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Business-Level Strategy

Firms must decide/evaluate: 1.  Customer needs– WHAT is to be satisfied 2.  Customer groups– WHO is to be satisfied 3.  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

o  Customer needs- desires, wants, or cravings to be satisfied through product attributes

Ä Customers choose product based on: 1.  Way product differentiated from others 2.  Price of product

o  Product differentiation- designing products to satisfy customers’ needs in ways competing products cannot

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Customer Groups and Market Segmentation

o  Market Segmentation- customers grouped based on differences in needs or preferences

o  Main Approaches to Segmenting Markets 1.  Ignore differences in segments– make product for

typical/average customer 2.  Recognize differences between segments– make

products that meet needs of all/most segments

3.  Target specific segments– focus on/serve 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

Strategic managers must devise strategies that determine how:

•  To DIFFERENTIATE & PRICE product •  To SEGMENT market & how

WIDE A RANGE of products to develop

A profitable business model depends on providing customer with most value while keeping cost structures viable.

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Cost Leadership Establishes a cost structure that allows them to provide goods/services at lower unit costs

Strategic Choices • Cost leader does not try to be industry

innovator. • Cost leader positions products to

appeal to “average” or typical customer.

• Overriding goal of cost leader is to increase efficiency & lower costs relative to industry rivals.

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Advantages of Cost Leadership Strategies

o  Protected from competitors by cost advantage o  Less affected by increased prices of

inputs if there are powerful suppliers o  Less affected by a fall in price of

inputs if there are powerful buyers o  Purchases in large quantities increase

bargaining power over suppliers o  Ability to reduce price to compete

with substitute products o  Low costs and prices are a barrier to entry

Cost leaders able to charge lower price or achieve superior profitability at same price.

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Disadvantages of Cost Leadership Strategies

û  Competitors may lower their cost structures.

û  Competitors may imitate cost leader’s methods.

û Cost reductions may affect demand.

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Companies with differentiation strategy create product different or

distinct from competitors in important way.

Strategic Choices- Differentiator » Strives to differentiate itself on as many

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

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

that provide source of distinct advantages.

Differentiation

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Advantages of Differentiation Strategies

o  Customers develop brand loyalty. o  Powerful suppliers not problem because company

geared more toward price it can charge than costs. o  Can pass price increases on to loyal customers. o  Powerful buyers not problem because product

distinct. o  Differentiation & brand loyalty = barriers to entry. o  Threat of substitute products depends on

competitors’ ability to meet customer needs. Differentiators create demand for their

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

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o  Difficulty maintaining long-term distinctiveness in customers’ eyes.

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

are limited in duration. o  Difficulty maintaining premium

price.

Disadvantages of Differentiation Strategies

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Focus Focuser strives to serve need of targeted

niche market segment where it has either low-cost or differentiated competitive advantage.

Strategic Choices- Focus •  Focuser selects specific market based on:

Ø  Geography Ø  Type of customer Ø  Segment of product line

•  Focused company positions self as either: Ø  Low-Cost or Ø  Differentiator

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Advantages of Focus Strategies

o  Focuser protected from rivals to extent can provide a product /service they cannot.

o  Focuser has power over buyers because they cannot get same thing elsewhere

o  Threat of new entrants limited by customer loyalty to focuser.

o  Customer loyalty lessens threat from substitutes.

o  Focuser stays close to customers and changing needs.

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Disadvantages of Focus Strategies

o  Focuser at disadvantage to powerful suppliers because it buys in small volume (but may pass costs to loyal customers).

o  Because of low volume, focuser may have higher costs than low-cost company.

o  Focuser’s niche may disappear because of technological change or changes in customers’ tastes.

o  Differentiators will compete for focuser’s niche.

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Strategic managers must: 1.  Map their competitors 2.  Better understand changes in industry 3.  Determine which strategies are successful 4.  Fine tune or radically alter business models

& strategies to improve competitive position

Groups of companies follow a business model similar to other

companies within their strategic group, but are different from other companies in other groups.

Competitive Positioning: Strategic Groups