Building Competitive Advantage Business-Level Strategy Through Business-Level Strategy Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. “I skate to where the puck is going to be . . . not to where it has been.” - Wayne Gretsky Copyright © Houghton Mifflin Company. All rights reserved. © RoyaltyFree/PhotoLink/ Getty Images
The Big Picture: the strategy model Environ-ment FIRM 4 levels of strategy Functional Business Corporate International Strategy
Copyright © Houghton Mifflin Company. All rights reserved. External Analysis Macroenvironment National & Global Industry Firm Industry Firm Firm Firm Industry Industry Copyright © Houghton Mifflin Company. All rights reserved.
Business Level Strategy What is business-level strategy? What are generic strategies? Competitive Positioning Strategy and Industry Life Cycle Competitive Dynamics Copyright © Houghton Mifflin Company. All rights reserved.
What is strategy ? Strategy = how you achieve your goals, the set of actions you take to reach your goal Plan for future action Pattern of past actions A goal makes your actions have a logical purpose Logical purpose of actions = actions linked to accomplishing goal Illogical actions are those that don’t help to accomplish goal
Business-Level Strategy A successful business model results from business level strategies that create a competitive advantage over its rivals. They must decide on: Customer needs – WHAT is to be satisfied Customer groups – WHO is to be satisfied Distinctive competencies – HOW customers are to be satisfied These decisions determine which strategies are formulated & implemented to put a business model into action. Copyright © Houghton Mifflin Company. All rights reserved.
Business Model Business Strategy Creating a business model includes key decisions on What are customer needs ? Who is the customer ? How will we satisfy these customers’ needs? Which strategies are formulated & implemented to realize customer goals Business Model in action Competitive Advantage Copyright © Houghton Mifflin Company. All rights reserved.
Customer Needs: Product Differentiation (What & How ) Customer needs (What) The desires, wants, or cravings that can be satisfied through product attributes Customers choose a product based on: How a product is differentiated from other products of its type The price of the product Product differentiation (How) Designing products to satisfy customers’ needs in ways that competing products cannot: Different ways to achieve distinctiveness Balancing differentiation with costs Ability to charge a higher or premium price Copyright © Houghton Mifflin Company. All rights reserved.
Customer Needs: Market Segmentation (Who) The way customers can be grouped based on important differences in their needs or preferences In order to gain a competitive advantage 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 segment 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 These decisions involve a value-price tradeoff Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. Value-Cost Tradeoff A profitable business model depends on providing the customer with the most value while keeping cost structures viable. If your strategy is differentiation (value), you have to worry about cost If your strategy is low cost, you have to worry about differentiation (value) 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 at the Business Level: External 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 at the Business Level: Internal 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 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 at the Business Level: Strategies 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.
Business Level Strategy Figure 5.7 What is business-level strategy? What are generic strategies? Competitive Positioning Strategy and Industry Life Cycle Competitive Dynamics Copyright © Houghton Mifflin Company. All rights reserved.
Generic Business-Level Strategies Specific business-level strategies that give a company a specific competitive position and advantage vis-à-vis its rivals Characteristics of Generic Strategies Can be pursued by all businesses regardless of whether they are manufacturing, service, or nonprofit Can be pursued in many different kinds of industry environments Results from a company’s consistent choices on product, market, and distinctive competencies Copyright © Houghton Mifflin Company. All rights reserved.
Generic Business-Level Strategies Generic strategies = very broad strategies Generic = apply to all industries at all times Very general guidelines Generic strategies ≠ specific strategies Not specific: may not necessarily apply to this company in this industry at this time Generic strategies = good starting point Strategy implementation = realizing the details of differentiation & cost leadership The details often determine success Copyright © Houghton Mifflin Company. All rights reserved.
The Four Principal 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.
The 4 Generic Strategies Figure 5.7 Copyright © Houghton Mifflin Company. All rights reserved.
Competitive Positioning 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. How do we measure success in an industry? Copyright © Houghton Mifflin Company. All rights reserved.
Generic Business Models 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.
