Transcript Chapter 5 Building Competitive Advantage Through Business

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Building Competitive
Advantage Through BusinessLevel Strategy
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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)
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Customer Needs and Product
Differentiation
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Customer needs
 Desires,
wants, or cravings that can be
satisfied through product attributes
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Product differentiation
 Designing
products to satisfy customers’
needs
Balancing differentiation with costs
 Ability to charge a higher price
 Different ways to achieve distinctness
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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
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 An
evolving process
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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
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Distinctive Competences

Ways to pursue competitive advantage
 Superior
efficiency
 Superior quality
 Superior innovation
 Superior responsiveness to customers
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The Dynamics of BusinessLevel 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)
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The Dynamics of BusinessLevel Strategy
Source: Copyright © C. W. L. Hill and G. R. Jones, “The Dynamics of Business-Level Strategy,”
(unpublished manuscript, 2002).
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Choosing a Generic BusinessLevel 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
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Product/Market/DistinctiveCompetency Choices and Generic
Competitive Strategies
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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
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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
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Cost Leadership Advantages
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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
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Cost Leadership Disadvantages
Competitors may lower their cost
structures
 Competitors may imitate the cost leader’s
methods
 Cost reductions may affect demand
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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
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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
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Differentiation Advantages
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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
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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
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Generic Business-Level
Strategy: Cost Leadership and
Differentiation
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Pursuing the business models of the cost
leader and differentiator simultaneously
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Cost Leadership and
Differentiation Strategic Choices
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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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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
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Why Focus Strategies Are
Different
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Focus Advantages
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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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Focus Disadvantages
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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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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
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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
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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
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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
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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
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Choosing an Investment
Strategy at the Business Level
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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
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A Decision Tree for UPS’s
Pricing Strategy
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Competitive Positioning: Game
Theory (cont’d)
Know thy rival
 Find the most profitable dominant strategy
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 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
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A Payoff Matrix for GM and Ford
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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
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Altered Payoff Matrix for GM and Ford
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