BUSINESS LEVEL STRATEGY
After successful completion of the course, you should be able to:
1. Understand and critically evaluate core theories and frameworks in advanced
topics in business-level strategy, assessing their assumptions, strengths, and limitations
in light of academic research.
2. Apply strategic concepts to analyse and interpret real-world business-level
strategy scenarios, integrating theoretical insights with contextual factors.
3. Diagnose and solve a specific business-level strategic issue faced by a
company, developing coherent, theory-driven and evidence-based recommendations.
4. Justify and communicate strategic recommendations persuasively, anticipating
counterarguments and reflecting on potential outcomes.
PREMASTER
Actions to gain competitive advantage in a single market or industry. A strategy
must: support firms’ mission, be consistent with firm’s objectives, exploit opportunities
in a firm’s environment with a firm’s strength and neutralize threats in a firm’s
environment while avoiding a firm’s weakness.
COST LEADERSHIP
A cost leadership business strategy focuses on gaining advantages by reducing its
costs below competitors. To execute this strategy, you need to have cost advantages.
Economies of scale Diseconomies of scale Learning curve Differential low-costs
access to productive inputs Technological advantage independent of scale Policy
choices
VALUE OF COST LEADERSHIP
Environmental threats
1. New entrants: by creating cost-based barriers
2. Threat of rivalry: though pricing strategies low-cost firms can engage in
3. Substitutes: when prices go high substitutes become attractive
4. Suppliers: purchase high volumes therefore important and powerful
5. Buyers: threat of vertical integration is lower
Sustained competitive advantage
,PRODUCT DIFFERENTIATION
Product differentiation is a business strategy where firms attempt to gain CA by
increasing the perceived value of their products relative to the perceived value of other
firm’s products.
Focus on product attributes: product features, product complexity,
timing/introduction, location.
Focus on firm-customer relationship: product customization, consumer marketing,
product reputation
Focus on linkages with/between firms: linkages between functions, linkages with
other firms, product mix, distribution channels, service/ support.
VALUE OF PRODUCT DIFFERENTIATION
Environmental threats
1. New entrants; are forced to make high costs to get new customers
2. Threat of rivalry: each firm seeks different niches and customer reducing rivalry
3. Substitutes: by making the product more attractive than the substitute
4. Suppliers: differentiated firms can pass price increases easily to customers
5. Buyers: firms sell differentiated product and enjoys quasi-monopoly in that
segment
Sustained competitive advantage
The rarity of a product differentiation
strategy depends on the ability of individual
firms to be creative in finding new ways to
differentiate their products. Highly creative
firms have an advantage in this.
REAL OPTIONS AND FLEXIBILITY
Strategic flexibility: When a firm can choose among several different strategic options.
Strategic options: If a firm has the ability, but not the obligation, to invest in a
particular strategy
Real option: When a firm has the ability, but not the obligation, to invest in real assets
Real asset: tangible resources that can have an impact on a firm’s production.
TYPES OF REAL OPTIONS
Option to defer: enhance the ability to defer additional investment in strategy until
some later point.
Option to grow: enhance the ability to grow an investment
Option to contract: enhance the ability to get smaller and reduce investment in
strategy.
Option to shut down and restart: enhance the ability to shut down and restart a
business
Option to abandon: enhance the ability to abandon a strategy
, Option to expand: enhance the ability to expand strategy beyond current
boundaries.
VALUE OF STRATEGIC REAL OPTIONS AND FLEXIBILITY
There is a difference between risk and uncertainty:
Risk: When the outcome of the decision is not known with certainty, but possible
outcomes are known before decision is made
Uncertainty: When the outcome of the decision is not known, and also possible
outcomes are not known.
