CHARLES W. L. HILL / GARETH R. JONES
Strategic Management
Chapter
5
An Integrated Approach 10th ed.
Building Competitive
Advantage Through
Business-Level Strategy
Student Version
© 2013 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.
Prepared by C. Douglas Cloud , Professor Emeritus of Accounting, Pepperdine University
OVERVIEW
 The companies that dominate an industry can
never take a leading position for granted.
 To create a successful business model,
strategic managers must do the following:
1) Formulate business-level strategies that
will allow a company to attract customers
and lead them away from competitors.
2) Implement business-level strategies.
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Learning Objective: After reading this chapter
you should be able to explain why a company
must define its business, and how managers
do this through choice about which customer
groups, customer needs, and distinctive
competencies to pursue.
COMPETITIVE POSITIONING AND
THE BUSINESS MODEL
 To create a successful business model,
managers must choose a set of business-level
strategies that work together to give a
company a competitive position over its rivals.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
COMPETITIVE POSITIONING AND
THE BUSINESS MODEL
 The two factors that determine which product a
customer chooses to satisfy a desire are:
1) The way a product is differentiated from other
products of its type so that it is appealing.
2) The price of the product.
 Product differentiation is a process of
designing products to satisfy customers’ needs.
 Companies that invest their resources to create
something distinct can often charge a premium
price for their product.
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COMPETITIVE POSITIONING AND
THE BUSINESS MODEL
 When devising a business model, strategic
managers are always constrained by the need to
differentiate their products against the need to
keep their cost structure under control.
 Cost control allows a company to price their
product at a price that gives customers as much
or more value than the products of its rivals.
 If the customer perceives there is more value in a
company’s product than a competing product, the
company can charge a premium price.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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COMPETITIVE POSITIONING AND
THE BUSINESS MODEL
Customer Groups and Market Segmentation
 A second important choice in formulating a
successful business model is to decide which
kind of product(s) to offer to which customer
group(s).
 Customer groups are the sets of people who
share a similar need for a particular product.
 Many different customer groups coexist in a
market.
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COMPETITIVE POSITIONING AND
THE BUSINESS MODEL
Three Approaches to Market Segmentation
 First, a company might choose not to recognize
that different market segments exit, and make a
product targeted at the typical customer.
 Second, a company can choose to recognize the
differences between customers groups, and
create a product targeted toward most (or all) of
the different market segments.
 Third, a company might choose to target only 1
or 2 segments.
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COMPETITIVE POSITIONING AND
THE BUSINESS MODEL
 Profitability increases to the degree that there are
significant differences in customer needs for a
product in a particular market or industry.
 In buying cars, customer needs differ widely.
 Thus, major global carmakers make numerous
vehicles to serve most market segments.
 In some markets, manufacturers make only one
or a few product(s) as inexpensively as possible.
 BIC (razors, pens), Arm & Hammer (baking
soda).
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COMPETITIVE POSITIONING AND
THE BUSINESS MODEL
 Another approach to market segmentation is to
target only one or two market segments.
 To do this, a company must develop something
very special or distinctive to attract a large share
of customers in those particular market
segments.
 Porsche targets its well-known sports car at
buyers in the high-priced sports car segment.
 A retailer might specialize in a particular style
of clothing, like western wear.
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Learning Objective: After reading this chapter
you should be able to define competitive
positioning and explain the tradeoffs between
differentiation, cost, and pricing options.
COMPETITIVE POSITIONING AND
BUSINESS-LEVEL STRATEGY
 Differentiation is expensive because strategies to
improve product quality, support a higher level of
service, or increase innovation increase
operating costs.
 Managers must compensate for differentiation,
but not price the product so high that customers
decide the differentiation is not worth the price.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
COMPETITIVE POSITIONING AND
BUSINESS-LEVEL STRATEGY
 No matter what level of differentiation a company
chooses to pursue in its business model,
differentiation and cost structure decisions affect
one another.
 If competitors develop products for new market
segments, the company must follow suit or
become uncompetitive, even if this reduces
profitability.
 If competitors develop a new product, the
company must follow suit for the same reason.
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Learning Objective: After reading this chapter
you should be able to identify the choices
managers make to pursue a business model
based on a combination of the primary
genetic business-level strategies: cost
leadership, differentiation, and focus.
COMPETITIVE POSITIONING: GENERIC
BUSINESS-LEVEL STRATEGIES
 We saw earlier that a successful business
model is the result of how a company
formulates and implements a set of strategies
to achieve appropriate differentiation, cost, and
pricing options.
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COST LEADERSHIP
 A company pursuing a cost leadership business
model chooses strategies that do everything
possible to lower its cost.
