Chapter Five Building Competitive Advantage Through Business-Level Strategy
They must decide on:
Customer needs –
WHAT is to be satisfied
Customer groups –
WHO is to be satisfied
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
The desires, wants, or cravings that can be satisfied through product attributes
Customers choose a product based on:
The way the product is differentiated from other products of its type
The price of the product
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
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
Ignore differences in customer segments –
Make a product for the typical or average customer
Recognize differences between customer groups –
Make products that meet the needs of all or most customer groups
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.
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:
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
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
Determine which strategies are successful
Why certain business models are working or not
Fine tune or radically alter business models and strategies to improve competitive position
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.
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.