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CHAPTER 5

Building Competitive Advantage Through Business-Level Strategy


0Summary of Chapter
10. To create a successful business model, managers must choose business-level strategies that give a company a competitive advantage over its rivals; that is, they must optimize competitive positioning. They must first decide on (1) customer needs, or hat is to be satisfied, (!) customer groups, or ho is to be satisfied, and (") distinctive competencies, or ho customer needs are to be satisfied. These decisions determine hich strategies they formulate and implement to put a company#s business model into action. !0. $ustomer needs are desires, ants, or cravings that can be satisfied through the attributes or characteristics of a product. $ustomers choose a product based on (1) the ay a product is differentiated from other products of its type and (!) the price of the product. %roduct differentiation is the process of designing products to satisfy customers# needs in ays that competing products cannot. $ompanies that create something distinct or different can often charge a higher, or premium, price for their product. "0. &f managers devise strategies to differentiate a product by innovation, e'cellent (uality, or responsiveness to customers, they are choosing a business model based on offering customers differentiated products. &f managers base their business model on finding ays to reduce costs, they are choosing a business model based on offering customers lo -priced products. )0. The second main choice in formulating a successful business model is to decide hich *ind of product(s) to offer to hich customer group(s). +ar*et segmentation is the ay a

company decides to group customers, based on important differences in their needs or preferences, in order to gain a competitive advantage. ,0. There are three main approaches to ard mar*et segmentation. -irst, a company might choose to ignore differences and ma*e a product targeted at the average or typical customer. .econd, a company can choose to recognize the differences bet een customer groups and ma*e a product targeted to ard most or all of the different mar*et segments. Third, a company might choose to target /ust one or t o mar*et segments. 00. To develop a successful business model, strategic managers have to devise a set of strategies that determine (1) ho to differentiate and price their product, and (!) ho much to segment a mar*et and ho ide a range of products to develop. 1hether these strategies

ill result in a profitable business model no depends on strategic managers# ability to provide customers ith the most value hile *eeping their cost structure viable. 20. The value creation frontier represents the ma'imum amount of value that the products of different companies inside an industry can give customers at any one time by using different business models. $ompanies on the value frontier are those that have the most successful business models in a particular industry. 30. The value creation frontier can be

reached by choosing among four generic competitive strategies: cost leadership, focused cost leadership, differentiation, and focused differentiation. 40. 5 cost-leadership business model is based on lo ering the company#s cost structure so it can ma*e and sell goods or services at a lo er cost than its rivals. 5 cost leader is often a large, national company that targets the average customer. -ocused cost leadership is developing the right strategies to serve /ust one or t o mar*et segments.

100. 5 differentiation business model is based on creating a product that customers perceive as different or distinct in some important ay. -ocused differentiation is providing a differentiated product for /ust one or t o mar*et segments. 110. The middle of the value creation frontier is occupied by broad differentiators, hich have pursued their differentiation strategy in a ay that has also allo ed them to lo er their cost structure over time. 1!0. .trategic-group analysis helps companies in an industry better understand the dynamics of competitive positioning. &n strategic-group analysis, managers identify and chart the business models and business-level strategies their industry rivals are pursuing. Then they can determine hich strategies are successful and unsuccessful and hy a certain business model is or*ing or not. &n turn, this allo s them to either fine-tune or radically alter their business models and strategies to improve their competitive position. 1"0. +any companies, through neglect, ignorance, or error, do not or* to continually improve their business model, do not perform strategic-group analysis, and often fail to identify and respond to changing opportunities and threats. 5s a result, their business-level strategies do not or* together, their business model starts to fail, and their profitability starts to decline. There is no more important tas* than ensuring that one#s company is optimally positioned against its rivals to compete for customers.