Must be 250 words or more. Everything must be in own words. Must have two or more references. Please make sure to have the answer well thought out.

one of the references: Parnell, J.A. (2008). Strategic management: Theory and practice (3rd ed). Cincinnati, OH: Cengage

Business Unit
Strategies

Chapter Outline
7-1 Porter’s Generic Strategies

7-1a Low-Cost (Cost Leadership) Strategy

7-1b Focus–Low-Cost Strategy

7-1c Differentiation Strategy (No Focus)

7-1d Focus-Differentiation Strategy

7-1e Low-Cost–Differentiation Strategy

7-1f Focus–Low-Cost/Differentiation Strategy

7-1g Multiple Strategies

7-2 Miles and Snow’s Strategy Framework

7-3 Business Size, Strategy, and Performance

7-4 Assessing Strategies

7-5 Global Concerns

7-6 Summary

Key Terms

Review Questions and Exercises

Practice Quiz

Notes

Reading 7-1

7

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A
fter a fi rm’s top managers have settled on a corporate-level strategy,
their focus then shifts to how the fi rm’s business or businesses should
compete. Whereas the corporate strategy concerns the basic thrust of
the fi rm—where top managers would like to lead the fi rm—the busi-

ness or competitive strategy addresses the competitive aspect—who the business
should serve, what needs should be satisfi ed, and how a business should develop
core competencies and be positioned to satisfy customers’ needs.

Another way of addressing the task of formulating a business strategy is to
consider whether a business should concentrate its efforts on exploiting current
opportunities, exploring new ones, or attempting to balance the two. Exploitation
generates returns in the short term; exploration can create forms of sustainable
competitive advantage for the long term. The business strategy developed for an
organization seeks, among other things, to resolve this challenge.1

A business unit is an organizational entity with its own mission, set of competi-
tors, and industry. A single fi rm that operates within only one industry is also
considered a business unit. Strategic managers craft competitive strategies for
each business unit to attain and sustain competitive advantage, a state whereby its
successful strategies cannot be easily duplicated by competitors.2 In most indus-
tries, different competitive approaches can be successful, depending on the busi-
ness unit’s resources

Each business competes with a unique competitive strategy. In the interest
of simplicity, however, it is useful to categorize different strategies into a lim-
ited number of generic strategies based on their similarities. Generic strategies
emphasize the commonalities among different business strategies, not their
differences. Businesses adopting the same generic strategy comprise what is
commonly referred to as a strategic group.3 In the airline industry, for exam-
ple, one strategic group may comprise carriers such as Southwest Airlines and
AirTran that offer low fares and no frills on a limited number of domestic routes,
thereby maintaining their low-cost structures (see Figure 7-1). A second strategic
group may comprise many traditional carriers such as Continental, United, and
American that serve both domestic and international routes and offer extra ser-
vices such as meals and movies on extended fl ights.

Because industry defi nitions and strategy assessments are not always clear,
identifying strategic groups within an industry is often diffi cult. Even when the
industry defi nition is clear, an industry’s business units may be categorized into

F I G U R E S t r a t e g i c G ro u p s i n t h e A i r l i n e I n d u s t r y7-1

Business Unit

An organizational entity
with its own unique mis-
sion, set of competitors,

and industry.

Generic Strategies

Broad competitive
Strategies that can be

adopted by business
units to guide their

organizations.

Strategic Group

A select group of direct
competitors who have

similar strategic profi les.

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Business Unit Strategies 151

any number of strategic groups depending on the level of specifi city desired. One
or two competitors may also seem to be functioning between groups and thus be
diffi cult to classify. For these reasons, the concept of strategic groups can be used
as a means of understanding and illustrating competition within an industry, but
the limitations of the approach should always be considered.

