134 Part 2: Strategic Actions: Strategy Formulation
to meaningfully reduce costs.^117 Firms may be motivated to make acquisitions to main-
tain their differentiation through innovation or to add products to their portfolio not
offered by competitors.^118 Research suggests that firms using “pure strategies,” either cost
leadership or differentiation, often outperform firms attempting to use a “hybrid strat-
egy” (i.e., integrated cost leadership/differentiation strategy). This research suggests the
risky nature of using an integrated strategy.^119 However, the integrated strategy is becom-
ing more common and perhaps necessary in many industries because of technological
advances and global competition. This strategy often necessitates a long-term perspec-
tive to make it work effectively, and therefore requires dedicated owners that allow the
implementation of a long-term strategy that can require several years to produce positive
returns.^120SUMMARY
■ A business-level strategy is an integrated and coordinated set
of commitments and actions the firm uses to gain a compet-
itive advantage by exploiting core competencies in specific
product markets. Five business-level strategies (cost leadership,
differentiation, focused cost leadership, focused differentiation,
and integrated cost leadership/differentiation) are examined
in the chapter.
■ Customers are the foundation of successful business-level
strategies. When considering customers, a firm simultaneously
examines three issues: who, what, and how. These issues,
respectively, refer to the customer groups to be served, the
needs those customers have that the firm seeks to satisfy, and
the core competencies the firm will use to satisfy customers’
needs. Increasing segmentation of markets throughout the
global economy creates opportunities for firms to identify
more distinctive customer needs that they can serve with one
of the business-level strategies.
■ Firms seeking competitive advantage through the cost lead-
ership strategy produce no-frills, standardized products for an
industry’s typical customer. However, these low-cost products
must be offered with competitive levels of differentiation.
Above-average returns are earned when firms continuously
emphasize efficiency such that their costs are lower than those
of their competitors, while providing customers with products
that have acceptable levels of differentiated features.
■ Competitive risks associated with the cost leadership strategy
include (1) a loss of competitive advantage to newer technolo-
gies, (2) a failure to detect changes in customers’ needs, and
(3) the ability of competitors to imitate the cost leader’s com-
petitive advantage through their own distinct strategic actions.
■ Through the differentiation strategy, firms provide custom-
ers with products that have different (and valued) features.
Differentiated products must be sold at a cost that custom-
ers believe is competitive relative to the product’s features
as compared to the cost/feature combinations available
from competitors’ goods. Because of their distinctiveness,differentiated goods or services are sold at a premium price.
Products can be differentiated on any dimension that some
customer group values. Firms using this strategy seek to
differentiate their products from competitors’ goods or ser-
vices on as many dimensions as possible. The less similarity
to competitors’ products, the more buffered a firm is from
competition with its rivals.
■ Risks associated with the differentiation strategy include (1) a
customer group’s decision that the unique features provided
by the differentiated product over the cost leader’s goods or
services are no longer worth a premium price, (2) the inabil-
ity of a differentiated product to create the type of value for
which customers are willing to pay a premium price, (3) the
ability of competitors to provide customers with products
that have features similar to those of the differentiated prod-
uct, but at a lower cost, and (4) the threat of counterfeiting,
whereby firms produce a cheap imitation of a differentiated
good or service.
■ Through the cost leadership and the differentiated focus strat-
egies, firms serve the needs of a narrow market segment (e.g.,
a buyer group, product segment, or geographic area). This
strategy is successful when firms have the core competencies
required to provide value to a specialized market segment
that exceeds the value available from firms serving customers
across the total market (industry).
■ The competitive risks of focus strategies include (1) a compet-
itor’s ability to use its core competencies to “out focus” the
focuser by serving an even more narrowly defined market
segment, (2) decisions by industry-wide competitors to focus
on a customer group’s specialized needs, and (3) a reduction in
differences of the needs between customers in a narrow mar-
ket segment and the industry-wide market.
■ Firms using the integrated cost leadership/differentiation strat-
egy strive to provide customers with relatively low-cost prod-
ucts that also have valued differentiated features. Flexibility
is required for firms to learn how to use primary value-chain