Agribusiness-Level Strategy:

Customers: Their Relationship with Business-Level Strategies,

Purpose of a Business-Level Strategy, Types of Business-Level
Strategies
Learning outcomes:

• Define business-level strategy

• Discuss the relationship between customers and business-level strategies in
terms of who, what, and how
• 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, and
• Describe the risks of using each of the business-level strategies.
Define business-level strategy

• Business-level strategy is 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.
• The choices are important because long-term performance is linked to a firm’s
strategies.
• Given the complexity of successfully competing in the global economy, the
choices about how the firm will compete can be difficult.
• Every firm must develop and implement a business-level strategy.
• However, some firms may not use all the strategies—corporate-level, merger and
acquisition, international, and cooperative.
• A firm competing in a single-product market in a single geographic location does
not need a corporate-level strategy regarding product diversity or an
international strategy to deal with geographic diversity.
• In contrast, a diversified firm will use one of the corporate-level strategies as well
as a separate business-level strategy for each product market in which it
competes.
• Customers are the foundation of successful business-level strategies
• In terms of customers, when selecting a business-level strategy the firm
determines:
1. who will be served,
2. what needs those target customers have that it will satisfy, and
3. how those needs will be satisfied.
• Selecting customers and deciding which of their needs the firm will try to satisfy,
as well as how it will do so, are challenging tasks.
• Global competition has created many attractive options for customers, thus
making it difficult to determine the strategy to best serve them.
Customers: Their Relationship with Business-Level
Strategies
• Strategic competitiveness results only when the firm satisfies 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 to meet the needs of new customers.
Effectively Managing Relationships with Customers
• 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.
• Importantly, delivering superior value often results in increased customer
satisfaction.
• In turn, customer satisfaction has a positive relationship with profitability
because satisfied customers are most likely to be repeat customers.
• However, more choices and easily accessible information about the functionality
of the firms’ products are creating increasingly sophisticated and knowledgeable
customers, making it difficult to earn their loyalty.
In customer relationships, there are three key dimensions companies Reach: This is about how far the company’s "reach" extends in
focus on: Reach, Richness, and Affiliation. terms of attracting and connecting with more customers.
Businesses aim to grow their audience by expanding their reach,
Reach, Richness, and Affiliation which means gaining access to a larger group of customers. For
social networks like Facebook, reach is especially important
because their value to users lies in helping them connect with a
wide circle of people.
• The reach dimension of relationships with customers is concerned with the firm’s
access and connection to customers.
• In general, firms seek to extend their reach, adding customers in the process of
doing so.
• Reach is an especially critical dimension for social networking sites such as
Facebook and MySpace in that the value these firms create for users is to connect
them with others.
• Richness, the second dimension of firms’ relationships with customers, is
concerned with the depth and detail of the two-way flow of information between
the firm and the customer.
• The potential of the richness dimension to help the firm establish a competitive
advantage in its relationship with customers leads many firms to offer online
services in order to better manage information exchanges with their customers.
Richness: Richness is about the depth and detail of the communication between the company and its customers. Companies
that invest in rich, two-way information exchanges—like personalized online services—gain a competitive edge. Rich
communication helps the company understand customer needs better, and it also gives customers a clear idea of how the
business can meet those needs. Thanks to the internet, meaningful interactions with customers are now easier and cheaper.
Affiliation: This dimension is all about making interactions with customers as valuable as possible by focusing on their
needs. When companies view their services through the customer's perspective, it increases customer satisfaction and
reduces complaints. In service-based industries, customers often don’t complain but rather switch to competitors if they’re
dissatisfied. A strong brand can help retain customers, even when they experience some dissatisfaction.
• Broader and deeper information-based exchanges allow firms to better
understand their customers and their needs.
• Such exchanges also enable customers to become more knowledgeable about
how the firm can satisfy them.
• Internet technology and e-commerce transactions have substantially reduced the
costs of meaningful information exchanges with current and potential customers.
• Affiliation, the third dimension, is concerned with facilitating useful interactions
with customers.
• Viewing the world through the customer’s eyes and constantly seeking ways to
create more value for the customer have positive effects in terms of affiliation.
• This approach enhances customer satisfaction and produces fewer customer
complaints.
• In fact, for services, customers often do not complain when dissatisfied; instead
they simply go to competitors for their service needs, although a firm’s strong
brand can mitigate the switching.
Who: Determining the Customers to Serve