The challenging task of formulating and implementing a generic strategy
is based on both internal and external factors. Because generic strategies by
nature are overly simplistic, selecting generic approach is only the fi rst step in
formulating a business strategy.4 It is also necessary to fi ne-tune the strategy and
accentuate the organization’s unique set of resource strengths.5 Two generic
strategy frameworks—one developed by Porter and another by Miles and
Snow—can serve as good starting points for developing business strategies.

7-1 Porter’s Generic Strategies
Michael Porter developed the most commonly cited generic strategy framework.6
According to Porter’s typology, a business unit must address two basic competi-
tive concerns. First, managers must determine whether the business unit should
focus its efforts on an identifi able subset of the industry in which it operates or
seek to serve the entire market as a whole. For example, specialty clothing stores
in shopping malls adopt the focus concept and concentrate their efforts on lim-
ited product lines primarily intended for a small market niche. In contrast, most
chain grocery stores seek to serve the mass market—or at least most of it—by
selecting an array of products and services that appeal to the general public as a
whole. The smaller the business, the more desirable a focus strategy tends to be,
although this is not always the case.

Second, managers must determine whether the business unit should compete
primarily by minimizing its costs relative to those of its competitors (i.e., a low-
cost strategy) or by seeking to offer unique or unusual products and services (i.e.,
a differentiation strategy). Porter views these two alternatives as mutually exclu-
sive because differentiation efforts tend to erode a low-cost structure by raising
production, promotional, and other expenses. In fact, Porter labeled business
units attempting to emphasize both cost leadership and differentiation simulta-
neously as “stuck in the middle.”7 This is not necessarily the case, however, and
the low-cost–differentiation strategy is a viable alternative for some businesses.
Combining the two strategies is diffi cult, but businesses able to do so can per-
form exceptionally well.

Depending on the way strategic managers in a business unit address the fi rst (i.e.,
focus or not) and second (low-cost, differentiation, or low-cost–differentiation)
questions, six confi gurations are possible. A seventh approach—multiple strategies—
involves the simultaneous deployment of more than one of the six confi gurations
(see Table 7-1). The low-cost and differentiation strategies with and without focus
comprise those in Porter’s original framework.

7-1a Low-Cost (Cost Leadership) Strategy
Businesses that compete with a low-cost strategy produce basic, no-frills products
and services for a mass market of price-sensitive customers. Because they attempt
to satisfy most or all of the market, these businesses tend to be large and estab-
lished. Low-cost businesses often succeed by building market share through low
prices, although some charge prices comparable to rivals and enjoy a greater
margin. Because customers generally are willing to pay only low to average prices

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TA B L E G e n e r i c S t r a t e g i e s B a s e d o n Po r t e r ’ s Ty p o l o g y7-1

Emphasis
on Entire
Market
or Niche

Emphasis
on Low
Costs

Emphasis on
Differentiation

Emphasis on
Low Costs and
Differentiation

Emphasis
on Various
Factors
Depending
on Market

Entire
Market

Low-Cost
Strategy

Differentiation
Strategy

Low-Cost–
Differentiation
Strategy

Multiple
Strategies

Niche Focus–Low-
Cost Strat-
egy

Focus-
Differentiation
Strategy

Focus–Low-Cost/
Differentiation
Strategy

for “basic” products or services, it is essential that businesses using this strategy
keep their overall costs as low as possible. Effi ciency is a key to such businesses, as
has been demonstrated by mega-retailer Wal-Mart in recent years.

Low-cost businesses tend to emphasize a low initial investment and low oper-
ating costs. Such organizations tend to purchase from suppliers who offer the
lowest prices within a basic quality standard. Research and development efforts
are directed at improving operational effi ciency, and attempts are made to
enhance logistical and distribution effi ciencies. Such businesses often but not
always deemphasize the development of new and improved products or services
that might raise costs, and advertising and promotional expenditures will be min-
imized (see Strategy at Work 7-1).

