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

The Nature of Competitive Positioning (Cont’d) The process of defining a business involves decisions about (1) customer needs, or what is to be satisfied; (2) customer groups, or who is to be satisfied; and (3) distinctive competences, or how customer needs are to be satisfied. These three decisions are the basis of the choice of a business-level strategy because they determine how a company will compete in an industry Copyright © Houghton Mifflin Company. All rights reserved.

The Nature of Competitive Positioning In order to maximize its competitive advantage, a company must find the best way to position itself against its rivals. It does this by using business-level strategy. Business-level strategy is the plan of action that strategic managers adopt to use a company’s resources and distinctive competences to gain a competitive advantage over its rivals in a market or industry Copyright © Houghton Mifflin Company. All rights reserved.

Customer needs and product differentiation Customer needs are desires, wants, or cravings that can be satisfied by means of the characteristics of a product or service. For example, a person’s craving for something sweet can be satisfied by a carton of Ben & Jerry’s ice cream, a Snickers bar, or a spoonful of sugar. Product differentiation is the process of creating a competitive advantage by designing products—goods or services—to satisfy customer needs. Copyright © Houghton Mifflin Company. All rights reserved.

Customer needs and product differentiation (Cont’d) All companies must differentiate their products to a certain degree in order to attract customers and satisfy some minimal level of need. However, some companies differentiate their products to a much greater degree than others, and this difference can give them a competitive edge. Copyright © Houghton Mifflin Company. All rights reserved.

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 Copyright © Houghton Mifflin Company. All rights reserved.

Identifying Customer Groups and Market Segments Figure 5.1 Copyright © Houghton Mifflin Company. All rights reserved.

Distinctive Competencies The third issue in business-level strategy is to decide which distinctive competences to pursue to satisfy customers’ needs and customer groups. Four ways in which companies can obtain a competitive advantage: superior efficiency, quality, innovation, and responsiveness to customers. The Four Seasons hotel chain, for example, attempts to do all it can to provide its customers with the highest quality accommodations and the best customer service possible. In making business strategy choices, a company must decide how to organize and combine its distinctive competences to gain a competitive advantage. 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 A profitable business model depends on providing the customer with the most value while keeping cost structures viable. 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.

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.

Copyright © Houghton Mifflin Company. All rights reserved. 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.

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.

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.

Copyright © Houghton Mifflin Company. All rights reserved. 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: 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. 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. 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.

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. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. 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.

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.

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.