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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 firm’s 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 Porter’s 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? .

The greater the differentiation. wants. the more money a customer will pay for the product . 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.Customer needs and Product Differentiation    Desires.

Customer Groups  Market Segmentation   The way a company decides to group customers It is based on important differences in their needs or preferences .

. Concentrate on serving only one segment. just aim to serve the average customer.Alternatives to Market Segmentation    Choose not to recognize different needs. Separate markets and create a product to suit each group.

Distinctive Competencies   Decide which distinctive competencies to pursue to satisfy customers Decide how to organize and combine distinctive competencies to gain a competitive advantage .

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

#-12 .

.To outperform competitors by doing everything it can to produce goods or services at the lowest possible cost. Focus.Business-Level Strategy  Three basic competitive approaches:    Cost Leadership. Differentiation.Directed toward serving the needs of a limited customer group or segment.The differentiated product has the ability to satisfy a customer’s need in a way that competitors cannot.

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 customer’s 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. therefore must define its niche constantly . making the firms vulnerable to changes Vulnerable to attack.

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

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All rights reserved. .Strategies in Consolidating a Fragmented and Growing Industry Copyright © 2014 McGraw-Hill Education. 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 .

and ensure quality consistent with the customers’ needs.STRATEGIES STRATEGIES IN IN FRAGMENTED FRAGMENTED INDUSTRIES INDUSTRIES Franchising Franchising  In franchising. 6-27 . reputation. they are motivated to make the company-wide business model work effectively. the parent company grants to its franchisees the right to use the parent’s name. therefore.  The franchisees own the business. and business model in a particular location in return for a franchise fee and often a percentage of the profits (McDonalds. KOA).

 By pursuing horizontal merger. 6-28 .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 Macy’s and Kroger chose a strategy of horizontal merger to consolidate their respective industries. companies are able to obtain economics of scale and secure a national market for their product.

. Horizontal Mergers consolidate an industry to secure a market. Franchising solves the problem of maintaining control over each location and retaining uniqueness.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. 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 .

6-31 . their actions are likely to stimulate a competitive response from industry rivals.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.

existing companies ensure that they are offering a product targeted at every segment of the market.  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 .  This strategy of “filling the niche” is known as product proliferation.Product Proliferation Proliferation Product STRATEGIES TO DETER ENTRY  Deter Entry Means: Discourage to enter  To reduce the threat of entry in a market.

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.  However. 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. but then aggressively cuts prices to build market share. this threat to increase output must be a credible option. 6-33 .

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

6-35 . Technology allows firms to produce the same or more with less space—thus causing excess capacity.  Capacity control refers to preventing the accumulation of costly excess capacity. It allows for stability based on product differentiation rather than on product price.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.

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 .

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