5 Building Competitive Advantage Through Business-Level Strategy GARETH R. JONES /CHARLES W. L. HILL Theory of Strategic Management 10th ed. Building Competitive Advantage Through Business-Level Strategy Chapter 5 Student Version © 2013 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. Prepared by C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University

Implement business-level strategies. OVERVIEW The companies that dominate an industry can never take a leading position for granted. To create a successful business model, strategic managers must do the following: Formulate business-level strategies that will allow a company to attract customers and lead them away from competitors. Implement business-level strategies. © 2013 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.

COMPETITIVE POSITIONING AND THE BUSINESS MODEL Learning Objective: After reading this chapter you should be able to explain why a company must define its business, and how managers do this through choice about which customer groups, customer needs, and distinctive competencies to pursue. COMPETITIVE POSITIONING AND THE BUSINESS MODEL To create a successful business model, managers must choose a set of business-level strategies that work together to give a company a competitive position over its rivals. © 2013 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.

COMPETITIVE POSITIONING AND THE BUSINESS MODEL The two factors that determine which product a customer chooses to satisfy a desire are: The way a product is differentiated from other products of its type so that it is appealing. The price of the product. Product differentiation is a process of designing products to satisfy customers’ needs. Companies that invest their resources to create something distinct can often charge a premium price for their product. © 2013 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.

COMPETITIVE POSITIONING AND THE BUSINESS MODEL When devising a business model, strategic managers are always constrained by the need to differentiate their products against the need to keep their cost structure under control. Cost control allows a company to price their product at a price that gives customers as much or more value than the products of its rivals. If the customer perceives there is more value in a company’s product than a competing product, the company can charge a premium price. © 2013 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.

Many different customer groups coexist in a market. COMPETITIVE POSITIONING AND THE BUSINESS MODEL Customer Groups and Market Segmentation A second important choice in formulating a successful business model is to decide which kind of product(s) to offer to which customer group(s). Customer groups are the sets of people who share a similar need for a particular product. Many different customer groups coexist in a market. © 2013 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.

Third, a company might choose to target only 1 or 2 segments. COMPETITIVE POSITIONING AND THE BUSINESS MODEL Three Approaches to Market Segmentation First, a company might choose not to recognize that different market segments exit, and make a product targeted at the typical customer. Second, a company can choose to recognize the differences between customers groups, and create a product targeted toward most (or all) of the different market segments. Third, a company might choose to target only 1 or 2 segments. © 2013 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.

COMPETITIVE POSITIONING AND THE BUSINESS MODEL Profitability increases to the degree that there are significant differences in customer needs for a product in a particular market or industry. In buying cars, customer needs differ widely. Thus, major global carmakers make numerous vehicles to serve most market segments. In some markets, manufacturers make only one or a few product(s) as inexpensively as possible. BIC (razors, pens), Arm & Hammer (baking soda). © 2013 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.

COMPETITIVE POSITIONING AND THE BUSINESS MODEL Another approach to market segmentation is to target only one or two market segments. To do this, a company must develop something very special or distinctive to attract a large share of customers in those particular market segments. Porsche targets its well-known sports car at buyers in the high-priced sports car segment. A retailer might specialize in a particular style of clothing, like western wear. © 2013 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.

COMPETITIVE POSITIONING AND BUSINESS-LEVEL STRATEGY Learning Objective: After reading this chapter you should be able to define competitive positioning and explain the tradeoffs between differentiation, cost, and pricing options. COMPETITIVE POSITIONING AND BUSINESS-LEVEL STRATEGY Differentiation is expensive because strategies to improve product quality, support a higher level of service, or increase innovation increase operating costs. Managers must compensate for differentiation, but not price the product so high that customers decide the differentiation is not worth the price. © 2013 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.

COMPETITIVE POSITIONING AND BUSINESS-LEVEL STRATEGY No matter what level of differentiation a company chooses to pursue in its business model, differentiation and cost structure decisions affect one another. If competitors develop products for new market segments, the company must follow suit or become uncompetitive, even if this reduces profitability. If competitors develop a new product, the company must follow suit for the same reason. © 2013 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.

COMPETITIVE POSITIONING: GENERIC BUSINESS-LEVEL STRATEGIES Learning Objective: After reading this chapter you should be able to identify the choices managers make to pursue a business model based on a combination of the primary genetic business-level strategies: cost leadership, differentiation, and focus. COMPETITIVE POSITIONING: GENERIC BUSINESS-LEVEL STRATEGIES We saw earlier that a successful business model is the result of how a company formulates and implements a set of strategies to achieve appropriate differentiation, cost, and pricing options. © 2013 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.

