BUILDING COMPETITIVE

ADVANTAGE THROUGH
BUSINESS-LEVEL STRATEGY
Learning Objectives
• Explain why company must define business
and how managers does this
• Define competitive positioning, explain
tradeoffs between differentiation, cost and
pricing
• Identify choices managers make to pursue
business model
• Explain why each business model allows
company to outperform rivals
• Discuss why some can successfully make
the competitive positioning decisions
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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
o Customer needs- desires, wants, or
cravings to be satisfied through
product attributes
 Customers choose product based on:
1. Way product differentiated from others
2. Price of product
o Product differentiation- designing
products to satisfy customers’ needs in
ways competing products cannot
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Customer Groups
and Market Segmentation
o Market Segmentation- customers grouped
based on differences in needs or preferences
o Main Approaches to Segmenting Markets
1. Ignore differences in segments– make product for
typical/average customer
2. Recognize differences between segments– make
products that meet needs of all/most segments
3. Target specific segments– focus on/serve 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
Strategic managers must devise strategies
that determine how:
• To DIFFERENTIATE & PRICE product
• To SEGMENT market & how
WIDE A RANGE of products to develop

A profitable business model

depends on providing customer with most
value while keeping cost structures viable.
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Competitive Positioning
at the Business Level
Maximizing profitability of the business model is making the right
choices on value creation through differentiation, costs, and pricing.

Figure 5.4
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Competitive Positioning and
the Value Creation Frontier
Figure 5.5

Value Creation Frontier

represents the maximum
value 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

Four Principal
Generic Strategies
1. Cost Leadership
2. Focused
Cost Leadership
3. Differentiation
4. Focused
Differentiation

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Cost Leadership
Establishes a cost structure that allows them
to provide goods/services at lower unit costs
Strategic Choices
• Cost leader does not try to be industry
innovator.
• Cost leader positions products to
appeal to “average” or typical
customer.
• Overriding goal of cost leader is to
increase efficiency & lower costs
relative to industry rivals.
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Advantages of
Cost Leadership Strategies
o Protected from competitors by cost advantage
o Less affected by increased prices of
inputs if there are powerful suppliers
o Less affected by a fall in price of
inputs if there are powerful buyers
o Purchases in large quantities increase
bargaining power over suppliers
o Ability to reduce price to compete
with substitute products
o Low costs and prices are a barrier to entry
Cost leaders able to charge lower price or
achieve superior profitability at same price.
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Disadvantages of
Cost Leadership Strategies
 Competitors may lower
their cost structures.

 Competitors may
imitate cost
leader’s methods.

 Cost reductions
may affect demand.
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Differentiation
Companies with differentiation
strategy create product different or distinct
from competitors in important way.

Strategic Choices- Differentiator

» Strives to differentiate itself on as many
dimensions as possible.
» Focuses on quality, innovation, and
responsiveness to customer needs.
» May segment market in many niches.
» Concentrates on organizational functions
that provide source of distinct advantages .
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Advantages of
Differentiation Strategies
o Customers develop brand loyalty.
o Powerful suppliers not problem because company
geared more toward price it can charge than costs.
o Can pass price increases on to loyal customers.
o Powerful buyers not problem because product
distinct.
o Differentiation & brand loyalty = barriers to entry.
o Threat of substitute products depends on
competitors’ ability to meet customer needs.
Differentiators 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
o Difficulty maintaining long-term
distinctiveness in customers’ eyes.
• Agile competitors can quickly imitate.
• Patents and first-mover advantage
are limited in duration.
o Difficulty maintaining premium
price.
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Focus
Focuser strives to serve need of targeted
niche market segment where it has either low-
cost or differentiated competitive advantage.
Strategic Choices- Focus
• Focuser selects specific market based on:
 Geography
 Type of customer
 Segment of product line
• Focused company positions self as either:
 Low-Cost or
 Differentiator
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Advantages of
Focus Strategies
o Focuser protected from rivals to extent can
provide a product /service they cannot.
o Focuser has power over buyers because
they cannot get same thing elsewhere
o Threat of new entrants limited by customer
loyalty to focuser.
o Customer loyalty lessens threat from
substitutes.
o Focuser stays close to customers and
changing needs.
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Disadvantages of
Focus Strategies
o Focuser at disadvantage to powerful
suppliers because it buys in small volume
(but may pass costs to loyal customers).
o Because of low volume, focuser may have
higher costs than low-cost company.
o Focuser’s niche may disappear because of
technological change or changes in
customers’ tastes.
o Differentiators will compete for focuser’s
niche.
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Why Focus Strategies
Are Different
Figure 5.7

 

 

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Competitive Positioning:
Strategic Groups
Groups of companies follow
a business model similar to other
companies within their strategic group, but are
different from other companies in other groups.
Strategic managers must:

1. Map their competitors

2. Better understand changes in industry
3. Determine which strategies are successful
4. Fine tune or radically alter business models
& strategies to improve competitive position
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Failures in
Competitive Positioning
o Many companies:
• Do not work continually to improve business model
• Do not perform strategic group analysis
• Often fail to identify/respond to changing
opportunities/threats in industry environment
o Companies lose position on value frontier
when:
• Lost source of competitive advantage
• Rivals find ways to push out value creation frontier
and leave them behind
There is no more important task than
ensuring 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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