Chapter

Five
Building
Competitive
Advantage
Through
Business-
Level Strategy
 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

Copyright © Houghton Mifflin Company. All rights reserved. 5|2

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 of its type
2. The price of the product

 Product differentiation
Designing products to satisfy customers’
needs in ways that competing products
cannot.
Copyright © Houghton Mifflin Company. All rights reserved. 5|3
 Customer Groups and Market
Segmentation
 Market Segmentation
The way customers can be grouped based on
important differences in their needs or preferences
 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 segments

Copyright © Houghton Mifflin Company. All rights reserved. 5|4

 Identifying Customer Groups
and Market Segments
Figure 5.1

Copyright © Houghton Mifflin Company. All rights reserved. 5|5

 Three Approaches
to Market Segmentation
Figure 5.2

Copyright © Houghton Mifflin Company. All rights reserved. 5|6

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.
Copyright © Houghton Mifflin Company. All rights reserved. 5|7
 Competitive Positioning
at the Business Level
Maximizing the profitability of the company’s business Figure 5.4
model is about making the right choices with regard to value
creation through differentiation, costs, and pricing.

Source: Copyright © C. W. L. Hill & G. R. Jones,

“The Dynamics of Business-Level Strategy,”
(unpublished manuscript, 2002).

Copyright © Houghton Mifflin Company. All rights reserved. 5|8

 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
Copyright © Houghton Mifflin Company. All rights reserved. 5|9
 Cost Leadership
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.

Copyright © Houghton Mifflin Company. All rights reserved. 5 | 10

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 leaders are able to charge a lower price
or are able to achieve superior profitability
than their competitors at the same price.
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 11
 Disadvantages of
Cost Leadership Strategies
 Competitors may lower
their cost structures.

 Competitors may
imitate the cost
leader’s methods.

 Cost reductions may

affect demand.
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 12
 Differentiation
Companies with a differentiation strategy
create a product that is different or distinct
from its competitors in an important way.
Strategic Choices
• A differentiator:
» Stives to differentiate itself on as many
dimensions as possible.
» Focuses on quality, innovation, and
responsiveness to customer needs.
» May segment the market in many niches.
» Concentrates on the organizational functions that
provide a source of distinct advantages.

Copyright © Houghton Mifflin Company. All rights reserved. 5 | 13

 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.
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 14
 Disadvantages of
Differentiation Strategies
 Difficulty maintaining long-term
distinctiveness in customers’ eyes.
• Agile competitors can quickly imitate.
• Patents and first-mover advantage are
limited in their duration.
 Difficulty maintaining premium price.

Copyright © Houghton Mifflin Company. All rights reserved. 5 | 15

Types of Differentiation Themes
 Unique taste – Dr. Pepper
 Multiple features – Microsoft Windows and Office
 Wide selection and one-stop shopping – Home Depot,
Amazon.com
 Superior service -- FedEx, Ritz-Carlton
 Spare parts availability – Caterpillar
 Engineering design and performance – Mercedes, BMW
 Prestige – Rolex
 Product reliability – Johnson & Johnson
 Quality manufacture – Karastan, Michelin, Toyota
 Technological leadership – 3M Corporation
 Top-of-line image – Ralph Lauren, Starbucks, Chanel

Copyright © Houghton Mifflin Company. All rights reserved. 5 | 16

 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
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 17
 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.
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 18
 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 focuser’s niche may disappear because
of technological change or changes in
customers’ tastes.
 Differentiators will compete for a focuser’s
niche.

Copyright © Houghton Mifflin Company. All rights reserved. 5 | 19

 Examples of Focus Strategies
 Animal Planet and History Channel
• Cable TV
 Google
• Internet search engines
 Porsche
• Sports cars
 Cannondale
• Top-of-the line mountain bikes
 Enterprise Rent-a-Car
• Provides rental cars to repair garage customers
 Bandag
• Specialist in truck tire recapping
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 20
 Why Focus Strategies
Are Different
Figure 5.7

 

 

Copyright © Houghton Mifflin Company. All rights reserved. 5 | 21

 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.
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 22
 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
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 23
 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.
Copyright © Houghton Mifflin Company. All rights reserved. 5 | 24
 “We know what happens to
people who stay in the middle
of the road. They get run over.”
- Aneurin Bevan

Copyright © Houghton Mifflin Company. All rights reserved. © RoyaltyFree/PhotoLink/ Getty Images 5 | 25