Chapter
Five
Building
Competitive
Advantage
Through
BusinessLevel Strategy
“I skate to where the
puck is going to be . . .
not to where it has been.”
- Wayne Gretsky
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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
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Customer Needs and
Product Differentiation
 Customer needs
The desires, wants, or cravings that can be
satisfied through product attributes
 Customers choose a product based on:
1. The way the product is differentiated from
other products of its type
2. The price of the product
 Product differentiation
Designing products to satisfy customers’
needs in ways that competing products
cannot.
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Customer Groups and Market
Segmentation
 Market Segmentation
The way customers can be grouped based on
important differences in their needs or preferences
 Main Approaches to Segmenting Markets
1. Ignore differences in customer segments –
Make a product for the typical or average customer
2. Recognize differences between customer groups –
Make products that meet the needs
of all or most customer groups
3. Target specific segments –
Choose to focus on and serve just
one or two selected segments
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Identifying Customer Groups
and Market Segments
Figure 5.1
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Three Approaches
to Market Segmentation
Figure 5.2
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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.
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Wal-Mart’s Business Model
Figure 5.3
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Competitive Positioning
at the Business Level
Maximizing the profitability of the company’s business Figure 5.4
model is about making the right choices with regard to
value creation through differentiation, costs, and pricing.
Source: Copyright © C. W. L. Hill & G. R. Jones,
“The Dynamics of Business-Level Strategy,”
(unpublished manuscript, 2002).
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Competitive Positioning and
the Value Creation Frontier
Figure 5.5
Value Creation Frontier represents the maximum
amount of value that 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.
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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
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Generic Business Models and the
Value Creation Frontier
Figure 5.6
The Four Principal
Generic Strategies
1.
2.
3.
4.
Cost Leadership
Focused
Cost Leadership
Differentiation
Focused
Differentiation
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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.
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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.
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Disadvantages of
Cost Leadership Strategies
 Competitors may lower
their cost structures.
 Competitors may
imitate the cost
leader’s methods.
 Cost reductions may
affect demand.
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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:
» Stives 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.
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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.
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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.
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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
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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.
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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.
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Why Focus Strategies
Are Different
Figure 5.7




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The 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 can
continually outperform
their rivals are rare.
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Broad Differentiation:
Cost Leadership and Differentiation
A broad differentiation business model may result when a
successful differentiator has pursued its strategy in a way
that has also allowed it to lower its cost structure:
 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.
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The Broad Differentiation
Business Model
Figure 5.9
The Broad Differentiators
The middle of the value
creation frontier is occupied
by broad differentiators,
which have pursued their
differentiation strategy in a
way that has allowed them
to lower their cost structure
at the same time.
They may pose serious
threats to both the cost
leaders and differentiators
over time.
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Using a Business Model to Push
out the Value Creation Frontier
Figure 5.10
The Dynamic & Changing
Value Creation Frontier
Broad differentiators
constantly improve their
strategy to formulate and
implement their broad
differentiation business
models and push out the
value creation frontier.
Industry differentiators
and cost leaders may find
over time that they have
lost their distinctive
competencies that
previously led to their
superior performance.
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Competitive Positioning:
Strategic Groups
Strategic Groups are groups of companies that follow a
business model similar to other companies within their
strategic group, but are different from that of other
companies in other strategic groups.
Implications of Strategic Groups for
Competitive Positioning
• Strategic managers must:
1.
2.
3.
4.
Map their competitors
Better understand changes in the industry
Determine which strategies are successful
Fine tune or radically alter business models and
strategies to improve competitive position
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Strategic Groups
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Failures in
Competitive Positioning
 Many companies, through neglect, ignorance or
error:
• Do not work continually to improve their business model
• Do not perform strategic group analysis
• Often fail to identify and respond to changing opportunities
and threats in the industry environment
 Companies lose their position on the value
frontier when:
• They have lost their source of competitive advantage
• Their rivals have found ways to push out the value creation
frontier and leave them behind
There is no more important task than ensuring
that the company is optimally positioned against
its rivals to compete for customers.
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“We know what happens to
people who stay in the middle
of the road. They get run over.”
- Aneurin Bevan
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