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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.
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