S T R A T E G Y A T W O R K 7 – 1

The Low-Cost Strategy at Kola Real

Coca-Cola and PepsiCo enjoy substantial profi t margins
on their soft drinks in Mexico’s $15 billion market, where
the two have waged intense battles for market share
during the past decade. Although Coke usually came
out on top, the two collectively controlled sales and dis-
tribution in almost all of the country’s major markets. In
2003, Coke had more than 70 percent of Mexican sales,
and Pepsi had 21 percent. Consumers in Mexico drink
more Coke per capita than those in any other nation.

In the early 2000s, however, both well-known colas
have been challenged by an unlikely upstart from Peru
known as Kola Real (pronounced “ray-’al”). Launched
in Mexico in 2001, Kola Real captured 4 percent of the
Mexican market in its fi rst two years.

Bottled by the Ananos family from Peru, Kola Real
lacks all of the frills and endorsements associated
with Coke and Pepsi. The strategy is simple: Eliminate
all possible costs and offer large sizes at low prices.
Whereas Coke and Pepsi spend nearly 20 percent of

revenues on concentrates, the Ananos family makes its
own. Whereas Coke and Pepsi spend millions on pro-
motion and manage their own fl eets of attractive trucks,
the Ananos family hires third parties for deliveries—
even individuals with dented pickup trucks—and relies
primarily on word-of-mouth advertising.

Central to Kola Real’s success is the fact that the
majority of Mexican cola drinkers are relatively poor
and consider price to be a major factor in their pur-
chase decisions. In Brazil, so-called B-brands (i.e., low-
cost generic or store brands) now account for almost
one-third of the country’s cola sales. Fearing this could
happen in Mexico, Coke and Pepsi have fought back
with price cuts of their own, although they will not be
able to challenge Kola Real’s low-cost position on a
large-scale basis.

Source: Adapted from D. Luhnow and C. Terhune, “A Low-Budget
Cola Shakes Up Markets South of the Border,” Wall Street Journal,
27 October 2003, A1, A18.

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Business Unit Strategies 153

A cost leader may be more likely than other businesses to outsource a number
of its production activities if costs are reduced as a result, even if modest amounts
of control over quality are lost in the process. In addition, the most effi cient
means of distribution is sought, even if it is not the fastest or easiest to manage. It
is worth noting that successful low-cost businesses do not emphasize cost minimi-
zation to the degree that quality and service decline excessively. In other words,
cost leadership taken to an extreme can result in the production of “cheap”
goods and services that nobody is willing to purchase.

Low-cost leaders depend on unique capabilities not available to others in
the industry such as access to scarce raw materials, large market share, or a
high degree of capitalization.8 Manufacturers that employ a low-cost strategy,
however, are vulnerable to intense price competition that drives down profi t
margins and limits their ability to improve outputs, to augment their products
with superior services, or to spend more on advertising and promotion.9 The
prospect of being caught in price wars keeps many manufacturers from adopt-
ing the low-cost strategy, although it can affect other businesses as well. Other
low-cost leaders have bought their suppliers to control quality and distribution.
Price cutting in the airline industry led to the demise of several upstarts even
before the events of 9/11, and made it even more diffi cult to raise fares shortly
thereafter.10

Success with the low-cost strategy can be short lived, however. Low-cost air-
line AirTran, for example, boasted a 2003 profi t of $101 million while Delta
squabbled with its pilots throughout the year in an effort to reduce costs. Delta
dominates Atlanta where AirTran also has a hub, but has had diffi culty cutting
costs. In 2004, however, Delta fi nally made headway and began cutting many of
its fares, some by as much as 50 percent. By 2005, AirTran, along with other low-
cost airlines, began to feel the squeeze as major airlines such as Delta became
more price competitive.11

Imitation by competitors can also be a concern when the basis for low-cost
leadership is not proprietary and can be easily duplicated. Lego discovered this
fact when Canadian upstart Mega Blocks began to steal market share by making
colorful blocks that not only look like Legos, but also snap into them and sell for
a lower price. Lego responded by launching the Quatro line of oversized blocks
aimed at the preschool market and carrying lower prices than traditional Lego
playsets.12

Low-cost businesses are also particularly vulnerable to technological obsoles-
cence. Manufacturers that emphasize technological stability and do not respond
to new product and market opportunities may eventually fi nd that their products
have become obsolete.

