Reading: Strategic Management Textbook Chapter 6
Chapter 6: Selecting Business-Level Strategies
6.1 Introduction
6.2 Understanding Business-Level Strategy through “Generic Strategies”
6.3 Cost Leadership
6.4 Differentiation
6.5 Focused Cost Leadership and Focused Differentiation
6.6 Best-Cost Strategy
6.7 Stuck in the Middle
6.8 Conclusion
Learning Objectives
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. Why is an examination of generic strategies valuable?
2. What are the four main generic strategies?
3. What is a best-cost strategy?
4. What does it mean to be “stuck in the middle”?
6.1 Introduction
Within the strategic management framework, an organization must define and continue to improve its generic,
business-level strategy. A generic, business-level strategy is also called its generic competitive strategy,
because it defines how a firm competes head-to-head against similar products and services in the marketplace.
According to Michael Porter, a firm may pursue one of five generic/competitive business-level strategies.
These are broad cost leadership, broad differentiation, focused cost leadership, focused differentiation, and
best cost strategies. An important point of distinction is that business level strategies are viewed from the
perspective of which consumer(s) are being targeted. It may be tempting to view business-level strategies in
124 | Chapter 6: Selecting Business-Level Strategies
Figure 6.1: Inside of a Target store
terms of the product lines, but the key point is to evaluate the business-level based on to whom the strategy
appeals. In this way, a firm can target a broad audience with a single or a few products.
There are two primary decisions in a generic business strategy. Will the intent of the strategy be on a broad or
focused target audience, and simultaneously, does the firm organize around a cost or differentiation approach?
If selecting a broad cost leadership or broad differentiation strategy, the target market for the product or
service is broad, meaning most people who buy within that industry. If the strategy is focused, that target
market is narrow, a niche market, and not meant for most people in the industry. A strategy of broad cost
leadership offers the lowest price in the market for that product or service. It appeals particularly to price
sensitive customers. Firms pursuing a broad differentiation strategy offer something unique that differentiates
their product or service from others. Typically this uniqueness adds cost and value to the product or service,
allowing the company to charge more. If the strategy is focused cost leadership, then the firm attempts
to provide the lowest cost to a narrow, niche target market. Focused differentiation provides unique or
differentiated products or services to a narrow, niche target market. The fifth generic business-level strategy
is called best cost, where the firm attempts to offer a hybrid of both lower cost and differentiated products
or services, combining the two basic strategies. A firm pursuing this strategy must be careful to perform both
strategies well, or risk not performing either well, and therefore becoming “stuck in the middle,” and losing
customers to the competition.
Once a firm establishes its overall generic business-level strategy, the strategic management process helps
the firm to continuously improve upon that strategy. The organizational performance, external, and internal
assessments, and the development of the strategic issue(s) through the SWOT analysis are then used to plot
strategies for the firm to achieve its vision through its business-level strategy.
The Competition Takes Aim at Target
On January 13, 2011, Target Corporation
announced its intentions to operate stores
outside the United States for the first time. The
plan called for Target to enter Canada by
purchasing existing leases from a Canadian
retailer and then opening 100 to 150 stores in
2013 and 2014 (Target, 2011). The chain already
included more than 1,700 stores in forty-nine
states. Given the close physical and cultural
ties between the United States and Canada, entering the Canadian market seemed to be a logical
move for Target.
Chapter 6: Selecting Business-Level Strategies | 125
In addition to making its initial move beyond the United States, Target had several other sources of
pride. The company claimed that 96% of American consumers recognized its signature logo,
surpassing the percentages enjoyed by famous brands such as Apple and Nike. In 2020, Fortune
magazine ranked Target twenty-second on its list of the “World’s Most Admired Companies.” But
not all had been well with Target (Fortune, 2020). They pulled out of Canada in 2015 after just two
years and $2 billion in losses. Concern also surrounded Target’s possible vulnerability to
competition within the retail industry (Peterson, 2015). Since its creation in the early 1960s, Target
executives had carved out a lucrative position for the firm. Target offers relatively low prices on
brand name consumer staples such as cleaning supplies and paper products, but it also offers chic
clothing and household goods. This unique combination helps Target to appeal to fairly affluent
customers. Perhaps the most tangible reflection of Target’s upscale position among large retailers
is the tendency of some customers to jokingly pronounce its name as if it were a French boutique:
“Tar-zhay.”
Target’s lucrative position was far from guaranteed, however. Indeed, a variety of competitors
seemed to be taking aim at Target. Retail chains such as Kohl’s and Old Navy offered fashionable
clothing at prices similar to Target’s. Discounters like T.J. Maxx, Marshalls, and Ross offered
designer clothing and chic household goods for prices that often were lower than Target’s.
Closeout stores such as Big Lots offered a limited selection of electronics, apparel, and household
goods but at deeply discounted prices. All these stores threatened to steal business from Target.
Walmart was perhaps Target’s most worrisome competitor. After some struggles in the 2000s, the
mammoth retailer’s performance was strong enough that it ranked consistently above Target on
Fortune’s list of the “World’s Most Admired Companies” (eighteenth vs. twenty-second in 2020).
Walmart also was much bigger than Target. The resulting economies of scale meant that Walmart
could undercut Target’s prices anytime it desired. Just such a scenario had unfolded before. A few
years ago, Walmart’s victory in a price war over Kmart led the latter into bankruptcy.
One important difference between Kmart and Target is that Target is viewed by consumers as
offering relatively high-quality goods. But this difference might not protect Target. Although
Walmart’s products tended to lack the chic appeal of Target’s, Walmart had begun offering better
products during the recession of the late 2000s in an effort to expand its customer base. If Walmart
executives chose to match Target’s quality while charging lower prices, Target could find itself
without a unique appeal for customers. As 2020 continued, a big question loomed: could Target
maintain its unique appeal to customers or would the competitive arrows launched by Walmart and
others force Target’s executives to quiver?
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References
Fortune Magazine. (2020). World’s most admired companies.
https://fortune.com/worlds-most-admired-companies/2020/search/?ordering=asc.
Peterson, H. (2015, January 15). 5 reasons Target failed in Canada. Business Insider.
https://www.businessinsider.com/why-target-canada-failed-2015-1.
Target fact card. (2007, January). https://web.archive.org/web/20071128161431/http://sites.target.com/
images/corporate/about/pdfs/corp_factcard_101107.pdf.
Target. (2011, January 13). Target Corporation to acquire interest in Canadian real estate from Zellers Inc., a
subsidiary of Hudson’s Bay Company, for $1.825 billion [Press release]. https://investors.target.com/newsreleases/
news-release-details/target-corporation-acquire-interest-canadian-real-estate-zellers.
Image Credits
Figure 6.1: Lovable98158. “A picture of the grocery section of a local Target.” CC BY-SA 4.0. Retrieved from
https://commons.wikimedia.org/wiki/File:Target_Store.jpg . Image edited to crop ceiling out.
6.2 Understanding Business-Level Strategy through “Generic Strategies”
Why Examine Generic Strategies?
Business-level strategy addresses the question of how a firm will compete in a particular industry (Table 6.1).
This seems to be a simple question on the surface, but it is actually quite complex. The reason is that there
are a great many possible answers to the question. Consider, for example, the restaurants in your town or city.
Chances are that you live fairly close to some combination of McDonald’s, Subway, Chili’s, Applebee’s, Panera
Bread Company, dozens of other national brands, and a variety of locally based eateries that have just one
location. Each of these restaurants competes using a business model that is at least somewhat unique. When an
executive in the restaurant industry analyzes her company and her rivals, she needs to avoid getting distracted
by all the nuances of different firm’s business-level strategies and losing sight of the big picture.
The solution is to think about business-level strategy in terms of generic strategies. A generic businesslevel
strategy is a general way of positioning a firm within an industry. Focusing on generic strategies allows
executives to concentrate on the core elements of firms’ business-level strategies. The most popular set of
generic strategies is based on the work of Professor Michael Porter of the Harvard Business School and
subsequent researchers that have built on Porter’s initial ideas (Porter, 1980; Williamson & Zeng, 2009).
Chapter 6: Selecting Business-Level Strategies | 127
Firms compete on two general dimensions—the source of competitive advantage (cost or differentiation) and the
scope of operations (broad or narrow). Four possible generic business-level strategies emerge from these decisions.
An example of each generic business-level strategy from the retail industry is illustrated below.
Table 6.1 Business-Level Strategies
Competitive Advantage: Cost
Broad Target Market: Walmart’s cost leadership strategy depends on attracting a large customer base and keeping prices
low by buying massive quantities of goods from suppliers.
Narrow Target Market: In using a focused cost leadership, Dollar General does not offer a full array of consumer goods,
but those that it does offer are priced to move.
