8.1 Introduction

In the previous chapter, you learned about the broadest level of strategy, corporate-level strategy. In this chapter, we begin to narrow the focus with business-level strategy.

After an introduction to business-level strategy, you learn the two dimensions along which strategic business unit managers formulate business-level strategy. The first addresses a firm’s strategic market position, which includes cost leadership and differentiation approaches. The second addresses a firm’s strategic market size, which can concentrate on a narrow, niche market segment (focused approach) or a wider market (broad approach). These two dimensions produce six business-level strategies: focused cost leadership, broad cost leadership, focused differentiation, broad differentiation, and two hybrid strategies known as best cost and blue ocean. Then you learn the risks of a firm not clearly formulating a business-level strategy and getting stuck in the middle. Next you learn how to analyze a firm’s business-level strategy. Finally, you consider why business-level strategy is important to business graduates.

8.2 Business-Level Strategy

Let’s begin by considering what business-level strategy is.

Where are we going?

You now understand that there are three stages to the strategic management process: strategic analysis (“Where are we?”), strategy formulation (“Where are we going?”), and strategy implementation (“How do we get there?”). Like all strategy formulation, business-level strategy addresses the question of where a firm is going.

Strategic Business Unit

While corporate-level strategy is the broadest level of strategy and is formulated at the corporate level of a company, business-level strategy is the strategy of a strategic business unit.

A strategic business unit is a fully functional unit of a business that has its own vision and direction and may be part of a larger organizational unit like a division. It may be based on markets served, products offered, or regions served.

Each strategic business unit has its own vision and direction it pursues through one business-level strategy. Smaller firms that have only one strategic business unit have only one business-level strategy. In large companies with more than one strategic business unit, different strategic business units may have different business-level strategies. Therefore, large corporations that have more than one strategic business unit potentially have multiple business-level strategies. Let’s revisit our diagram that depicts the three levels of strategy to now consider how business-level strategy fits into the larger picture of strategy in an organization.

How to win?

How a firm wins in its chosen markets is largely driven by the firm’s ability to develop a winning strategy around its resources, capabilities, and core competencies that are superior to those of its competitors and that will create value for the firm’s customers. Overall, the “How to win?” question addresses the firm’s search for a sustainable competitive advantage.

Volatile, Uncertain, Complex, and Ambiguous Environment

As you now know, when executives analyze their organizational environments, they consider factors that relate to both the external environment and the internal environment of the firm. The external analysis of the general, industry, and competitive environments focuses on an outside-in perspective of the firm. The internal analysis of a firm’s resources, capabilities, core competencies, and value chain focuses on an inside-out perspective of the firm. When you conduct a case analysis, you analyze companies through these same lenses.

When strategic management leaders and managers formulate strategy, they focus on an outside-in perspective. All successful strategies are driven by outside-in perspectives. Chapter 7 discussed how this is true for corporate-level strategy. An outside-in perspective is equally important to business-level strategy and the strategies embedded into business-level strategies.

Strategic leaders and managers carefully monitor the external environment of their companies, analyze trends, and develop strategies that are forward-looking. Regardless of the level of strategy being formulated, firms must navigate an external environment that is volatile, uncertain, complex, and ambiguous (VUCA), where change and disruption are the new normal.

Focus

Both corporate-level strategy and business-level strategy focus on the markets and market segments in which a firm competes. Corporate-level strategy is broader in focus, aimed at creating synergy across businesses and industries.

Business-level strategy is narrower in focus. Business-level strategy is the strategy of a strategic business unit. A business-level strategy is a general way of positioning a company within an industry for gaining a competitive advantage by defining how a firm competes head-to-head against similar products and services in its market and market segments. In contrast, corporate-level strategy considers what industries and markets a firm should operate in and how to create synergy between them. Both focus on markets and market segments, but the focus is different. It is important the business-level strategy is congruent with and supports corporate-level strategy.

Determining a firm’s business-level strategy involves making decisions about how to best serve specific groups of customers, address their unique needs, and provide solutions that stand out from competitors. At its core, business-level strategy is about identifying who the firm will serve, what needs it will meet, and how it will go about satisfying those needs in a way that delivers value.

Who Are Our Customers?

The first step in crafting a business-level strategy is understanding who the company is trying to serve. Every organization must carefully define its target market and market segments. For smaller companies, this might involve focusing on a single customer group, while larger organizations may develop different strategies for each of its markets and market segments. Understanding the customers being served is critical, as it guides the firm in tailoring its offerings and competitive approach to meet specific needs.

What Customer Needs Do We Meet?

Next, a business-level strategy must address what customer needs will be met. This step involves identifying the core problems or desires of the company’s target market and market segments. Successful firms invest heavily in understanding these needs, often through market research, customer feedback, and competitive analysis. Whether customers are looking for affordability, innovation, reliability, or premium quality, the firm must clearly identify what drives purchasing decisions. The ability to accurately define and prioritize customer needs is essential to developing a strategy that resonates with the target market.

How Do We Satisfy Customer Needs?

Finally, the business must decide how it will satisfy its customers’ needs and desires. This involves choosing the methods the firm will use to deploy its strategic resources, capabilities, and core competencies to deliver value to customers. The choice of how needs will be satisfied is closely tied to the firm’s internal resources, capabilities, and core competencies. From a thorough knowledge of its customers, firms develop business-level strategies.

Business-level strategy leads to decisions about how to deploy a firm’s resources, capabilities, and core competencies to best serve specific groups of customers, address their unique needs, and provide solutions that stand out from competitors. It is essential the firm keeps customers as a primary focus in deciding business-level strategies. Aligning a firm’s resources, capabilities, and core competencies to business-level strategies includes decisions about product design, marketing, pricing, distribution, and customer service. An organization must define and continuously improve its business-level strategy because they are not necessarily static. They can change, especially in response to VUCA environments.

Strategic leaders and managers choose from a limited number of business-level strategies that are available to all companies. Despite companies choosing from a common pool of business-level strategies, all strategy should be specific and differentiating, and companies must implement them in ways that reflect their specific company conditions.

As you learn in Part V, there are strategies that are embedded into business-level strategies. We cover four of them in the book: innovation strategy, sustainability and ethics strategy, technology strategy, and multinational strategy. Therefore, the overall strategies that are formulated and implemented at the strategic business unit level are a combination of a company’s chosen business-level strategy and the ways in which it embeds a combination of other strategies (such as innovation strategy, sustainability and ethics strategy, technology strategy, and multinational strategy) into their business-level strategy. This nuanced combination of strategies gives a company a distinctive competitive edge.

Next, we consider a business-level strategy framework.

8.3 Business-Level Strategy Framework

Firms formulate business-level strategies by making critical decisions on two fundamental dimensions. The first of these decisions is defining the firm’s strategic market position. The second decision that firms make concerns the company’s strategic market size. Both dimensions require a thorough understanding of the firm’s customers, and both dimensions address which customers are being targeted.

These decisions combine to create business-level strategies and are represented in the business strategy framework as depicted in figure 8.2. The text that follows walks you through the business-level strategy framework.

Next we consider a firm’s strategic market position, which involves cost leadership and differentiation. Then we turn our attention to a company’s strategic market size, which concerns whether it competes in a broad market or a focused market segment.

8.4 Strategic Market Position: Cost Leadership and Differentiation

The first critical strategic decision in defining the firm’s business-level strategy is deciding its strategic market position. The strategic market position addresses how the firm distinguishes itself in its chosen market and market segments, either through addressing consumer preferences for low-cost alternatives or by addressing consumer preferences for luxury items. Strategic market position is sometimes referred to as the source of competitive advantage or as just strategic position.

