1. Building Competitive Advantage through Business Level Strategy
Chapter 5

2. Levels of Strategic Management From Chapter 1

3. Key Question for Each Level
Corporate Strategy – what business(es) should the organization be in?
Business Strategy – how should the organization compete?
Functional Strategy – how should the organization’s resources be best employed to support business strategy?

4. Business-Level Strategy
How do we compete in this business?

5. 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)

6. Customer Needs and Product Differentiation
Desires, wants, or cravings that can be satisfied through product attributes
Product differentiation
Designing products to satisfy customers’ needs
Balancing differentiation with costs
Ability to charge a higher price
Different ways to achieve distinctness

7. Customer Groups and Market Segmentation
The way a company decides to group customers, based on their different needs or preferences
Price
Kinds of needs
An evolving process

8. 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 segments but concentrate on serving only one segment

9. The Dynamics of Business-Level 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)

10. The Dynamics of Business-Level Strategy
Source: Copyright © C. W. L. Hill and G. R. Jones, “The Dynamics of Business-Level Strategy,” (unpublished manuscript, 2002).

11. Choosing a Generic Business-Level 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

12. Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies

13. 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

14. 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

15. Cost Leadership Advantages
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

16. Cost Leadership Disadvantages
Competitors may lower their cost structures
Competitors may imitate the cost leader’s methods
Cost reductions may affect demand

17. 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

18. 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

19. Differentiation Advantages
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

20. 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

21. Generic Business-Level Strategy: Cost Leadership and Differentiation
Pursuing the business models of the cost leader and differentiator simultaneously

22. Cost Leadership and Differentiation Strategic Choices
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

23. 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

24. Why Focus Strategies Are Different

25. Focus Advantages
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

26. Focus Disadvantages
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

27. Exercise Form groups Vail: describe in detail its generic strategy
Pick an example for each generic strategy. Explain
Cost leadership
Differentiation
Focus

28. 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
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

29. 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

30. 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

31. 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

32. Choosing an Investment Strategy at the Business Level

33. 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

34. A Decision Tree for UPS’s Pricing Strategy

35. Competitive Positioning: Game Theory (cont’d)
Know thy rival
Find the most profitable dominant strategy
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

36. A Payoff Matrix for GM and Ford

37. 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

38. Altered Payoff Matrix for GM and Ford