Net present value (NPV) Black-Scholes model:
Luehrman-approach:
NPVq=S/Pv(x) Step 1: Recognize real options, Step 4: NPVq=S/Pv(x)
σ√T,
Pv(x) = X/(1+Rf)^T Step 2: use financial option parameters, Step 5: Estimate
value of the option,
σ√T Step 3: Pv(x) = X/(1+Rf)^T, Step 6: compare with
benchmark,
Sustained competitive advantage
Real assets a firm possesses in the right place at the right time or assets that grew up
over time in an organization may be able to gain sustained competitive advantage
because these could be rare and costly to imitate.
Path dependence: If, to make a strategic decision in the future, you must make a first
decision now.
When the real options facing a firm are path dependent, and when the ability to do real
options analysis is not widely diffused among a set of competing firms, retaining
flexibility can be a source of sustained CA. When real options are not path dependent, or
when the ability to do real options analysis is widely diffused among competing firms,
this will not likely be a source of CA.
COLLUSION
Collusion exists when firms in an industry or market cooperate to reduce competition.
Some forms:
Explicit collusion: is when firms directly negotiate agreements about how to reduce
competition
Tacit collusion: This exists when firms cooperate in reducing competition but engage
in no face-to-face negotiations to do so.
Environment: small number of firms, product/cost homogeneity, price leaders,
industry social structure, high order frequency and small order size, large inventories and
order backlogs, entry barriers
VALUE OF COLLUSION
Barrier of entry
New competitors: increase economies of scale, technology standards, product
differentiation
, Current competitors: can increase prices while maintaining low costs
Other competitive threats: firms can agree to pay less than the market price
for raw materials- agreeing to limit the number of products they are willingly to
sell to customers
Sustained competitive advantage
Difficult to maintain collusion for the long term desire to cheat, because while both
parties have strong incentives to cooperate, they also have strong incentives to cheat on
those agreements.
Bertrand cheating do not send though signals
1. Puppy dog ploy: maintaining a non-aggressive stand leads to be non-aggressive
2. Fat-cat effect: actively invest in ways others will not find threatening
Cournot cheating do send though signals
1. Top dog strategy: aggressive investment if another firm engages in aggressive
behaviour
2. Lean and hungry look: retaining the ability to make aggressive strategic investments
After successful completion of the course, you should be able to:
1. Understand and critically evaluate core theories and frameworks in advanced
topics in business-level strategy, assessing their assumptions, strengths, and limitations
in light of academic research.
2. Apply strategic concepts to analyse and interpret real-world business-level
strategy scenarios, integrating theoretical insights with contextual factors.
3. Diagnose and solve a specific business-level strategic issue faced by a
company, developing coherent, theory-driven and evidence-based recommendations.
4. Justify and communicate strategic recommendations persuasively, anticipating
counterarguments and reflecting on potential outcomes.
PREMASTER
Actions to gain competitive advantage in a single market or industry. A strategy
must: support firms’ mission, be consistent with firm’s objectives, exploit opportunities
in a firm’s environment with a firm’s strength and neutralize threats in a firm’s
environment while avoiding a firm’s weakness.
COST LEADERSHIP
A cost leadership business strategy focuses on gaining advantages by reducing its
costs below competitors. To execute this strategy, you need to have cost advantages.
Economies of scale Diseconomies of scale Learning curve Differential low-costs
access to productive inputs Technological advantage independent of scale Policy
choices
VALUE OF COST LEADERSHIP
Environmental threats
1. New entrants: by creating cost-based barriers
2. Threat of rivalry: though pricing strategies low-cost firms can engage in
3. Substitutes: when prices go high substitutes become attractive
4. Suppliers: purchase high volumes therefore important and powerful
5. Buyers: threat of vertical integration is lower
Sustained competitive advantage
,PRODUCT DIFFERENTIATION
Product differentiation is a business strategy where firms attempt to gain CA by
increasing the perceived value of their products relative to the perceived value of other
firm’s products.
Focus on product attributes: product features, product complexity,
timing/introduction, location.
Focus on firm-customer relationship: product customization, consumer marketing,
product reputation
Focus on linkages with/between firms: linkages between functions, linkages with
other firms, product mix, distribution channels, service/ support.