Cost Leadership

When a firm distinguishes itself in the market by responding to consumer preferences for low-cost alternatives, the company competes primarily by being the lowest-cost producer or provider in its chosen market. The goal is to offer products or services that are of an equal or similar value to competitors’ products or services at a lower price than them. This is called a cost leadership approach, and it appeals to cost-conscious customers.

A cost leadership strategic market position involves a firm striving to become the lowest-cost producer or provider in its chosen market or market segment while still offering products or services that meet customer expectations. Successful cost leadership leverages operational efficiencies, scale, and cost control measures to reduce production and distribution costs.

Companies achieve cost leadership through a combination of strategic initiatives focused on reducing costs across various areas of their operations. One common approach is leveraging economies of scale to achieve efficiency, where firms produce in large quantities to lower the average cost per unit. Economies of scale are created when the costs of offering goods and services decrease as a firm sells more items. This occurs because expenses are distributed across a greater number of items.

Automation, outsourcing, and streamlined processes also play crucial roles in keeping production costs low. Firms often simplify product offerings, standardize processes, and minimize waste to reduce overhead. Moreover, firms pursuing cost leadership often invest heavily in supply chain optimization, negotiating better terms with suppliers and seeking out more affordable raw materials. This relentless focus on cost-cutting allows companies to maintain their profit margins while offering lower prices to customers, creating a competitive advantage.

Firms that pursue cost leadership focus on achieving operational efficiency, leveraging economies of scale, and controlling overhead costs. This strategy is particularly effective in industries where price is the primary driver of customer decisions, such as retail, transportation, or basic consumer goods. Cost leaders streamline their supply chains and keep operating costs low to offer lower prices than competitors.

Large companies often choose to pursue a cost leadership strategic market position, and they keep their prices down by demanding price concessions from suppliers. The firm then passes some of these savings on to customers in the form of reduced prices in its stores. Typically, firms following a cost leadership approach spend little on advertising, market research, or research and development.

The key to this strategic market position is maintaining profitability through low costs while offering value that resonates with price-sensitive customers. However, it is important for firms to avoid compromising on quality to a degree that alienates their customer base. The challenge is striking a balance between being cost-competitive and delivering acceptable value.

A cost leadership approach works well when price competition among rival sellers is vigorous, identical products are available from many sellers, there are few ways to differentiate industry products, most buyers use the product in the same way, and buyers incur low costs in switching among sellers. The primary driver of a cost leadership approach is cost, which is most influenced by the cost of input factors and economies of scale.

For example, Walmart strategically positions itself in the market by using a cost leadership strategic market position. It has mastered this position by streamlining its supply chains and keeping operating costs low to offer lower prices than competitors. The key to success in cost leadership is maintaining cost advantages without sacrificing quality, which can erode the firm’s competitive position if not carefully managed.

Advantages

Cost leadership offers several advantages for companies that can successfully implement it. One of the most significant benefits is that it allows firms to maintain a competitive position by offering lower prices than competitors, which can attract a larger share of price-sensitive customers. By being the lowest-cost producer, a firm can set its prices below industry averages, making it difficult for rivals to compete without sacrificing profitability. Additionally, cost leadership can provide companies with a buffer during economic downturns or periods of weak demand. When consumers are more cautious with their spending, companies with lower costs can continue to thrive by offering affordable alternatives, which can allow them to maintain their sales volume even when higher-priced competitors suffer. The emphasis on efficiency also makes firms well positioned to withstand price competition from rivals.

Another advantage is the potential for greater profitability through economies of scale and operational efficiency. Firms that achieve cost leadership often benefit from producing goods or services at high volumes, which spreads fixed costs over a larger number of units, reducing the per-unit cost. This can lead to higher margins, even when selling at lower prices. Furthermore, cost leaders are often more resistant to price wars in which competitors continually lower prices in pursuit of market share; they can resist because they have the financial flexibility to absorb lower margins without significantly harming their bottom line. This ability to maintain profitability while keeping prices low enables cost leaders to undercut competitors in highly competitive markets. High profits are possible if a cost leader has a high market share.

Disadvantages

Cost leadership also has several disadvantages that firms must be aware of. One major risk is the potential for lower perceived value by customers. If a firm focuses solely on reducing costs, it may neglect product quality, innovation, or customer service, leading customers to perceive the product as inferior. In industries where customers value features, brand loyalty, or innovation, cost leadership can backfire if the firm sacrifices these elements in pursuit of cost reduction. Additionally, firms pursuing cost leadership are highly vulnerable to changes in the cost structure, such as rising raw material prices, labor costs, or supply chain disruptions, especially in a VUCA environment. If a firm’s cost advantage erodes due to external factors, it may struggle to compete, particularly if it cannot quickly adjust its prices or improve efficiency.

Another disadvantage of cost leadership is that it can lead to complacency and a lack of differentiation. Firms focused on cutting costs may not invest enough in research and development, marketing, or customer experience, which can prevent them from adapting to changing market conditions. Competitors might develop innovations or create brand loyalty that cost leaders cannot match. In such cases, cost leadership may become unsustainable if competitors can offer superior products at a similar price point. Additionally, cost leadership is often imitable, meaning competitors can adopt similar cost-cutting measures, eroding the initial firm’s advantage.

Another disadvantage includes customer perceptions of quality. Just offering cheaper products is not sufficient to succeed at a cost leadership strategy. If customers perceive the quality of the product as no longer of the same or similar value, they are likely to take their business to a competitor. Sacrificing quality to a level that cost-conscious customers no longer perceive as acceptable can erode the firm’s competitive position if not carefully managed.

Another disadvantage for cost leaders is reliance on large sales volumes. When sales decline, so do profits because the profit margin is low. Cost leaders often offset this risk by selling recession-proof products like groceries, healthcare, and other essentials. Firms that follow a cost leadership strategy are slow to respond to market changes because low investment in research and development can lead to a sluggishness to detect market changes, which can be a disadvantage. Large volumes of sales are required for cost leaders because profit margins are slim. Lastly, the need to keep expenses low might lead cost leaders to be slow in detecting key environmental trends.

Differentiation

When a firm distinguishes itself in the market by responding to consumer preferences for luxury items, the company competes primarily by offering products or services that are perceived as unique or superior by customers. This is referred to as a differentiation approach.

Firms that choose a differentiation approach offer products or services that have unique features or attributes. They aim to create higher value than competitors’ products or services. They invest heavily in advertising in general and brand building in particular.

Firms that choose a differentiation approach add value to the products and services they offer. They are responsive to customer preferences, and this can increase costs. The invest in research and development and innovation. Their customers are willing to pay a premium for products and services because of distinct product features, customer service, and the perception that the product is superior to those offered by competitors. The primary driver of the differentiation approach is value, and this is most influenced by product features, customer service, and perception of quality.

A differentiation approach involves offering products or services that are perceived as unique or superior by customers, allowing firms to stand out in the marketplace. Companies pursuing this approach focus on developing features, quality, brand identity, or customer experiences that go beyond what competitors offer. By doing so, they hope to attract customers who are willing to pay a premium for these distinctive qualities. This approach is particularly effective in industries where customers value innovation, quality, customization, or specialized expertise over just price.

Instead of competing on price, the objective is to create a product or service that customers are willing to pay a premium for because it meets needs in ways that rivals cannot easily replicate. Companies that follow a differentiation approach often offer cutting-edge technology, superior design, and a strong brand identity. Differentiation can be achieved through various means, including innovation, superior customer service, or the creation of a prestigious brand image. However, this strategic market position often requires significant investment in research and development, marketing, and customer engagement.

A differentiation approach works well when firms differentiate their products and services in ways that are difficult for rivals to duplicate or imitate, such as through company reputation, long-standing relationships with buyers, and a unique product or service image. Differentiating along these dimensions creates substantial switching costs that lock in buyers. Patent-protected product innovation and relationship-based customer service can also be success factors for a company following a differentiation strategy. Differentiation also works well when there are many ways that differentiation can have value to buyers and there is rapid change in the product’s technology and features.

