Building Competitive Advantage Through BusinessLevel Strategy

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• Building Competitive Advantage Through
  Business-Level Strategy

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Distinctive Competences

• Ways to pursue competitive advantage
• Superior efficiency
• Superior quality
• Superior innovation
• Superior responsiveness to customers

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Choosing a Generic Business-Level Strategy

• Generic strategies
• All businesses can pursue them regardless of
  whether they are manufacturing, service, or
  nonprofit
• Can be pursued in different kinds of industry
  environments
• Results from a companys consistent choices on
  product, market, and distinctive competencies

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Product/Market/Distinctive-Competency Choices and
Generic Competitive Strategies
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Generic Business-Level Strategy Cost Leadership

• Establish a cost structure that allows the
  company to provide goods and services at lower
  unit costs than competitors
• Advantages
• If rivals charge similar prices, the cost leader
  achieves superior profitability
• The cost leader is able to charge a lower price
  than competitors

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Cost Leadership Strategic Choices

• The cost leader does not try to be the product-
  innovator in the industry
• The cost leader positions its products to appeal
  to the average customer
• The overriding goal of the cost leader is to
  increase efficiency and lower its costs relative
  to its rivals

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Cost Leadership Advantages

• 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

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Cost Leadership Disadvantages

• Competitors may lower their cost structures
• Competitors may imitate the cost leaders methods
• Cost reductions may affect demand

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Generic Business-Level Strategy Differentiation

• Create a product that customers perceive as
  different or distinct in an important way
• Advantages
• Premium price
• Increased revenues superior profitability

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Differentiation Strategic Choices

• Quality, innovation, responsiveness to customer
  needs
• A differentiator strives to differentiate itself
  along as many dimensions as possible
• A differentiator segments its market into many
  niches
• A differentiated company concentrates on the
  organizational functions that provide the source
  of differentiation advantage

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Differentiation Advantages

• 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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Differentiation Disadvantages

• Difficulty in maintaining long-term distinctness
  in customers eyes
• Agile competitors can quickly imitate
• Patents and first-mover advantage are limited
• Difficulty of maintaining premium price
• Difficulty maintaining perception of added value

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Generic Business-Level Strategy The Value
Leader

• Pursuing the business models of the cost leader
  and differentiator simultaneously

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Value Leader Strategic Choices

• 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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Generic Business-Level Strategy Focus

• Serving the needs of a specific market segment
• Geographic
• Type of customer
• Segment of the product line
• After choosing a market segment, a focused
  company positions itself using either
• Low-cost OR differentiation

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Focus Advantages

• 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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Focus Disadvantages

• 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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Fragmented Industries

• An industry composed of a large number of small
  and medium-sized companies
• Reasons for fragmented industries
• Low barriers to entry due to lack of economies of
  scale
• Diseconomies of scale
• Low entry barriers permit constant entry by new
  companies
• Specialized customer needs require small job lots
  of products no room for a mass-production
  operation

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Strategies in Fragmented Industries Franchising

• The franchisor grants to franchisees the right to
  use the parents name, reputation, and business
  skills
• To maintain control over many small outlets and
  retain differentiated appeal
• To lessen the financial burden of swift expansion
  and permit rapid growth
• To reap economies of scale in advertising,
  purchasing, management, and distribution

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Strategies in Fragmented Industries Horizontal
Merger and Chaining

• Acquiring or merging with industry competitors
• To obtain economies of scale
• To secure a national market
• To pursue a cost-leadership or differentiation
  strategy (or both)
• Chaining Establishes networks of linked
  merchandising outlets that function as one large
  business entity
• To obtain scale economies
• To pursue larger markets or market share

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Strategy in Mature Industries

• Strategies for deterring entry of rivals

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Product Proliferation in the Restaurant Industry
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Pricing Games

• Predatory pricing
• Using revenue generated in one product market to
  support pricing below the companys costs of
  production in another to drive rivals out
• Limit pricing
• The established companies charge a price below
  the profit-maximizing quantity and price that is
  below the average cost structure of new entrants
  but above their own average cost structure

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Strategies to Manage Rivalry in Mature Industries

• Pricing Strategies
• Signaling
• Price leadership
• Nonprice competition
• Product differentiation
• Maintaining excess capability to produce more of
  a product than demanded warns potential entrants
  that if they enter, output can be increased and
  prices driven down

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Four Nonprice Competitive Strategies
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Factors that Determine the Intensity of
Competition in Declining Industries
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Strategy in Declining Industries

• Leadership
• A company seeks to become the dominant player
• Niche
• Focusing on pockets of demand that are declining
  more slowly than the industry as a whole
• Harvest
• Optimizing cash flow
• Divestment
• Selling off the business

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Strategy Selection in a Declining Industry
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Thought for the Day
Although prepared for martyrdom, I prefer that
it be postponed. Winston Churchill (1874-1965)