5 Building Competitive Advantage Through BusinessLevel Strategy BusinessLevel
5 Building Competitive Advantage Through Business-Level Strategy
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) Copyright © Houghton Mifflin Company. All rights reserved. 2
Customer Needs and Product Differentiation • Customer needs – 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 Copyright © Houghton Mifflin Company. All rights reserved. 3
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 – An evolving process Copyright © Houghton Mifflin Company. All rights reserved. 4
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 Copyright © Houghton Mifflin Company. All rights reserved. 5
Distinctive Competences • Ways to pursue competitive advantage – Superior efficiency – Superior quality – Superior innovation – Superior responsiveness to customers Copyright © Houghton Mifflin Company. All rights reserved. 6
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) Copyright © Houghton Mifflin Company. All rights reserved. 7
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Business-Level Strategy Source: Copyright © C. W. L. Hill and G. R. Jones, “The Dynamics of Business-Level Strategy, ” (unpublished manuscript, 2002). Copyright © Houghton Mifflin Company. All rights reserved. 8
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 Copyright © Houghton Mifflin Company. All rights reserved. 9
Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies Copyright © Houghton Mifflin Company. All rights reserved. 10
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 Copyright © Houghton Mifflin Company. All rights reserved. 11
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 Copyright © Houghton Mifflin Company. All rights reserved. 12
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 Copyright © Houghton Mifflin Company. All rights reserved. 13
Cost Leadership Disadvantages • 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. 14
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 Copyright © Houghton Mifflin Company. All rights reserved. 15
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 Copyright © Houghton Mifflin Company. All rights reserved. 16
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 Copyright © Houghton Mifflin Company. All rights reserved. 17
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 Copyright © Houghton Mifflin Company. All rights reserved. 18
Generic Business-Level Strategy: Cost Leadership and Differentiation • Pursuing the business models of the cost leader and differentiator simultaneously Copyright © Houghton Mifflin Company. All rights reserved. 19
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 Copyright © Houghton Mifflin Company. All rights reserved. 20
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 Copyright © Houghton Mifflin Company. All rights reserved. 21
Why Focus Strategies Are Different Copyright © Houghton Mifflin Company. All rights reserved. 22
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 Copyright © Houghton Mifflin Company. All rights reserved. 23
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 Copyright © Houghton Mifflin Company. All rights reserved. 24
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 Copyright © Houghton Mifflin Company. All rights reserved. 25
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 Copyright © Houghton Mifflin Company. All rights reserved. 26
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 Copyright © Houghton Mifflin Company. All rights reserved. 27
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 Copyright © Houghton Mifflin Company. All rights reserved. 28
Choosing an Investment Strategy at the Business Level Copyright © Houghton Mifflin Company. All rights reserved. 29
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 Copyright © Houghton Mifflin Company. All rights reserved. 30
A Decision Tree for UPS’s Pricing Strategy Copyright © Houghton Mifflin Company. All rights reserved. 31
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 Copyright © Houghton Mifflin Company. All rights reserved. 32
A Payoff Matrix for GM and Ford Copyright © Houghton Mifflin Company. All rights reserved. 33
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 Copyright © Houghton Mifflin Company. All rights reserved. 34
Altered Payoff Matrix for GM and Ford Copyright © Houghton Mifflin Company. All rights reserved. 35
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