For example, Apple exemplifies the differentiation approach to strategic market position by offering cutting-edge technology, superior design, and a strong brand identity.

Advantages

Differentiation offers significant advantages to firms that can successfully execute it. One of the primary benefits is the ability to command premium prices for products or services, as customers are often willing to pay more for offerings they perceive as unique or superior. This premium pricing not only boosts profit margins but also allows companies to reinvest in continuous innovation, marketing, and customer service. For example, Tesla has been able to charge significantly higher prices than traditional automakers due to the perceived value of its cutting-edge technology, superior design, and sustainable approach to transportation.

Another advantage of differentiation is the potential for strong brand loyalty. When customers feel that a company offers something truly distinctive, whether it’s exceptional quality, innovative features, or a unique experience, they are more likely to remain loyal to the brand. This loyalty can reduce price sensitivity, making customers less likely to switch to a competitor, even if that competitor offers a lower price. For example, buyer loyalty is extremely common for smartphone users.

Disadvantages

A differentiation approach also comes with its challenges. One of the most significant disadvantages is the higher cost structure associated with maintaining differentiation. Companies must invest heavily in research and development, marketing, and customer service to ensure that their products or services remain distinct and relevant in the marketplace. This constant need for innovation can strain resources, especially if competitors begin to catch up or replicate similar features.

Another disadvantage is the risk of imitation by competitors. In highly competitive markets, rivals may quickly copy the features or innovations that originally differentiated the product. As competitors adopt similar technology, designs, or service enhancements, the perceived uniqueness of the original product may diminish over time. This can erode the firm’s competitive advantage, forcing it to lower prices or further invest in differentiation to maintain its market position.

Another disadvantage is that customers’ own perception of quality is a crucial element in them continuing to buy luxury items. If a company following a differentiation approach offers discounts that are too deep, this can have negative ramifications on customers’ perception of the quality of its offerings.

8.5 Strategic Market Size: Broad and Focused

The second critical decision that firms make when deciding their business-level strategy concerns the company’s strategic market size. Like the firm’s strategic market position, a company’s strategic market size is also a decision based on the firm’s customers. The strategic market size defines whether the firm will target a broad market, serving many customer segments, or a narrow market, focusing on a specific niche market segment.

If the approach is broad, the target market is broad, meaning most people within that industry buy the product or service. If the approach is focused, the target market is narrow, and the product or service is not meant for most people in the industry. Sometimes strategic market size is referred to as scope of operations or competitive scope.

Broad

A broad approach to strategic market size targets large markets, typically encompassing a wide range of customer groups. These strategies aim to appeal to as many customers as possible by offering products or services designed to meet diverse customer needs and preferences. By leveraging economies of scale and broad market reach, firms employing this approach seek to dominate their industry and build a strong competitive position. Broad approaches are often associated with significant operational scale, extensive distribution networks, and the ability to serve a diverse customer base efficiently. The goal of a broad strategic market size is to achieve widespread market penetration and long-term sustainability by serving the needs of a diverse customer base.

For example, Walmart targets in a broad strategic market. Its products appeal to a large and diverse customer base.

Advantages

One advantage of a broad strategic market size is the ability to achieve economies of scale. By serving a large customer base, firms can lower their per-unit costs through higher production volumes, enabling them to price competitively.

Another advantage of a broad approach is the potential for extensive market coverage and revenue generation. By targeting large, diverse markets, firms can access multiple customer groups, maximizing their sales potential.

A third advantage is that broad approaches also help firms build brand recognition and customer loyalty. A well-recognized brand that appeals to a wide audience can establish connections with customers and help to secure a firm’s competitive position.

Additionally, firms that adopt a broad strategic market size benefit from reduced dependency on any single customer groups. This diversification allows them to be more resilient to changes in consumer preferences or economic conditions.

Finally, broad approaches enable firms to create or maintain entry barriers for competitors. Extensive market coverage, brand equity, and economies of scale make it challenging for new entrants to compete effectively, reinforcing the firm’s market dominance.

Disadvantages

One major disadvantage of a broad strategic market size is the complexity of managing operations. Serving a large and diverse market requires extensive resources, including multiple product lines, varied distribution channels, and significant administrative oversight. This operational complexity can result in inefficiencies and higher costs.

Another disadvantage is the risk of diluted focus. Broad approaches often require firms to cater to the general needs of many customer groups, which may prevent them from meeting the specific needs of individual groups. This lack of specialization can leave the firm vulnerable to competitors employing focused approaches that target niche market segments more effectively.

Staying competitive across a wide market often requires substantial resources, which can strain profitability. In industries with intense competition, this challenge is even more pronounced.

Expanding a brand to appeal to a broad audience can also dilute its identity. When a firm attempts to serve too many customer groups, it risks alienating its core audience. For example, luxury brands that adopt a broad approach may lose their exclusive appeal, reducing their differentiation from competitors.

Finally, firms pursuing a broad strategic market size face intense competition from other large players targeting the same markets. This competition can lead to price wars, reduced profit margins, and challenges in sustaining a competitive advantage. A broad approach to strategic market size requires continuous effort to remain relevant and efficient in highly contested markets.

Focused

A focused approach to strategic market size targets specific niche markets segments. Focused strategic market segments allow firms to understand and cater to the specific needs of a niche market segment, fostering customer loyalty by offering tailored products or services that meet the unique demands of their target market segment. By concentrating on a narrow market segment, firms that follow a focused approach can reduce direct competition, but the small size of the niche market segment limits long-term growth opportunities and may constrain economies of scale. Focused strategic market segments are highly vulnerable to changes in customer preferences and can be threatened by larger competitors entering the niche market segment, leveraging their resources and scales to replicate or surpass the focused firm’s offerings. Focused approaches allow firms to serve niche market segments with precision and build customer loyalty, but they also come with risks, such as limited market size, vulnerability to market shifts, and the threat of competition from larger rivals. Firms pursuing focused strategic market segment must stay vigilant in maintaining their unique value proposition while being prepared to adapt to changes in their niche market segment.

For example, Apple follows a focused approach to strategic market size. They serve a market segment that is interested in high quality products with the latest technology.

Advantages

One of the primary advantages of a focused approach is that they allow firms to deeply understand and cater to the specific needs of a niche market segment. By concentrating on a well-defined customer segment, companies can offer tailored products or services that align closely with the preferences, behaviors, and demands of their target market segment. This precision leads to stronger customer loyalty, as the specialized nature of the offering makes it difficult for competitors to meet the same level of personalization or relevance.

Another advantage of focused strategies is the reduced competition within the niche market segment. Firms employing a focused strategy can carve out a space in underserved or overlooked areas of the market, reducing direct rivalry. By serving specific groups more effectively than larger, more generalist competitors, these firms can establish strong market positions without having to constantly fend off well-resourced competitors.

Additionally, focused approaches enable firms to maximize resource efficiency by concentrating on a single market segment. Companies can align their operations, marketing, and product development efforts specifically with the needs of their niche market segment, reducing waste and avoiding the complexity of serving a broad, diverse market.

Companies adopting a focused approach often build significant expertise in their products and services to attract customers to their specialty stores, such as camping shops that offer customers expert advice in maximizing their limited vacation times.

Disadvantages

Focused approaches come with several disadvantages. One major risk is the limited market size. By concentrating on a narrow, niche market segment, firms may struggle to achieve the economies of scale available to competitors with broader market reach. The small size of the target market segment means that growth opportunities are often constrained, limiting the potential for long-term scalability. Demand for specialized goods and services is limited, making each sale critical. For instance, a company that succeeds in a very specific market segment, such as high-end luxury goods, may find it difficult to expand beyond that market segment without losing its specialized appeal.