VALUE OF PRODUCT DIFFERENTIATION
Environmental threats
1. New entrants; are forced to make high costs to get new customers
2. Threat of rivalry: each firm seeks different niches and customer reducing rivalry
3. Substitutes: by making the product more attractive than the substitute
4. Suppliers: differentiated firms can pass price increases easily to customers
5. Buyers: firms sell differentiated product and enjoys quasi-monopoly in that
segment
Sustained competitive advantage
The rarity of a product differentiation
strategy depends on the ability of individual
firms to be creative in finding new ways to
differentiate their products. Highly creative
firms have an advantage in this.
REAL OPTIONS AND FLEXIBILITY
Strategic flexibility: When a firm can choose among several different strategic options.
Strategic options: If a firm has the ability, but not the obligation, to invest in a
particular strategy
Real option: When a firm has the ability, but not the obligation, to invest in real assets
Real asset: tangible resources that can have an impact on a firm’s production.
TYPES OF REAL OPTIONS
Option to defer: enhance the ability to defer additional investment in strategy until
some later point.
Option to grow: enhance the ability to grow an investment
Option to contract: enhance the ability to get smaller and reduce investment in
strategy.
Option to shut down and restart: enhance the ability to shut down and restart a
business
Option to abandon: enhance the ability to abandon a strategy
, Option to expand: enhance the ability to expand strategy beyond current
boundaries.
VALUE OF STRATEGIC REAL OPTIONS AND FLEXIBILITY
There is a difference between risk and uncertainty:
Risk: When the outcome of the decision is not known with certainty, but possible
outcomes are known before decision is made
Uncertainty: When the outcome of the decision is not known, and also possible
outcomes are not known.
Net present value (NPV) Black-Scholes model:
Luehrman-approach:
NPVq=S/Pv(x) Step 1: Recognize real options, Step 4: NPVq=S/Pv(x)
σ√T,
Pv(x) = X/(1+Rf)^T Step 2: use financial option parameters, Step 5: Estimate
value of the option,
σ√T Step 3: Pv(x) = X/(1+Rf)^T, Step 6: compare with
benchmark,
Sustained competitive advantage
Real assets a firm possesses in the right place at the right time or assets that grew up
over time in an organization may be able to gain sustained competitive advantage
because these could be rare and costly to imitate.
Path dependence: If, to make a strategic decision in the future, you must make a first
decision now.
When the real options facing a firm are path dependent, and when the ability to do real
options analysis is not widely diffused among a set of competing firms, retaining
flexibility can be a source of sustained CA. When real options are not path dependent, or
when the ability to do real options analysis is widely diffused among competing firms,
this will not likely be a source of CA.
COLLUSION
Collusion exists when firms in an industry or market cooperate to reduce competition.
Some forms:
Explicit collusion: is when firms directly negotiate agreements about how to reduce
competition
Tacit collusion: This exists when firms cooperate in reducing competition but engage
in no face-to-face negotiations to do so.
Environment: small number of firms, product/cost homogeneity, price leaders,
industry social structure, high order frequency and small order size, large inventories and
order backlogs, entry barriers
VALUE OF COLLUSION
Barrier of entry
New competitors: increase economies of scale, technology standards, product
differentiation
, Current competitors: can increase prices while maintaining low costs
Other competitive threats: firms can agree to pay less than the market price
for raw materials- agreeing to limit the number of products they are willingly to
sell to customers
Sustained competitive advantage
Difficult to maintain collusion for the long term desire to cheat, because while both
parties have strong incentives to cooperate, they also have strong incentives to cheat on
those agreements.
Bertrand cheating do not send though signals
1. Puppy dog ploy: maintaining a non-aggressive stand leads to be non-aggressive
2. Fat-cat effect: actively invest in ways others will not find threatening
Cournot cheating do send though signals
1. Top dog strategy: aggressive investment if another firm engages in aggressive
behaviour
2. Lean and hungry look: retaining the ability to make aggressive strategic investments
