5 Chapter 5: Building Competitive Advantage Through Business-Level Strategy BA 469 Spring Term, 2007 Prof. Dowling

5 - 2 Business-Level Strategy Developing a firm-specific business model that will allow a company to gain competitive advantage over its rivals in a market or industry –Customers’ needs –Customer groups –Distinctive competencies (how customers’ need will be satisfied)

5 - 3 Customer Needs and Product Differentiation Customer needs –Desires, wants, or cravings that can be satisfied through product attributes Product differentiation –Designing products to satisfy customers’ needs Balancing differentiation with costs Ability to charge a higher price Different ways to achieve distinctness

5 - 4 Customer Groups and Market Segmentation Market segmentation –The way a company decides to group customers, based on their different needs or preferences Price Kinds of needs –An evolving process

5 - 5 Customer Groups and Market Segmentation (cont’d) Strategies to market segmentation –Choose not to recognize that different groups of customers have different needs; serve the average customer –Segment a market and develop a product to suit the needs of each segment –Recognize that the market is segments but concentrate on serving only one segment

5 - 6 Distinctive Competences Ways to pursue competitive advantage –Superior efficiency –Superior quality –Superior innovation –Superior responsiveness to customers

5 - 7 The Dynamics of Business-Level Strategy Make a consistent and compatible set of choices concerning: –How to differentiate and price the product –When and how much to segment the market to maximize demand –Where and how to invest capital in order to create value while keeping cost structures viable (for competitive pricing)

5 - 8 The Dynamics of Business-Level Strategy Source: Copyright © C. W. L. Hill and G. R. Jones, “The Dynamics of Business-Level Strategy,” (unpublished manuscript, 2002).

5 - 9 Choosing a Generic Business-Level Strategy Generic strategies –All businesses can pursue them regardless of whether they are manufacturing, service, or nonprofit –Can be pursued in different kinds of industry environments –Results from a company’s consistent choices on product, market, and distinctive competencies

Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies

Generic Business-Level Strategy: Cost Leadership Establish a cost structure that allows the company to provide goods and services at lower unit costs than competitors Advantages –If rivals charge similar prices, the cost leader achieves superior profitability –The cost leader is able to charge a lower price than competitors

Cost Leadership Strategic Choices The cost leader does not try to be the industry innovator The cost leader positions its products to appeal to the “average” customer The overriding goal of the cost leader is to increase efficiency and lower its costs relative to its rivals

Cost Leadership Advantages Protected from industry competitors by cost advantage Less affected by increased prices of inputs if 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 Leadership Disadvantages Competitors may lower their cost structures Competitors may imitate the cost leader’s methods Cost reductions may affect demand

Generic Business-Level Strategy: Differentiation Create a product that customers perceive as different or distinct in an important way Advantages –Premium price –Increased revenues = superior profitability

Differentiation Strategic Choices Quality, innovation, responsiveness to customer needs A differentiator strives to differentiate itself along as many dimensions as possible A differentiator segments its market into many niches A differentiated company concentrates on the organizational functions that provide the source of differentiation advantage

Differentiation Advantages 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

Differentiation Disadvantages Difficulty in maintaining long-term distinctness in customers’ eyes –Agile competitors can quickly imitate –Patents and first-mover advantage are limited Difficulty of maintaining premium price

Generic Business-Level Strategy: Cost Leadership and Differentiation Pursuing the business models of the cost leader and differentiator simultaneously

Cost Leadership and Differentiation Strategic Choices Using robots and flexible manufacturing cells reduces costs while producing different products Standardizing component parts used in different end products can 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 to customers and reduce costs Low-cost and differentiated products are often both produced in countries with low labor costs

Generic Business-Level Strategy: Focus Serving the needs of a specific market segment –Geographic –Type of customer –Segment of the product line After choosing a market segment, a focused company positions itself using either –Low-cost OR differentiation

Why Focus Strategies Are Different

Focus Advantages The focuser is protected from rivals to the extent it can provide a product or service they cannot The focuser has power over buyers because they cannot get the same thing from anyone else The threat of new entrants is limited by customer loyalty to the focuser Customer loyalty lessens the threat from substitutes The focuser stays close to its customers and their changing needs

Focus Disadvantages The focuser is at a disadvantage with regard to powerful suppliers because it buys in small volume (but it may be able to pass costs along to loyal customers) Because of low volume, a focuser may have higher costs than a low-cost company The focuser’s niche may disappear because of technological change or changes in customers’ tastes Differentiators will compete for a focuser’s niche

Business-Level Strategy: Stuck in the Middle Companies that do not do the planning necessary for success in their chosen strategy –Product and market choices that have not been able to obtain or sustain competitive advantage Successful generic competitive strategy: –Product, market, and distinctive competency decisions must result in a business-level strategy that leads to competitive advantage and superior profitability –The environment and competition must be monitored constantly in order to stay in tune with changes

Competitive Positioning and Business- Level Strategy In every market segment or industry, several companies typically compete for the same customers The actions of one company have an impact on the others Managers must position their companies competitively with regard to customers and competitors

Competitive Positioning: Strategic Group Analysis Identifying the strategies that a company’s rivals are pursuing Strategic groups: companies in an industry that are pursuing a similar generic strategy

Competitive Positioning: Choosing an Investment Strategy The amount and type of resources that must be invested to maximize a company’s profitability over time –Human –Functional –Financial

Choosing an Investment Strategy at the Business Level

Competitive Positioning: Game Theory Companies are players that are simultaneously making choices The potential profitability varies depending on the strategy one company selects and the strategies that its rivals select Sequential move and simultaneous move games Look forward and reason back

Competitive Positioning: Game Theory (cont’d) Know thy rival Find the most profitable dominant strategy –Dominant strategy: one that makes you better off than you would be if you pursued any other strategy, no matter what strategy your opponent uses

Competitive Positioning: Game Theory (cont’d) Strategy shapes the payoff structure of the game By their choice of strategy and business model, companies can alter the payoff structure of the game, alter their dominant strategy, and move away from a prisoner’s dilemma type of game structure