Another disadvantage is the vulnerability to changes in the niche market. If customer preferences shift or technological advancements alter the landscape, companies employing focused approaches may find it difficult to adapt without fundamentally changing their business models. When a firm’s competitive advantage is built on serving a very specific group, any changes in customer demand can significantly impact the firm’s success.

Finally, focused approaches are vulnerable to competitors who decide to enter the niche market. Larger firms with more resources might recognize the profitability of the niche market segment and begin targeting it with similar offerings.

8.6 Six Business-Level Strategies

So far you have learned that business-level strategy involves two critical decisions. The first addresses a firm’s strategic market position and considers whether the firm follows a cost leadership or a differentiation approach. The second addresses a firm’s strategic market size and addresses whether a company concentrates on a broad market segment called a broad approach or a narrow market segment called a focused approach.

Now let’s consider how these two dimensions dynamically interact to suggest six business-level strategies: broad cost leadership, focused cost leadership, broad differentiation, focused differentiation, best-cost strategy, and blue ocean strategy. Each offers distinct paths to achieving competitive advantage.

8.7 Broad Cost Leadership

A broad cost leadership strategy is a business-level strategy that combines a broad strategic market size and a cost leadership strategic market position. The firm distinguishes itself in the market by responding to consumer preferences for low-cost alternatives and competes primarily by being the lowest-cost producer in its industry. This is the cost leadership element of the company’s business-level strategy. The company is also targeting a broad market, meaning most people within that industry buy the product or service.

Firms that pursue a broad cost leadership business-level strategy focus on achieving operational efficiency, leveraging economies of scale, and controlling overhead costs. This strategy is particularly effective in industries where price is the primary driver of customer decisions, such as retail, transportation, or basic consumer goods.

Walmart is an excellent example of a company following a broad cost leadership strategy by streamlining their supply chains and keeping operating costs low to offer lower prices than competitors. Walmart uses its massive supplier network and distribution capabilities to offer low prices to a broad market, securing its leadership in cost-effective retail. Walmart focuses on selling products of an equal or similar quality than its competitors at a lower cost, and most people in the market shop at Walmart. If a customer is purchasing a consumable product like tissue and decides to purchase a name brand product, then it is likely that Walmart has the economies of scale to sell those name brand consumables at a lower cost than most of its competitors. However, if a consumer decides to buy a store brand product, the consumer may consider Walmart’s products to be of a lesser quality though still just good enough to purchase. In this case, although the store brand consumable product may not be of an equal or similar quality than its competitors, consumers prioritize cost savings over quality. Walmart’s range of products allows it to be an attractive option for many price-sensitive customers.

McDonald’s is another example of a company that follows a broad cost leadership strategy. McDonald’s uses a standardized menu in many countries and negotiates bulk purchasing agreements, allowing the company to keep costs low while maintaining consistent quality across its global locations. This approach enables McDonald’s to offer affordable meals that appeal to a broad customer base, making it a leader in the fast-food industry.

Spotify’s free version operates on an ad-supported model that attracts a broad audience with no upfront cost. However, this low-cost strategy depends on having a large user base to generate sufficient ad revenue. Therefore, this Spotify service follows a broad cost leadership business-level strategy. Spotify’s dependency on maintaining high volumes creates financial pressure and limits flexibility, as Spotify must continuously cater to and retain a vast user base to sustain profitability on its free tier.

Hulu’s low-cost, ad-supported model also follows a broad cost leadership business-level strategy. The ad-supported model allows it to offer affordable streaming options, but it has also restricted its ability to evolve with customer demands by failing to add premium features to their service, such as offline downloads. The broad cost leadership business-level strategy allows them to meet one market and limits their ability to respond to new customer preferences, which in turn affects their competitiveness in the overall marketplace.

Procter & Gamble follows a broad cost leadership business-level strategy by offering a range of affordable household products. This ensures steady revenue streams even as market demands fluctuate.

Figure 8.4: Broad cost leadership strategy examples

8.8 Focused Cost Leadership

Firms that pursue a focused cost leadership strategy target a narrow market segment that prefers low-cost products. The firm distinguishes itself in the market by responding to consumer preferences for low-cost alternatives and competes primarily by being the lowest-cost producer in its industry, appealing to cost-conscious customers. This is the cost leadership element of the company’s business-level strategy. The company is also following a focused strategy, which means the company is concentrating on a target market segment that is a narrow, niche market and that the product or service is not meant for most people in the industry. The firm’s strategic market position is cost leadership, and its strategic market size is focused. Focused cost leadership involves offering products or services at the lowest price within a defined market segment, catering to a particular group of cost-conscious customers.

Focused cost leadership strategy involves a company targeting a specific niche market segment while maintaining a low-cost structure to serve that market. The focus is not on competing broadly across all market segments but on tailoring products or services to meet the specific needs of a defined group of customers. Companies that pursue this strategy aim to be the lowest-cost provider in their niche, offering affordable solutions without the broad operational scope required by larger competitors. By zeroing in on a smaller market segment, firms can better align their resources, capabilities, and core competencies to maximize efficiency and minimize costs while addressing the unique needs of their customers.

Dollar General, for instance, employs a focused cost leadership strategy by targeting rural and small-town customers with low-cost, basic goods. Dollar General’s business model is built around keeping operational costs low, including a focus on smaller store footprints and private-label goods, which helps reduce purchasing and distribution costs. By focusing on price-sensitive customers in underserved areas, Dollar General effectively captures a niche market segment that is less competitive than the broader retail market dominated by companies like Walmart. Its ability to offer affordable goods in convenient, smaller locations makes it attractive to customers who prioritize convenience and low prices. Dollar General has been able to thrive in rural, lower-income areas where larger retailers like Walmart have less presence, leveraging its focused cost leadership approach to dominate that market segment.

Another example of a company that follows a focused cost leadership strategy is Ryanair, which has become a dominant player in the European budget airline industry by targeting budget-conscious travelers. Unlike full-service airlines, Ryanair offers extremely low base fares by stripping away all nonessential services and charging extra for things like luggage, seat selection, and food. This no-frills approach is designed specifically for customers who prioritize price over comfort. Ryanair’s focused cost leadership strategy includes using secondary airports and maintaining a standardized fleet, both of which contribute to keeping costs down. By catering to a niche market segment of cost-sensitive travelers willing to sacrifice convenience and amenities for lower fares, Ryanair has successfully built a strong presence in the highly competitive airline industry.

The success of focused cost leadership hinges on the company’s ability to tightly manage costs while meeting the essential needs of its target market segment. Firms often achieve this by offering fewer product variations, reducing complexity in their supply chains, and simplifying operational processes. For example, Dollar General minimizes store sizes and product variety to keep overhead costs low, passing those savings on to customers through lower prices. Similarly, Ryanair’s use of secondary airports not only reduces airport fees but also allows for faster turnaround times, enabling more flights per day. In both cases, the companies have honed in on a specific customer market segment that values affordability above all else, tailoring their business models to meet those expectations.

This strategy is particularly effective when there is a segment of the market that is underserved by broader competitors. In the case of Dollar General, major retailers often overlook smaller, rural markets, allowing the company to step in and dominate those areas with its focused, low-cost approach. Similarly, Ryanair has found a niche in the European market where cost-conscious travelers are looking for the cheapest possible airfare, even if it means sacrificing comfort. By understanding and capitalizing on the specific needs of its niche market, the company has created a strong competitive position within its industry while maintaining low operational costs.

