Effective use of the cost leadership strategy allows

Effective use of the cost leadership strategy allows a firm to earn above-average returns in spite
of the presence of strong competitive forces. Moreover, the differentiation strategy is where the
firm produces unique products for customers who value differentiated features more than they
value low cost. The firm would concentrate on investing in and developing features that
differentiate a product in ways that create value for customers and thus earn above-average
returns. Lastly, the potential to earn above-average returns by successfully using the integrated
cost leadership/differentiation strategy is appealing. To earn these returns, firms must be able to
simultaneously reduce costs incurred to produce products (as required by the cost leadership
strategy) while increasing products’ differentiation (as required by the differentiation strategy).
5. Product substitutes, potential entrants, bargaining power of suppliers, bargaining power of
customers (buyers), and rivalry with existing competitors all prove to be risks for business-level
strategies. Specifically, one risk of the differentiation strategy is that customers might decide that
the price differential between the differentiator’s product and the cost leader’s product is too
large. Thus the firm becomes vulnerable to competitors that are able to offer customers a
combination of features and price that is more consistent with their needs. Another risk of the

differentiation strategy is that a firm’s means of differentiation may cease to provide value for
which customers are willing to pay. A differentiated product becomes less valuable if imitation