Chapter 5 BUILDING COMPETITIVE ADVANTAGE THROUGH BUSINESS-LEVEL STRATEGY.

Chapter 5

BUILDING COMPETITIVE ADVANTAGE THROUGH

BUSINESS-LEVEL STRATEGY

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Learning Objectives• Explain why company must define business

and how managers does this• Define competitive positioning, explain

tradeoffs between differentiation, cost and pricing

• Identify choices managers make to pursue business model

• Explain why each business model allows company to outperform rivals

• Discuss why some can successfully make the competitive positioning decisions


“I skate to where the puck is going to be . . .not to where it has been.”

- Wayne Gretsky

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Business-Level Strategy

Firms must decide/evaluate:1. Customer needs– WHAT is to be satisfied2. Customer groups– WHO is to be satisfied3. Distinctive competencies– HOW customers are to be

satisfied

A successful business model results from business-level strategies that create a

competitive advantage over its rivals.


Customer Needs and Product Differentiation

o Customer needs- desires, wants, or cravings to be satisfied through product attributes

Customers choose product based on:1. Way product differentiated from others

2. Price of product

o Product differentiation- designing products to satisfy customers’ needs in ways competing products cannot


Customer Groupsand Market Segmentation

o Market Segmentation- customers grouped based on differences in needs or preferences

o Main Approaches to Segmenting Markets

1. Ignore differences in segments– make product for typical/average customer

2. Recognize differences between segments– make products that meet needs of all/most segments

3. Target specific segments– focus on/serve one or two selected segments


Identifying CustomerGroups and Market Segments

Figure 5.1


Three Approachesto Market Segmentation

Figure 5.2


Implementingthe Business Model

Strategic managers must devise strategies that determine how:

• To DIFFERENTIATE & PRICE product

• To SEGMENT market & how WIDE A RANGE of products to develop

A profitable business model depends on providing customer with most value while keeping cost structures viable.


Walmart’s Business Model

Figure 5.3


Competitive Positioning at the Business Level

Maximizing profitability of the business model is making the right choices on value creation through differentiation, costs, and pricing.

Figure 5.4


Competitive Positioning and the Value Creation Frontier

Value Creation Frontier represents the maximum

value the products of different companies 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


Generic Business-Level Strategies

1. Cost Leadership- Lowest cost structure vis-à-vis competitors allowing price flexibility & higher profitability

2. Focused Cost Leadership- Cost leadership in selected market niches where it has a local or unique cost advantage

3. Differentiation - Features important to customers & distinct from competitors that allow premium pricing

4. Focused Differentiation- Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators


Generic Business Models and the Value Creation Frontier

Four Principal Generic Strategies

1. Cost Leadership2. Focused

Cost Leadership3. Differentiation4. Focused

Differentiation

Figure 5.6


Cost LeadershipEstablishes a cost structure that allows them to provide goods/services at lower unit costs

Strategic Choices

• Cost leader does not try to be industry innovator.

• Cost leader positions products to appeal to “average” or typical customer.

• Overriding goal of cost leader is to increase efficiency & lower costs relative to industry rivals.


Advantages of Cost Leadership Strategies

o Protected from competitors by cost advantageo Less affected by increased prices of

inputs if there are powerful suppliers o Less affected by a fall in price of

inputs if there are powerful buyerso Purchases in large quantities increase

bargaining power over supplierso Ability to reduce price to compete

with substitute productso Low costs and prices are a barrier to entry

Cost leaders able to charge lower price or achieve superior profitability at same price.


Disadvantages of Cost Leadership Strategies

Competitors may lower their cost structures.

Competitors may imitate cost leader’s methods.

Cost reductions may affect demand.


Companies with differentiation strategy create product different or distinct from competitors in important way.

Strategic Choices- Differentiator»Strives to differentiate itself on as many

dimensions as possible.»Focuses on quality, innovation, and

responsiveness to customer needs.»May segment market in many niches.»Concentrates on organizational functions

that provide source of distinct advantages.

Differentiation


Advantages of Differentiation Strategies

o Customers develop brand loyalty.o Powerful suppliers not problem because company

geared more toward price it can charge than costs.o Can pass price increases on to loyal customers.o Powerful buyers not problem because product

distinct.o Differentiation & brand loyalty = barriers to entry.o Threat of substitute products depends on

competitors’ ability to meet customer needs.

Differentiators create demand for their distinct products and charge a premium price,

resulting in greater revenue and higher profitability.


o Difficulty maintaining long-term distinctiveness in customers’ eyes.

• Agile competitors can quickly imitate.• Patents and first-mover advantage

are limited in duration.o Difficulty maintaining premium

price.

Disadvantages of Differentiation Strategies


FocusFocuser strives to serve need of targeted

niche market segment where it has either low-cost or differentiated competitive advantage.

Strategic Choices- Focus

• Focuser selects specific market based on: Geography Type of customer Segment of product line

• Focused company positions self as either: Low-Cost or Differentiator


Advantages of Focus Strategies

o Focuser protected from rivals to extent can provide a product /service they cannot.

o Focuser has power over buyers because they cannot get same thing elsewhere

o Threat of new entrants limited by customer loyalty to focuser.

o Customer loyalty lessens threat from substitutes.

o Focuser stays close to customers and changing needs.


Disadvantages of Focus Strategies

o Focuser at disadvantage to powerful suppliers because it buys in small volume (but may pass costs to loyal customers).

o Because of low volume, focuser may have higher costs than low-cost company.

o Focuser’s niche may disappear because of technological change or changes in customers’ tastes.

o Differentiators will compete for focuser’s niche.


Why Focus Strategies Are Different

Figure 5.7


Dynamics ofCompetitive Positioning

Retail Industry Dynamics Many successful

companies lose their position on the frontier at

some point in their history. To turn around their

declining performance, they need to change their

business models.

Companies that continually

outperform rivals are rare.

Figure 5.8


Broad Differentiation:Cost Leadership and Differentiation

A broad differentiation business model may result when successful differentiator has pursued its strategy

in a way that also allowed it to lower its cost structure:o Using robots/flexible manufacturing cells reduces costs

while producing different products.o Standardizing component parts used in different end

products can achieve economies of scale.o Limiting customer options reduces production/marketing

costs.o JIT inventory can reduce costs/improve quality/reliability.o Using the Internet/e-commerce can provide information to

customers and reduce costs.o Low-cost, differentiated products often produced in

countries with low labor costs.


Strategic managers must:

1. Map their competitors

2. Better understand changes in industry

3. Determine which strategies are successful

4. Fine tune or radically alter business models & strategies to improve competitive position

Groups of companies follow a business model similar to other

companies within their strategic group, but are different from other companies in other groups.

Competitive Positioning: Strategic Groups


Failures in Competitive Positioning

o Many companies:• Do not work continually to improve business model• Do not perform strategic group analysis• Often fail to identify/respond to changing

opportunities/threats in industry environmento Companies lose position on value frontier

when:• Lost source of competitive advantage• Rivals find ways to push out value creation frontier

and leave them behindThere is no more important task than

ensuring company is optimally positioned against its rivals to compete for customers.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 | 29

“We know what happens to people who stay in the middle

of the road. They get run over.” - Aneurin Bevan

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Chapter 5 BUILDING COMPETITIVE ADVANTAGE THROUGH BUSINESS-LEVEL STRATEGY.

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