Building Competitive Advantage

Chapter
Five
Building
Competitive
Advantage
Through
Business-
Level Strategy

Copyright © Houghton Mifflin Company. All rights reserved. 5 | 2
Business-Level Strategy
They must decide on:
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
A successful business model results from
business level strategies that create a
competitive advantage over its rivals.
These decisions determine
which strategies are formulated & implemented
to put a business model into action.

Customer Needs:
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:
• Different ways to achieve distinctiveness
• Balancing differentiation with costs
• Ability to charge a higher or premium price

Customer Needs:
Market Segmentation
 Market Segmentation
The way customers can be grouped based on
important differences in their needs or preferences
 In order to gain a competitive advantage
 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 segment

Identifying Customer Groups
and Market Segments
Figure 5.1

Three Approaches
to Market Segmentation
Figure 5.2

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.

Wal-Mart’s Business Model
Figure 5.3

Competitive Positioning
at the Business Level
Source: Copyright © C. W. L. Hill & G. R. Jones,
“The Dynamics of Business-Level Strategy,”
(unpublished manuscript, 2002).
Maximizing the profitability of the company’s business
model is about making the right choices with regard to
value creation through differentiation, costs, and pricing.
Figure 5.4

Generic
Business-Level Strategies
Specific business-level strategies that give a
company a specific competitive position
and advantage vis-à-vis its rivals
Characteristics of Generic Strategies
• Can be pursued by all businesses
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

The Four Principal 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

Cost Leadership
Generic Business-Level Strategies
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.

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 leader is able to charge a lower price
or is able to achieve superior profitability
than its competitors at the same price.

Disadvantages
Cost Leadership Strategies
 Competitors may lower
their cost structures.
 Competitors may
imitate the cost
leader’s methods.
 Cost reductions may
affect demand.

Why Focus Strategies
Are Different
 


Figure 5.7

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

Advantages:
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.

Disadvantages:
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.

Companies with a differentiation strategy
create a product that is different or distinct
from its competitors in an important way.
Strategic Choices
• A differentiator strives to differentiate itself
on as many dimensions as possible.
• Differentiator focuses on quality, innovation,
and responsiveness to customer needs.
• May segment the market in many niches.
• A differentiated company concentrates on
the organizational functions that provide a
source of distinct advantages.
Differentiation:

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.

 Difficulty maintaining long-term
distinctiveness in customers’ eyes.
• Agile competitors can quickly imitate.
• Patents and first-mover advantage are
limited.
 Difficulty maintaining premium price.
Disadvantages of
Differentiation Strategies

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.

Implications of Strategic Groups for Competitive Positioning:
1. Strategic managers must map their competitors:
• Map according to their choice of business model
• Use this knowledge to position themselves closer to customers
• Differentiate themselves from their competitors
2. Use the map to better understand changes in the industry
• Affecting its relative position vis-à-vis differentiation & cost structure
• To identify opportunities and threats
• Identify emerging threats from companies outside the strategic group
3. Determine which strategies are successful
 Why certain business models are working or not
4. Fine tune or radically alter business models and strategies to
improve competitive position
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.
Competitive Positioning:
Strategic Groups

Failures in
Competitive Positioning
Successful competitive positioning requires
that a company achieve a fit between its
strategies and its business model.
 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 –
• 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.

Building Competitive Advantage

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