 Two advantages accrue to company pursuing
cost leadership.
 First, it will be more profitable than its closest
competitors.
 Second, it gains a competitive edge because it
is able to charge a lower price than its
competitors.
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FOCUSED COST LEADERSHIP
 A company can pursue a focused cost
leadership business model based on combining
the cost leadership and focused business-level
strategies to compete for customers in just one
market segments.
 Focused cost leaders compete for customers in
just one, or a few, market segments.
 These market segments may be defined
geographically by type of customer, or by segment
of the product line.
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FOCUSED COST LEADERSHIP
 If a company uses a focused cost leadership
approach, it competes against the cost leader in
the market segments where it can operate at no
cost disadvantage.
 The focused cost leader concentrates on smallvolume custom products, for which it has a cost
advantage.
 It leaves the large-volume custom standardized
market to the national cost leader. For example,
Mexican food specials versus Big Macs.
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FOCUSED COST LEADERSHIP
Implications and Conclusions
 A differentiator cannot allow a cost leader to gain
too great a cost advantage.
 A cost leader must also imitate the strategic
moves of its differentiated competitor, and
increase the quality and features of its products to
prosper in the long run.
 When designers such as Gucci and Dior unveil
their new lineup, their designs are copied and the
plans are transmitted to factories in Malaysia.
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DIFFERENTIATION
 A company pursuing a differentiator business
model pursues business-level strategies that allow
it to create a unique product.
 A differentiator invests its resources to gain a
competitive advantage from superior innovation,
excellent quality, and responsiveness to customer
needs.
 When differentiation is based on responsiveness
to customers, a company offers comprehensive
after-sales service and product repair.
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DIFFERENTIATION
 The more a company resembles its rivals, the
more the company is protected from competition,
and the wider its market appeal.
 A differentiator chooses to divide its market into
many segments and offer different products in
each segment.
 A differentiator can tolerate moderate increases in
input prices better than the cost leader can.
 The major problems with this strategy are related
to how well strategic managers can maintain a
product’s perceived difference to customers.
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FOCUSED DIFFERENTIATION
 A company that pursues a business model based
on focused differentiation chooses to combine
the differentiation and focused generic businesslevel strategies.
 A focused company will position itself to compete
in just one, or a few, segments.
 A focused differentiator can protect its competitive
advantage in a market segment to the extent that
it can provide a good or service that its rivals
cannot.
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5-19
Learning Objective: After reading this chapter
you should be able to explain why each business
model allows a company to outperform its rival,
reach the value-creation frontier, and obtain
above average profitability.
VALUE-CREATION FRONTIER
 A value-creation frontier is the maximum amount
of value that the products of different companies
within an industry can provide to customers at any
one time using the different business models.
 Companies at this frontier have a competitive
advantage and above average profitability.
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VALUE-CREATION FRONTIER
 Neiman Marcus, Target, and Walmart have
reached the value frontier; but their competitors,
Saks, JCPenny, and Sears/Kmart have not.
 Few companies are able to continuously
outperform their rivals and remain on the valuecreation frontier over time.
 Sony and Dell were on the frontier a few years
ago, but they lost their competitive advantage to
rivals, such as Samsung, Apple, and HP.
 Companies on the value-creation frontier offer a
superior “value proposition” than their rivals.
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BROAD DIFFERENTIATION
 Broad differentiators occupy the middle segment
of the value-creation frontier.
 These are companies that have developed
business-level strategies to better differentiate
their products and lower their cost structure
simultaneously.
 This strategy enables companies to reach a high
profitability level and become an increasing threat
to both differentiators and cost leaders over time.
 With growing profits, broad differentiators can
invest in new technology to weaken competition.
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5-22
Learning Objective: After reading this
chapter you should be able to discuss why
some companies can make the competitive
positioning decisions that allow them to
sustain their competitive advantage over
time while others cannot.
COMPETITIVE POSITIONING AND
STRATEGIC GROUPS
 Within most industries, strategic groups, that
is, the set of companies that pursue a similar
business model, emerge.
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STRATEGIC GROUPS
 The concept of strategic groups has several
implications for competitive position:
1) Strategic managers must map their
competitors according to their choice of
specific business model.
2) Once a company has mapped its rivals, it can
better understand how changes taking place in
the industry are affecting its competitive
advantage from a differentiation and coststructure perspective (UPS versus FedEx).
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FAILURES IN COMPETITIVE POSITIONING
 Successful competitive positioning requires that a
company achieve a fit between its strategies and
its business model.
 Many companies fail because of the following
reasons:
 They do not work to continuously improve their
business model.
 They do not perform strategic-group analysis.
 They often fail to identify and respond to
change.
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