Competitive Advantage: Differentiation
Broad Target Market: Nordstrom builds its differentiation strategy around offering designer merchandise and providing
exceptional service.
Narrow Target Market: Anthropologie follows a focused differentiation strategy by selling unique (and pricey) women’s
apparel, accessories, and home furnishings.
According to Porter, two competitive dimensions are the keys to business-level strategy. The first dimension
is a firm’s source of competitive advantage. This dimension involves whether a firm tries to gain an edge on
rivals by keeping costs down or by offering something unique in the market. The second dimension is a firms’
scope of operations. This dimension involves whether a firm tries to target customers in general or whether
it seeks to attract just a narrow segment of customers. Four generic business-level strategies emerge from
these decisions: (1) broad cost leadership, (2) broad differentiation, (3) focused cost leadership, and (4) focused
differentiation. In rare cases, firms are able to offer both low prices and unique features that customers find
desirable. These firms are following a best-cost strategy. Firms that are not able to offer low prices or appealing
unique features are referred to as “stuck in the middle.”
Understanding the differences that underlie generic strategies is important because different generic
strategies offer different value propositions to customers. A firm focusing on cost leadership will have a
different value chain configuration than a firm whose strategy focuses on differentiation. For example,
marketing and sales for a differentiation strategy often requires extensive effort while some firms that follow
cost leadership such as Waffle House are successful with limited marketing efforts. This chapter presents
each generic strategy and the “recipe” generally associated with success when using that strategy. When firms
follow these recipes, the result can be a strategy that leads to superior performance. But when firms fail to
follow logical actions associated with each strategy, the result may be a value proposition configuration that is
expensive to implement and that does not satisfy enough customers to be viable.
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Figure 6.2: Analyzing generic strategies enhances the understanding of how firms compete at the
business level.
Limitations of Generic Strategies
Examining business-level strategy in terms of generic strategies has limitations. Firms that follow a particular
generic strategy tend to share certain features. For example, one way that cost leaders generally keep costs
low is by not spending much on advertising. Not every cost leader, however, follows this path. While cost
leaders such as Waffle House spend very little on advertising, Walmart spends considerable money on print
and television advertising despite following a cost leadership strategy. Thus a firm may not match every
characteristic that its generic strategy entails. Indeed, depending on the nature of a firm’s industry, tweaking
the recipe of a generic strategy may be essential to cooking up success.
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Section Video
Five Competitive Strategies [02:50]
The video for this lesson explains the five generic strategies and why some work better in some
industries or conditions than others.
You can view this video here:
https://www.youtube.com/watch?v=xUW6_Nbe8d0&feature=emb_logo
Key Takeaway
• Business-level strategies examine how firms compete in a given industry. Firms derive such
strategies by executives making decisions about whether their source of competitive advantage
is based on price or differentiation and whether their scope of operations targets a broad or
narrow market.
Exercises
1. What are examples of each generic business-level strategy in the apparel industry?
2. What are the limitations of examining firms in terms of generic strategies?
3. Create a new framework to examine generic strategies using different dimensions than the two
offered by Porter’s framework. What does your approach offer that Porter’s does not?
References
Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. Free Press.
130 | Chapter 6: Selecting Business-Level Strategies
Williamson, P. J. & Zeng, M. (2009). Value-for-money strategies for recessionary times. Harvard Business
Review, 87(3), 66–74. https://hbr.org/2009/03/value-for-money-strategies-for-recessionary-times.
Video Credits
Gregg Learning. (2018, June 11). Five competitive strategies [Video]. YouTube.
https://www.youtube.com/watch?v=xUW6_Nbe8d0&feature=emb_logo.
6.3 Cost Leadership
Firms that compete based on price and target a broad target market are following a broad cost leadership
strategy. Several examples of firms pursuing a broad cost leadership strategy are illustrated below.
Table 6.2 Cost Leadership
Examples of Firms Pursuing a Broad Cost Leadership Strategy
Despite its name, Dunkin’ Donuts makes more money selling inexpensive coffee than it does from selling donuts. The
coffee is often advertised as costing under a dollar, making Dunkin’ Donuts a low-priced alternative to Starbucks.
Supercuts’s website makes clear their longstanding cost leadership strategy by noting, “A Supercut is a haircut that has
kept people looking their best, while keeping money in their pockets, since 1975.”
Payless ShoeSource is a discount retailer that sells inexpensive shoes for men, women, and children. However, they filed
for bankruptcy in 2020 and closed all their stores, only operating their overseas stores. Super Shoes survives as a low
cost leader.
Little Debbie snack cakes began when O. D. McKee started selling treats for five cents each in the early 1930s. Little
Debbie cakes cost a lot more than five cents today, but they remain cheaper than similar offerings from Entenmann’s,
Tastykake, and other snack cake rivals.
The Nature of the Cost Leadership Strategy
It is tempting to think of cost leaders as companies that sell inferior, poor-quality goods and services for rockbottom
prices. This is not necessarily true, but some companies get this reputation. K-Mart, for example, had
been a successful discount department store with a cost leadership strategy. As Walmart competed head to
head with K-Mart, however, and offered higher quality products at the same or lower prices than its rivals, KMart
was doomed. Its reputation for cheap, inferior products and its inability to win a price war with Walmart
pushed K-Mart into bankruptcy.
In contrast to firms such as K-Mart, cost leaders can be very successful. A firm following a cost leadership
strategy offers products or services with acceptable quality and features to a broad set of customers at a low
price (Table 6.2). Super Shoes, for example, sells name-brand shoes at inexpensive prices. Little Debbie snack
Chapter 6: Selecting Business-Level Strategies | 131
cakes offer another example. The brand was started in the 1930s when O. D. McKee began selling sugary treats
for five cents. Most consumers today would view the quality of Little Debbie cakes as a step below similar
offerings from Entenmann’s, but enough people believe that they offer acceptable quality that the brand is still
around eight decades after its creation.
Perhaps the most famous cost leader is Walmart, which has used a cost leadership strategy to become the
largest company in the world. The firm’s advertising slogans such as “Always Low Prices” and “Save Money. Live
Better” communicate Walmart’s emphasis on price slashing to potential customers. Meanwhile, Walmart has
the broadest customer base of any firm in the United States. Approximately one hundred million Americans
visit a Walmart in a typical week (Zimmerman & Hudson, 2006). Incredibly, this means that roughly one-third
of Americans are frequent Walmart customers. This huge customer base includes people from all demographic
and social groups within society.
Cost leaders tend to share some important characteristics. The ability to charge low prices and still make a
profit is challenging. Cost leaders manage to do so by emphasizing efficiency. At Waffle House restaurants,
for example, customers are served cheap eats quickly to keep booths available for later customers. As part
of the effort to be efficient, most cost leaders spend little on advertising, market research, or research and
development. Waffle House, for example, limits its advertising to billboards along highways. Meanwhile, the
simplicity of Waffle House’s menu requires little research and development.
Many cost leaders rely on economies of scale to achieve efficiency. Economies of scale are created when the
costs of offering goods and services decreases as a firm is able to sell more items. This occurs because expenses
are distributed across a greater number of items. Walmart spent approximately $3.5 billion on advertising in
2019 (Guttmann, 2019). This is a huge number, but Walmart is so large that its advertising expenses equal just
a tiny fraction of its sales. Also, cost leaders are often large companies, which allows them to demand price
concessions from their suppliers. Walmart is notorious for squeezing suppliers such as Procter & Gamble to sell
goods to Walmart for lower and lower prices over time. The firm passes some of these savings to customers in
the form of reduced prices in its stores.
Advantages and Disadvantages of Cost Leadership
Each generic strategy offers advantages that firms can potentially leverage to enhance their success as well
as disadvantages that may undermine their success. In the case of cost leadership, one advantage is that cost
leaders’ emphasis on efficiency makes them well positioned to withstand price competition from rivals (Table
6.3). Kmart’s ill-fated attempt to engage Walmart in a price war ended in disaster, in part because Walmart was
so efficient in its operations that it could live with smaller profit margins far more easily than Kmart could.
132 | Chapter 6: Selecting Business-Level Strategies
Figure 6.3: Challenging a cost leader in a price war may end
up destroying a company.
Using a cost leadership strategy offers firms important advantages and disadvantages. Below, table 6.3 illustrates
a few examples in relation to entertainment and leisure.
Table 6.3 Executing a Low-Cost Strategy
Advantages
High profits can be enjoyed if a cost leader has a high market share. An example is Kampgrounds of America, a chain of
nearly 500 low cost camping franchises in the United States.
Low-cost firms such as many municipal golf courses can withstand price wars because high-priced competitors will not
want to compete directly with a more efficient rival.
Disadvantages
If perceptions of quality become too low, business will suffer.
Large volumes of sales are a must because margins are slim.