• 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.
• Market segmentation is a process used to cluster people with similar needs into
individual and identifiable groups.
• Almost any identifiable human or organizational characteristic can be used to
subdivide a market into segments that differ from one another on a given
characteristic.
Table 4.1 Basis for Customer Segmentation

• 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
What: Determining Which Customer Needs to Satisfy

• After the firm decides who it will serve, it must identify the targeted customer
group’s needs that its goods or services can satisfy.
• In a general sense, needs (what) are related to a product’s benefits and features.
• Successful firms learn how to deliver to customers what they want, when they
want it.
• Having close and frequent interactions with both current and potential customers
helps the firm identify those individuals’ and groups’ current and future needs.
• From a strategic perspective, a basic need of all customers is to buy products that
create value for them.
• The generalized forms of value that goods or services provide are either low cost
with acceptable features or highly differentiated features with acceptable cost.
How: Determining Core Competencies Necessary to Satisfy
Customer Needs dakkhata

• After deciding who the firm will serve and the specific needs of those customers,
the firm is prepared to determine how to use its capabilities and competencies to
develop products that can satisfy the needs of its target customers.
• Core competencies are resources and capabilities that serve as a source of
competitive advantage for the firm over its rivals.
• Firms use core competencies (how) to implement value-creating strategies,
thereby satisfying 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.
• Firms must continuously upgrade their capabilities to ensure that they maintain
the advantage over their rivals by providing customers with a superior product.
• Companies draw from a wide range of core competencies to produce goods or
services that can satisfy customers’ needs.
The Purpose of a Business-Level Strategy
• 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 it
intends to perform activities differently or to perform different activities.
• Strategy defines the path which provides the direction of actions to be taken by
leaders of the organization.
• In fact, “choosing to perform activities differently or to perform different
activities than rivals” is the essence of business-level strategy.
• 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 value.
• Indeed, in the current complex competitive landscape, successful use of a
business-level strategy results from the firm learning how to integrate the
activities it performs in ways that create superior value for customers.
Types of Business-Level Strategies
• Firms choose between five business-level strategies to establish and defend their
desired strategic position against competitors:
-cost leadership,
-differentiation,
-focused cost leadership,
-focused differentiation, and
-integrated cost leadership/differentiation
• Each business-level strategy can help the firm to establish and exploit a particular
competitive advantage within a particular competitive scope.
• How firms integrate the activities they perform within each different business-
level strategy demonstrates how they differ from one another.
• When selecting a business-level strategy, firms evaluate two types of potential
competitive advantages: “lower cost than rivals or the ability to differentiate and
command a premium price that exceeds the extra cost of doing so.”
• Having lower costs results from the firm’s ability to perform activities differently
than rivals; being able to differentiate indicates the firm’s capacity to perform
different (and valuable) activities.
Thus, 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
distinctiveness competitive advantage as the basis for implementing its business-
level strategy.
• Two types of target markets are broad market and narrow market segment(s).
• Firms serving a broad market seek to use their capabilities to create value for
customers on an industry-wide basis.
• A narrow market segment means that the firm intends to serve the needs of a
narrow customer group.
• With focus strategies, the firm “selects a segment or group of segments in the
industry and tailors its strategy to serving them to the exclusion of others.”
• Buyers with special needs and buyers located in specific geographic regions are
examples of narrow customer groups.
• None of the five business-level strategies 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.
 Cost Leadership Strategy
• 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,
but with competitive levels of differentiation, to the industry’s most typical customers.
• Process innovations, which are newly designed production and distribution methods
and techniques that allow the firm to operate more efficiently, are critical to successful
use of the cost leadership strategy.
• Cost leaders also carefully examine all support activities to find additional potential cost
reductions.
• Developing new systems for finding the optimal combination of low cost and acceptable
levels of differentiation in the raw materials required to produce the firm’s goods or
services is an example of how the procurement support activity can facilitate successful
use of the cost leadership strategy.
Rivalry with Existing Competitors

• Having the low-cost position is valuable when dealing with rivals.

