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

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“I skate to where the puck is going to be not to where it has been.”
- Wayne Gretsky
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3. 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
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4. 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.
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5. 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
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6. Identifying Customer Groups and Market Segments
Figure 5.1
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7. Three Approaches to Market Segmentation
Figure 5.2
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8. 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.
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9. Wal-Mart’s Business Model
Figure 5.3
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10. 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).
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11. 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.
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12. 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
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13. Generic Business Models and the Value Creation Frontier
Figure 5.6
The Four Principal Generic Strategies
Cost Leadership
Focused Cost Leadership
Differentiation
Focused Differentiation
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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.
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15. 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.
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16. Disadvantages of Cost Leadership Strategies
 Competitors may lower their cost structures.
 Competitors may imitate the cost leader’s methods.
 Cost reductions may affect demand.
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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.
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18. 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.
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19. 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.
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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
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21. 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.
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22. 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.
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23. Why Focus Strategies Are Different
Figure 5.7    
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24. 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.
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25. 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.
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26. 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.
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27. 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.
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28. 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
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Strategic Groups
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30. 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.
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“We know what happens to people who stay in the middle of the road. They get run over.”
- Aneurin Bevan
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