7-1b Focus–Low-Cost Strategy
The focus–low-cost strategy emphasizes low overall costs while serving a narrow
segment of the market, producing no-frills products or services for price-sensi-
tive customers in a market niche. Ideally, the small business unit that adopts the
focus–low-cost strategy competes only in distinct market niches where it enjoys a
cost advantage relative to large, low-cost competitors.

The focus concept is clear in theory, but often confusing in practice. In gen-
eral, a business rejects a focus approach when it attempts to serve most of the
market. In practice, however, virtually every business focuses its efforts, at least to
some extent. Because most is a subjective term, scholars sometimes disagree on
whether a particular business should be classifi ed as focus or not.

Focus–Low-Cost
Strategy:

A generic business
unit strategy in which a
smaller business keeps
overall costs low while
producing no-frills
products or services
for a market niche with
elastic demand.

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154 Chapter 7

Aldi is a clear example of a business that pursues a focus–low-cost strategy.
Aldi is an international retailer that offers a limited assortment of groceries and
related items at the lowest possible prices. Functional operations are tightly coor-
dinated around a single strategic objective: low costs. Efforts are targeted to con-
sumers with low to moderate incomes.

Aldi minimizes costs a number of ways. Most products are private label, allow-
ing Aldi to negotiate rock-bottom prices from its suppliers. Stores are modest in
size, much smaller than that of a typical chain grocer. Aldi only stocks common
food and related products, maximizing inventory turnover. The retailer does
not accept credit cards, eliminating the 2 to 4 percent fee typically charged
by banks to process the transaction. Customers bag their own groceries and
must either bring their own bags or purchase them from Aldi for a nominal
charge. Aldi also takes an innovative approach to the use of its shopping carts.
Customers insert a quarter to unlock a cart from the interlocked row of carts
located outside the store entrance. The quarter is returned with the cart when
it is locked back into the group. As a result, no employee time is required
to collect stray carts unless a customer is willing to forego the quarter by not
returning the cart!

Adding a focus orientation to cost leadership can enable a fi rm to avoid
direct competition with a mass-market cost leader. In this manner, grocer Save-
A-Lot has found a way to compete successfully against Wal-Mart Supercenters.
Its prices are competitive with those at Wal-Mart, but Save-A-Lot pursues loca-
tions in urban areas that Wal-Mart rejected. Save-A-Lot also generates profi ts
by opening small, inexpensive stores catering to U.S. households earning less
than $35,000 a year. Save-A-Lot stocks mostly its own brand of high-turnover
goods to minimize costs and eschews cost-inducing pharmacies, bakeries, and
baggers.13

Like low-cost businesses, those adopting the focus–low-cost strategy are vul-
nerable to intense price competition that periodically occurs in markets with
no-frills outputs. For instance, several years ago, Laker Airways successfully
used the focus–low-cost strategy by providing the fi rst no-frills, low-priced trans-
Atlantic passenger service. The major airlines responded by dropping prices,
eventually driving Laker out of business. The large competitors, because of
their greater fi nancial resources, were able to weather the short-term fi nancial
losses and survive the shakeout.14 Southwest Airlines, in contrast, adopted a
similar strategy and has been able to perform well despite competitive pressure
from its large rivals.