• Because of the cost leader’s advantageous position, rivals hesitate to compete on
the basis of price, especially before evaluating the potential outcomes of such
competition.
• The degree of rivalry present is based on a number of different factors such as
size and resources of rivals, their dependence on the particular market, and
location and prior competitive interactions, among others.
Bargaining Power of Buyers (Customers)

• Powerful customers can force a cost leader to reduce its prices, but not below the
level at which the cost leader’s next-most-efficient industry competitor can earn
average returns.
• Although powerful customers might be able to force the cost leader to reduce
prices even below this level, they probably would choose not to do so.
• Prices that are low enough to prevent the next-most-efficient competitor from
earning average returns would force that firm to exit the market, leaving the cost
leader with less competition and in an even stronger position.
• Customers would thus lose their power and pay higher prices if they were forced
to purchase from a single firm operating in an industry without rivals.
• Buyers can also develop a counterbalancing power to the customers’ power by
thoroughly analyzing and understanding each of their customers.
• To obtain information and understand the customers’ needs, buyers can
participate in customers’ networks.
Bargaining Power of Suppliers

• The cost leader generally operates with margins greater than those of
competitors and often tries to increase its margins by driving costs lower.
• Among other benefits, higher gross margins relative to those of competitors
make it possible for the cost leader to absorb its suppliers’ price increases.
• When an industry faces substantial increases in the cost of its supplies, only the
cost leader may be able to pay the higher prices and continue to earn either
average or above-average returns.
• Alternatively, a powerful cost leader may be able to force its suppliers to hold
down their prices, which would reduce the suppliers’ margins in the process.
Potential Entrants

• Through continuous efforts to reduce costs to levels that are lower than
competitors, a cost leader becomes highly efficient.
• Because increasing levels of efficiency (e.g., economies of scale) enhance profit
margins, they serve as a significant entry barrier to potential competitors.
• New entrants must be willing to accept less than average returns until they gain
the experience required to approach the cost leader’s efficiency.
• To earn even average returns, new entrants must have the competencies
required to match the cost levels of competitors other than the cost leader.
Product Substitutes

• Compared with its industry rivals, the cost leader also holds an attractive position
relative to product substitutes.
• A product substitute becomes a concern for the cost leader when its features and
characteristics, in terms of cost and differentiation, are potentially attractive to
the firm’s customers.
• When faced with possible substitutes, the cost leader has more flexibility than its
competitors.
Competitive Risks of the Cost Leadership Strategy
• The cost leadership strategy is not risk free.
• One risk is that the processes used by the cost leader to produce and distribute its
good or service could become obsolete because of competitors’ innovations.
• These innovations may allow rivals to produce goods or services at costs lower
than those of the original cost leader, or to provide additional differentiated
features without increasing the product’s price to customers.
• A second risk is that too much focus by the cost leader on cost reductions may
occur at the expense of trying to understand customers’ perceptions of
“competitive levels of differentiation.
• Imitation is a final risk of the cost leadership strategy.
• Using their own core competencies, competitors sometimes learn how to
successfully imitate the cost leader’s strategy.
• When this happens, the cost leader must increase the value its good or service
provides to customers.
Differentiation Strategy
• The differentiation strategy is 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.
• 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.
• Product innovation, which is “the result of bringing to life a new way to solve the
customer’s problem—through a new product or service development—that
benefits both the customer and the sponsoring company,” is critical to successful
use of the differentiation strategy.
• 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 may exceed what the firm’s target customers are willing
to pay.
• If 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 effective in
helping it earn above-average returns.
• Through the differentiation strategy, the firm produces distinctive products for
customers who value differentiated features more than they value low cost.
• To maintain success with the differentiation strategy results, the firm must
consistently upgrade differentiated features that customers value and/or create
new valuable features (i.e., innovate) without significant cost increases.
• This approach requires firms to constantly change their product lines.
• Overall, a firm using the differentiation strategy seeks to be different from its
competitors on as many dimensions as possible.
• The less similarity between a firm’s goods or services and those of its
competitors, the more buffered it is from rivals’ actions.
• A good or service can be differentiated in many ways. Unusual features,
responsive customer service, rapid product innovations and technological
leadership, perceived prestige and status, different tastes, and engineering design
and performance are examples of approaches to differentiation.
• While the number of ways to reduce costs may be finite, virtually anything a firm
can do to create real or perceived value is a basis for differentiation.
• The value chain can be analyzed to determine if a firm is able to link the activities
required to create value by using the differentiation strategy.
• Examples of value chain activities and support functions that are commonly used
to differentiate a good or service
Rivalry with Existing Competitors

