direct their efforts by focusing in two ways:
1. Selecting a limited number of businesses within which companies wish to be
successful. Firms need to analyse the structural characteristics of interesting
businesses to be able to judge whether they are attractive enough for the firm, or can be
made to be attractive.
2. Focusing within each selected business. Even within the limited set of businesses
selected, it is necessary to choose a number of distinct market segments and to target a
few special product offerings to meet these customers’ needs.
Positioning within a business
Positioning is concerned with both the questions of ‘where’ to compete’ and ‘how to compete’.
The issue of competitive scope: determining in which product-market combinations within a
business a firm wants to be involved. In selecting a competitive scope, firms can vary anywhere
between being widely oriented and very tightly focused.
The issue of competitive advantage: finding a way to beat rivals and win over customers for a
product offering. In developing a competitive advantage, firms have many dimensions along
which they can attempt to outdo their rivals:
● Price. All things being equal, buyers generally prefer to pay the lowest amount
necessary.