The need to keep expenses low might lead cost leaders to be late in detecting key environment trends.
Low-cost firms’ emphasis on efficiency makes it difficult for them to change quickly if needed.
Beyond existing competitors, a cost leadership strategy also creates benefits relative to potential new entrants.
Specifically, the presence of a cost leader in an industry tends to discourage new firms from entering the
business because a new firm would struggle to attract customers by undercutting the cost leaders’ prices. Thus,
a cost leadership strategy helps create barriers to entry that protect the firm—and its existing rivals—from new
competition.
In many settings, cost leaders attract a large market
share because a large portion of potential customers
find paying low prices for goods and services of
acceptable quality to be very appealing. This is
certainly true for Walmart, for example. The need for
efficiency means that cost leaders’ profit margins are
often slimmer than the margins enjoyed by other firms.
However, cost leaders’ ability to make a little bit of
profit from each of a large number of customers means
that the total profits of cost leaders can be substantial.
In some settings, the need for high sales volume is a
critical disadvantage of a cost leadership strategy.
Highly fragmented markets and markets that involve a
lot of brand loyalty may not offer much of an opportunity to attract a large segment of customers. In both the
soft drink and cigarette industries, for example, customers appear to be willing to pay a little extra to enjoy the
brand of their choice. Lower-end brands of soda and cigarettes appeal to a minority of consumers, but famous
brands such as Coca-Cola, Pepsi, Marlboro, and Camel still dominate these markets. A related concern is that
achieving a high sales volume usually requires significant upfront investments in production and/or
distribution capacity. Not every firm is willing and able to make such investments.
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Due to the need for cost leaders to have high volumes and slim margins, a focused cost leadership strategy
is difficult to achieve. By definition, a focused approach is directed at a narrow, niche segment of the market.
This means lower volumes, therefore contrary to the normal cost leadership strategy. An example would be an
Hispanic grocery store in Northern Virginia serving the niche market of Hispanics living there, that uses a cost
leadership strategy to compete against the other Hispanic grocery stores.
Cost leaders tend to keep their costs low by minimizing advertising, market research, and research and
development, but this approach can prove to be expensive in the long run. A relative lack of market research
can lead cost leaders to be less skilled than other firms at detecting important environmental changes.
Meanwhile, downplaying research and development can slow cost leaders’ ability to respond to changes once
they are detected. Lagging rivals in terms of detecting and reacting to external shifts can prove to be a deadly
combination that leaves cost leaders out of touch with the market and out of answers.
Section Video
Low Cost Strategy [03:20]
The video for this lesson describes the competitive approach of low cost strategy.
You can view this video here:
https://www.youtube.com/watch?v=-C0MQzIb7Y4&feature=emb_logo.
Key Takeaway
• Cost leadership is an effective business-level strategy to the extent that a firm offers low prices,
provides satisfactory quality, and attracts enough customers to be profitable.
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Exercises
1. What are three industries in which a cost leadership strategy would be difficult to implement?
2. What is your favorite cost leadership restaurant?
3. Name three examples of firms conducting a cost leadership strategy that use no advertising.
Should they start advertising? Why or why not?
References
Guttmann, A. (2019, August 9). Walmart: advertising spending 2014-2019. Statista.
https://www.statista.com/statistics/622029/walmart-ad-spend/.
Zimmerman, A., & Hudson, K. (2006). Managing Wal-Mart: How US-store chief hopes to fix Wal-Mart. Wall
Street Journal. https://www.wsj.com/articles/SB114462756022321371.
Image Credits
Figure 6.3: Skirvin, Ben. “Closed Sign.” CC BY-NC 2.0. Retrieved from https://flic.kr/p/8ScoFg.
Video Credits
Gregg Learning. (2018, June 12). Low cost strategy [Video]. YouTube.
https://www.youtube.com/watch?v=-C0MQzIb7Y4&feature=emb_logo.
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Figure 6.4: Coleman’s patented stove captures the
essence of a differentiation strategy, since buyers
are willing to pay a premium for its reliability.
6.4 Differentiation
Firms that compete on uniqueness and target a broad market are following a differentiation strategy. Several
examples of firms pursuing a differentiation strategy are illustrated below.
Table 6.4 Differentiation
Examples of Firms Pursuing a Differentiation Strategy
Although salt is a commodity, Morton has differentiated its salt by building a brand around its iconic umbrella girl and its
trademark slogan of “When it rains, it pours.”
FedEx’s former slogan “When it absolutely, positively has to be there overnight” highlights the commitment to very
speedy delivery that differentiates them from competitors such as UPS and the US Postal Service.
Offerings such as Hot Wheels cars and the Barbie line of dolls highlight toy maker Mattel’s differentiation strategy. Both
are updated regularly to reflect current trends and tastes.
Nike differentiates its athletic shoes through its iconic “swoosh” as well as an intense emphasis on product innovation
through research and development. Nike also differentiates their athletic brand through their marketing strategy of
highlighting social justice issues regardless of potential public controversy.
The Walt Disney Company has developed incomparable customer service standards (“the happiest place on earth”) and
numerous well-known characters such as Mickey Mouse, the Little Mermaid, and Captain Jack Sparrow that help
differentiate their movies, theme parks, and merchandise.
The Nature of the Differentiation Strategy
A famous clich contends that “you get what you pay for.” This
saying captures the essence of a differentiation strategy. A firm
following a differentiation strategy attempts to convince
customers to pay a premium price for its goods or services by
providing unique and desirable features (Table 6.4). The message
that such a firm conveys to customers is that you will pay a little
bit more for our offerings, but you will receive a good value
overall because our offerings provide something special.
In terms of the two competitive dimensions described by Michael
Porter, using a differentiation strategy means that a firm is
competing based on uniqueness rather than price and is seeking
to attract a broad market (Porter, 1980). Coleman camping
equipment offers a good example. If camping equipment such as
sleeping bags, lanterns, and stoves fail during a camping trip, the
result will be, well, unhappy campers. Coleman’s sleeping bags,
lanterns, and stoves are renowned for their reliability and durability. Cheaper brands are much more likely to
have problems. Lovers of the outdoors must pay more to purchase Coleman’s goods than they would to obtain
136 | Chapter 6: Selecting Business-Level Strategies
Figure 6.5: Express Oil Change sets itself apart through
superior service and great locations.
lesser brands, but having equipment that you can count on to keep you warm and dry is worth a price premium
in the minds of most campers.
Successful use of a differentiation strategy depends on not only offering unique features but also
communicating the value of these features to potential customers. As a result, advertising in general and brand
building in particular are important to this strategy. Few goods are more basic and generic than table salt. This
would seemingly make creating a differentiated brand in the salt business next to impossible. Through clever
marketing, however, Morton Salt has done so. Morton has differentiated its salt by building a brand around its
iconic umbrella girl and its trademark slogan of “When it rains, it pours.” Would the typical consumer be able to
tell the difference between Morton Salt and cheaper generic salt in a blind taste test? Not a chance. Yet Morton
succeeds in convincing customers to pay a little extra for its salt through its brand-building efforts.
FedEx and Nike are two other companies that have done well at communicating to customers that they
provide differentiated offerings. FedEx’s former slogan “When it absolutely, positively has to be there overnight”
highlights the commitment to speedy delivery that sets the firm apart from competitors such as UPS and the
US Postal Service. Nike differentiates its athletic shoes and apparel through its iconic “swoosh” logo as well as
an intense emphasis on product innovation through research and development.
Developing a Differentiation Strategy at Express Oil Change
Express Oil Change and Service Centers is a
chain of auto repair shops that stretches from
Florida to Texas. Based in Birmingham,
Alabama, the firm has more than 170 companyowned
and franchised locations under its
brand. Express Oil Change tries to provide a
unique level of service, and the firm is content
to let rivals offer cheaper prices. We asked an
Express Oil Change executive about his firm
(Ketchen & Short, 2010).
Question:
The auto repair and maintenance business is a
pretty competitive space. How is Express Oil
Change being positioned relative to other
firms, such as Super Lube, American LubeFast, and Jiffy Lube?
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Don Larose, Senior Vice President of Franchise Development:
Every good business sector is competitive. The key to our success is to be more convenient and
provide a better overall experience for the customer. Express Oil Change and Service Centers
outperform the industry significantly in terms of customer transactions per day and store sales, for
a host of reasons.
In terms of customer convenience, Express Oil Change is faster than most of our competitors—we
do a ten-minute oil change while the customer stays in the car. Mothers with kids in car seats
especially enjoy this feature. We also do mechanical work that other quick lube businesses don’t do.
We change and rotate tires, do brake repairs, air conditioning, tune ups, and others. There is no
appointment necessary for many mechanical services like tire rotation and balancing, and checking
brakes. So, overall, we are more convenient than most of our competitors.