Another example of focused cost leadership is Xiaomi, the Chinese electronics and smartphone company. Xiaomi has grown rapidly by implementing a focused cost leadership strategy in the highly competitive smartphone industry. Unlike major players like Apple or Samsung, Xiaomi minimizes costs by selling its devices primarily through e-commerce, cutting out intermediaries, and maintaining extremely low profit margins on hardware. In addition, the company generates revenue through software, apps, and internet services, allowing it to offer high-quality smartphones at significantly lower prices than its competitors. Xiaomi’s ability to deliver affordable yet innovative devices has enabled it to rapidly expand its market share, particularly in developing markets, by appealing to price-sensitive consumers without sacrificing product quality. Less-expensive smartphones from companies such as budget-friendly brands like Xiaomi and Realme can offer smartphones with the same competitive features as flagship models from Apple and Samsung, such as high-refresh-rate screens, decent cameras, and a solid performance for everyday tasks at a fraction of the price. These alternatives attract price-sensitive buyers who want a good smartphone without paying premium prices. Imitation devices and lookalike smartphones closely resemble popular flagship models and are often sold by street vendors and online marketplaces. This can result in budget-conscious buyers straying away from the original brand, diluting their exclusivity.

Aldi, the German-based grocery retailer, is another example of a company that follows a focused cost leadership strategy. Aldi has made a significant impact in various global markets, including the United States. Aldi’s success is rooted in its rigorous cost-cutting measures. The company reduces operational expenses by offering a limited selection of private-label products. Requiring customers to bring their own shopping bags and deposit coins to use shopping carts is standard procedure in global markets, such as the United Kingdom. They are less common in the United States. These efficiency-driven and sustainability-focused practices allow Aldi to keep prices significantly lower than traditional grocery chains while maintaining quality standards that appeal to budget-conscious shoppers. By focusing on operational simplicity and scale, Aldi has effectively maintained a competitive position in the crowded grocery market.

Figure 8.5: Focused cost leadership strategy examples

8.9 Broad Differentiation

Firms that pursue a broad differentiation strategy target a broad market and customers who want a quality product. A firm distinguishes itself in the market by responding to consumer preferences, typically for luxury items. A company using such a strategy competes primarily by offering products or services that are perceived as unique or superior by customers. This is the differentiation element of the business-level strategy. If the company is also following a broad strategy, this means it is concentrating on a target market that is broad, meaning most people within that industry buy the product or service. The firm’s strategic market position is differentiation, and its strategic market size is broad.

An example of a firm that follows a broad differentiation strategy is Marriott International, which differentiates itself through a wide range of premium accommodations and customer service, catering to both business and leisure travelers worldwide.

One significant advantage of broad differentiation strategies is the ability to attract a large customer base while maintaining higher profit margins. Customers are often willing to pay premium prices for products or services that they perceive as superior, allowing firms to sustain profitability despite higher production or marketing costs. Additionally, strong brand recognition and customer loyalty fostered by differentiation can provide long-term competitive advantages, reducing vulnerability to price-based competition. For example, BMW is able to command higher prices for its vehicles from a large worldwide consumer base that appreciates the admiration tied to the brand.

Broad differentiation also enables firms to adapt to diverse customer preferences. By offering products or services that appeal to a wide audience but maintain unique attributes, companies can meet the varied demands of their customer base, driving growth and market share. For instance, Toyota’s Lexus brand targets luxury car buyers globally with a blend of premium quality, technology, and reliability.

Although broad differentiation can be beneficial, these strategies are accompanied with challenges as well. One major disadvantage is the significant cost of maintaining differentiation while serving a large, diverse market. High investments in research, development, branding, and marketing are often required to sustain a unique position, which can strain a firm’s resources.

Firms pursuing broad differentiation are also vulnerable to imitation. Competitors with lower costs may attempt to replicate unique features or quality, eroding the firm’s competitive advantage. For example, luxury fashion brands like Gucci often face competition from lower-cost brands or counterfeit producers that mimic their designs and style. These imitators can attract price-sensitive customers, potentially diluting the exclusivity and perceived value of the high-end brand.

Figure 8.6: Broad differentiation strategy examples

8.10 Focused Differentiation

A firm that pursues a focused differentiation strategy targets a narrow, niche market segment and offers quality products. The firm distinguishes itself in the market by responding to consumer preferences for luxury items, offering products or services that are perceived as unique or superior by customers. The company concentrates on a niche target market, and the product or service is not meant for most people in the industry. The firm’s strategic market position is differentiation, and its strategic market size is focused. Focused differentiation involves offering unique, differentiated products or services tailored to the specific needs of a niche market segment, allowing the firm to charge premium prices.

The focused differentiation strategy involves a firm targeting a specific niche market and offering products or services that are highly differentiated and tailored to meet the unique needs of that market segment. Focused differentiation concentrates on a particular consumer group with specific preferences or demands. The essence of this strategy is to provide something unique and valuable for which customers in the market will pay a premium. By doing so, firms can build strong customer loyalty and insulate themselves from price-based competition, as customers are drawn to the specialized nature of the product or service rather than any factor relating to price.

One of the primary characteristics of focused differentiation strategies is the ability to offer a product or service that is difficult for competitors to replicate. Companies that pursue this approach spend significant time and resources studying the needs, desires, and pain points of their target customers. By honing in on these unique characteristics, the firm can craft a highly specialized offering that resonates with the segment. For example, Ferrari focuses exclusively on high-performance luxury cars for affluent customers who value exclusivity, design, and engineering excellence. The company’s focused differentiation strategy allows it to cater specifically to a small but wealthy market that is less sensitive to price and more concerned with brand prestige and performance.

The success of the focused differentiation strategy often hinges on brand loyalty and customer retention. Because the firm’s product or service is so tailored to the specific needs of its niche market segment, customers develop strong brand loyalty and are less likely to switch to competitors. The emotional connection and perceived value of the specialized offering create a barrier to entry for other firms. This allows companies to build long-term relationships with their customers, fostering repeat business and reducing the threat of price competition. By continually innovating and maintaining a close connection with their market segment, focused differentiators can sustain a competitive advantage in the long run. Many individuals stay loyal to Apple due to their seamless connectivity across devices like the iPhone, iPad, Apple Watch, and MacBook. The integration of services, such as iCloud and AirDrop, incentivizes customers to stay with Apple in order for their devices to stay connected. Apple’s focus on the creative professional market segment has allowed it to cultivate a highly loyal customer base willing to pay a premium for the brand’s high-performance products.

However, the narrow strategic market size of focused differentiation means that firms must remain vigilant in staying aligned with the evolving needs of their quality-conscious customers. Changes in customer preferences or shifts in the market can quickly erode the competitive advantage if the firm fails to adapt. Additionally, the company’s growth potential may be more limited compared to firms pursuing broader strategies because the company targets a smaller market segment. Nevertheless, for firms that can effectively cater to a specialized group and offer something truly unique, focused differentiation provides an opportunity to build a strong, loyal customer base and command premium prices, establishing a distinct market position.

One of the most prominent examples of a focused differentiation strategy is Tesla, which has redefined the automotive industry by offering electric vehicles (EVs) that combine luxury, sustainability, and advanced technology. Tesla’s vehicles stand out for their long-range electric powertrains, high performance, and innovative software features, including autonomous driving capabilities. Beyond the product itself, Tesla has differentiated its brand by providing over-the-air software updates that continually enhance the functionality and performance of its cars, allowing customers to experience new features long after their initial purchases. Tesla’s commitment to innovation, sustainable transportation, and cutting-edge design has created a loyal customer base that is willing to pay a premium for these exclusive benefits. This has positioned Tesla as a leader not only in the EV market but also in the broader technology and luxury spaces. By differentiating itself through innovation and performance, Tesla maintains a loyal customer base that values its products beyond just their functional capabilities.

While Tesla has enjoyed a significant lead in electric vehicle technology, other automakers are rapidly developing their own EV models, forcing Tesla to continuously innovate to maintain its competitive edge. This ongoing investment can put pressure on profitability, particularly if the firm is unable to justify premium pricing indefinitely. While Tesla’s initial differentiation was its pioneering electric vehicle technology, other automakers like Ford and Volkswagen have introduced their own electric models, with some offering similar features at more competitive prices. The more these rivals imitate Tesla’s differentiation points, the more difficult it becomes for Tesla to maintain its premium positioning without introducing new innovations. This ongoing investment can put pressure on profitability, particularly if the firm is unable to justify premium pricing indefinitely.

