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Copyright © Houghton Mifflin Company. All rights reserved. 5 | 1 Theory of Strategic Management with Cases, 8e Hills, Jones Chapter Five Strategy at the Business- Level

Hill 8e Basic Ch05

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Page 1: Hill 8e Basic Ch05

Copyright © Houghton Mifflin Company. All rights reserved. 5 | 1

Theory of Strategic Management with Cases, 8e

Hills, Jones

Chapter Five Strategy at the Business-Level

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Business-Level Strategy

Firms must decide/evaluate:1. Customer needs – WHAT is to be satisfied2. Customer groups – WHO is to be satisfied3. Distinctive competencies – HOW customers are to be satisfied

A successful business model results from business-level strategies that create a competitive advantage over its rivals.

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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:

1. The way the product is differentiated from other products of its type

2. The price of the product

Product differentiation Designing products to satisfy customers’

needs in ways that competing products cannot.

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Customer Groups and Market Segmentation

Market SegmentationThe way customers can be grouped based on important differences in their needs or preferences

Main Approaches to Segmenting Markets1. Ignore differences in customer segments –

Make a product for the typical or average customer2. Recognize differences between customer groups –

Make products that meet the needs of all or most customer groups

3. Target specific segments –Choose to focus on and serve just one or two selected segments

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Identifying Customer Groups and Market Segments

Figure 5.1

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Three Approaches to Market Segmentation

Figure 5.2

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Implementing the Business Model

To develop a successful 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

A profitable business model depends on providing the customer with the most value

while keeping cost structures viable.

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Wal-Mart’s Business ModelFigure 5.3

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Competitive Positioning at the Business Level

Source: Copyright © C. W. L. Hill & G. R. Jones, “The Dynamics of Business-Level Strategy,”

(unpublished manuscript, 2002).

Maximizing the profitability of the company’s business model is about making the right choices with regard to value

creation through differentiation, costs, and pricing.

Figure 5.4

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Cost LeadershipCost leaders establish a cost structure that allows them to provide goods and services at lower unit costs than competitors.

Strategic Choices• The cost leader does not try to be the

industry innovator.• The cost leader positions its products to

appeal to the “average” or typical customer.• The overriding goal of the cost leader is to

increase efficiency and lower its costs relative to industry rivals.

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Advantages of Cost Leadership Strategies

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 entryCost leaders are able to charge a lower price or are able to achieve superior profitability

than their competitors at the same price.

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Disadvantages of Cost Leadership Strategies

Competitors may lower their cost structures.

Competitors may imitate the cost leader’s methods.

Cost reductions may affect demand.

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Companies with a differentiation strategy create a product that is different or distinct from its competitors in an important way. Strategic Choices

• A differentiator:» Stives to differentiate itself on as many

dimensions as possible.» Focuses on quality, innovation, and

responsiveness to customer needs.» May segment the market in many niches.» Concentrates on the organizational functions that

provide a source of distinct advantages.

Differentiation

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Advantages of Differentiation Strategies

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.Differentiators can create demand for their

distinct products and charge a premium price, resulting in greater revenue and higher profitability.

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Difficulty maintaining long-term distinctiveness in customers’ eyes.

• Agile competitors can quickly imitate.• Patents and first-mover advantage are

limited in their duration. Difficulty maintaining premium price.

Disadvantages of Differentiation Strategies

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FocusThe focuser strives to serve the need of a targeted niche market segment where it has either a low-cost or differentiated competitive advantage. 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 or Differentiator

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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.

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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.

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Why Focus Strategies Are Different

Figure 5.7

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Broad Differentiation:Cost Leadership and 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.

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Implications of Strategic Groups for Competitive Positioning• Strategic managers must:

1. Map their competitors2. Better understand changes in the industry3. Determine which strategies are successful4. Fine tune or radically alter business models and

strategies to improve competitive position

Strategic Groups are groups of companies that follow a business model similar to other companies within their strategic group, but are different from that of other companies in other strategic groups.

Competitive Positioning: Strategic Groups

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Strategic Groups

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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 environmentCompanies 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

There is no more important task than ensuring that the company is optimally positioned against

its rivals to compete for customers.