Theory of Strategic Management with Cases, 8e
Hills, Jones
Chapter Five
Strategy at the Business-Level
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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 2. Customer groups
WHAT is to be satisfied WHO is to be satisfied
3. Distinctive competencies
HOW customers are to be satisfied
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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.
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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
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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
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
Maximizing the profitability of the companys 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).
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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.
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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 leaders are able to charge a lower price or are able to achieve superior profitability than their competitors at the same price.
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Disadvantages of Cost Leadership Strategies Competitors may lower
their cost structures.
Competitors may
imitate the cost leaders methods.
Cost reductions may
affect demand.
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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.
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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.
Differentiators can 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
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.
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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
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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.
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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 focusers niche may disappear because of technological change or changes in customers tastes. Differentiators will compete for a focusers niche.
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Why Focus Strategies Are Different
Figure 5.7
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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.
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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. 2. 3. 4. Map their competitors Better understand changes in the industry Determine which strategies are successful Fine tune or radically alter business models and strategies to improve competitive position
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Strategic Groups
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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.
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