sm gen strategies v1_2

Copyright © Houghton Mifflin Company. All rights reserved. 5 | 1

Building Competitive Advantage Through

Business-Level Strategy


“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

FIRMEnviron-ment

Strategy4 levels of strategy•Functional•Business•Corporate•International

The Big Picture: the Business Level strategy model

FIRMEnviron-ment

Strategy

FunctionalLevel

BusinessLevel

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?


Simple Organization• Business level strategy, supported by• Functional level strategy

» Primary & Support activities: value chainComplex Organization: 2 or more

businesses• Corporate level strategy

Multiple national markets• International or global level strategy



Complexity

More Simple More Complex

Functional &

Business level Corp - related

Corp - unrelated

InternationalGlobal


External Analysis

MacroenvironmentNational & Global

Industry

Industry

IndustryIndustry

FirmFirm FirmFirm

Business Level Strategy

1. What is business-level strategy? 2. What are generic strategies?3. Competitive Positioning4. Strategy and Industry Life Cycle5. Competitive Dynamics


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 don’t help to

accomplish goal


Business-Level Strategy

They must decide on:1. Customer needs – WHAT is to be satisfied2. Customer groups – WHO is to be satisfied3. 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 StrategyCreating 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



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


Customer Needs:Market Segmentation (Who)

Market SegmentationThe 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 Markets1. Ignore differences in customer segments –

Make a product for the typical or average customer2. 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

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)


A profitable business model depends on providing the customer with the most value

while keeping cost structures viable.


Wal-Mart’s Business ModelFigure 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


Competitive Positioning at the Business Level: External






Competitive Positioning at the Business Level: Internal






Competitive Positioning at the Business Level: Strategies








Figure 5.7


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 many different kinds of industry environments

• Results from a company’s consistent choices on product, market, and distinctive competencies

Generic Business-Level Strategies

• 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 successCopyright © Houghton Mifflin Company. All rights reserved. 5 | 27


The Four Principal Generic Business-Level

Strategies1. Cost Leadership Lowest cost structure vis-à-vis competitors

allowing price flexibility & higher profitability2. 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 pricing4. Focused Differentiation Distinctiveness in selected market niches where

it better meets the needs of customers than the broad differentiators


The 4 Generic Strategies

Figure 5.7


Competitive Positioning 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?


Generic Business Models The Value-Creation Frontier

The Four Principal Generic Strategies

1. Cost Leadership2. Focused Cost Leadership3. Differentiation4. Focused Differentiation

Figure 5.6


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.


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 entryCost leader is able to charge a lower price

OR achieve superior profitability than its competitors at the same price.


DisadvantagesCost Leadership Strategies

Competitors may lower their cost structures.

Competitors may imitate the cost leader’s methods.

Cost reductions may affect demand (less quality, fewer features).


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: Generic Business-Level Strategies

Differentiators can create demand for their distinct

products and charge a premium price, resulting in greater

revenue and higher profitability.

Differentiation Strategy


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.


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.


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


Why Focus Strategies Are Different

Figure 5.7


Focus Generic Business-Level

Strategies 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


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.


The Dynamics of Competitive Positioning

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


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.


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


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 StrategiesCompetitive 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

dimensionsStuck in the middle

• Try for cost leadership, differentiation or combined strategy and fail, leaving company without a competitive advantage

Do nothing: the no strategy strategyCopyright © Houghton Mifflin Company. All rights reserved. 5 | 47

Stuck in the MiddleCaught between 2 strategies

• differentiation & low cost, OR• Focus and broad markets

Strategic Choices: turnaround or exitTurnaround strategies

• Incorrect choices regarding formulation• Incorrect choices regarding implementation• Need for new investments

Exit strategies: sell, spin off or close


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 = firm’s competitive situation relative to its competitive rivals

In effect, the business model decides the firm’s desired competitive positioning relative to its rivals.



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





Figure 5.8


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 behindThere is no more important task than ensuring

that the company is optimally positioned against its rivals to compete for customers.




Figure 5.7

Business Strategy and Industry Life Cycle

Five stages of the Industry Life Cycle1. Embryonic2. Growth3. Shakeout4. Maturity5. Decline



Stages in the Industry Life Cycle

Strength and nature of five forces change as industry evolves Figure 2.4


Should we use the same strategy regardless of where the industry

is in its life cycle?


Business Strategy and Industry Life CycleHere’s some ideas:

Embryonic stage: share-building strategy• Business model emphasizes

creation of stable distinctive competencies

• Failure may = early exit



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



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



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





Figure 5.7

Competitive DynamicsLet’s talk about driving a motorbike. What’s 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?


Competitive DynamicsSo, 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


Competitive Dynamics

When a firm takes a competitive action, it may change the firm and the industry and the macroenvironment.

A firm’s 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


Competitive DynamicsWhat you do depends on what your

competitor(s) do(es) or doesn’t do. What your competitor does depends on

what you do or don’t do.


Company A Action

Company BDirect Reaction

Indirect Reaction

No Reaction

Competitive DynamicsCompetitors must decide to react or not.If they react, they must decide how,

where and whenIf your competitor acts, your firm must

decide whether to reactIf it decides to react, it must decide how,

where and when. So competitive industries are dynamic,

in constant flux or change.


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:• Tomorrow’s internal, external and strategy


Competitive Dynamics

A firm’s strategy should aim it at the future• To create the firm that has a competitive

advantage in the industry of the futureThe managerial challenges of

maintaining a strategic perspective: having and acting in light of • Internal and external perspectives• Present and future perspectives



“I skate to where the puck is going to be . . .

not to where it has been.”

- Wayne Gretsky© RoyaltyFree/PhotoLink/ Getty Images


Why Focus Strategies Are Different

Stuck in the Middle





Figure 5.8

Competitive DynamicsWhat you do depends on what your

competitor(s) do(es) or doesn’t do. What your competitor does depends on

what you do or don’t do.


Company A Action

Company BDirect Reaction

Indirect Reaction

No Reaction

Review QuestionsWhat 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 firm’s strategy change according to

the industry life cycle? What are competitive dynamics? Are they important? Copyright © Houghton Mifflin Company. All rights reserved. 5 | 76


“We know what happens to people who stay in the middle

of the road. They get run over.” - Aneurin Bevan

© RoyaltyFree/PhotoLink/ Getty Images

sm gen strategies v1_2

Documents