In terms of staffing our stores, full-time workers are all that we employ. Full-time workers are
better trained and typically have less turnover. They therefore have more experience and do better
quality work.
We think incentives are very important. We use a payroll system that provides incentives to the
store staff on how many cars are serviced each day and on the total sales of the store, rather than
on increasing the average transactions by selling the customer items they did not come in for,
which is what most of the industry does. We don’t sell customers things they don’t yet need, like air
filters and radiator flushes. We focus on building trust, by acting with integrity, to get the customer
to come back and build the daily car count. This philosophy is not a slogan for us. It is how we
operate with every customer, in every store, every day.
The placement of our outlets is another key factor. We place our stores in A-caliber retail locations.
These are lots that may cost more than our competitors are willing or able to pay. We get what we
pay for though; we have approximately 41% higher sales per store than the industry average.
Question:
What is the strangest interaction you’ve ever had with a potential franchisee?
Larose:
I once had a franchisee candidate in New Jersey respond to a request by us for proof of his liquid
assets by bringing to the interview about $100,000 in cash to the meeting. He had it in a bag, with
bundles of it wrapped in blue tape. Usually, folks just bring in a copy of a bank or stock statement.
Not sure why he had so much cash on hand, literally, and I didn’t want to know. He didn’t become a
franchisee.
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A differentiation strategy offers important advantages and disadvantages for firms that adopt it. Below we
illustrate a few examples in relation to an often differentiated product—women’s handbags.
Table 6.5 Executing a Differentiation Strategy
Advantages
Buyer loyalty is common among handbag buyers. Many individuals enjoy seeing—and being seen with—a designer logo on
the products they buy such as the iconic C that is shown on Coach bags.
Chanel enjoys strong margins because their well-known name allows them to charge a premium for their handbags.
Disadvantages
Less expensive bags from retailers such as Target provide enough of a trendy look to satisfy many price-sensitive buyers.
These individuals will choose to save their money by avoiding expensive bags from top-end designers.
Imitations may steal customers, such as is common with knock-off handbags sold by street vendors.
Advantages and Disadvantages of Differentiation
Each generic strategy offers advantages that firms can potentially leverage to enjoy strong performance, as
well as disadvantages that may damage their performance. In the case of differentiation, a key advantage is that
effective differentiation creates an ability to obtain premium prices from customers (Table 6.5). This enables a
firm to enjoy strong profit margins. Coca-Cola, for example, currently enjoys a profit margin of approximately
33%, meaning that about 33 cents of every dollar it collects from customers is profit. In comparison, Walmart’s
cost leadership strategy delivered a margin of under 4% in 2010.
In turn, strong margins mean that the firm does not need to attract huge numbers of customers to have a good
overall level of profit. Luckily for Coca-Cola, the firm does attract a great many buyers. Overall, the firm made
a profit of just under $9.0 billion on sales of just over $37.3 billion in 2019. Interestingly, Walmart’s profits were
only 2.4 times higher ($22.0 billion) than Coca-Cola’s while its sales volume ($514.4 billion) was 13.8 times higher
than Coca-Cola’s (Walmart, 2019; Coca Cola, 2019). This comparison of profit margins and overall profit levels
illustrates why a differentiation strategy is so attractive to many firms.
To the extent that differentiation remains in place over time, buyer loyalty may be created. Loyal customers
are very desirable because they are not price sensitive. In other words, buyer loyalty makes a customer unlikely
to switch to another firm’s products if that firm tries to steal the customer away through lower prices. Many
soda drinkers are fiercely loyal to Coca-Cola’s products. Coca-Cola’s headquarters are in Atlanta, and loyalty
to the firm is especially strong in Georgia and surrounding states. Pepsi and other brands have a hard time
convincing loyal Coca-Cola fans to buy their beverages, even when offering deep discounts. This helps keep
Coca-Cola’s profits high because the firm does not have to match any promotions that its rivals launch to keep
its customers.
Meanwhile, Pepsi also has attracted a large set of brand-loyal customers that Coca-Cola struggles to steal. This
enhances Pepsi’s profits. In contrast, store-brand sodas such as Sam’s Choice, which is sold at Walmart, seldom
attract loyalty. As a result, they must be offered at very low prices to move from store shelves into shopping
carts.
Chapter 6: Selecting Business-Level Strategies | 139
Figure 6.6: Firms following a
differentiation strategy must “watch” out
for counterfeit goods such as the faux
Rolexes shown here.
Beyond existing competitors, a differentiation strategy also creates benefits relative to potential new entrants.
Specifically, the brand loyalty that customers feel to a differentiated product makes it difficult for a new entrant
to lure these customers to adopt its product. A new soda brand, for example, would struggle to take customers
away from Coca-Cola or Pepsi. Thus, a differentiation strategy helps create barriers to entry that protect the
firm and its industry from new competition.
The big risk when using a differentiation strategy is that customers will not be willing to pay extra to obtain the
unique features that a firm is trying to build its strategy around. Department store Dillard’s stopped carrying
men’s sportswear made by Nautica because the seafaring theme of Nautica’s brand had lost much of its cache
among many men (Kapner, 2007). Because Nautica’s uniqueness had eroded, Dillard’s believed that space in its
stores that Nautica had been occupying could be better allocated to other brands.
In some cases, customers may simply prefer a cheaper alternative. For example, products that imitate the look
and feel of offerings from Ray-Ban, Gucci, and Patagonia are attractive to many value-conscious consumers.
Firms such as these must work hard at product development and marketing to ensure that enough customers
are willing to pay a premium for their goods rather than settling for knockoffs.
In other cases, customers desire the unique features that a firm offers,
but competitors are able to imitate the features well enough that they
are no longer unique. If this happens, customers have no reason to pay
a premium for the firm’s offerings. IBM experienced the pain of this
scenario when executives tried to follow a differentiation strategy in
the personal computer market. The strategy had worked for IBM in
other areas. Specifically, IBM had enjoyed a great deal of success in the
mainframe computer market by providing superior service and
charging customers a premium for their mainframes. A business owner
who relied on a mainframe to run her company could not afford to have
her mainframe out of operation for long. Meanwhile, few businesses
had the skills to fix their own mainframes. IBM’s message to customers
was that they would pay more for IBM’s products but that this was a
good investment because when a mainframe needed repairs, IBM
would provide faster and better service than its competitors could. The
customer would thus be open for business again very quickly after a
mainframe failure.
This positioning failed when IBM used it in the personal computer
market. Rivals such as Dell were able to offer service that was just as good as IBM’s while also charging lower
prices for personal computers than IBM charged. From a customer’s perspective, a person would be foolish to
pay more for an IBM personal computer since IBM did not offer anything unique. IBM steadily lost market share
as a result. IBM’s struggles led it to sell its personal computer business to Lenovo. The firm is still successful,
however, within the mainframe market where its offerings remain differentiated.
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Section Video
Differentiation Strategy [04:28]
The video for this lesson discusses differentiation strategies.
You can view this video here:
https://www.youtube.com/watch?v=NshI_qoaf7g&feature=emb_logo.
Key Takeaway
• Differentiation can be an effective business-level strategy to the extent that a firm offers unique
features that convince customers to pay a premium for their goods and services. As with other
business-level strategies, there are advantages and disadvantages in pursuing a differentiation
strategy.
Exercises
1. What are two industries in which a differentiation strategy would be difficult to implement?
2. What is an example of a differentiated business near your college or university?
3. Name three ways businesses that provide entertainment that might better differentiate their
services. How might they do this?
References
Kapner, S. (2007, November 1). Nautica brand losing ground. CNNMoney.
http://money.cnn.com/2007/10/31/news/companies/Kapner_Nautica.fortune/index.htm.
Chapter 6: Selecting Business-Level Strategies | 141
Ketchen, D. J., & Short, J. C. (2010). The franchise player: An interview with Don Larose. Journal of Applied
Management and Entrepreneurship, 15(4), 94–101.
Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. Free Press.
The Coca Cola Company. (2019). Form 10K. https://investors.coca-colacompany.com/filings-reports/annualfilings-
10-k.
Walmart. (2019). Earnings release.
https://s2.q4cdn.com/056532643/files/doc_financials/2019/Q4/Q4FY19-Earnings-Release-Final.pdf.
Image Credits
Figure 6.4: Tullis, B.W. – US Patent Office. “Patent drawing for Coleman Model 520 stove – No. 236098.” Public
Domain. Retrieved from https://en.wikipedia.org/wiki/G.I._pocket_stove#/media/
File:Patent_Drawing_for_Coleman_Model_520_Stove.jpg
Figure 6.5: Dystopos. “Express Oil Change.” CC BY-NC 2.0. Cropped. Retrieved from
https://flic.kr/p/8FYBk.
