Business-Level Strategy (Chapter 4)

Question 1

What is strategic positioning?

Answer 1

The essence of strategy is choosing to perform activities differently than rivals do. - M. Porter

Question 2

What are the two main strategic positions?

Answer 2

Cost Leadership – compete by having lower costs than competitors and hence attracting customers with lower prices on staple products. Successful business models operate on low margins / high volume.

• Ex.: Walmart, Tim Hortons, West Jet, Dell

Differentiation – compete by offering better quality or unique features at the same or higher prices than competitors.

• Hudson’s Bay Co., Starbucks Coffee, KLM, Apple

Question 3

What are the five generic business-level strategies?

Answer 3

• Cost leadership: lowest cost + broad market
• Focused cost leadership: lowest cost + narrow market segment(s)
• Differentiation: distinctiveness + broad market
• Focused differentiation: distinctiveness + narrow market segments)
• Integrated cost leadership/differentiation

Question 4

Discuss the Starbucks value chain

Answer 4

only read this slide

Question 5

Discuss the Walmart cost leadership strategy value chain example

Answer 5

only read this slide

Question 6

Discuss the Starbucks differentiation strategy value chain example

Answer 6

only read this slide

Question 7

What are the risks of differentiation strategy?

Answer 7

• Customers determine that the cost of differentiation is too great (Starbucks losing sales to McDonald’s during the economic recession.)
• The means of differentiation may not provide value for which customers are willing to pay (DomiNick’s, a struggling predecessor of Domino’s pizza)
• Experience can narrow customers’ perceptions of the value of a product’s differentiated features (Hotels vs. Airbnb)
• Counterfeiting (“fake” purses, watches etc.)
• Most sensitive to economic downturns (during recession, customers tend to switch from “green”, chemical-free household products to less expensive conventional, not eco-friendly options)

Question 8

What are the risks of cost leadership strategy?

Answer 8

• Must sell in large volumes to realize the intended bottom line (Tim Hortons).
• Source of cost advantage can become obsolete, as the external environment changes (Can we see this happening with IKEA?).
• Focus on cost may cause the firm to overlook important customer preferences, i.e. “cut corners” (lack of service at Wal-Mart, Dollarama).
• Imitation (Most computer manufacturers can now sell DTC - direct to consumer – online and allow customized building of computers, which was pioneered by Dell in 1990s.)

Question 9

What are the risks of an integrated strategy?

Answer 9

“Stuck in the middle”:

• excelling neither in cost reduction nor in differentiation
• cost structure is not efficient enough for attractive pricing of products; at the same time products not sufficiently differentiated to create distinct value for target customers
• result: the firm does not earn above-average returns

Nonetheless, companies like Target, Zara, Singapore Airlines proved to be successful in the integrated strategy.

Question 10

How to decide what type of strategy the company has

Answer 10

• Product:
  unique, premium quality (differentiation) or staple (cost leadership)
• Prices:
  premium (differentiation) or affordable (cost leadership)
• Target market:
  narrow with specific characteristics (focused strategy) or mass market (broad strategy)

Note: not all companies have a distinct strategy, many are simply trying to survive by benchmarking against competitors. So if you can’t determine the type, it might mean that the strategy is lacking.