Cost Leadership Generic Business-Level Strategies Cost leaders establish a cost structure that allows them to provide goods and services at lower unit costs than competitors. Strategic Choices for cost leaders The overriding goal of the cost leader is to increase efficiency and lower its costs relative to industry rivals. The cost leader positions its products to appeal to the “average” or typical customer. The cost leader does not try to be the industry innovator except as relates to costs. 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 leader is able to charge a lower price OR achieve superior profitability than its competitors at the same price. Copyright © Houghton Mifflin Company. All rights reserved.
Disadvantages Cost Leadership Strategies Competitors may lower their cost structures. Competitors may imitate the cost leader’s methods. Cost reductions may affect demand (less quality, fewer features). Copyright © Houghton Mifflin Company. All rights reserved.
Differentiation: Generic Business-Level Strategies Companies with a differentiation strategy create a product that is different from its competitors in a way that is valued by its chosen customers. 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.
Differentiation Strategy Strategic Choices for differentiators A differentiator strives to differentiate itself on as many dimensions as possible. Differentiator focuses on quality, innovation, and responsiveness to customer needs. May segment the market in many niches. A differentiated company 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. 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. Difficulty maintaining premium price. Copyright © Houghton Mifflin Company. All rights reserved.
Why Focus Strategies Are Different Figure 5.7 Copyright © Houghton Mifflin Company. All rights reserved.
Focus Generic Business-Level Strategies The focuser strives to serve the need of a targeted niche market segment where it can create either a low-cost or differentiated competitive advantage. Strategic Choices for focus strategies: 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: 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: 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.
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 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.
Other Default Strategies Competitive parity: no-one in industry can achieve competitive advantage Price at cost or tacit agreement Copycat: do what others do Competitors easily imitated on important dimensions Stuck in the middle Try for cost leadership, differentiation or combined strategy and fail, leaving company without a competitive advantage Do nothing: the no strategy strategy Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. Stuck in the Middle Caught between 2 strategies differentiation & low cost, OR Focus and broad markets Strategic Choices: turnaround or exit Turnaround strategies Incorrect choices regarding formulation Incorrect choices regarding implementation Need for new investments Exit strategies: sell, spin off or close Copyright © Houghton Mifflin Company. All rights reserved.
Business Level Strategy What is business-level strategy? What are generic strategies? Competitive Positioning Strategy and Industry Life Cycle Competitive Dynamics Copyright © Houghton Mifflin Company. All rights reserved.
Competitive Positioning: Definition Creating a business model includes key decisions on What are customer needs ? Who is the customer ? How will we satisfy these customers’ needs? Competitive positioning = firm’s competitive situation relative to its competitive rivals In effect, the business model decides the firm’s desired competitive positioning relative to its rivals. 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: Map according to their choice of business model Use this knowledge to position themselves closer to customers Differentiate themselves from their competitors Use the map to better understand changes in the industry Affecting its relative position vis-à-vis differentiation & cost structure To identify opportunities and threats Identify emerging threats from companies outside the strategic group Determine which strategies are successful Why certain business models are working or not Fine tune or radically alter business models and strategies to improve competitive position 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.
Failures in Competitive Positioning Successful competitive positioning requires that a company achieve a fit between its strategies and its business model. 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 – 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.
Business Level Strategy Figure 5.7 What is business-level strategy? What are generic strategies? Competitive Positioning Strategy and Industry Life Cycle Competitive Dynamics Copyright © Houghton Mifflin Company. All rights reserved.
Business Strategy and Industry Life Cycle Five stages of the Industry Life Cycle Embryonic Growth Shakeout Maturity Decline Copyright © Houghton Mifflin Company. All rights reserved.
Stages in the Industry Life Cycle Strength and nature of five forces change as industry evolves Figure 2.4 Copyright © Houghton Mifflin Company. All rights reserved.
Business Strategy and Industry Life Cycle Should we use the same strategy regardless of where the industry is in its life cycle? Copyright © Houghton Mifflin Company. All rights reserved.
Business Strategy and Industry Life Cycle Here’s some ideas: Embryonic stage: share-building strategy Business model emphasizes creation of stable distinctive competencies Failure may = early exit Copyright © Houghton Mifflin Company. All rights reserved.
