Building Competitive Advantage Through Business-Level Strategy

8/6/2019 Building Competitive Advantage Through Business-Level Strategy

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` A successful business model results from business levelstrategies that create a competitive advantage over itsrivals.

` Business-level strategy

A plan of action to use the firms resources and distinctivecompetencies to gain competitive advantage.

` Abells Business Definition process Customer needs product differentiation (what)

Customer groups market segmentation (who)

Distinctive competencies competitive actions (how)


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` Product/Market/Distinctive-Competency Choicesand Generic Competitive Strategies

Cost LeadershipCost Leadership DifferentiationDifferentiation FocusFocus

ProductProductDifferentiationDifferentiation

LowLow(principally(principally

by price)by price)

HighHigh(principally by(principally by

uniqueness)uniqueness)

Low to highLow to high(price or(price or

uniqueness)uniqueness)

MarketMarket

SegmentationSegmentation

LowLow

(mass market)(mass market)

HighHigh

(many market(many market

segments)segments)

LowLow

(one or a few(one or a few

segments)segments)

DistinctiveDistinctive

CompetencyCompetency

ManufacturingManufacturing

and materialsand materials

managementmanagement

Research andResearch and

development, salesdevelopment, sales

and marketingand marketing

Any kind ofAny kind of

distinctivedistinctive

competencycompetency


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` Cost-leadership strategy success is affected by: Competitors producing at equal or lower costs.

The bargaining strength of suppliers.

Powerful buyers demanding lower prices.

Substitute products moving into the market.

New entrants overcoming entry barriers.


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` Differentiation strategy success is achieved

through: An emphasis on product or service quality.

Innovation in providing new features for which customerswill pay a premium price.

Responsiveness to customers after the sale.

Appealing to the psychological desires of customers.


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` Differentiation strategy success is affected by: Competitors imitating features and services.

Increases in supplier costs exceeding differentiators

price premium.

Buyers becoming less brand loyal.

Substitute products adding similar features.

New entrants overcoming entry barriers related to

differentiators competitive advantage.


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` Focus strategy success is affected by: Competitor entry into focusers market segment.

Suppliers capable of increasing costs affecting only the

focuser.

Buyers defecting from market segment.

Substitute products attracting customers away from

focusers segment.

New entrants overcoming entry barriers that are the

source of the focusers competitive advantage.


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` Implications for business-level strategy Immediate competitors are companies pursuing same

strategy within the same strategic group.

Different strategic groups can have a differentstanding with respect to the effects of the fivecompetitive forces.

` First mover advantage Benefits are first choice of customers and suppliers,

setting standards, building entry barriers.


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` Investment strategy The resources (human, functional, and financial)

required to gain sustainable competitive advantage.

` Competitive position Market share is an indicator of competitive strength.

Distinctive competencies are competitive tools.

` Life Cycle Effects An industrys life cycle stage affects its attractiveness

to investment prospects.


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` Customer needsThe desires, wants, or cravings that can be satisfiedthrough product attributes

Customers choose a product based on:

1. The way the product is differentiated from otherproducts of its type

2. The price of the product

` Product differentiationDesigning products to satisfy customers needs in waysthat competing products cannot:

Different ways to achieve distinctiveness

Balancing differentiation with costs

Ability to charge a higher or premium price


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` Market Segmentation

The way customers can be grouped based on importantdifferences in their needs or preferences

In order to gain a competitive advantage

` Main Approaches to Segmenting Markets

1. Ignore differences in customer segments

Make a product for the typical or average customer

2. Recognize differences between customer groups

Make products that meet the needsof all or most customer groups

3. Target specific segments

Choose to focus on and serve justone or two selected segment


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Figure 5.2


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To develop a successful business model,

strategic managers must devise a set of

strategies that determine:

How to DIFFERENTIATE their product

How to PRICE their product

How to SEGMENT their markets

How WIDE A RANGE of products to develop

A profitable business model depends onproviding the customer with the most value

while keeping cost structures viable.


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Maximizing the profitability of the companys businessmodel is about making the right choices with regard to

value creation through differentiation, costs, and pricing.


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Specific business-level strategies that give acompany a specific competitive positionand advantage vis--vis its rivals

Characteristics of Generic Strategies Can be pursued by all businesses regardless of whether

they are manufacturing, service, or nonprofit

Can be pursued in different kinds of industry

environments Results from a companys consistent choices on product,

market, and distinctive competencies


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Value-Creation Frontier -

represents the maximum

amount of value that the

products of differentcompanies inside an

industry can give customers

at any one time by using

different business models.

Companies on the value-

creation frontier have the

most successful strategy

in a particular industry.

Figure 5.5


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1. Cost LeadershipLowest cost structure vis--vis competitorsallowing price flexibility & higher profitability

2. Focused Cost Leadership

Cost leadership in selected market niches where ithas a local or unique cost advantage

3. DifferentiationFeatures important to customers & distinct fromcompetitors that allow premium pricing

4. Focused DifferentiationDistinctiveness in selected market niches where itbetter meets the needs of customers than thebroad differentiators


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The Four PrincipalGeneric Strategies

1. Cost Leadership

2. FocusedCost Leadership

3. Differentiation

4. FocusedDifferentiation

Figure 5.6


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Cost leaders establish a cost structure thatallows them to provide goods and services

at lower unit costs than competitors.

