5
Chapter 5: Building Competitive
Advantage Through Business-Level
Strategy
BA 469 Spring Term, 2005
Professor Dowling
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)
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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
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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
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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
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Distinctive Competences
• Ways to pursue competitive advantage
–
–
–
–
Superior efficiency
Superior quality
Superior innovation
Superior responsiveness to customers
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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)
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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(unpublished manuscript, 2002).
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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
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Product/Market/Distinctive-Competency
Choices and Generic Competitive Strategies
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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
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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
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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
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Cost Leadership Disadvantages
• Competitors may lower their cost structures
• Competitors may imitate the cost leader’s methods
• Cost reductions may affect demand
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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
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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
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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
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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
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Generic Business-Level Strategy: Cost
Leadership and Differentiation
• Pursuing the business models of the cost leader
and differentiator simultaneously
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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
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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
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Why Focus Strategies Are Different
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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
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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
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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
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Competitive Positioning and BusinessLevel 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
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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
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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
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Choosing an Investment Strategy at the
Business Level
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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
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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
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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
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