• Customers tend to be loyal purchasers of products differentiated in ways that are

meaningful to them.
• As their loyalty to a brand increases, customers’ sensitivity to price increases is
reduced.
• The relationship between brand loyalty and price sensitivity insulates a firm from
competitive rivalry.
• Thus, reputations can sustain the competitive advantage of firms following a
differentiation strategy.
Bargaining Power of Buyers (Customers)

• The distinctiveness of differentiated goods or services reduces customers’

sensitivity to price increases.
• Customers are willing to accept a price increase when a product still satisfies their
unique needs better than a competitor’s offering.
Bargaining Power of Suppliers

• Because the firm using the differentiation strategy charges a premium price for its
products, suppliers must provide high-quality components, driving up the firm’s
costs.
• However, the high margins the firm earns in these cases partially insulate it from
the influence of suppliers in that higher supplier costs can be paid through these
margins.
Potential Entrants

• Customer loyalty and the need to overcome the uniqueness of a differentiated

product create substantial barriers to potential entrants.
• Entering an industry under these conditions typically demands significant
investments of resources and patience while seeking customers’ loyalty.
Product Substitutes

• Firms selling brand-name goods and services to loyal customers are positioned
effectively against product substitutes.
• In contrast, companies without brand loyalty face a higher probability of their
customers switching either to products which offer differentiated features that
serve the same function (particularly if the substitute has a lower price) or to
products that offer more features and perform more attractive functions.
Competitive Risks of the Differentiation Strategy
• One risk of the differentiation strategy is that customers might decide that the
price differential between the differentiator’s product and the cost leader’s
product is too large.
• In this instance, a firm may be offering differentiated features that exceed target
customers’ needs.
• The firm then becomes vulnerable to competitors that are able to offer
customers a combination of features and price that is more consistent with their
needs.
• Another risk of the differentiation strategy is that a firm’s means of differentiation
may cease to provide value for which customers are willing to pay.
• Counterfeiting is the differentiation strategy’s fourth risk.
• Counterfeits are products which are labeled with a trademark or logo that is
identical to or indistinguishable from a legal logo owned by another party, thus
infringing the rights of the legal owner.
Focus Strategies

• The focus strategy is an integrated set of actions taken to produce goods or

services that serve the needs of a particular competitive segment.
• Thus, firms use a focus strategy when they utilize 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 strategy
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).
• Although the breadth of a target is clearly a matter of degree, the essence of the
focus strategy “is the exploitation of a narrow target’s differences from the
balance of the industry.”
• Firms using the focus strategy intend to serve a particular segment of an industry
more effectively than can industry-wide competitors.
• Firms can create value for customers in specific and unique market segments by
using the focused cost leadership strategy or the focused differentiation strategy.
Focused Cost Leadership Strategy

• Based in Sweden, IKEA, a global furniture retailer with locations in 35 countries

and territories and sales revenue of 28.7 billion euros in 2014, uses the focused
cost leadership strategy.
• Young buyers desiring style at a low cost are IKEA’s target customers.
• For these customers, the firm offers home furnishings that combine good design,
function, and acceptable quality with low prices.
• IKEA emphasizes several activities to keep its costs low.
• For example, instead of relying primarily on third-party manufacturers, the firm’s
engineers design low-cost, modular furniture ready for assembly by customers.
• To eliminate the need for sales associates or decorators,
Focused Differentiation Strategy

• Other firms implement the focused differentiation strategy.