Business Strategy and Industry Life Cycle Growth Stage Growth strategy = maintain or increase competitive position in rapidly expanding market Significant resources needed to fund expansion Market segmentation (focus strategy): Specialize in some way in expanding market Exit Strategy: If weak, sell out to stronger competitor or new entrant Copyright © Houghton Mifflin Company. All rights reserved.
Business Strategy and Industry Life Cycle Shakeout stage: Share-increasing strategy: gain market share from weaker competitors Market concentration strategy: develop niches in market Exit strategy: leave the market Maturity stage Hold-and-maintain strategy Maintain distinctive competency Profit strategy: Maximize profits, minimize resource commitments Copyright © Houghton Mifflin Company. All rights reserved.
Business Strategy and Industry Life Cycle Decline Stage Market concentration strategy Consolidate product range Consolidate market segments Potential for a focus strategy Asset reduction or harvest strategy Reduce investment, maximize profits Copyright © Houghton Mifflin Company. All rights reserved.
Business Level Strategy Figure 5.7 What is business-level strategy? What are generic strategies? Competitive Positioning Strategy and Industry Life Cycle Competitive Dynamics Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. Competitive Dynamics Let’s talk about driving a motorbike. What’s your strategy for driving a motorbike to avoid accidents? Do the actions you take while driving conform to this strategy? How? If you have a general or generic strategy, do you ever have to change it? What makes you change? Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. Competitive Dynamics So, when you drive a motorbike, you are constantly changing what you do to reflect the changes in your situation and the environment. In strategy, the BIG picture is constantly changing. Competitive Dynamics = actions and reactions of a firm and its competitive rivals over time Within and among strategic groups Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. Competitive Dynamics When a firm takes a competitive action, it may change the firm and the industry and the macroenvironment. A firm’s competitive actions may change the industry by: provoking a reaction from other firms Provoking a reaction from other forces Provoking a reaction from the macro-environmental forces Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. Competitive Dynamics What you do depends on what your competitor(s) do(es) or doesn’t do. What your competitor does depends on what you do or don’t do. Company B Direct Reaction Company A Action Indirect Reaction No Reaction Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. Competitive Dynamics Competitors must decide to react or not. If they react, they must decide how, where and when If your competitor acts, your firm must decide whether to react If it decides to react, it must decide how, where and when. So competitive industries are dynamic, in constant flux or change. Copyright © Houghton Mifflin Company. All rights reserved.
Competitive Dynamics: the role of the future You and your competitors and the macroenvironment may also react to what they think the firm is going to do in the future. So Strategic perspectives must be dynamic, have two elements: The current situation: Internal, external, strategy The probable future of that situation: Tomorrow’s internal, external and strategy Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. Competitive Dynamics A firm’s strategy should aim it at the future To create the firm that has a competitive advantage in the industry of the future The managerial challenges of maintaining a strategic perspective: having and acting in light of Internal and external perspectives Present and future perspectives Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. “I skate to where the puck is going to be . . . not to where it has been.” - Wayne Gretsky Copyright © Houghton Mifflin Company. All rights reserved. © RoyaltyFree/PhotoLink/ Getty Images
Business Level Strategy What is business-level strategy? What are generic strategies? Competitive Positioning Strategy and Industry Life Cycle Competitive Dynamics 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.
Why Focus Strategies Are Different Stuck in the Middle 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.
Copyright © Houghton Mifflin Company. All rights reserved. Competitive Dynamics What you do depends on what your competitor(s) do(es) or doesn’t do. What your competitor does depends on what you do or don’t do. Company B Direct Reaction Company A Action Indirect Reaction No Reaction Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. Review Questions What is business-level strategy? What are the 4 generic business-level strategies? What is competitive positioning and why is it important? What are the five stages in the industry life cycle? Should a firm’s strategy change according to the industry life cycle? What are competitive dynamics? Are they important? Copyright © Houghton Mifflin Company. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved. “We know what happens to people who stay in the middle of the road. They get run over.” - Aneurin Bevan © RoyaltyFree/PhotoLink/ Getty Images Copyright © Houghton Mifflin Company. All rights reserved.