Business-Level Strategy

Agenda

• Power and Network Theory
• Review Internal Analysis
• Business Level Strategies

Market Power and Network Theory

Network theory is a branch of mathematics that focuses on understanding and analyzing networks by studying relationships (edges) between elements (nodes) within a system.

It provides a framework to:

• Model interconnected systems
• Quantify structural positions
• Interpret power and influence
• Understand economic and competitive dynamics

Used across:social science, computer science, biology, physics

Basic Concepts in Network Structure

Power in Networks

Centrality Actors in central positions control information and resource flows.

Clusters Tightly connected groups within a network.

Structural Holes Bridging gaps between clusters generates unique advantage.

Brokerage The the act or process of bridging the disconnected groups creates power.

Structural Features of High-Power Nodes

High Degree Centrality → Many direct connections

High Betweenness Centrality → Controls pathways between others Example: Distributor connecting manufacturers and retailers

High Eigenvector Centrality → Connected to other powerful nodes Example: Partnering with industry leaders

Cluster Positioning → Strategic alliances amplify collective power

Structural Features of Low-Power Nodes

Low Degree Centrality Few connections

Low Betweenness Centrality No control over flows Example: Local business with no unique supply-chain role

Peripheral Position Example: Niche supplier disconnected from major buyers

Dependence on Few Connections Example: Startup dependent on one investor

Isolated or Sparse Networks Example: Independent contractors in commoditized markets

**Power changes if dispersed customers form collectives, e.g., union

Mini Case Discussion: Airline Ticket War Expedia vs. American Airlines

Discussion Questions

1. How does American Airlines hold bargaining power over Expedia?
2. How does Expedia hold bargaining power over airlines?
3. How do customer preferences for convenience affect power dynamics?
4. How does network theory explain these dyadic relationships?

Power in Airline Ticketing Markets

• Structural Hole Position: Expedia historically occupied a structural hole between: Airlines → Expedia → Consumers

This position provided: → Information control → Price comparison authority → Traffic aggregation power

• Loss of Structural Hole: if customers book directly with airlines, expedia loses: intermediary leverage, betweenness centrality, control over flows

Platform Competition

As more platforms emerge, Expedia now competes on:

• Centrality
• User base
• Complementary services

Competition shifts from: Structural hole dominance → Platform ecosystem rivalry

Case Outcome

American Airlines and Expedia eventually: reached agreement, relisted fares and restored distribution

Lesson:

Structural power is negotiable when both parties depend on network access.

Review: Chapter 3 Internal Analysis

• Resources & Capabilities Analysis
  • VRIN test: Value, Rarity, Inimitability, Non-substitutability
• Value Creation & Capture
  • Primary and support activities
  • Who creates value, who captures it?
  • Economic outcomes of activities (impact on WTP and SOC)
• Internal analysis decomposes firm elements (activities and resources) for business level strategy

What Is Business-Level Strategy?

• Business Any activity or organization that provides goods or services to customers for profit

• Customers Groups of individuals or organizations with needs the firm seeks to satisfy

• Business Model Configuration of actions and resources used to create, deliver, and capture value

• Business-Level Strategy Decisions that lead to unique positioning in serving customers

Five Generic Business-Level Strategies

Developed by Michael Porter’s basic strategies Michael Porter (1980).

1. Cost Leadership: Producing acceptable products at the lowest cost relative to competitors.

2. Differentiation: Products that customers perceive as being different in important ways.

3. Focused Cost Leadership: Serving a narrow market segment at the lowest cost.

4. Focused Differentiation: Serving a narrow segment with unique, valued features.

5. Integrated Cost Leadership/Differentiation: Simultaneously achieving low cost and some differentiation.

Additional Strategy Types

• Basic strategies with product lifecycle focus (Capsim)
• Variety-based strategy
• Access-based strategy
• Best-cost strategy
  • Higher value at lower cost
  • Example: Lexus

Steps in Business-Level Strategy Formulation

Who — Target Customers - Define the primary customer segment(s) and competitive scope
- Assess segment attractiveness and strategic positioning

Market Segmentation is the process of dividing customers into groups based on their needs to cluster similar requirements into identifiable groups.

What — Customer Needs & Value Proposition - Identify the key problems or needs to address
- Articulate how the offering creates differentiated value

How — Strategic Position to Capture Value - Align value chain activities to sustain cost or differentiation advantage - Determine the core resources and distinctive capabilities required - Strategy works only if your activity system pushes WTP up and pushes cost down in a way competitors can’t easily copy

Team Exercise: From Position to Strategies (15 mins)

Objective: Translate one competitive strategy into a concrete business strategy consisting: target customer, value activities strategies and resources/capabilities associated with the positioning. Appoint one team member for verbal debriefing.

Team Assignments

Team 1. Broad Cost Leader — Lowest cost across broad market

Team 2. Broad Differentiation — Raise WTP across broad market

Team 3. Niche Cost Leader — Lowest cost in specific segment

Team 4. Niche Differentiation — Deep value for narrow need

Team 5. Cost + Lifecycle Focus — Cost structure shifts over product stages

Team 6. Differentiation + Lifecycle Focus — Sustain premium over lifecycle

Cost Leadership vs. Differentiation

Key Takeaways

Network Power

• Network structure shapes the distribution of power.
  
• Centrality determines leverage over information and resource flows.
  
• Structural holes create brokerage advantages.

Business-Level Strategy

• Business level strategy defines where to compete and how to win.
  
• Competitive advantage emerges from a coherent system of value-chain activities.
  
• Trade-offs and internal consistency are essential for defensibility.

Next Session

• Business Model and Platform Strategy
• Competitive Rivalry
• Game Theory