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Chapter Five

Building Competitive Advantage Through Business-Level Strategy

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Level of Strategies

Corporate level

Business Level

A successful business model results from business-level strategies that create a competitive advantage over its rivals.

Functional Level

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Business-Level Strategy

Firms must decide/evaluate:

Customer needs Customer groups Distinctive competencies

WHAT is to be satisfied WHO is to be satisfied 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 2. The price

Product differentiation
Designing products to satisfy customers needs in ways that competing products cannot.
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Customer Groups and Market Segmentation


The way customers can be grouped based on important differences in their needs or preferences

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Basis for Customer Segmentation


Consumer Markets
Demographic Socioeconomic Geographic Psychological Consumption patterns Perceptual

Industrial Markets
End-use segments Product segments Geographic segments Common buying factor segments Customer size segments

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Identifying Customer Groups and Market Segments

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Three Approaches to Market Segmentation

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Implementing the 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-Marts Business Model

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Competitive Positioning at the Business Level

Make the right choices with regard to value creation through differentiation, costs, and pricing.

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Competitive Positioning and the Value Creation Frontier


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


Competitive Advantage
Low-cost Differentiation

Broad Target

Cost leadership

Differentiation

Competitive Scope

Narrow Target

Cost Focus

Differentiation Focus
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Generic Business Models and the Value Creation Frontier

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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 Not try to be the industry innovator. To appeal to the average or typical customer. To increase efficiency and lower its costs.

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Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

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Advantages of Cost Leadership Strategies


Protected from industry competitors Less affected by increased prices of inputs Less affected by a fall in price of inputs Increase bargaining power over suppliers Ability to reduce price to compete with substitute products Low costs and prices as a barrier to entry

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Disadvantages of Cost Leadership Strategies

Competitors may lower their


cost structures. Competitors may imitate the cost leaders 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.

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Differentiation
Strategic Choices Differentiate itself on as many dimensions as possible. Focuses on quality, innovation, and customer responsiveness. May segment the market in many niches. Concentrates on the organizational functions that provide a source of distinct advantages.

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Examples of Value-Creating Activities Associated with the Differentiation Strategy

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Advantages of Differentiation Strategies


Brand loyalty Powerful suppliers are not a problem Pass price increases on to customers. Powerful buyers are not a problem 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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Disadvantages of Differentiation Strategies


Difficulty maintaining long-term distinctiveness in customers eyes. 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.

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Focus
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
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 focusers niche may disappear because of technological change or changes in customers tastes. Differentiators will compete for a focusers niche.

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Why Focus Strategies Are Different

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The Dynamics of Competitive Positioning


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
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


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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Business Model and the Value Creation Frontier


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. Map their competitors 2. Better understand changes in the industry 3. Determine which strategies are successful 4. 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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Summary

Corporate level

Business Level

Cost leadership Differentiation Focus Efficiency Quality Innovation Responsiveness

Functional Level

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