Building Competitive Advantage Through Business-Level Strategy

Copyright Houghton Mifflin Company. All rights reserved.
5 | 1
Building Competitive Advantage
Through
Business-Level Strategy
5 | 2
I skate to where the
puck is going to be . . .

not to where it has been.
- Wayne Gretsky
RoyaltyFree/PhotoLink/ Getty Images
The Big Picture: the strategy
model
FIRM
Environ
-ment
Strategy
4 levels of strategy
Functional
Business
Corporate
International

The Big Picture: the Business
Level strategy model
FIRM
Environ
-ment
Strategy
Functional
Level
Business
Level
+Business Level Strategy
What business are we in?
How shall we compete?
+Functional Level Strategy
What organizational activities do we need to do
well?
How will we be competitive?
+Corporate Level Strategy
How many businesses should we be in and which
ones?
How should we compete?
+International Level Strategy
Which national markets should we compete in?
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+Simple Organization
Business level strategy, supported by
Functional level strategy
Primary & Support activities: value chain
+Complex Organization: 2 or more
businesses
Corporate level strategy
+Multiple national markets
International or global level strategy
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Complexity
More Simple More Complex
Functional &
Business level
Corp -
related
Corp -
unrelated
International
Global
2 | 8
External Analysis
Macroenvironment
National & Global
Industry
Industry
Industry
Industry
Firm
Firm
Firm
Firm
Business Level Strategy
1. What is business-level strategy?
2. What are generic strategies?
3. Competitive Positioning
4. Strategy and Industry Life Cycle
5. Competitive Dynamics
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What is strategy ?
+Strategy = how you achieve your
goals, the set of actions you take to reach
your goal
Plan for future action
Pattern of past actions
+A goal makes your actions have a logical
purpose
Logical purpose of actions = actions linked to
accomplishing goal
Illogical actions are those that dont help to
accomplish goal

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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.
Business Model + Business Strategy
+Creating a business model includes key
decisions on
What are customer needs ?
Who is the customer ?
How will we satisfy these customers needs?

+Which strategies are formulated &
implemented to realize customer goals

+Business Model in action

+Competitive Advantage

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Customer Needs:
Product Differentiation (What & How )
+ Customer needs (What)
The desires, wants, or cravings that can be satisfied
through product attributes
+ Customers choose a product based on:
1. How a product is differentiated from other
products of its type
2. The price of the product

+ Product differentiation (How)
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
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Customer Needs:
Market Segmentation (Who)
+ 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
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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
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

These decisions involve a value-price tradeoff
Value-Cost Tradeoff

+If your strategy is differentiation (value),
you have to worry about cost

+If your strategy is low cost, you have to
worry about differentiation (value)
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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
Figure 5.3
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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 companys business model is about
making the right choices with regard to value creation through
differentiation, costs, and pricing.
Figure 5.4
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at the Business Level: External
Figure 5.4
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at the Business Level: Internal
Figure 5.4
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Figure 5.4
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at the Business Level: Strategies
Figure 5.4
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Figure 5.7
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Generic
Business-Level Strategies
Specific business-level strategies that give a
company a specific competitive position
and advantage vis--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 many different kinds of
industry environments
Results from a companys consistent
choices on product, market, and distinctive
competencies
Generic
Generic strategies = very broad
strategies
Generic = apply to all industries at all times
Very general guidelines
Generic strategies specific strategies
Not specific: may not necessarily apply to
this company in this industry at this time
Generic strategies = good starting point
Strategy implementation = realizing the
details of differentiation & cost leadership
The details often determine success
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The Four Principal Generic
1. Cost Leadership
Lowest cost structure vis--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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The 4 Generic Strategies
C C
C C
Figure 5.7
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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.
Figure 5.5
How do we measure success in an industry?
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Generic Business Models
The Value-Creation Frontier
The Four Principal
Generic Strategies
1. Cost Leadership
2. Focused Cost Leadership
3. Differentiation
4. Focused Differentiation
Figure 5.6
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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 for cost leaders
The overriding goal of the cost leader is to
increase efficiency and lower its costs
relative to industry rivals.
The cost leader positions its products to
appeal to the average or typical customer.
The cost leader does not try to be the
industry innovator except as relates to
costs.
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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 achieve superior profitability than its
competitors at the same price.
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Disadvantages
Cost Leadership Strategies
Competitors may lower
their cost structures.

Competitors may
imitate the cost
leaders methods.