To deter price competition, businesses employing the focus–low-cost strat-
egy must continuously search for new ways to trim costs. The Irish no-frills air
carrier Ryanair has surpassed Southwest in this regard. Passengers are required
to pay for all food, drinks, and newspapers. Employees pay for their own train-
ing and uniforms. The airline even incorporates a strict no-refund policy, even
if the airline cancels a fl ight. Even with an average ticket price of about $50,
Ryanair faces constant pressure from its large rivals. In 2004, Ireland’s state car-
rier Aer Lingus added routes and lowered prices in an attempt to model itself
after Ryanair.15

Founded in 2003, Hungary’s low-cost airline Wizz Air specializes in trans-
porting Hungarians, Poles, and other Eastern Europeans to Britain and Ireland
where many seek and fi nd better paying jobs. CEO Jozsef Varadi sees buses—not
other airlines—as their primary competition. Sparked by recent expansion of
the European Union, Wizz Air makes economic sense for its customer base when
considering fares and travel time.16

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Business Unit Strategies 155

Like low-cost businesses that do not adopt a focus approach, focus–low-cost
businesses are particularly vulnerable to technological obsolescence. Businesses
that value technological stability and do not respond to new product and market
opportunities may eventually fi nd that their products have become obsolete and
are no longer desired by customers.

7-1c Differentiation Strategy (No Focus)
Businesses that utilize the differentiation strategy produce and market to the
entire industry products or services that can be readily distinguished from those
of their competitors. Because they attempt to satisfy most or all of the market,
these businesses tend to be large and established. Differentiated businesses often
attempt to create new product and market opportunities and have access to the
latest scientifi c breakthroughs because technology and fl exibility are key factors
if fi rms are to initiate or keep pace with new developments in their industries.

The potential for differentiation is to some extent a function of its physical
characteristics. Tangibly speaking, it is easier to differentiate an automobile than
bottled water. However, intangible differentiation can extend beyond the physi-
cal characteristics of a product or service to encompass everything associated
with the value perceived by customers. Because such businesses’ customers per-
ceive signifi cant differences in their products or services, they are willing to pay
average to high prices for them.

Of the prospective bases for differentiation, the most obvious is features of the
product (or the mix of products) offered, including the objective and subjective
differences in product attributes. Lexus automobiles, for example, have been dif-
ferentiated on product features and are well known for their attention to detail,
quality, and luxury feel. United and other airlines have attempted to differenti-
ate their businesses by offering in-fl ight satellite telephone and e-mail services.17
Continental even differentiated itself by emphasizing animal cargo.18

Speed can also be a key differentiator. For example, according to a 2004
survey by Mintel International Group, 64 percent of Americans said that they
selected a restaurant based on the amount of time they had to eat. Speed has
been an essential part of the Starbucks competitive strategy, but became a key
concern when service slowed after breakfast sandwiches were added to the prod-
uct line in the mid-2000s. Adding these food items broadened the appeal of
Starbucks, but slowed service in a segment of the market where seconds count.
In contrast, competitor Caribou Coffee can make a small coffee-of-the-day in
only six seconds.19

Timing can also be a key factor, because fi rst movers are more able to establish
themselves in the market than those who come later, as was seen for a number of
years with Domino’s widespread introduction of pizza delivery.20 Factors such as
partnerships with other fi rms, locations, and a reputation for service quality can
also be important (see Strategy at Work 7-2).

When customers are relatively price insensitive, a business may select a differen-
tiation strategy and emphasize quality throughout its functional areas. Marketing
materials may be printed on high-quality paper. The purchasing department
emphasizes the quality and appropriateness of supplies and raw materials over
their per unit costs. The research and development department emphasizes new
product development (as opposed to cost-cutting measures).

Differentiated businesses are vulnerable to low-cost competitors offering simi-
lar products at lower prices, especially when the basis for differentiation is not
well defi ned or it is not valued by customers. For example, a grocer may empha-
size fast checkout, operating on the assumption that customers are willing to pay

Differentiation
Strategy

A generic business
unit strategy in which
a larger business
produces and markets
to the entire industry
products or services
that can be readily dis-
tinguished from those
of its competitors.

