Business

Level
Strategy:
Creating and
Sustaining
Competitive
Advantages
chapter 5

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5-2

Sustaining a Competitive
Advantage
Consider
The viability of a firms success is driven
by both the internal operations of the firm
and the desires and preferences of the
market. Firms that succeed have the
appropriate resources and cost structure to
meet the needs of the environment.
They also have a strategy

5-3

Sustaining a Competitive
Advantage

Business-level strategies require a

choice:
How to overcome the five forces and
achieve competitive advantage?
Suggestion - use Porters three generic
strategies:

Overall cost leadership

Differentiation
Focus

The Nature of Competitive

positioning
#-4

A company must find the best way to

position itself against its rival and it is only
possible through by using business- level
strategy.

Business Level Strategy

The plan of action that managers

adopt to use resources and distinctive
competencies to gain a competitive
advantage

What? Who? How?

Basis of choosing a business level

strategy by determining how well a
company can compete

What
Who
How

customer need will be satisfied?

is to be satisfied?
will the need be satisfied?

Customer needs and

Product Differentiation

Desires, wants, or cravings that can be

satisfied by means of the characteristics
of a product or service
The process of creating a competitive
advantage by designing goods or services
to satisfy customers needs.
The greater the differentiation, the more
money a customer will pay for the product

Customer Groups

Market Segmentation

The way a company decides to group

customers
It is based on important differences in
their needs or preferences

Alternatives to Market
Segmentation

Choose not to recognize different needs;

just aim to serve the average customer.
Separate markets and create a product
to suit each group.
Concentrate on serving only one
segment.

Distinctive Competencies

Decide which distinctive competencies

to pursue to satisfy customers
Decide how to organize and combine
distinctive competencies to gain a
competitive advantage

Choosing a Business Level

Strategy
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

#-12

Business-Level Strategy

Three basic competitive approaches:

Cost Leadership- To outperform

competitors by doing everything it can
to produce goods or services at the
lowest possible cost.
Differentiation- The differentiated
product has the ability to satisfy a
customers need in a way that
competitors cannot.
Focus- Directed toward serving the
needs of a limited customer group or
segment.

Cost-Leadership Strategy

Goal: Outperform competitors by doing

everything at a lower cost
Cost leader chooses low level of
differentiation
Positions the product to appeal to the
average customer

Cost-Leadership Strategy

Advantages:

Charge lower price

than competitors but
make the same level
of profit
Withstand
competition based
on price

Disadvantages:

Easy to lose sight

of changes in
customers taste
Competitors will
try to beat the
cost leader at its
own game

Differentiation Strategy

Goal: To achieve a competitive

advantage by creating a product that
customers perceive as unique in some
important way
A differentiated company can charge a
premium price

Differentiation Strategy

Advantages:

Customers develop
brand loyalty for a
product
Differentiation
creates barriers to
entry for other
companies

Disadvantages:

Difficult to
maintain
uniqueness in the
customers eye
Threat of
substitute
products

Cost Leadership and

Differentiation

Flexible manufacturing strategies make

the choice between these two strategies
less clear-cut
The new flexible manufacturing
technologies makes diversification
inexpensive for firms, allowing firms to
obtain benefits of both strategies

Focus Strategy

Goal: To serve the needs of a limited

customer group or segment
Concentrate on serving a:

Geographic area
Type of customer
Segment of the product line

Focus Strategy

Advantages:

Customer loyalty
lessens the threat
of substitutes
Power over buyers
because they
cannot get the
same product
elsewhere

Disadvantages:

Suppliers have
power over
focused firms,
making the firms
vulnerable to
changes
Vulnerable to
attack, therefore
must define its
niche constantly

#-21

Stuck in the Middle

The fate of a company whose strategy fails

because it has made product in a way that
doesn't lead to a sustained competitive
Advantage.
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

#-23

Strategies in Consolidating a
Fragmented and Growing
Industry
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Strategies for consolidating a

fragmented Industry
#-25

IT and the
Internet

chaining

Franchising

Horizontal
Merger

Strategies for consolidating a fragmented

Industry

STRATEGIES IN FRAGMENTED INDUSTRIES

Chaining
Chaining

Chaining is where companies establish

networks of linked merchandise outlets that are
interconnected by IT and function as one large
company.
Chaining allows companies to negotiate large
price reductions with suppliers.
Companies using chaining can overcome the
barrier of high transportation costs by
establishing regional distribution centers.
6-26

