Chapter 5 BUILDING COMPETITIVE ADVANTAGE THROUGH BUSINESSLEVEL STRATEGY
Chapter 5 BUILDING COMPETITIVE ADVANTAGE THROUGH BUSINESS-LEVEL STRATEGY
Learning Objectives • Explain why company must define business and how managers does this • Define competitive positioning, explain tradeoffs between differentiation, cost and pricing • Identify choices managers make to pursue business model • Explain why each business model allows company to outperform rivals • Discuss 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 -2
“I skate to where the puck is going to be. . . not to where it has been. ” - 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. 5 -3
Business-Level Strategy A successful business model results from business-level strategies that create a competitive advantage over its rivals. Firms must decide/evaluate: 1. Customer needs– WHAT is to be satisfied 2. Customer groups– WHO is to be satisfied 3. Distinctive competencies– HOW customers are to be satisfied 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 -4
Customer Needs and Product Differentiation o Customer needs- desires, wants, or cravings to be satisfied through product attributes Customers choose product based on: 1. Way product differentiated from others 2. Price of product o Product 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 -5
Customer Groups and Market Segmentation o Market Segmentation- customers grouped based on differences in needs or preferences o Main 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 -6
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 -7
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 -8
Implementing the Business Model Strategic managers must devise strategies that determine how: • To DIFFERENTIATE & PRICE product • To 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. 5 -9
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. 5 -10
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. 5 -11
Competitive Positioning and the Value Creation Frontier Figure 5. 5 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. 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 -12
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. 5 -13
Generic Business Models and the Value Creation Frontier Figure 5. 6 Four Principal Generic Strategies 1. 2. 3. 4. Cost Leadership Focused Cost Leadership Differentiation Focused 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. 5 -14
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 positions products to appeal to “average” or typical customer. • 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. 5 -15
Advantages of Cost Leadership Strategies o o o Protected from 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 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. 5 -16
Disadvantages of Cost Leadership Strategies û Competitors may lower their cost structures. û 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. 5 -17
Differentiation 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. 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 -18
Advantages of Differentiation Strategies o o o Customers develop brand loyalty. Powerful suppliers not problem because company geared more toward price it can charge than costs. Can pass price increases on to loyal customers. Powerful buyers not problem because product distinct. Differentiation & brand loyalty = barriers to entry. Threat 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. 5 -19
Disadvantages of Differentiation Strategies o Difficulty maintaining long-term distinctiveness in customers’ eyes. • • Agile competitors can quickly imitate. Patents and first-mover advantage are limited in duration. o Difficulty maintaining premium 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. 5 -20
Focuser strives to serve need of targeted niche market segment where it has either lowcost or differentiated competitive advantage. Strategic Choices- Focus • Focuser selects specific market based on: Ø Geography Ø Type of customer Ø Segment of product line • Focused company positions self as either: Ø Low-Cost or Ø 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. 5 -21
Advantages of Focus Strategies o o o Focuser protected from rivals to extent can provide a product /service they cannot. Focuser has power over buyers because they cannot get same thing elsewhere Threat of new entrants limited by customer loyalty to focuser. Customer loyalty lessens threat from substitutes. Focuser 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. 5 -22
Disadvantages of Focus Strategies o Focuser at disadvantage to powerful suppliers because it buys in small volume (but may pass costs to loyal customers). o Because of low volume, focuser may have higher costs than low-cost company. o Focuser’s niche may disappear because of technological change or changes in customers’ tastes. o Differentiators 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. 5 -23
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. 5 -24
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 continually outperform rivals are rare. 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 -25
Broad Differentiation: Cost Leadership and Differentiation o o o 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: Using robots/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/marketing costs. JIT inventory can reduce costs/improve quality/reliability. Using the Internet/e-commerce can provide information to customers and reduce costs. Low-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. 5 -26
Competitive Positioning: Strategic Groups of companies follow a business model similar to other companies within their strategic group, but are different from other companies in other groups. 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 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 -27
Failures in Competitive Positioning o Many companies: • • • Do not work continually to improve business model Do not perform strategic group analysis Often fail to identify/respond to changing opportunities/threats in industry environment o Companies lose position on value frontier when: • Lost source of competitive advantage • Rivals 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 -28
“We know what happens to people who stay in the middle of the road. They get run over. ” - Aneurin Bevan 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as © Royalty. Free/Photo. Link/ Getty permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Images 5 | 29
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