Figure 6.6: Nino, Gerald. “Counterfeit Rolex watches seized by US CBP.” Public Domain. Retrieved from
https://commons.wikimedia.org/wiki/File:Patent_Drawing_for_Coleman_Model_520_Stove.jpg.
Video Credits
Gregg Learning. (2018, June 13). Differentiation strategy [Video]. YouTube.
https://www.youtube.com/watch?v=NshI_qoaf7g&feature=emb_logo.
142 | Chapter 6: Selecting Business-Level Strategies
Figure 6.7: Redbox machines are available nationwide.
6.5 Focused Cost Leadership and Focused Differentiation
Companies that use a cost leadership strategy and those that use a differentiation strategy share one important
characteristic: both groups try to be attractive to customers in general. These efforts to appeal to broad
markets can be contrasted with strategies that involve targeting a relatively narrow niche of potential
customers. These latter strategies are known as focus strategies (Porter, 1980).
The Nature of the Focus Cost Leadership Strategy
Focused cost leadership is the first of two focus strategies.
A focused cost leadership strategy requires competing
based on price to target a narrow market (Table 6.6). A firm
that follows this strategy does not necessarily charge the
lowest prices in the industry. Instead, it charges low prices
relative to other firms that compete within the target
market. Redbox, for example, uses vending machines placed
outside grocery stores and other retail outlets to rent DVDs
of movies for $1. There are ways to view movies even
cheaper, such as through the flat-fee streaming video
subscriptions offered by Netflix. But among firms that rent
actual DVDs, Redbox offers unparalleled levels of low price
and high convenience.
Firms that compete based on price and target a narrow
market are following a focused cost leadership strategy.
Several examples of firms pursuing a focused cost leadership
strategy are illustrated below.
Table 6.6 Focused Cost Leadership
Example of Firms Pursuing a Focused Cost Leadership Strategy
Redbox rents DVDs and video games through vending machines for only $1.
Papa Murphy’s targets its inexpensive take-and-bake pizzas at value-conscious families. Because the pizzas are baked at
home rather than in the store, Papa Murphy’s is permitted to accept food stamps. This allows the firm to attract
customers that might not otherwise be able to afford a restaurant-quality pizza.
Claire’s nearly 3,000+ locations target young women with inexpensive jewelry, accessories, and ear piercings. The
strategy has worked: Claire’s has over three thousand locations and has stores in 95% of US shopping malls.
Providing indoor seating creates expenses for fast food restaurants. Checkers Drive In keeps its costs low by not offering
indoor seating. Checkers targets drive-thru customers and offers them big burgers at rock-bottom prices.
Another important point is that the nature of the narrow target market varies across firms that use a focused
cost leadership strategy. In some cases, the target market is defined by demographics. Claire’s, for example,
Chapter 6: Selecting Business-Level Strategies | 143
seeks to appeal to young women by selling inexpensive jewelry, accessories, and ear piercings. Claire’s use of
a focused cost leadership strategy has been very successful; the firm has more than three thousand locations
and has stores in 95% of US shopping malls.
In other cases, the target market is defined by the sales channel used to reach customers. Most pizza shops
offer sit-down service, delivery, or both. In contrast, Papa Murphy’s sells pizzas that customers cook at home.
Because these inexpensive pizzas are baked at home rather than in the store, the law allows Papa Murphy’s to
accept food stamps as payment. This allows Papa Murphy’s to attract customers that might not otherwise be
able to afford a prepared pizza. In contrast to most fast-food restaurants, Checkers Drive In is a drive-throughonly
operation. To serve customers quickly, each store has two drive-thru lanes: one on either side of the
building. Checkers saves money in a variety of ways by not offering indoor seating to its customers—Checkers’s
buildings are cheaper to construct, its utility costs are lower, and fewer employees are needed. These savings
allow the firm to offer large burgers at very low prices and still remain profitable.
The Nature of the Focused Differentiation Strategy
Focused differentiation is the second of the two focused strategies. A focused differentiation strategy requires
offering unique features that fulfill the demands of a narrow market (Table 6.7). As with a focused low-cost
strategy, narrow markets are defined in different ways in different settings. Some firms using a focused
differentiation strategy concentrate their efforts on a particular sales channel, such as selling over the internet
only. Others target particular demographic groups. One example is Breezes Resorts, a company that caters to
couples without children. The firm operates seven tropical resorts where vacationers are guaranteed that they
will not be annoyed by loud and disruptive children.
Firms that compete based on uniqueness and target a narrow market are following a focused differentiation
strategy. Several examples of firms pursuing a focused differentiation strategy are illustrated below.
Table 6.7 Focused Differentiation
Examples of Firms Pursuing a Focused Differentiation Strategy
Whole Foods Market focuses on selling natural and organic products. The supermarket’s reputation for high prices has
led to a wry nickname—”Whole Paycheck”—but a sizable number of consumers are willing to pay a premium in order to
feel better about the food they are buying. Amazon, a broad cost leader, owns Whole Foods.
At Build-A-Bear Workshop, customers enjoy an interactive process of designing and assembling teddy bears.
Build-A-Bear customers are willing to pay a premium price because they receive a unique, hands-on experience rather
than simply buying a stuffed toy.
You can buy a cinnamon roll cheaper elsewhere, but Cinnabon’s pricey pastries are so delicious that sugar-obsessed
snackers line up to buy them. Perhaps in a nod to Cinnabon’s strategy, the brand is owned by a parent company named
Focus Brands.
The dedication of Mercedes-Benz to cutting-edge technology, styling, and safety innovations has made the firm’s
vehicles prized by those who are wealthy enough to afford them.
While a differentiation strategy involves offering unique features that appeal to a variety of customers, the
need to satisfy the desires of a narrow market means that the pursuit of uniqueness is often taken to the
144 | Chapter 6: Selecting Business-Level Strategies
proverbial “next level” by firms using a focused differentiation strategy. Thus the unique features provided by
firms following a focused differentiation strategy are often specialized.
When it comes to uniqueness, few offerings can top Kopi Luwak coffee beans. High-quality coffee beans often
sell for $10 to $15 a pound. In contrast, Kopi Luwak coffee beans sell for hundreds of dollars per pound (Cat’s
Ass Coffee, n.d.). This price is driven by the rarity of the beans and their rather bizarre nature. As noted in an
article in the New York Times, these beans are found in the droppings of the civet, a nocturnal, furry, long-tailed
catlike animal that prowls Southeast Asia’s coffee-growing lands for the tastiest, ripest coffee cherries. The
civet eventually excretes the hard, indigestible innards of the fruit—essentially, incipient coffee beans—though
only after they have been fermented in the animal’s stomach acids and enzymes to produce a brew described
as smooth, chocolaty and devoid of any bitter aftertaste (Onishi, 2010).
Although many consumers consider Kopi Luwak to be disgusting, a relatively small group of coffee enthusiasts
has embraced the coffee, making it a profitable product. This illustrates the essence of a focused differentiation
strategy—effectively serving the specialized needs of a niche market can create great riches.
Larger niches are served by Whole Foods Market and Mercedes-Benz. Although most grocery stores devote
a section of their shelves to natural and organic products, Whole Foods Market works to sell such products
exclusively. For customers, the large selection of organic goods comes at a steep price. Indeed, the
supermarket’s reputation for high prices has led to a wry nickname—”Whole Paycheck”—but a sizable number
of consumers are willing to pay a premium to feel better about the food they buy.
Figure 6.8: Janis Joplin’s musical tribute to Mercedes-Benz underscores the allure of the brand.
The dedication of Mercedes-Benz to cutting-edge technology, styling, and safety innovations has made the
firm’s vehicles prized by those who are rich enough to afford them. This appeal has existed for many decades. In
1970, acid-rocker Janis Joplin recorded a song called “Mercedes Benz” that highlighted the automaker’s allure.
Chapter 6: Selecting Business-Level Strategies | 145
Since then Mercedes-Benz has used the song in several television commercials. Here is Joplin’s song “Mercedes
Benz:” https://youtu.be/-H7YULkiLIA
Developing a Focused Differentiation Strategy at Augustino LoPrinzi
Guitars and Ukuleles
Augustino LoPrinzi Guitars and Ukuleles in Clearwater, Florida, builds high-end custom
instruments. The founder of the company, Augustino LoPrinzi, has been a builder of custom guitars
for five decades. While a reasonably good mass-produced guitar can be purchased elsewhere for a
few hundred dollars, LoPrinzi’s handmade models start at $1,100, and some sell for more than
$10,000. The firm’s customers have included professional musicians such as Dan Fogelberg, Leo
Kottke, Herb Ohta (Ohta-San), Lyle Ritz, Andr s Segovia, and B. J. Thomas. Their instruments can be
found at http://www.augustinoloprinzi.com. We asked Augustino about his firm (Short, 2007).