Cost reductions may
affect demand (less quality,
fewer features).
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Companies with a differentiation strategy
create a product that is different from its
competitors in a way that is valued by its
chosen customers.
Differentiation:
Differentiators can create
demand for their distinct
products and charge a premium
price, resulting in greater
revenue and higher profitability.
Differentiation Strategy
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Strategic Choices for differentiators
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.
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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.
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+ 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
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Why Focus Strategies
Are Different
C C
C C
Figure 5.7
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Focus
The focuser strives to serve the need of
a targeted niche market segment
where it can create either a low-cost or
differentiated competitive advantage.
Strategic Choices for focus strategies:
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
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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.
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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 focusers niche may disappear because
of technological change or changes in
customers tastes.
+ Differentiators will compete for a focusers
niche.
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The Dynamics of
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.
Figure 5.8
5 | 44
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 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.
Figure 5.9
5 | 46
Using a Business Model to Push
Out 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.
Figure 5.10
Other Default Strategies
+Competitive parity: no-one in industry
can achieve competitive advantage
Price at cost or tacit agreement
+Copycat: do what others do
Competitors easily imitated on important
dimensions
+Stuck in the middle
Try for cost leadership, differentiation or
combined strategy and fail, leaving
company without a competitive advantage
+Do nothing: the no strategy strategy
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Stuck in the Middle
+Caught between 2 strategies
differentiation & low cost, OR
Focus and broad markets
+Strategic Choices: turnaround or exit
+Turnaround strategies
Incorrect choices regarding formulation
Incorrect choices regarding implementation
Need for new investments
+Exit strategies: sell, spin off or close
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Competitive Positioning:
Definition
+Creating a business model includes key
decisions on
What are customer needs ?
Who is the customer ?
How will we satisfy these customers needs?
+Competitive positioning = firms
competitive situation relative to its
competitive rivals
+In effect, the business model decides the
firms desired competitive positioning
relative to its rivals.
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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--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
5 | 52
The Dynamics of
business models.

Companies that can
Figure 5.8
5 | 53
Failures in
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.
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Figure 5.7
Business Strategy and
Industry Life Cycle
+Five stages of the Industry Life Cycle
1. Embryonic
2. Growth
3. Shakeout
4. Maturity
5. Decline

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Stages in the Industry Life Cycle
O O O O O
Strength and nature of five forces change as industry evolves Figure 2.4
Industry Life Cycle
Should we use the same strategy
regardless of where the industry
is in its life cycle?

5 | 57
Industry Life Cycle
Heres some ideas:

+Embryonic stage: share-
building strategy
Business model emphasizes
creation of stable distinctive
competencies
Failure may = early exit

5 | 58
Industry Life Cycle
+Growth Stage
Growth strategy = maintain or increase
competitive position in rapidly expanding
market
Significant resources needed to fund expansion
Market segmentation (focus strategy):
Specialize in some way in expanding market
Exit Strategy:
If weak, sell out to stronger competitor or new
entrant
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Industry Life Cycle
+Shakeout stage:
Share-increasing strategy: gain market
share from weaker competitors
Market concentration strategy: develop
niches in market
Exit strategy: leave the market
+Maturity stage
Hold-and-maintain strategy
Maintain distinctive competency
Profit strategy:
Maximize profits, minimize resource
commitments
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Industry Life Cycle
+Decline Stage
Market concentration strategy
Consolidate product range
Consolidate market segments
Potential for a focus strategy
Asset reduction or harvest strategy
Reduce investment, maximize profits
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Figure 5.7
Competitive Dynamics
+Lets talk about driving a motorbike.
+Whats your strategy for driving a
motorbike to avoid accidents?
+Do the actions you take while driving
conform to this strategy?
+How?
+If you have a general or generic strategy,
do you ever have to change it?
+What makes you change?

5 | 63
+So, when you drive a motorbike, you are
constantly changing what you do to
reflect the changes in your situation and
the environment.
+In strategy, the BIG picture is constantly
changing.
+Competitive Dynamics = actions and
reactions of a firm and its competitive
rivals over time
Within and among strategic groups

5 | 64
+When a firm takes a competitive action,
it may change the firm and the industry
and the macroenvironment.
+A firms competitive actions may change
the industry by:
provoking a reaction from other firms
Provoking a reaction from other forces
Provoking a reaction from the macro-
environmental forces
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+What you do depends on what your
competitor(s) do(es) or doesnt do.
+What your competitor does depends on
what you do or dont do.
5 | 66
Company
A Action
Company B
Direct Reaction
Indirect
Reaction
No Reaction
+Competitors must decide to react or not.
+If they react, they must decide how,
where and when
+If your competitor acts, your firm must
decide whether to react
+If it decides to react, it must decide how,
where and when.
+So competitive industries are dynamic,
in constant flux or change.

5 | 67
Competitive Dynamics: the role of
the future
+You and your competitors and the
macroenvironment may also react to
what they think the firm is going to do in
the future.
+So Strategic perspectives must be
dynamic, have two elements:
1.The current situation:
Internal, external, strategy
2.The probable future of that situation:
Tomorrows internal, external and strategy
5 | 68
+A firms strategy should aim it at the
future
To create the firm that has a competitive
advantage in the industry of the future
+The managerial challenges of
maintaining a strategic perspective:
having and acting in light of
Internal and external perspectives
Present and future perspectives
5 | 69
5 | 70
I skate to where the
puck is going to be . . .

not to where it has been.
- Wayne Gretsky
5 | 71
5 | 72
Figure 5.4
5 | 73
Why Focus Strategies
Are Different
C C
C C
Stuck in the
Middle
5 | 74
The Dynamics of
business models.

Companies that can
Figure 5.8
+What you do depends on what your
competitor(s) do(es) or doesnt do.
+What your competitor does depends on
what you do or dont do.
5 | 75
Company
A Action
Company B
Direct Reaction
Indirect
Reaction
No Reaction
Review Questions
+What is business-level strategy?
+What are the 4 generic business-level
strategies?
+What is competitive positioning and why is it
important?
+What are the five stages in the industry life
cycle?
+Should a firms strategy change according to
the industry life cycle?
+What are competitive dynamics?
+Are they important?
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We know what happens to
people who stay in the middle
of the road. They get run over.
- Aneurin Bevan

Building Competitive Advantage Through Business-Level Strategy

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