Two advantages accrue to company pursuing cost leadership. A company pursuing a cost leadership business model chooses strategies that do everything possible to lower its cost. Two advantages accrue to company pursuing cost leadership. First, it will be more profitable than its closest competitors. Second, it gains a competitive edge because it is able to charge a lower price than its competitors. © 2013 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.

FOCUSED COST LEADERSHIP A company can pursue a focused cost leadership business model based on combining the cost leadership and focused business-level strategies to compete for customers in just one market segments. Focused cost leaders compete for customers in just one, or a few, market segments. These market segments may be defined geographically by type of customer, or by segment of the product line. © 2013 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.

FOCUSED COST LEADERSHIP If a company uses a focused cost leadership approach, it competes against the cost leader in the market segments where it can operate at no cost disadvantage. The focused cost leader concentrates on small-volume custom products, for which it has a cost advantage. It leaves the large-volume custom standardized market to the national cost leader. For example, Mexican food specials versus Big Macs. © 2013 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.

FOCUSED COST LEADERSHIP Implications and Conclusions A differentiator cannot allow a cost leader to gain too great a cost advantage. A cost leader must also imitate the strategic moves of its differentiated competitor, and increase the quality and features of its products to prosper in the long run. When designers such as Gucci and Dior unveil their new lineup, their designs are copied and the plans are transmitted to factories in Malaysia. © 2013 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.

DIFFERENTIATION A company pursuing a differentiator business model pursues business-level strategies that allow it to create a unique product. A differentiator invests its resources to gain a competitive advantage from superior innovation, excellent quality, and responsiveness to customer needs. When differentiation is based on responsiveness to customers, a company offers comprehensive after-sales service and product repair. © 2013 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.

DIFFERENTIATION The more a company resembles its rivals, the more the company is protected from competition, and the wider its market appeal. A differentiator chooses to divide its market into many segments and offer different products in each segment. A differentiator can tolerate moderate increases in input prices better than the cost leader can. The major problems with this strategy are related to how well strategic managers can maintain a product’s perceived difference to customers. © 2013 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.

FOCUSED DIFFERENTIATION A company that pursues a business model based on focused differentiation chooses to combine the differentiation and focused generic business-level strategies. A focused company will position itself to compete in just one, or a few, segments. A focused differentiator can protect its competitive advantage in a market segment to the extent that it can provide a good or service that its rivals cannot. © 2013 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.

VALUE-CREATION FRONTIER Learning Objective: After reading this chapter you should be able to explain why each business model allows a company to outperform its rival, reach the value-creation frontier, and obtain above average profitability. VALUE-CREATION FRONTIER A value-creation frontier is the maximum amount of value that the products of different companies within an industry can provide to customers at any one time using the different business models. Companies at this frontier have a competitive advantage and above average profitability. © 2013 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.

VALUE-CREATION FRONTIER Neiman Marcus, Target, and Walmart have reached the value frontier; but their competitors, Saks, JCPenny, and Sears/Kmart have not. Few companies are able to continuously outperform their rivals and remain on the value- creation frontier over time. Sony and Dell were on the frontier a few years ago, but they lost their competitive advantage to rivals, such as Samsung, Apple, and HP. Companies on the value-creation frontier offer a superior “value proposition” than their rivals. © 2013 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.

BROAD DIFFERENTIATION Broad differentiators occupy the middle segment of the value-creation frontier. These are companies that have developed business-level strategies to better differentiate their products and lower their cost structure simultaneously. This strategy enables companies to reach a high profitability level and become an increasing threat to both differentiators and cost leaders over time. With growing profits, broad differentiators can invest in new technology to weaken competition. © 2013 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.

COMPETITIVE POSITIONING AND STRATEGIC GROUPS Learning Objective: After reading this chapter you should be able to discuss why some companies can make the competitive positioning decisions that allow them to sustain their competitive advantage over time while others cannot. COMPETITIVE POSITIONING AND STRATEGIC GROUPS Within most industries, strategic groups, that is, the set of companies that pursue a similar business model, emerge. © 2013 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.

STRATEGIC GROUPS The concept of strategic groups has several implications for competitive position: Strategic managers must map their competitors according to their choice of specific business model. Once a company has mapped its rivals, it can better understand how changes taking place in the industry are affecting its competitive advantage from a differentiation and cost-structure perspective (UPS versus FedEx). © 2013 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.

FAILURES IN COMPETITIVE POSITIONING Successful competitive positioning requires that a company achieve a fit between its strategies and its business model. Many companies fail because of the following reasons: They do not work to continuously improve their business model. They do not perform strategic-group analysis. They often fail to identify and respond to change. © 2013 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.