Question:
Were there other entrepreneurial opportunities you considered before you began making guitars?
Augustino Loprinzi:
I originally thought of pursuing a career in commercial art, but I found my true love was in classical
guitar building. I was trained by my father to be a barber from a very young age, and after my term
in the service, I opened a barbershop.
Question:
What is the most expensive guitar you’ve ever sold?
Loprinzi:
$17,500.
Question:
How old were you when you started your first business in the guitar industry?
Loprinzi:
I was in my early twenties.
Question:
How did you get your break with more famous customers?
Loprinzi:
I think word of mouth had a lot to do with it.
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Question:
You have been active in Japan. Do the preferences of Japanese customers differ from those of
Americans?
Loprinzi:
Yes. The Japanese want only high-end instruments. Aesthetics are very important to the Japanese
along with high-quality materials and workmanship. The US market seems to care in general less
about ornamentation and more about quality workmanship, tone, and playability.
Question:
How do you stay ahead in your industry?
Loprinzi:
Always try to stay abreast on what the music industry is doing. We do this by reading several music
industry publications, talking with suppliers, and keeping an eye on the trends going on in other
countries because usually they come full circle. Also, for the past several years by following the
internet forums and such has been extremely beneficial.
Advantages and Disadvantages of the Focused Strategies
Each generic strategy offers advantages that firms can potentially leverage to enhance their success as well
as disadvantages that may undermine their success. In the case of focus differentiation, one advantage is that
very high prices can be charged. Indeed, these firms often price their wares far above what is charged by firms
following a differentiation strategy (Table 6.8). Recreational Equipment Inc. (REI), for example, commands a
hefty premium for its outdoor sporting goods and clothes that feature name brands, such as The North Face
and Marmot. Nat Nast’s focused differentiation strategy centers on selling men’s silk camp shirts with a 1950s
retro flair. These shirts retail for more than $100. Focused cost leaders such as Checkers Drive In do not charge
high prices like REI and Nat Nast do, but their low cost structures enable them to enjoy healthy profit margins.
A second advantage of using a focus strategy is that firms often develop tremendous expertise about the goods
and services that they offer. In markets such as camping equipment where product knowledge is important,
rivals and new entrants may find it difficult to compete with firms following a focus strategy.
Chapter 6: Selecting Business-Level Strategies | 147
Using one of the focus strategies offers firms important advantages and disadvantages. Below we illustrate a few
examples in relation to an industry where many different types of focus exist—sporting goods.
Table 6.8 Executing a Focus Strategy
Advantages
High prices can be charged. Recreational Equipment Incorporated (REI), for example, commands a premium for their
outdoor sporting goods and clothes that feature name brands such as The North Face and Marmot.
Firms using a focused strategy often develop great expertise about the good or service being sold. Thus, customers may
gravitate toward a specialty camping shop in order to learn how to best take advantage of limited vacation time.
Disadvantages
Limited demands exist for specialized goods and services, so every potential sale counts.
The area of focus may be taken over by others or even disappear over time. Many gun stores went out of business after
large retailers such as Walmart started carrying an array of firearms.
Other firms may provide an even narrower focus. An outdoor sporting goods store, for example, might lose business to a
store that focuses solely on ski apparel because the latter can provide more guidance about how skiers can stay warm
and avoid broken bones.
In terms of disadvantages, the limited demand available within a niche can cause problems. First, a firm could
find its growth ambitions stymied. Once its target market is being well served, expansion to other markets
might be the only way to expand, and this often requires developing a new set of skills. Also, the niche could
disappear or be taken over by larger competitors. Many gun stores have struggled and even gone out of
business since Walmart and sporting goods stores such as Academy Sports and Bass Pro Shops have started
carrying an impressive array of firearms.
Figure 6.9: In contrast to tacky Hawaiian souvenirs, the
quality of Kamaka ukuleles makes them a favorite of ukulele
phenom Jake Shimabukuro and others who are willing to pay
$1,000 or more for a high-end instrument.
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Finally, damaging attacks may come not only from larger firms but also from smaller ones that adopt an even
narrower focus. A sporting goods store that sells camping, hiking, kayaking, and skiing goods, for example,
might lose business to a store that focuses solely on ski apparel because the latter can provide more guidance
about how skiers can stay warm and avoid broken bones.
Strategy at the Movies
Zoolander
One man’s trash is another man’s fashion? That’s what fashion mogul Jacobim Mugatu was counting
on in the comedy Zoolander. In his continued effort to be the most cutting-edge designer in the
fashion industry, Mugatu developed a new line of clothing inspired “by the streetwalkers and hobos
that surround us.” His new product line, Derelicte, characterized by dresses made of burlap and
parking cones and pants made of garbage bags and tin cans, was developed for customers who
valued the uniqueness of his…eclectic design. Emphasizing unique products is typical of a company
following a differentiation strategy; however, Mugatu targeted a very specific set of customers. Few
people would probably be enticed to wear garbage for the sake of fashion. By catering to a niche
target market, Mugatu went from a simple differentiation strategy to a focused differentiation.
Mugatu’s Derelicte campaign in Zoolander is one illustration of how a particular firm might develop
a focused differentiation strategy.
Section Video
Focused Strategy [03:47]
The video for this lesson explains that focused strategies concentrate on a narrow segment of the
total market.
You can view this video here:
https://www.youtube.com/watch?v=cSMD6MoNeBo&feature=emb_logo.
Chapter 6: Selecting Business-Level Strategies | 149
Key Takeaway
• Focus strategies can be effective business-level strategies to the extent that a firm can match
their goods and services to specific niche markets. As with the other business-level strategies,
there are advantages and disadvantages to focus strategies.
Exercises
1. What are three different demographics that firms might target to establish a focus strategy?
2. What is an example of a business that you think is focused in too narrow a fashion to be
successful? How might it change to be more successful?
References
Cat’s Ass Coffee. http://www.catsasscoffee.com.
Onishi, N. (2010, April). From dung to coffee brew with no aftertaste. New York Times.
http://www.nytimes.com/2010/04/18/world/asia/18civetcoffee.html?pagewanted=all.
Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. Free Press.
Short, J. C. (2007). A touch of the masters’ hands: An interview with Augustino and Donna Loprinzi. Journal of
Applied Management and Entrepreneurship, 12, 103–109.
Image Credits
Figure 6.7: Everett, Valerie. “A big mac and saving private ryan please.” CC BY-SA 2.0. Retrieved from
https://flic.kr/p/4ozURH.
Figure 6.8: Navigator84. “Mercedes-Benz E-Class V212 facelift photographed in Guangzhou, Guangdong
province, China.” CC BY-SA 4.0. Retrieved from https://commons.wikimedia.org/w/
index.php?curid=84685638.
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Figure 6.9: Surfsupusa. “Jake Shimabukuro performing in Joshua Tree, California in 2007.” Public Domain.
Retrieved from https://upload.wikimedia.org/wikipedia/commons/f/fc/Jake_Shimabukuro.jpg.
Music Credits
Columbia Records. (1971). Mercedes Benz – Janis Joplin. All Rights Reserved. Provided to YouTube by Sony
Music Entertainment. https://youtu.be/-H7YULkiLIA.
Video Credits
Gregg Learning. (2018, June 14). Focused strategy [Video]. YouTube.
https://www.youtube.com/watch?v=cSMD6MoNeBo&feature=emb_logo.
Chapter 6: Selecting Business-Level Strategies | 151
6.6 Best-Cost Strategy
Firms that charge relatively low prices and offer substantial differentiation are following a best-cost strategy. This
strategy is difficult to execute, but it is also potentially very rewarding. Several examples of firms pursuing a bestcost
strategy are illustrated below.
Table 6.9 Best-Cost Strategy
Examples of Firms Pursuing a Best-Cost Strategy
Southwest Airlines provides low cost flights to vacation destinations such as San Antonio, San Diego, and Orlando. While
many airlines make passengers feel like cattle loaded onto a truck, Southwest creates fun by, for example, getting
children excited about visiting Sea World when they see this custom Shamu plane design.
Target offers extremely competitive prices, but the firm also differentiates itself from other discount retailers by
carrying products from trendy designers such as Michael Graves, Isaac Mizrahi, Fiorruci, and Universal Thread.
Chipotle Mexican Grill relies on organic ingredients to create very tasty burritos that are sold at prices comparable to
those of fast-food restaurants. When noon arrives, many hungry people prefer to spend their lunch dollars on a
top-shelf burrito rather than a greasy burger combo meal.
Pabst Blue Ribbon is offered at an extremely low price and its taste (or lack thereof) is comparable to other inexpensive
beers. PBR enjoys brand loyalty, however, due to its high name recognition. The frequent appearance of PBR’s
well-known logo on signs, t-shirts, and other merchandise has helped make PBR an enduring favorite among beer
consumers with light wallets.