A different but equally strong example of focused differentiation can be found in Palantir, a data analytics company that has set itself apart by offering highly specialized and customizable software solutions for governments and large enterprises. Palantir’s differentiation lies in its ability to provide powerful, mission-critical tools that help organizations make sense of massive amounts of data for intelligence, defense, and commercial applications. Palantir’s platforms, such as Gotham and Foundry, are renowned for their ability to integrate and analyze vast datasets, offering insights that drive key decision-making processes. What differentiates Palantir from other software companies is its deep collaboration with clients. Its software is not a one-size-fits-all solution but is tailored to the specific needs of each client, whether it be national security, public health, or financial services. This level of customization, combined with Palantir’s expertise in handling highly sensitive data, has made it indispensable to clients that require precision, security, and flexibility, allowing the company to charge premium prices for its services and building long-term relationships with its clients. Because Palantir tailors its software to meet the exact needs of its clients, the switching costs for customers are high, and they are less likely to move to another provider, even if a cheaper option becomes available.

Both Tesla and Palantir demonstrate the power of focused differentiation to establish a strong market presence. Tesla’s focus on innovative, luxury electric vehicles and Palantir’s ability to provide customized, high-stakes data solutions have allowed both companies to build loyal customer bases and command premium pricing. By offering unique value propositions that competitors find difficult to replicate, these firms have carved out durable competitive advantages in their respective industries. Differentiation, when executed effectively, enables companies like Tesla and Palantir to transcend traditional price competition and build deeper connections with their customers based on the specialized benefits they offer.

Patagonia is another company that uses a focused differentiation business-level strategy. Patagonia is known for giving their consumers high-quality, durable outdoor clothing and for having a commitment to environmental activism through various environmental programs. This company targets eco-conscious adventurers that are willing to pay extra for sustainable products from a company that cares about the planet.

Success in focused differentiation comes from knowing the customer segment deeply and offering a product that is tailored specifically to their needs and preferences.

Oatly, a Swedish food company, specializes in plant-based milk made from oats. They differentiate themselves within the milk industry by promoting their strong environmental responsibility and sustainability as well as by using a marketing approach focused on humor to appeal to eco-conscious consumers and vegans by highlighting the benefits of oat milk over traditional dairy milk.

A focused differentiation strategy works well in industries where customer preferences are highly diverse and specialized products can command higher prices. Companies pursuing focused differentiation may target high-end customers, specific geographic regions, or niche needs within a broader market. Ferrari, for example, focuses on a luxury, high-performance car market, providing exclusive, differentiated vehicles to a narrow audience of high-end consumers. Success in focused differentiation comes from knowing the customer segment deeply and offering a product that is tailored specifically to their needs and preferences.

Figure 8.9: Focused differentiation strategy examples

8.11 Best-Cost Strategy

There are two business-level strategies that rely on combining a cost leadership approach and a differentiation approach. The first is a best-cost strategy, a hybrid approach that combines elements of both cost leadership and differentiation in an existing market or market segment.

A best-cost strategy allows firms to offer products or services with superior features at lower prices than competitors. This strategy seeks to deliver more value to customers by providing high quality while keeping costs lower than rivals who offer similar levels of quality.

By offering both superior quality and competitive pricing, firms employing this strategy can attract both price-conscious consumers and those who are willing to pay a bit more for added value. This dual appeal allows companies to capture market share from both low-cost competitors and premium brands.

To successfully implement a best-cost strategy, companies must tightly control costs while continuing to invest in features or attributes that enhance the perceived value of their offerings. This requires efficient operations, strong supply chain management, and a focus on innovation. Firms need to leverage technology, economies of scale, and operational efficiency to keep production costs down, allowing them to offer competitive pricing without sacrificing quality.

Strategic Market Position: A Continuum

For firms that implement broad cost leadership, focused cost leadership, broad differentiation, or focused differentiation business-level strategy, an assumption is that the two dimensions that underpin these strategies consist of two primary and opposing choices. As you recall, a firm defining its strategic market position either follows a cost leadership strategy and appeals to cost-conscious customers or it follows a differentiation strategy and appeals consumer preferences for luxury items. When defining a company’s strategic market size, a firm either follows a focused approach, targeting a narrow, niche market segment or a broad approach, targeting a broad market.

A best-cost strategy primarily focuses on this first dimension, strategic market position. A best-cost strategy is based on the starting premise that the choice of strategic market position is a continuum of choices, with pure cost leadership at one end and pure differentiation at the other. There are many points along the strategic market position continuum that represent varying degrees of cost leadership and differentiation.

In practice, firms that follow a best-cost strategy aim to balance offering some degree of luxury with offering as low a cost as possible. Firms compete, at least indirectly, with both cost leadership and differentiation rivals. They often aim to acquire market share from rivals using both cost leadership and differentiation strategies.

Although best-cost strategy primarily addresses strategic market position, all firms using this strategy must also choose their strategic market size. A best-cost strategy is based on the assumption that the choice of a strategic market size is also a continuum of choices, with a pure focused approach at one end and a pure broad approach at the other. There are many points along the continuum that represent varying degrees of targeting a narrow niche market segment through a focused approach and targeting a broad market through a broad approach.

For example, IKEA uses a best-cost strategy by offering stylish, well-designed furniture at affordable prices. While customers could find cheaper options at discount furniture stores or more luxurious items at high-end retailers, IKEA’s combination of modern design and reasonable pricing allows it to appeal to both markets, giving customers the perception of high value.

Toyota uses a best-cost strategy with its Lexus brand, offering luxury features at lower prices than traditional luxury automakers like Mercedes-Benz or BMW. Toyota achieves this balance by leveraging its efficient manufacturing processes and economies of scale, keeping costs low while maintaining high quality in its Lexus line. Lexus appeals to customers who may not be able to afford more luxury vehicles or who choose not to spend their money on more expensive automobiles from a value perspective but who still want a little luxury at a reasonable price.

Another example of a company that follows a best-cost strategy in the fast-fashion industry is Zara. Zara has successfully employed a best-cost strategy by offering trendy, stylish clothing at relatively affordable prices. Zara’s ability to quickly produce fashion-forward designs while maintaining competitive pricing gives it an edge over both lower-cost fast-fashion competitors and more expensive designer brands.

Advantages

A best-cost strategy can achieve a strong competitive advantage. The ability to offer customers more value for their money—high-quality products at reasonable prices—creates a compelling proposition in many markets. Companies that master this strategy can build a loyal customer base and protect themselves from competitive pressures by offering a unique blend of cost efficiency and quality. The best-cost strategy allows firms to occupy a middle ground between cost leadership and differentiation, giving them flexibility and broad appeal.

Disadvantages

The best-cost strategy can be challenging to execute because it requires excellence in both cost management and differentiation, which are different strategies with different trade-offs. Firms must be able to provide features or qualities that customers value while maintaining low-cost structures. Balancing the cost driver of cost leadership and the value driver of differentiation is difficult in practice.

This best-cost strategy works well in a market where customers want both a little luxury and affordability, but it might not be as effective in markets or market segments where customers prioritize either luxury or the lowest possible price. The strategy works best in markets where customers want products that offer enhanced features but are not willing to pay premium prices, combining differentiation and affordability. The goal of the best-cost strategy is to strike a balance, offering customers more value for their money without sacrificing profitability.

Figure 8.10: Best-cost strategy examples

One way to be successful by using a best-cost strategy is by reducing overhead costs while providing innovative quality products. Entrepreneurial enterprises may have an advantage when it comes to balancing reducing overhead and providing creative products and may find a best-cost strategy appealing.