• For example, the new generation of food trucks populating cities such as Los
Angeles use the focused differentiation strategy.
• They serve organic food crafted by highly trained chefs and well known
restaurateurs who own and operate many of these trucks.
• With a focus strategy, firms must be able to complete various primary value-chain
activities and support functions in a competitively superior manner to develop
and sustain a competitive advantage and earn above-average returns.
Competitive Risks of Focus Strategies

• With either focus strategy, the firm faces the same general risks as does the
company using the cost leadership or the differentiation strategy on an industry-
wide basis.
• However, focus strategies have three additional risks.
• First, a competitor may be able to focus on a more narrowly defined competitive
segment and thereby “out-focus” the focuser.
• Second, a company competing on an industry-wide basis may decide that the
market segment served by the firm using a focus strategy is attractive and worthy
of competitive pursuit.
• The third risk involved with a focus strategy is that the needs of customers within
a narrow competitive segment may become more similar to those of industry-
wide customers as a whole over time.
Integrated Cost Leadership/Differentiation Strategy

• Most consumers have high expectations when purchasing goods or services. In

general, it seems that most consumers want to pay a low price for products with
somewhat highly differentiated features.
• Because of these customer expectations, a number of firms engage in primary
value-chain activities and support functions that allow them to simultaneously
pursue low cost and differentiation.
• Firms seeking to do this use the integrated cost leadership/differentiation
strategy which involves engaging in primary value-chain activities and support
functions that allow a firm to simultaneously pursue low cost and differentiation.
• The objective of using this strategy is to efficiently produce products with some
differentiated features.
• Concentrating on the needs of its core customer group (e.g., higher-income,
fashion conscious discount shoppers), Target stores uses an integrated cost
leadership/differentiation strategy as shown by its “Expect More. Pay Less.” brand
promise in its mission statement.
• Often firms are “caught in the middle” because they do not differentiate
effectively or provide the lowest-cost goods.
• Flexibility is required for firms to complete primary value-chain activities and
support functions in ways that allow them to use the integrated cost
leadership/differentiation strategy in order to produce somewhat differentiated
products at relatively low costs.
Flexible Manufacturing Systems

• Using a flexible manufacturing system (FMS), the firm integrates human, physical,
and information resources to create relatively differentiated products at relatively
low costs.
• A significant technological advance, the FMS is a computer-controlled process
used to produce a variety of products in moderate, flexible quantities with a
minimum of manual intervention.
• The goal of a FMS is to eliminate the “low cost versus product variety” tradeoff
that is inherent in traditional manufacturing technologies.
• Firms use a FMS to change quickly and easily from making one product to making
another.
Information Networks

• Information Networks By linking companies with their suppliers, distributors, and

customers information networks provide another source of flexibility.
• These networks, when used effectively, help the firm satisfy customer
expectations in terms of product quality and delivery speed.
• Customer relationship management (CRM) is one form of an information-based
network process that firms use for this purpose.
• An effective CRM system provides a 360-degree view of the company’s
relationship with customers, encompassing all contact points, business processes,
and communication media and sales channels.
Total Quality Management Systems

• Total quality management (TQM) is a managerial process that emphasizes an

organization’s commitment to the customer and to continuous improvement of
all processes through problem-solving approaches based on empowerment of
employees.
• Firms develop and use TQM systems to:
1. increase customer satisfaction,
2. cut costs, and
3. reduce the amount of time required to introduce innovative products to the
marketplace
• Firms able to simultaneously reduce costs while enhancing their ability to
develop innovative products increase their flexibility, an outcome that is
particularly helpful to firms implementing the integrated cost
leadership/differentiation strategy.
• Exceeding customers’ expectations regarding quality is a differentiating feature
and eliminating process inefficiencies to cut costs allows the firm to offer that
quality to customers at a relatively low price.
• Thus, an effective TQM system helps the firm develop the flexibility needed to
identify opportunities to simultaneously increase differentiation and reduce
costs.
Competitive Risks of the Integrated Cost
Leadership/Differentiation Strategy
• The potential to earn above-average returns by successfully using the integrated
cost leadership/differentiation strategy is appealing.
• However, it is a risky strategy because firms find it difficult to perform primary
value-chain activities and support functions in ways that allow them to produce
relatively inexpensive products with levels of differentiation that create value for
the target customer.