The Challenge of Following a Best-Cost Strategy
Some executives are not content to have their firms compete based on offering low prices or unique features.
They want it all! Firms that charge relatively low prices and offer substantial differentiation are following a
best-cost strategy (Table 6.9). This strategy is difficult to execute in part because creating unique features and
communicating to customers why these features are useful generally raises a firm’s costs of doing business.
Product development and advertising can both be quite expensive. However, firms that manage to implement
an effective best-cost strategy are often very successful.
Target appears to be following a best-cost strategy. The firm charges prices that are relatively low among
retailers while at the same time attracting trend-conscious consumers by carrying products from famous
designers, such as Michael Graves, Isaac Mizrahi, Fiorucci, Universal Thread, and others. This is a lucrative
position for Target, but the position is under attack from all sides. Cost leader Walmart charges lower prices
than Target. This makes Walmart a constant threat to steal the thriftiest of Target’s customers. Focus
differentiators such as Anthropologie that specialize in trendy clothing and home furnishings can take business
from Target in those areas. Deep discounters such as T. J. Maxx and Marshalls offer another viable alternative
to shoppers because they offer designer clothes and furnishings at closeout prices. A firm such as Target that
uses a best-cost strategy also opens itself up to a wider variety of potentially lethal rivals.
152 | Chapter 6: Selecting Business-Level Strategies
Figure 6.10: The success recent college graduates have as
entrepreneurs have may inspire other recent graduates
to become entrepreneurs.
Developing a Best-Cost Strategy at Plain Ivey Jane
According to government statistics, women are
60% less likely than men to become
entrepreneurs. Meanwhile, succeeding within
the specialty fashion retailing market is
notoriously difficult. These trends do not
worry Sarah Reeves, a young entrepreneur and
2007 graduate of Auburn University who is
rapidly becoming a key player within the
Austin, Texas, retail scene by offering high-end
fashion at low prices.
Sarah describes Plain Ivey Jane as “the go-to
place for women who want to elevate their
wardrobes. We offer high end designer names
at a discount, and the new overstocked apparel is handpicked from over 70 different brands to offer
exactly what Austin needs at a price every girl can afford. To pair with your fabulous new wardrobe,
Plain Ivey Jane carries accessories from undiscovered local artisans.” We asked Reeves to discuss
her firm (Ketchen & Short).
Question:
Can you tell us a little about your Plain Ivey Jane concept?
Sarah Reeves, Owner:
Plain Ivey Jane sells overstock from Anthropologie, Urban Outfitters, Bloomingdales, and other
high-end and small designers. Although I buy from the same designers as the big and famous
retailers, our dresses and accessories are sold at a fraction of their prices.
Question:
What differentiates your boutique from competitors?
Reeves:
I’m one of the lowest-priced retailers in the shopping district that people in Austin call the Second
Street area. My niche in the fashion retailing business is that my merchandise is overstock from
great brands. There’s maybe one other business in Austin that sells overstock. What makes my
concept different is that it has the feel of a high-end retail store versus a basement feel of the
typical discount retailer.
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Question:
Do have a lot of regular customers?
Reeves:
Yes. Once people find out what I offer, they’re in here all the time. I see the same group of people
every few months, but getting in new faces is the challenge. I think a lot of people walk by and
assume that our clothes are expensive, but nothing could be further from the truth.
Question:
Were you fearful of starting your own business so young?
Reeves:
No, I figured this was a great time since I had nothing to lose. I thought getting it out of my system
now was a good idea, and it was a good time since I was able to get a great deal on my lease. With
the downturn in the economy, the time was right for my lower-priced strategy.
Question:
What would you say is the biggest key to success for a small business?
Reeves:
Flexibility. Rolling with the punches and definitely the ability to follow up with people. I thought
that people who owned their own business must know what they are doing, but many people don’t.
At this point, I prefer to do everything myself. At least I can blame myself when things go wrong.
Another key is networking with other small-business owners. A lot of the other boutique owners
nearby have become close friends. I learn what works for them and what might possibly apply to
my concept.
Many firms would like to use a best cost strategy but struggle to meet the strategy’s dual requirements of charging
low prices and providing differentiation features. One way to help make the best cost strategy a reality is to use a
business model that slashes fixed costs. Amazon.com, for example, can charge low prices in part because it does
not have to absorb the overhead involved in operating stores. Similarly, some talented chefs are pursuing a best
cost strategy by operating food trucks and thereby avoiding the overhead required to run a restaurant such as
rent and utilities. Several examples are illustrated below.
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Table 6.10 Driving toward a Best-Cost Strategy
Driving toward a Best-Cost Strategy by Reducing Overhead
For about the same price as a Subway or Jimmy John’s sandwich, Counter Culture in Austin, Texas, provides vegan
offerings such as their Garbanzo “Tuna” sandwich.
PBJ’s offer unique sandwiches with organic peanut butter at the heart of many of their creations. The traditional PB and J
is a staple nationwide, but customers will travel far to get the “Hot Hood” with Challah bread, black cherry jam, jalape o,
applewood-smoked bacon, and PBJ’s peanut butter for only $5.50.
Owners Kahala and Kat founded Ninja Plate Lunch in Portland, Oregon, to offer large portions of delectable Hawaiian
foods such as pulled pork for only around $5.
In the smash hit graphic novel Tales of Garc n: The Franchise Players, the Tapas Taxi takes the concept of a cheap taxi
ride to a new level by also offering passengers a variety of “tapas.” These Spanish snacks are top shelf, of course!
Pursuing the Best-Cost Strategy through a Low-Overhead Business Model
One route toward a best-cost strategy is for a firm to adopt a business model whose fixed costs and overhead
are very low relative to the costs that competitors are absorbing (Table 6.10). The internet has helped make this
possible for some firms. Amazon, for example, can charge low prices in part because it does not have to endure
the expenses that firms such as Walmart and Target do in operating many hundreds of stores. Meanwhile,
Amazon offers an unmatched variety of goods. This combination has made Amazon the unquestioned leader in
e-commerce.
Another example is Netflix. This firm is able to offer customers a far greater variety of movies and charge lower
prices than video rental stores by conducting all its business over the internet and via mail. Netflix’s best-cost
strategy has been so successful that $10,000 invested in the firm’s stock in May 2006 was worth more than
$1,050,000 in May 2020, fourteen years later (Forbes, 2020).
Moving toward a best-cost strategy by dramatically reducing expenses is also possible for firms that cannot
rely on the internet as a sales channel. Owning a restaurant requires significant overhead costs, such as rent
and utilities. Some talented chefs are escaping these costs by taking their food to the streets. Food trucks that
serve high-end specialty dishes at very economical prices are becoming a popular trend in cities around the
country. In Portland, Oregon, a food truck called the Viking Soul Food offers Norwegian food at low prices.
Another Portland food truck is The Good and Evil Wrap Company, whose unique and inexpensive wraps center
on specialty foods. Beyond keeping costs low, the mobility of food trucks offers important advantages over a
traditional restaurant. Some food trucks set up outside big-city nightclubs, for example, to sell party goers a
late-night snack before they head home.
Chapter 6: Selecting Business-Level Strategies | 155
Figure 6.11: Hey Cupcake! in Austin, Texas, is a low-overhead bakery that has become a delicious
success.
A best cost strategy offers some important advantages and disadvantages.
Table 6.11 Executing a Best Cost Strategy
Advantages Disadvantages
Best cost can attract both the cost-conscientious
buyer and one looking for better quality than the low
cost leader.
Trying to achieve best cost can result in not having low enough
prices to attract the cost-conscious buyer.
Best cost can also result in the best value for the
buyer.
Neither achieving a low enough price nor sufficient
differentiation can result in accomplishing neither, and getting
“stuck in the middle.”
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Section Video
Best-Cost Provider Strategy [03:29]
The video for this lesson discusses companies that use best-cost strategies.
You can view this video here:
https://www.youtube.com/watch?v=zOaMXfFHzwQ&feature=emb_logo.
Key Takeaway
• A best-cost strategy can be an effective business-level strategy to the extent that a firm offers
differentiated goods and services at relatively low prices.
Exercises
1. What is an example of an industry in which you think a best-cost strategy could be successful?
How would you differentiate a company to achieve success in this industry?
2. What is an example of a firm following a best-cost strategy near your college or university?
References
Ketchen, D. J., & Short, J. C. Forthcoming. The discount diva: An interview with Sarah Reeves. Journal of Applied
Management and Entrepreneurship.
Forbes. (n.d.). Netflix (NFLX). [Infographic]. https://www.forbes.com/companies/netflix/#bf246018541f.
