Chapter 5 BUILDING COMPETITIVE ADVANTAGE THROUGH BUSINESS-LEVEL STRATEGY

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5-2 Learning Objectives Explain why company must define business and how managers does thisExplain why company must define business and how managers does this Define competitive positioning, explain tradeoffs between differentiation, cost and pricingDefine competitive positioning, explain tradeoffs between differentiation, cost and pricing Identify choices managers make to pursue business modelIdentify choices managers make to pursue business model Explain why each business model allows company to outperform rivalsExplain why each business model allows company to outperform rivals Discuss why some can successfully make the competitive positioning decisionsDiscuss why some can successfully make the competitive positioning decisions

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5-3 “I skate to where the puck is going to be... not to where it has been.” - Wayne Gretsky - Wayne Gretsky

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Business-Level Strategy Firms must decide/evaluate: 1.Customer needs– WHAT is to be satisfied WHAT is to be satisfied 2.Customer groups– WHO is to be satisfied WHO is to be satisfied 3.Distinctive competencies– HOW customers are to be satisfied HOW customers are to be satisfied A successful business model results from business-level strategies that create a competitive advantage over its rivals.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5-5 Customer Needs and Product Differentiation oCustomer needs- desires, wants, or cravings to be satisfied through product attributes  Customers choose product based on:  Customers choose product based on: 1.Way product differentiated from others 2.Price of product oProduct differentiation- designing products to satisfy customers’ needs in ways competing products cannot

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5-6 Customer Groups and Market Segmentation oMarket Segmentation- customers grouped based on differences in needs or preferences oMain Approaches to Segmenting Markets 1.Ignore differences in segments– make product for typical/average customer 2.Recognize differences between segments– make products that meet needs of all/most segments 3.Target specific segments– focus on/serve one or two selected segments

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5-7 Identifying Customer Groups and Market Segments Figure 5.1

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5-8 Three Approaches to Market Segmentation Figure 5.2

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5-9 Implementing the Business Model Strategic managers must devise strategies that determine how: To DIFFERENTIATE & PRICE productTo DIFFERENTIATE & PRICE product To SEGMENT market & how WIDE A RANGE of products to developTo SEGMENT market & how WIDE A RANGE of products to develop A profitable business model depends on providing customer with most value while keeping cost structures viable.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Walmart’s Business Model Figure 5.3

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Competitive Positioning at the Business Level Maximizing profitability of the business model is making the right choices on value creation through differentiation, costs, and pricing. Figure 5.4

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Competitive Positioning and the Value Creation Frontier Value Creation Frontier represents the maximum value 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. Figure 5.5

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Generic Business-Level Strategies 1.Cost Leadership- Lowest cost structure vis-à-vis competitors allowing price flexibility & higher profitability 2.Focused Cost Leadership- Cost leadership in selected market niches where it has a local or unique cost advantage 3.Differentiation - Features important to customers & distinct from competitors that allow premium pricing 4.Focused Differentiation- Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Generic Business Models and the Value Creation Frontier Four Principal Generic Strategies Four Principal Generic Strategies 1.Cost Leadership 2.Focused Cost Leadership 3.Differentiation 4.Focused Differentiation Figure 5.6

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Cost Leadership Establishes a cost structure that allows them to provide goods/services at lower unit costs Strategic Choices Cost leader does not try to be industry innovator.Cost leader does not try to be industry innovator. Cost leader positions products to appeal to “average” or typical customer.Cost leader positions products to appeal to “average” or typical customer. Overriding goal of cost leader is to increase efficiency & lower costs relative to industry rivals.Overriding goal of cost leader is to increase efficiency & lower costs relative to industry rivals.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Advantages of Cost Leadership Strategies oProtected from competitors by cost advantage oLess affected by increased prices of inputs if there are powerful suppliers oLess affected by a fall in price of inputs if there are powerful buyers oPurchases in large quantities increase bargaining power over suppliers oAbility to reduce price to compete with substitute products oLow costs and prices are a barrier to entry Cost leaders able to charge lower price or achieve superior profitability at same price.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Disadvantages of Cost Leadership Strategies  Competitors may lower their cost structures.  Competitors may imitate cost leader’s methods.  Cost reductions may affect demand.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Companies with differentiation strategy create product different or distinct from competitors in important way. Strategic Choices- Differentiator »Strives to differentiate itself on as many dimensions as possible. »Focuses on quality, innovation, and responsiveness to customer needs. »May segment market in many niches. »Concentrates on organizational functions that provide source of distinct advantages. Differentiation