STRATEGIES
STRATEGIES IN
IN FRAGMENTED
FRAGMENTED INDUSTRIES
INDUSTRIES
Franchising
Franchising

In franchising, the parent company grants to its

franchisees the right to use the parents name,
reputation, and business model in a particular
location in return for a franchise fee and often a
percentage of the profits (McDonalds, KOA).
The franchisees own the business; therefore,
they are motivated to make the company-wide
business model work effectively, and ensure
quality consistent with the customers needs.
6-27

Horizontal
Horizontal Merger
Merger

A horizontal merger is a merger where companies

manufacturing similar kinds of commodities or
running similar types of businesses merge.
Companies like Macys and Kroger chose a
strategy of horizontal merger to consolidate their
respective industries.
By pursuing horizontal merger, companies are
able to obtain economics of scale and secure a
national market for their product.
6-28

Strategy in Fragmented or
Growing Industry

Focus strategy stands out as the best

choice through:

Chaining allows cost advantage and amazing

buying power to promote competitive
advantage.
Franchising solves the problem of maintaining
control over each location and retaining
uniqueness.
Horizontal Mergers consolidate an industry to
secure a market.
Using the Internet consolidates fragmented
industries globally.

Strategy in a Mature
Industry

In a mature industry it is crucial to

adopt a strategy that will
simultaneously preserve competitive
advantages while preserving industry
profitability
Interdependent companies adopt
strategies to:

Manage rivalry
Deter entry

STRATEGY
STRATEGY IN
IN MATURE
MATURE INDUSTRIES
INDUSTRIES

A mature industry is commonly dominated by a

small number of large companies.
If a mature company changes its strategies,
their actions are likely to stimulate a
competitive response from industry rivals.

6-31

Product Proliferation
Proliferation
Product

STRATEGIES TO DETER ENTRY

Deter Entry Means: Discourage to enter
To reduce the threat of entry in a market, existing
companies ensure that they are offering a product
targeted at every segment of the market.
This strategy of filling the niche is known as product
proliferation.

6-32

Price
Price Cutting
Cutting

time a
new company enters the
(continued)
industry--then raise prices
An entry-deterring strategy is to cut prices every

STRATEGIES
STRATEGIES TO
TO DETER
DETER ENTRY
ENTRY
The established company initially charges a high price
for a product and seizes a short-term profit, but then
aggressively cuts prices to build market share; thus
deterring potential entrants.
Maintaining
Maintaining Excess
Excess Capacity
Capacity

A third strategy is to maintain the physical

capacity to produce more product than
customers currently demand.
However, this threat to increase output must be
a credible option.
6-33

STRATEGIES
STRATEGIES TO
TO MANAGE
MANAGE RIVALRY
RIVALRY

Price signaling is the process by which

companies increase or decrease product prices to
convey their intentions to other companies.
Price leadership occurs when companies jointly
set prices, which is illegal under antitrust laws.
Non-price competition:
Market penetration is accomplished by heavy
advertising to promote a product differentiation.
Product development is the creation of new or
improved products to replace existing ones.
6-34

STRATEGIES
STRATEGIES TO
TO MANAGE
MANAGE RIVALRY
RIVALRY
Non-price competition also includes:
Market development where a company finds a new
market segment for its products.
Product proliferation generally means that large
companies in an industry all have a product in each
market segment and compete head-to-head for
customers. It allows for stability based on product
differentiation rather than on product price.
Capacity control refers to preventing the accumulation
of costly excess capacity. Technology allows firms to
produce the same or more with less spacethus
causing excess capacity.
6-35

STRATEGIES
STRATEGIES IN
IN DECLINING
DECLINING INDUSTRIES
INDUSTRIES

Strategies to adopt to deal with decline:

1) Leadership strategy
2) Niche strategy
3) Harvest strategy
4) Divestment strategy

STRATEGIES
STRATEGIES IN
IN AA DECLINING
DECLINING INDUSTRY
INDUSTRY
6-37

A leadership strategy aims at growing in a declining

industry by picking up the market share of companies
that are leaving the industry.
A niche strategy focuses on pockets of demand where
the demand is stable, or declining less rapidly than the
industry as a whole.
A harvest strategy requires the company to halt all new
investments in capital equipment, etc.
A disvestment strategy is selling an underperforming
business before the industry enters into a steep decline.