Strategic Choices The cost leader does not try to be the

industry innovator.

The cost leader positions its products to

appeal to the average or typical customer. The overriding goal of the cost leader is to

increase efficiency and lower its costsrelative to industry rivals.


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` Protected from industry competitors by costadvantage

` Less affected by increased prices of inputsif there are powerful suppliers

` Less affected by a fall in price of inputs

if there are powerful buyers` Purchases in large quantities increase bargaining

power over suppliers` Ability to reduce price to compete with

substitute products

` Low costs and prices are a barrier to entry

Cost leader is able to charge a lower priceor is able to achieve superior profitability

than its competitors at the same price.


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Competitors may lower their coststructures.

Competitors may

imitate the cost

leaders methods.

Cost reductions may

affect demand.


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The focuser strives to serve the need ofa targeted niche market segmentwhere it has either a low-cost ordifferentiated competitive advantage.

Strategic Choices The focuser selects a specific market niche

that may be based on: Geography

Type of customer Segment of product line

Focused company positions itself as either: Low-Cost or

Differentiator


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Companies with a differentiation strategycreate a product that is different or distinctfrom its competitors in an important way.

Strategic Choices A differentiator strives to differentiate itself

on as many dimensions as possible.

Differentiator focuses on quality, innovation,

and responsiveness to customer needs. May segment the market in many niches.

A differentiated company concentrates onthe organizational functions that provide asource of distinct advantages.

Differentiation:Generic Business-Level Strategies


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` Customers develop brand loyalty.

` Powerful suppliers are not a problem because the company is

geared more toward the price it can charge than its costs.

` Differentiators can pass price increases on to customers.

` Powerful buyers are not a problem because the product is distinct.

` Differentiation and brand loyalty are barriers to entry.

` The threat of substitute products depends on competitors ability to

meet customer needs.

Differentiators can create demand for their distinctproducts and charge a premium price, resulting in

greater revenue and higher profitability.


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` Difficulty maintaining long-term distinctiveness in

customers eyes. Agile competitors can quickly imitate.

Patents and first-mover advantage are limited.

` Difficulty maintaining premium price.


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Retail Industry Dynamics

Many successful companies

lose their position on the

frontier at some point in theirhistory. To turn around their

declining performance, they

need to change their

business models.

Companies that cancontinually outperform

their rivals are rare.

Figure 5.8


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A broad differentiation business model may result when asuccessful differentiatorhas pursued its strategy in a way thathas also allowed it to lower its cost structure:

` Using robots and flexible manufacturing cells reduces costswhile producing different products.

`

Standardizing component parts used in different end productscan achieve economies of scale.` Limiting customer options reduces production and marketing

costs.` JIT inventory can reduce costs and improve quality and

reliability.

` Using the Internet and e-commerce can provide information tocustomers and reduce costs.

` Low-cost and differentiated products are often both produced incountries with low labor costs.


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The Broad DifferentiatorsThe middle of the value-

creation frontier is occupiedby broad differentiators,which have pursued theirdifferentiation strategy in away that has allowed them

to lower their cost structureat the same time.

They may pose seriousthreats to both the costleaders and differentiatorsover time.

Figure 5.9


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The Dynamic & ChangingValue-Creation FrontierBroad differentiators

constantly improve theirstrategy to formulate andimplement their broaddifferentiation businessmodels and push out thevalue-creation frontier.

Industry differentiators andcost leaders may find overtime that they have lost theirdistinctive competencies thatpreviously led to theirsuperior performance.

Figure 5.10


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Implications of Strategic Groups forCompetitive Positioning:1. Strategic managers must map their competitors:

Map according to their choice of business model

Use this knowledge to position themselves closer to customers

Differentiate themselves from their competitors

2. Use the map to better understand changes in the industry Affecting its relative position vis--vis differentiation & cost structure

To identify opportunities and threats

Identify emerging threats from companies outside the strategic group3. Determine which strategies are successful

Why certain business models are working or not

4. Fine tune or radically alter business models and strategies to improvecompetitive position

Strategic Groups are groups of companies thatfollow a business model similar to other companieswithin their strategic group, but are different fromthat of other companies in other strategic groups.


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Successful competitive positioning requires that a

company achieve a fit between its strategies and its

business model.

` Many companies, through neglect, ignorance or error:

Do not work continually to improve their business model Do not perform strategic group analysis

Often fail to identify and respond to changing opportunities and

threats in the industry environment

` Companies lose their position on the value frontier

They have lost their source of competitive advantage Their rivals have found ways to push out the value-creation frontier

and leave them behindThere is no more important task than ensuringthat the company is optimally positioned against

its rivals to compete for customers.

Building Competitive Advantage Through Business-Level Strategy

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