Building Competitive Advantage Through Business-Level Strategy Chapter Five Building Competitive Advantage Through Business-Level Strategy

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Business-Level Strategy A successful business model results from business-level strategies that create a competitive advantage over its rivals. Firms must decide/evaluate: Customer needs – WHAT is to be satisfied Customer groups – WHO is to be satisfied Distinctive competencies – HOW customers are to be satisfied Copyright © Houghton Mifflin Company. All rights reserved.

Customer Needs and Product Differentiation The desires, wants, or cravings that can be satisfied through product attributes  Customers choose a product based on: The way the product is differentiated from other products of its type The price of the product Product differentiation Designing products to satisfy customers’ needs in ways that competing products cannot. Copyright © Houghton Mifflin Company. All rights reserved.

Customer Groups and Market Segmentation The way customers can be grouped based on important differences in their needs or preferences Main Approaches to Segmenting Markets Ignore differences in customer segments – Make a product for the typical or average customer Recognize differences between customer groups – Make products that meet the needs of all or most customer groups Target specific segments – Choose to focus on and serve just one or two selected segments Copyright © Houghton Mifflin Company. All rights reserved.

Identifying Customer Groups and Market Segments Figure 5.1 Copyright © Houghton Mifflin Company. All rights reserved.

Three Approaches to Market Segmentation Figure 5.2 Copyright © Houghton Mifflin Company. All rights reserved.

Implementing the Business Model 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 on providing the customer with the most value while keeping cost structures viable. Copyright © Houghton Mifflin Company. All rights reserved.

Wal-Mart’s Business Model Figure 5.3 Copyright © Houghton Mifflin Company. All rights reserved.

Competitive Positioning at the Business Level Maximizing the profitability of the company’s business model is about making the right choices with regard to value creation through differentiation, costs, and pricing. Figure 5.4 Source: Copyright © C. W. L. Hill & G. R. Jones, “The Dynamics of Business-Level Strategy,” (unpublished manuscript, 2002). Copyright © Houghton Mifflin Company. All rights reserved.

Competitive Positioning and the Value Creation Frontier Figure 5.5 Value Creation Frontier - represents the maximum amount of value that 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. Copyright © Houghton Mifflin Company. All rights reserved.

Generic Business-Level Strategies Cost Leadership Lowest cost structure vis-à-vis competitors allowing price flexibility & higher profitability Focused Cost Leadership Cost leadership in selected market niches where it has a local or unique cost advantage Differentiation Features important to customers & distinct from competitors that allow premium pricing Focused Differentiation Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators Copyright © Houghton Mifflin Company. All rights reserved.

Generic Business Models and the Value Creation Frontier Figure 5.6 The Four Principal Generic Strategies Cost Leadership Focused Cost Leadership Differentiation Focused Differentiation Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Cost Leadership Cost leaders establish a cost structure that allows 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 costs relative to industry rivals. Copyright © Houghton Mifflin Company. All rights reserved.

Advantages of Cost Leadership Strategies 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 leaders are able to charge a lower price or are able to achieve superior profitability than their competitors at the same price. Copyright © Houghton Mifflin Company. All rights reserved.

Disadvantages of Cost Leadership Strategies  Competitors may lower their cost structures.  Competitors may imitate the cost leader’s methods.  Cost reductions may affect demand. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Differentiation Companies with a differentiation strategy create a product that is different or distinct from its competitors in an important way. Strategic Choices A differentiator: Stives to differentiate itself on as many dimensions as possible. Focuses on quality, innovation, and responsiveness to customer needs. May segment the market in many niches. Concentrates on the organizational functions that provide a source of distinct advantages. Copyright © Houghton Mifflin Company. All rights reserved.

Advantages of Differentiation Strategies 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 distinct products and charge a premium price, resulting in greater revenue and higher profitability. Copyright © Houghton Mifflin Company. All rights reserved.

Disadvantages of Differentiation Strategies Difficulty maintaining long-term distinctiveness in customers’ eyes. Agile competitors can quickly imitate. Patents and first-mover advantage are limited in their duration. Difficulty maintaining premium price. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Focus The focuser strives to serve the need of a targeted niche market segment where it has either a low-cost or differentiated 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 Copyright © Houghton Mifflin Company. All rights reserved.

Advantages of Focus Strategies 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. Copyright © Houghton Mifflin Company. All rights reserved.

Disadvantages of Focus Strategies 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. Copyright © Houghton Mifflin Company. All rights reserved.

Why Focus Strategies Are Different Figure 5.7     Copyright © Houghton Mifflin Company. All rights reserved.

The Dynamics of Competitive Positioning Figure 5.8 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 can continually outperform their rivals are rare. Copyright © Houghton Mifflin Company. All rights reserved.

Broad Differentiation: Cost Leadership and Differentiation A broad differentiation business model may result when a successful differentiator has pursued its strategy in a way that has also allowed it to lower its cost structure: 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. Copyright © Houghton Mifflin Company. All rights reserved.

The Broad Differentiation Business Model Figure 5.9 The Broad Differentiators The middle of the value creation frontier is occupied by broad differentiators, which have pursued their differentiation strategy in a way that has allowed them to lower their cost structure at the same time. They may pose serious threats to both the cost leaders and differentiators over time. Copyright © Houghton Mifflin Company. All rights reserved.

Using a Business Model to Push out the Value Creation Frontier Figure 5.10 The Dynamic & Changing Value Creation Frontier Broad differentiators constantly improve their strategy to formulate and implement their broad differentiation business models and push out the value creation frontier. Industry differentiators and cost leaders may find over time that they have lost their distinctive competencies that previously led to their superior performance. Copyright © Houghton Mifflin Company. All rights reserved.

Competitive Positioning: Strategic Groups Strategic Groups are groups of companies that follow a business model similar to other companies within their strategic group, but are different from that of other companies in other strategic groups. Implications of Strategic Groups for Competitive Positioning • Strategic managers must: Map their competitors Better understand changes in the industry Determine which strategies are successful Fine tune or radically alter business models and strategies to improve competitive position Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategic Groups Copyright © Houghton Mifflin Company. All rights reserved.

Failures in Competitive Positioning 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 when: They have lost their source of competitive advantage Their rivals have found ways to push out the value creation frontier and leave them behind There is no more important task than ensuring that the company is optimally positioned against its rivals to compete for customers. Copyright © Houghton Mifflin Company. All rights reserved.

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