Entrepreneurs in the food industry are an excellent example of this strategy, as seen in figure 8.11.

Figure 8.12: Pursuing a best-cost strategy by reducing overhead and providing quality products

8.12 Blue Ocean Strategy

Some firms find it difficult to strictly adhere to either a cost leadership or differentiation strategy, as market conditions often require a blend of cost control and differentiation. Firms that choose a best-cost strategy combine cost leadership and differentiation in existing markets. Other companies are bold, creating a completely new market using a blue ocean strategy, which is also a combination of cost leadership and differentiation but with the distinction of market creation.

Blue ocean strategy is a relatively new strategic approach which has resonated both in the academic community and the corporate world. The core goals of the blue ocean strategy are to create uncontested market space and ideally make competition irrelevant. By doing so, blue ocean strategy breaks the paradigm that business is a zero-sum game in which a company can only increase its business at the expense of its competitors.

In contrast to blue ocean strategy, red ocean leads to competing on the same attributes with the same or similar products and services as the organization’s competitors; in this situation, market share gains can only be achieved at the expense of competitors. When all industry players compete in this red ocean, they face intense competition with limited differentiation, using price as one of the means to gain market share. This approach will eventually lead to lower industry profit, a limited industry attractiveness, and eventually a deterioration of profitability for all players in the red ocean.

Business professors Chan Kim and Renée Mauborgne identified the blue ocean strategy. This new paradigm strategically positions a business for success and is characterized by the following elements.

• Creating uncontested markets instead of competing in an existing market space
• Making the competition irrelevant instead of beating them
• Creating new demand instead of capturing more of the existing demand
• Creating value innovation that disproves the value/cost trade-off

Value innovation as one of the core principles of blue ocean strategy, which defies the notion that a business can only select either a differentiation or cost leadership strategy. The blue ocean strategy simultaneously pursues both through the concept of value innovation. Successfully combining differentiation and cost leadership activities through value innovation allows a business to conquer untapped market space, create additional demand, and pursue opportunities for highly profitable growth.

An example of a company that followed a blue ocean strategy to great success is Marvel. Marvel was founded in 1939 as a comic book company, and its customers were children. In the 1960s, Marvel followed a blue ocean strategy by seeking new customers, college students, with superheroes that were humans first and superheroes second, like the Hulk. In the 1980s, Marvel returned to a red ocean strategy by repeating the same strategy with little innovation. Customers were alienated, and the company went bankrupt. In 1999, Peter Cuneo was appointed CEO, and he is credited with taking Marvel from bankruptcy to its purchase by Disney to being valued at over four billion dollars in a decade. In achieving this, Marvel also transformed movie production. Marvel is an excellent example of a blue ocean strategy because it not only opened a new field, it reconstructed the field to open a blue ocean. Marvel was able to create unprecedented value at a low cost, using both differentiation and cost leadership to create a new a market.

There are many advantages to following a blue ocean strategy, such as brand identity and customer loyalty. However, a firm cannot remain in the same blue ocean indefinitely because competitors quickly enter the blue ocean, turning it red. It takes continuous innovation to lead an industry in a blue ocean. As you can see from the case of Marvel, a company can create multiple blue ocean strategies.

While this sounds surely very compelling and like a “no-brainer” for every business leader and strategy expert, the decisive question is where and how an organization can find these “magic” blue oceans. The answer to this success-critical question is the thorough use of value curves.

Value Curves

The value curve is a different concept from the value chain analysis. The value curve is a two-dimensional graph that shows the principal buying factors on the X-axis and the service level on the Y-axis.

The X-axis depicts the competing factors that are the main factors that a customer considers in a buying decision in the specific industry. Typical principal buying factors are price, innovation, reliability, customer service, supply security, global availability, and sustainability of the offered product and service, among others. These principal buying factors are specific to the industry in which the business operates.

The Y-axis depicts the service level offered per principal buying factor, ranked from low to high (for example, on a scale from 0 – 5 or 0 – 10).

Using this concept, the organization creates two different value curves. The industry as-is curve depicts the current profile of offerings. Additionally, the company depicts its current value curve for its business.

Lastly, the organization identifies a blue ocean market space by purposefully and intentionally diverting from the as-is industry value curve. The logic of this move is that the organization deliberately does not want to offer the same level of the same principal buying factors, which would lead to the classic red ocean play. Based on the as-is industry curve and the current value curve of the organization, a blue ocean can be identified by raising the service level of certain principal buying factors, reducing the service level, eliminating certain product and service elements, and creating new product and service factors.

Through this process, the organization purposefully creates a new value curve that deviates from the as-is industry curve. This blue ocean move means that the business is not operating anymore in the same market space, as it has created a differentiated offering that ideally creates a new blue ocean space.

The organization that uses this approach lowers its costs by eliminating or reducing factors that the industry takes for granted and that are the industry’s current standard. At the same time, the business also increases perceived consumer benefits by raising and creating factors well above the industry’s standard or by offering completely new factors that the industry has never offered. This simultaneous reduction of costs and creation of new benefits supports the value innovation at the core of blue ocean strategy as a combination of differentiation and cost leadership strategies.

Value innovation places equal emphasis on value and innovation. As such, it is a new way of thinking about and executing strategy that results in the creation of a blue ocean. The creation of blue oceans allows driving costs down while simultaneously driving value up for buyers.

The graph in figure 8.16 shows a blue ocean value curve that purposefully deviates from the industry curve.

8.13 Stuck in the Middle

Companies that attempt to combine cost leadership and differentiation strategies and fail to balance the tensions inherent in cost leadership and differentiation may end up being stuck in the middle, unable to compete on price with low-cost leaders or on quality with premium brands. This is a risk for companies following a best-cost strategy, which focuses on existing markets or market segments. It is also a risk for firms that are attempting to create entirely new markets by following a blue ocean strategy.

For instance, if a firm attempts to cut costs too aggressively, it may erode the value of its differentiated features, causing customers to perceive the product as inferior. Conversely, if the firm invests too heavily in enhancing product features without controlling costs, it may not be able to offer competitive pricing, limiting its appeal to price-sensitive consumers.

When firms are stuck in the middle, they are left without a clear competitive advantage. These firms cannot compete on price with low-cost leaders, nor can they offer unique enough products or services to justify premium pricing.

A recent example of a company caught in this strategic dilemma is Fisker Automotive, an electric vehicle manufacturer. Fisker attempted to position itself as both a luxury electric vehicle producer, competing with Tesla, and as an affordable option for environmentally conscious consumers. However, the company failed to differentiate itself with unique technology or a distinct brand identity. At the same time, it was unable to achieve the cost efficiencies required to compete with lower-priced electric vehicle options offered by larger manufacturers. This misalignment left Fisker without a strong customer base, and the company filed for bankruptcy in 2024 after struggling to find a buyer or secure additional funding to continue operations.

Another company that recently became stuck in the middle is Bed Bath & Beyond, which filed for bankruptcy in 2023. Bed Bath & Beyond was once a dominant player in the home goods market, but over time, the company failed to clearly define its competitive strategy. It was unable to effectively compete with low-cost giants like Walmart and Amazon, who offered similar products at lower prices. At the same time, the company did not differentiate itself enough in terms of customer experience, product offerings, or convenience to maintain its status as a go-to destination for home goods. As online retailers gained market share with more efficient operations and aggressive pricing, Bed Bath & Beyond found itself squeezed between cost leaders and brands that are more innovative or customer-centric, ultimately leading to its collapse.

Being stuck in the middle poses significant risks for companies. Without a clear value proposition, these firms face increasing pressure from all sides. Competitors with well-defined cost leadership or differentiation strategies will be better positioned to attract customers, leaving middle-ground companies vulnerable to shrinking margins, declining sales, and loss of relevance in the market. Both Fisker and Bed Bath & Beyond serve as recent examples of how lacking strategic focus can lead to financial instability and eventually bankruptcy.