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Advantages of Differentiation Strategies oCustomers develop brand loyalty. oPowerful suppliers not problem because company geared more toward price it can charge than costs. oCan pass price increases on to loyal customers. oPowerful buyers not problem because product distinct. oDifferentiation & brand loyalty = barriers to entry. oThreat of substitute products depends on competitors’ ability to meet customer needs. Differentiators create demand for their distinct products and charge a premium price, resulting in greater revenue and higher profitability.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use oDifficulty maintaining long-term distinctiveness in customers’ eyes. Agile competitors can quickly imitate.Agile competitors can quickly imitate. Patents and first-mover advantage are limited in duration.Patents and first-mover advantage are limited in duration. oDifficulty maintaining premium price. Disadvantages of Differentiation Strategies

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Focus Focuser strives to serve need of targeted niche market segment where it has either low- cost or differentiated competitive advantage. Strategic Choices- Focus Focuser selects specific market based on:Focuser selects specific market based on:  Geography  Type of customer  Segment of product line Focused company positions self as either:Focused company positions self as either:  Low-Cost or  Differentiator

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Advantages of Focus Strategies oFocuser protected from rivals to extent can provide a product /service they cannot. oFocuser has power over buyers because they cannot get same thing elsewhere oThreat of new entrants limited by customer loyalty to focuser. oCustomer loyalty lessens threat from substitutes. oFocuser stays close to customers and changing needs.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Disadvantages of Focus Strategies oFocuser at disadvantage to powerful suppliers because it buys in small volume (but may pass costs to loyal customers). oBecause of low volume, focuser may have higher costs than low-cost company. oFocuser’s niche may disappear because of technological change or changes in customers’ tastes. oDifferentiators will compete for focuser’s niche.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Why Focus Strategies Are Different   Figure 5.7

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Dynamics of Competitive Positioning 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 continually outperform rivals are rare. Figure 5.8

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Broad Differentiation: Cost Leadership and Differentiation A broad differentiation business model may result when successful differentiator has pursued its strategy in a way that also allowed it to lower its cost structure: A broad differentiation business model may result when successful differentiator has pursued its strategy in a way that also allowed it to lower its cost structure: oUsing robots/flexible manufacturing cells reduces costs while producing different products. oStandardizing component parts used in different end products can achieve economies of scale. oLimiting customer options reduces production/marketing costs. oJIT inventory can reduce costs/improve quality/reliability. oUsing the Internet/e-commerce can provide information to customers and reduce costs. oLow-cost, differentiated products often produced in countries with low labor costs.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Strategic managers must: Strategic managers must: 1.Map their competitors 2.Better understand changes in industry 3.Determine which strategies are successful 4.Fine tune or radically alter business models & strategies to improve competitive position Groups of companies follow a business model similar to other companies within their strategic group, but are different from other companies in other group s. Competitive Positioning: Strategic Groups

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Failures in Competitive Positioning oMany companies: Do not work continually to improve business modelDo not work continually to improve business model Do not perform strategic group analysisDo not perform strategic group analysis Often fail to identify/respond to changing opportunities/threats in industry environmentOften fail to identify/respond to changing opportunities/threats in industry environment oCompanies lose position on value frontier when: Lost source of competitive advantageLost source of competitive advantage Rivals find ways to push out value creation frontier and leave them behindRivals find ways to push out value creation frontier and leave them behind There is no more important task than ensuring company is optimally positioned against its rivals to compete for customers.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 | 29 “We know what happens to people who stay in the middle of the road. They get run over.” - Aneurin Bevan - Aneurin Bevan © RoyaltyFree/PhotoLink/ Getty Images