Chapter Five Building Competitive Advantage Through Business- Level Strategy
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 2 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. 5 | 3 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. 5 | 4 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. 5 | 5 Companies with a differentiation strategy create a product that is different or distinct from its competitors in an important way. Strategic Choices A differentiator: »Strives 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. Differentiation
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 6 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. 5 | 7 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. Disadvantages of Differentiation Strategies
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 8 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. 5 | 9 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. 5 | 10 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. 5 | 11 Why Focus Strategies Are Different Figure 5.7
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 12
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 13 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. 5 | 14 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.
Task for Next Tuesday Case No 4 of Hill and Jones Blockbuster's challenges Copyright © Houghton Mifflin Company. All rights reserved. 5 | 15