Chapter 6: Selecting Business-Level Strategies | 157
Image Credits
Figure 6.10: Mentadgt. “Two Women Looking and Pointing at Macbook Laptop.” Pexels license. Retrieved from
https://www.pexels.com/photo/two-women-looking-and-pointing-at-macbook-laptop-1569076.
Figure 6.11: Bench, Evan. “Hey Cupcake!” CC BY 2.0. Retrieved from https://flic.kr/p/5W7uPu.
Video Credits
Gregg Learning. (2018, June 15). Best-Cost provider strategy [Video]. YouTube.
https://www.youtube.com/watch?v=zOaMXfFHzwQ&feature=emb_logo.
6.7 Stuck in the Middle
A firm is said to be stuck in the middle if it does not offer features that are unique enough to convince customers
to buy its offerings and its prices are too high to effectively compete based on price. Firms that are stuck in the
middle generally perform poorly because they lack a clear market or competitive pricing. Several examples of
such firms are illustrated below.
Table 6.12 Stuck in the Middle
Examples of Firms that are Stuck in the Middle
Arby’s signature roast beef sandwiches are neither cheaper than other fast food nor are they standouts in taste.
Sears and their famous catalog once dominated US retailing, but the failure to cultivate customers among newer
generations and prices that are higher than those of rivals have severely wounded the company. Sears filed for
bankruptcy in 2018.
Electronics retailer Circuit City found itself squeezed by the superior service offered by rival Best Buy and the cheaper
prices charged on electronics by Walmart and Target. Headquartered in Richmond, Virginia, the firm went bankrupt in
2009 after sixty years in business.
Kmart’s “Blue Light Specials” that alert shoppers to a deeply discounted item reflect the firm’s long-running effort to be
a cost leader. But emerging on the losing end of a price war with Walmart sent the firm into bankruptcy. Struggling to
survive, it has closed most of its stores.
Stuck in the Middle: Neither Inexpensive nor Differentiated
Some firms fail to effectively pursue one of the generic strategies. A firm is said to be stuck in the middle if it
does not offer features that are unique enough to convince customers to buy its offerings, and its prices are too
high to compete effectively based on price (Table 6.11). Arby’s appears to be a good example. Arby’s signature
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Figure 6.12: This illustration from 1887 captures the lesson of
Aesop’s fable “The Miller, His Son, and Their Ass”—a lesson
that executives need to follow.
roast beef sandwiches are neither cheaper than other fast-food sandwiches nor standouts in taste. Firms that
are stuck in the middle generally perform poorly because they lack a clear market or competitive pricing.
Doing Everything Means Doing Nothing Well
Michael Porter has noted that strategy is as much about executives deciding what a firm is not going to do as
it is about deciding what the firm is going to do (Porter, 1996). In other words, a firm’s business-level strategy
should not involve trying to serve the varied needs of different segments of customers in an industry. No firm
could possibly pull this off.
The fable, The Miller, His Son, and Their Ass, told by the
ancient Greek storyteller Aesop helps illustrate this
idea. In this tale, a miller and his son were driving their
ass (donkey) to market for sale. They soon encountered
a group of girls who mocked them for walking instead
of riding. The father then told his son to ride the
animal. Not long after, father and son overheard a man
claim that young people had no respect for the elderly.
On hearing this opinion, the father told the boy to
dismount the animal and he began to ride. They
progressed a short distance farther and met a
company of women and children. Several of the women
suggested that it was both ridiculous and lazy for the
father to ride while the young son was forced to walk
alone; once again the two changed positions. Another
bystander suggested that they could not believe that
the man was the owner of the beast, judging from the
way it was weighed down. In fact, it would make more
sense for the man and his son to carry the ass. On
hearing this, the father and his son tied the animal’s legs together and carried it on a pole. As they crossed a
bridge near town, the townspeople began to gather and laugh at the unorthodox sight. The noise and the chaos
frightened the beast, leading it to thrash around until it tumbled into the river. With tongue in cheek, we note
that the moral of the story is that if you try to please everyone, you may lose your ass (Short & Ketchen, 2005).
Getting Outmaneuvered by Competitors
In many cases, firms become stuck in the middle not because executives fail to arrive at a well-defined strategy
but because firms are simply outmaneuvered by their rivals. After six decades as an electronics retailer, Circuit
City went out of business in 2009. The firm had simply lost its appeal to customers. Rival electronics retailer
Chapter 6: Selecting Business-Level Strategies | 159
Best Buy offered comparable prices to Circuit City’s prices, but the former offered much better customer
service. Meanwhile, the service offered by discount retailers such as Walmart and Target on electronics was no
better than Circuit City’s, but their prices were better.
The results were predictable—customers who made electronics purchases based on the service they received
went to Best Buy, and value-driven buyers patronized Walmart and Target. Circuit City’s demise was probably
inevitable because it lacked a competitive advantage within the electronics business. Although Target was on
the winning end of this battle, Target executives need to worry that their firm could become stuck in the middle
between Walmart’s better prices on one side and the trendiness of specialty shops on the other.
IBM’s personal computer business offers another example. IBM tried to position its personal computers via
a differentiation strategy. In particular, IBM’s personal computers were offered at high prices, and the firm
promised to offer excellent service to customers in return. Unfortunately for IBM, rivals such as Dell were able
to provide equal levels of service while selling computers at lower prices. Nothing made IBM’s computers stand
out from the crowd, and the firm eventually exited the business.
Figure 6.13: Netflix and Redbox have left video rental stores such as Movie Gallery and Blockbuster stuck
in the middle. Blockbuster filed for bankruptcy in late 2010.
At its peak in the mid-2000’s, Blockbuster operated approximately 9,000 video rental stores. By 2010, the
firm filed for bankruptcy. This rapid demise can be traced to the firm becoming outmaneuvered by Netflix.
When Netflix began offering inexpensive DVD rentals through the mail, customers defected in droves from
Blockbuster and other video rental stores such as Movie Gallery. Netflix customers were delighted by the
firm’s low prices, vast selection, the convenience of not having to visit a store to select and return videos, and
were among the first to transition to streaming movies. The low price strategy of RedBox also hurt the firm.
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Blockbuster was stuck in the middle—its prices were higher than those of Redbox and Netflix, and Netflix’s
service was superior. Once individuals lacked a compelling reason to be Blockbuster customers, the firm’s fate
was sealed. As of 2020 Blockbuster operated one store!
Key Takeaway
• When executing a business-level strategy, a firm must not become stuck in the middle between
viable generic business-level strategies by neither offering unique features nor competitive
pricing.
Exercises
1. What is an example of a firm that you would consider to be “stuck in the middle”? What would
your advice be to the executives in charge of this firm?
2. Research a company that has gone bankrupt or otherwise stopped operations in the past decade
because their strategy was “stuck in the middle” of otherwise viable generic business-level
strategies. Could its demise have been prevented?
References
Porter, M. E. (1996). What is strategy? Harvard Business Review, reprint 96608.
Short, J. C., & Ketchen, D. J. (2005). Using classic literature to teach timeless truths: An illustration using
Aesop’s fables to teach strategic management. Journal of Management Education, 29(6), 816–832.
Image Credits
Figure 6.12: Crane, Walter. “Illustration for ‘The Man That Pleased None.'” Public Domain. Retrieved from
https://upload.wikimedia.org/wikipedia/commons/a/a5/Can%27t_please_everyone2.jpg.
Figure 6.13: Stu pendousmat. “A Blockbuster location in Moncton.” CC BY-SA 3.0. Retrieved from
https://upload.wikimedia.org/wikipedia/commons/3/35/BlockbusterMoncton.JPG.
Chapter 6: Selecting Business-Level Strategies | 161
6.8 Conclusion
This chapter explains generic business-level strategies that executives select to keep their firms competitive.
Executives must select their firm’s source of competitive advantage by choosing to compete based on low-cost
versus more expensive features that differentiate their firm from competitors. In addition, targeting either a
narrow or broad market helps firms further understand their customer base. Based on these choices, firms
will follow broad cost leadership, broad differentiation, focused cost leadership, or focused differentiation
strategies. Another potentially viable business strategy, best cost, exists when firms offer relatively low prices
while still managing to differentiate their goods or services on some important value-added aspects. All firms
pursuing a best cost strategy can fall victim to being “stuck in the middle” by not offering unique features or
competitive prices.
Exercises
1. Divide your class into four or eight groups, depending on the size of the class. Each group should
select a different industry. Find examples of each generic business-level strategy for your
industry. Discuss which strategy seems to be the most successful in your selected industry.
2. This chapter discussed Target and other retailers. If you were assigned to turn around a
struggling retailer such as Kmart, what actions would you take to revive the company?
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Остання зміна: пʼятниця 22 жовтня 2021 08:43 AM