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156 Chapter 7

a few cents more for additional cashiers and checkout lanes. If customers tend to
be more concerned with product assortments and prices than with waiting times,
they may shop at other stores instead.

Instituting a change in competitive strategy can be a diffi cult process, espe-
cially when the nature of the change involves a heightened emphasis on dif-
ferentiation. For example, in 2002, Volkswagen entered the luxury market with
the Phaeton, complete with doors trimmed in Italian leather, brushed chrome
and chestnut, and a price tag of $70,000. Consumers found it diffi cult to associ-
ate Volkswagen with such refi nement and the company sold only about three
thousand Phaetons that year. Interestingly, upscale carmakers including such
notables as BMW and Jaguar began to produce smaller, less expensive “luxury”
cars, a move that received a greater welcome from consumers.21

7-1d Focus-Differentiation Strategy
Firms utilizing the focus-differentiation strategy produce highly differentiated
products or services for the specialized needs of a market niche. At fi rst glance,
the focus-differentiation strategy may appear to be a less attractive strategy than
the no-focus differentiation strategy, because the former consciously limits the set
of customers it seeks to target. However, unique market segments often require
distinct approaches. For example, The Limited operates retail outlets to address
multiple demographic segments simultaneously. Men are served by its Structure
stores, women by its Lane Bryant stores, and children by its Limited Too stores.
The Limited even targets trendy consumers with Express stores. U.S. chain Torrid
features fi fty-two stores and specializes in plus-size clothing for young, fashion-
conscious women, a niche nonfocused retailers have not fi lled effectively.22 In
some cases, however, large business units are simply not interested in serving
smaller, highly defi ned niches.

S T R A T E G Y A T W O R K 7 – 2

The Differentiation Strategy in Residential Real Estate

Implementing a differentiation strategy can be diffi –
cult in a highly regulated industry in which competi-
tors are forced to follow rules and even work together.
Residential real estate is an example of such an indus-
try. In most cases, a real estate agent who lists a home
for a seller must work with agents from other fi rms
who represent prospective buyers. Buyers and sellers
are interested in working only with agents who can
negotiate successfully with other agents to complete
the transaction. When one also considers the myriad of
federal, state, and local regulations concerning prop-
erty disclosure, confi dentiality, and the like, one can
easily see why it is diffi cult for an agent or real estate
fi rm to differentiate service.

Differentiation in such an industry is possible, how-
ever. Boyd Williams Real Estate Company (www.boyd-
williams.com) operates in the southeastern Mississippi
community of Meridian, a city of about forty thousand

people. To distinguish himself from his rivals, Boyd
brings his mobile offi ce to clients’ homes, offi ces,
hotel lobbies, and even restaurants over lunch break.
He is always equipped with a laptop computer, portable
printer, cell phone, and digital camera. Prospective
buyers can view full-color pictures of virtually every
home in the market from the mobile offi ce. This
approach seeks to provide maximum effi ciency and
convenience to the buyer.

Interestingly, commissions available to Boyd Williams
are the same as those available to other agents who do
not offer the same amenities. Clearly, Williams seeks to
fi nance his additional investment in the mobile offi ce
by allowing consumers to move through the buying
process more effi ciently—saving him time as well—and
by increasing his volume.

Source: Adapted from Boyd Williams Real Estate Company home page,
accessed March 29, 2002, www.boydwilliams.com.

Focus-Differentiation
Strategy

A generic business
unit strategy in which

a smaller business
produces highly dif-

ferentiated products
or services for the

specialized needs of a
market niche.

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Business Unit Strategies 157

Firms can focus their efforts in several ways. Popular retailer Cabela’s has
even successfully targeted its efforts to men who hate to shop! The Cabela’s in
Michigan draws an estimated 6 million visitors to its retail store each year, mixing
its outdoorsman-oriented merchandise with an aquarium, indoor waterfall
stocked with trout, and realistic nature scenes. As a result, Cabela’s has secured a
customer base …