Chapter Five

1. 5-1 Chapter Five Building Competitive Advantage Through Business-Level Strategy

2. 5-2 Level of Strategies

3. 5-3 Business-Level Strategy Firms must decide/evaluate:

4. 5-4 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: The way the product is differentiated from other products The price Product differentiation Designing products to satisfy customers� needs in ways that competing products cannot.

5. 5-5 Customer Groups and Market Segmentation The way customers can be grouped based on important differences in their needs or preferences

6. 5-6 Basis for Customer Segmentation Consumer Markets Demographic Socioeconomic Geographic Psychological Consumption patterns Perceptual Consumer Markets Demographic factors (age, income, sex, etc.) Socioeconomic factors (social class, stage in the family life cycle) Geographic factors (cultural, regional, and national differences) Psychological factors (lifestyle, personality traits) Consumption patterns (heavy, moderate, and light users) Perceptual factors (benefit segmentation, perceptual mapping) Industrial Markets End-use segments (identified by SIC code) Product segments (based on technological differences or production economics) Geographic segments (defined by boundaries between countries or by regional differences within them) Common buying factor segments (cut across product market and geographic segments) Customer size segments Consumer Markets Demographic factors (age, income, sex, etc.) Socioeconomic factors (social class, stage in the family life cycle) Geographic factors (cultural, regional, and national differences) Psychological factors (lifestyle, personality traits) Consumption patterns (heavy, moderate, and light users) Perceptual factors (benefit segmentation, perceptual mapping) Industrial Markets End-use segments (identified by SIC code) Product segments (based on technological differences or production economics) Geographic segments (defined by boundaries between countries or by regional differences within them) Common buying factor segments (cut across product market and geographic segments) Customer size segments

7. 5-7 Identifying Customer Groups and Market Segments

8. 5-8 Three Approaches to Market Segmentation 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 segments 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 segments

9. 5-9 Implementing the 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

10. 5-10 Wal-Mart�s Business Model

11. 5-11 Competitive Positioning at the Business Level

12. 5-12 Competitive Positioning and the Value Creation Frontier

13. 5-13 Generic Business-Level Strategies Cost Leadership Lowest cost structure vis-�-vis competitors allowing price flexibility & higher profitability Focused Cost Leadership Cost leadership in selected market niches where it has a local or unique cost advantage Differentiation Features important to customers & distinct from competitors that allow premium pricing Focused Differentiation Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators Cost Leadership Lowest cost structure vis-�-vis competitors allowing price flexibility & higher profitability Focused Cost Leadership Cost leadership in selected market niches where it has a local or unique cost advantage Differentiation Features important to customers & distinct from competitors that allow premium pricing Focused Differentiation Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators

14. 5-14 Generic Business Models and the Value Creation Frontier

15. 5-15 Cost Leadership

16. 5-16 Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

17. 5-17 Advantages of Cost Leadership Strategies Protected from industry competitors Less affected by increased prices of inputs Less affected by a fall in price of inputs Increase bargaining power over suppliers Ability to reduce price to compete with substitute products Low costs and prices as a barrier to entry

18. 5-18 Disadvantages of Cost Leadership Strategies ? Competitors may lower their cost structures. ? Competitors may imitate the cost leader�s methods. ? Cost reductions may affect demand.

19. 5-19

20. 5-20 Differentiation Strategic Choices Differentiate itself on as many dimensions as possible. Focuses on quality, innovation, and customer responsiveness. May segment the market in many niches. Concentrates on the organizational functions that provide a source of distinct advantages.

21. 5-21 Examples of Value-Creating Activities Associated with the Differentiation Strategy

22. 5-22 Advantages of Differentiation Strategies Brand loyalty Powerful suppliers are not a problem Pass price increases on to customers. Powerful buyers are not a problem Differentiation and brand loyalty are barriers to entry. The threat of substitute products depends on competitors� ability to meet customer needs.

23. 5-23 Difficulty maintaining long-term distinctiveness in customers� eyes. Difficulty maintaining premium price. Disadvantages of Differentiation Strategies Agile competitors can quickly imitate. Patents and first-mover advantage are limited in their duration. Agile competitors can quickly imitate. Patents and first-mover advantage are limited in their duration.

24. 5-24 Focus

25. 5-25 Focus 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 Differentiator

26. 5-26 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.

27. 5-27 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.

28. 5-28 Why Focus Strategies Are Different

29. 5-29 The Dynamics of Competitive Positioning

30. 5-30 Broad 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.

31. 5-31 The Broad Differentiation Business Model

32. 5-32 Business Model and the Value Creation Frontier

33. 5-33 Implications of Strategic Groups for Competitive Positioning � Strategic managers must: 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 Competitive Positioning: Strategic Groups

34. 5-34 Strategic Groups

35. 5-35 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

36. 5-36 Summary