Exam 4: Business-Level Strategy

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Rivalry: Customers tend to be loyal purchasers of products that are differentiated in ways that are meaningful to them.As their loyalty to a brand increases, customers' sensitivity to price increases is reduced.The relationship between brand loyalty and price sensitivity insulates a firm from competitive rivalry.Buyers: The uniqueness of differentiated goods or services reduces customers' sensitivity to price increases.Suppliers: Because a firm using the differentiation strategy charges a premium price for its products, suppliers must provide high-quality components, driving up the firm's costs.However, the high margins the firm earns in these cases partially insulate it from the influence of suppliers because higher supplier costs can be paid through these margins.Alternatively, because of buyers' relative insensitivity to price increases, the differentiated firm might choose to pass the additional cost of supplies on to customers by increasing the price of its unique product.Entrants: Customer loyalty and the need to overcome the uniqueness of a differentiated product generate substantial barriers for potential entrants.Entering an industry under these conditions typically demands significant investments of resources and patience while seeking customer loyalty.Substitutes: Firms selling brand-name goods and services to loyal customers are positioned effectively against product substitutes.In contrast, companies without brand loyalty face a higher probability of their customers switching either to products that offer differentiated features that serve the same function (particularly if the substitute has a lower price) or to products that offer more features and perform more attractive functions.

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Integrated strategies present risks that go beyond those that arise from the pursuit of any single strategy by itself.Principal among these risks is that a firm becomes 'stuck in the middle'.In such a situation, a firm fails to implement either the differentiation or the cost leadership strategy effectively.The elements of differentiation erode the firm's low-cost status, and its efforts to achieve low costs destroy some of the aspects of the product's differentiation.The result is poor performance for the firm.