Figure 8.17: Examples of companies that are “stuck in the middle”

8.14 Limitations of Business-Level Strategies

While broad cost leadership, focused cost leadership, broad differentiation, and focused differentiation provide useful frameworks for understanding competitive positioning, they have several limitations. One of the key challenges is that these strategies can be overly simplistic and may not fully capture the complexity of real-world competition. Competitors can easily imitate cost or differentiation advantages, eroding a firm’s edge.

The existence of hybrid strategies like best-cost strategy can lead to some firms trying to do too much, getting stuck in the middle of the industry. Additionally, shifting customer preferences, technological advancements, and the fast-paced nature of industries can make these static strategies less effective over time, requiring firms to constantly adapt their approach to remain competitive.

8.15 Analyze Business-Level Strategy

Strategic business unit managers focus on formulating business-level strategies. When you conduct a case analysis, you analyze a firm’s business-level strategy. This is step six in the case analysis process.

8.16 Why Business-Level Strategy Is Important to Business Graduates

Just like corporate-level strategy, business-level strategy has a direct influence on the implementation of functional-level strategy. Business graduates that start as business support unit managers will support business units of large companies, such as business information technology managers. They may be asked to support divisional or strategic business unit managers by providing data analysis from functional business managers, such as managers of marketing, accounting, and human resource management are ideally placed to assist with. As divisional mangers choose between broad cost leadership, broad differentiation, focused cost leadership, focused differentiation, and best cost strategies, the access that business support unit managers have to key data and their skills with robust data analysis is essential support for divisional leaders. Even in those more rare instances of a firm that follows a blue ocean strategy, timely data analysis is vital to a successful outcome.

Those of you joining smaller companies will immediately spend more time working closely with divisional or strategic business unit managers responsible for business-level strategy. Business graduates that enter either internal or external consulting roles require a high level of competence with business-level strategy to communicate to divisional or strategic business unit managers how their consulting projects fit into the business-level strategy of the firm. Some of you already are or will become entrepreneurs, and fluency with business-level strategy is essential to establishing and growing a successful firm. It is essential to know how your company competes within its chosen market and market segments.

8.17 Conclusion

Business-level strategies are essential for firms to create and sustain competitive advantage in their respective markets. Companies must clearly define how they will compete to serve their target customers effectively. Each strategy has its benefits and challenges, requiring careful alignment of resources, capabilities, and core competencies. Firms that fail to commit to a clear strategy risk becoming stuck in the middle, where they lose out to both low-cost leaders and differentiated competitors. To thrive, companies must remain adaptable, continuously refining their strategies to meet evolving market conditions and customer needs. Firms can pursue one of six business-level strategies: broad cost leadership, focused cost leadership, broad differentiation, focused differentiation, best-cost strategy, or blue ocean strategy. Each offer a distinct path to achieving competitive advantage.

Figure Descriptions

Figure 8.1: Purple hierarchical organizational chart displaying the structure of a company’s management and strategic planning. At the top is a rectangle labeled “Board of directors.” Below this, another rectangle labeled “Corporate office (corporate executives).” This level of hierarchy represents corporate-level strategy. Below this, two rectangles are labeled “Division 1 (division 1 manager)” and “Division 2 (division 2 manager).” Below this, there are four SBU boxes (each with one manager). There are two SBU boxes beneath Division 1 and two SBU boxes beneath Division 2. This level of hierarchy represents business-level strategy, innovation strategy, sustainability and ethics strategy, technology strategy, and multinational strategy. Below the SBUs are five “Business support Unit 1” boxes, dedicated to finance, operations, human resources (HRM), IT, and sales and marketing, each managed by their own business support unit manager. This level of hierarchy represents functional-level strategy.

Figure 8.2: First quadrant of an X-Y axis with four purple boxes. The x-axis represents strategic market position (ranging from low cost to unique) and the y-axis represents strategic market size (ranging from narrow market to broad market). Low cost and narrow market is marked focused cost leadership. Unique and broad market is marked broad differentiation. Unique and narrow market is marked focused differentiation. Low cost and broad market is marked broad cost leadership. At the center of these four boxes, there is “Best cost; Blue ocean.”

Figure 8.13: Line graph comparing the performance of a company against the industry across six categories: Price, Innovation, Customer Service, Supply Security, Global Availability, and Sustainability. The vertical axis ranges from 1 to 10, representing the performance scores. Two lines are plotted: a dark purple line representing the company and a light purple line for the industry. For price, the company scores 8 while the industry scores 4. In innovation, the company scores 8, and the industry 5. For customer service, the company scores 5, while the industry scores 8. In supply security, the company scores 4, while the industry scores 8. For global availability, the company scores 9, and the industry 7. Lastly, in sustainability, the company and industry both score 8.

Figure 8.14: Four purple boxes are arranged in a circle and all point to the center that reads “New value curve.” The top box is labeled “RAISE” and asks which factors should be raised above the industry’s standard. The right box is labeled “CREATE” and asks which factors should be created that the industry has never offered. The bottom box is labeled “REDUCE” and asks which factors should be reduced below the industry standard. The left box is labeled “ELIMINATE” and asks which factors that have long been the focus of industry completion should be eliminated.

Figure 8.15: Venn diagram of two purple triangles (one inverted and stacked on top of the other) that meet at their apexes in the middle of the diagram. The top triangle is labeled costs with a description that reads “To capture cost savings, reduce factors well below the industry standard and eliminate factors that have long been the focus of industry competition.” The bottom triangle is labeled buyer value with a description that reads “To capture buyer value, raise factors well above the industry standard and create factors that the industry has never offered. Where costs and buyer value overlap, is value innovation.”

Figure 8.16: Line graph comparing two curves: the blue ocean strategic move (dark purple) and the industry value curve (light purple). The x-axis is labeled competing factors and ranges from low to high, while the y-axis is labeled offering level, and ranges from low to high. The blue ocean strategic move line starts in the middle, falls, begins rising again, and ends higher than where it started. The industry value curve starts in the middle, increases slightly, decreases slightly, and ends slightly lower than where it started.

Figure References

Figure 8.1: Three levels of strategy. Kindred Grey. 2025. CC BY.

Figure 8.2: Business-level strategy framework. Kindred Grey. 2025. CC BY.

Figure 8.3: McDonald’s. Unknown author. 2022. Public domain. https://commons.wikimedia.org/wiki/File:McDonald%27s_i%27mlovin%27it-Logo.svg

Figure 8.7: Patagonia. Adam Fagen. 2012. CC BY-NC-SA 2.0. https://flic.kr/p/ct9pQq

Figure 8.8: Oatly. Tiia Monto. 2018. CC BY-SA 3.0. https://commons.wikimedia.org/wiki/File:Oatly.jpg

Figure 8.11: Recent business graduates who are successful entrepreneurs inspire other recent graduates to become entrepreneurs. Tima Miroshnichenko. 2020. Pexels license. https://www.pexels.com/photo/business-meeting-5686105

Figure 8.13: Value curve. Kindred Grey. 2025. CC BY.

Figure 8.14: Creating a blue ocean value curve. Kindred Grey. 2025. CC BY-NC-SA. Adapted from http://dx.doi.org/10.1016/j.sbspro.2015.06.162 (CC BY-NC-SA 4.0)

Figure 8.15: Value innovation as the result of lowering costs while increasing customer benefit. Adapted under fair use from https://barnabythinks.wordpress.com/2018/12/02/blue-ocean-strategy-kim-mauborgne

Figure 8.16: Creating a blue ocean value curve that purposefully deviates from the industry value curve. Kindred Grey. 2025. CC BY.