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A successful business model results from business level strategies that create a competitive advantage over its rivals.
Business-level strategy
A plan of action to use the firms resources and distinctive competencies to gain competitive advantage.
High (principally by uniqueness) High (many market segments) Research and development, sales and marketing
Investment strategy
The resources (human, functional, and financial) required to gain sustainable competitive advantage.
Competitive position
Market share is an indicator of competitive strength. Distinctive competencies are competitive tools.
Customer needs
The desires, wants, or cravings that can be satisfied through product attributes Customers choose a product based on:
1. 2. The way the product is differentiated from products of its type The price of the product other
Product differentiation
Designing products to satisfy customers needs in ways that competing products cannot:
Different ways to achieve distinctiveness Balancing differentiation with costs Ability to charge a higher or premium price
Market Segmentation
The way customers can be grouped based on important differences in their needs or preferences In order to gain a competitive advantage
Figure 5.2
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.
Maximizing the profitability of the companys business model is about making the right choices with regard to value creation through differentiation, costs, and pricing.
Specific business-level strategies that give a company a specific competitive position and advantage vis--vis its rivals
Characteristics of Generic Strategies
Can be pursued by all businesses regardless of whether they are manufacturing, service, or nonprofit Can be pursued in different kinds of industry environments Results from a companys consistent choices on product, market, and distinctive competencies
Figure 5.5
Value-Creation Frontier represents the maximum amount of value that the products of different companies inside an industry can give customers at any one time by using different business models. Companies on the valuecreation frontier have the most successful strategy in a particular industry.
1. Cost Leadership
Lowest cost structure vis--vis competitors allowing price flexibility & higher profitability
3. Differentiation
Features important to customers & distinct from competitors that allow premium pricing
4. Focused Differentiation
Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators
Figure 5.6
The Four Principal Generic Strategies 1. 2. 3. 4. Cost Leadership Focused Cost Leadership Differentiation Focused Differentiation
Cost 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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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 entry
Cost leader is able to charge a lower price or is able to achieve superior profitability than its competitors at the same price.
their cost
Competitors may imitate the cost leaders methods. Cost reductions may affect demand.
The 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
Strategic Choices
A differentiator strives to differentiate itself on as many dimensions as possible. Differentiator focuses on quality, innovation, and responsiveness to customer needs. May segment the market in many niches. A differentiated company concentrates on the organizational functions that provide a source of distinct advantages.
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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.
Figure 5.8
Retail Industry Dynamics Many successful companies lose their position on the frontier at some point in their history. To turn around their declining performance, they need to change their business models. Companies that can continually outperform their rivals are rare.
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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.
Figure 5.9
The Broad Differentiators The middle of the valuecreation frontier is occupied by broad differentiators, which have pursued their differentiation strategy in a way that has allowed them to lower their cost structure at the same time. They may pose serious threats to both the cost leaders and differentiators over time.
Figure 5.10
The Dynamic & Changing Value-Creation Frontier Broad differentiators constantly improve their strategy to formulate and implement their broad differentiation business models and push out the value-creation frontier. Industry differentiators and cost leaders may find over time that they have lost their distinctive competencies that previously led to their superior performance.
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.
Implications of Strategic Groups for Competitive Positioning: 1. Strategic managers must map their competitors:
Map according to their choice of business model Use this knowledge to position themselves closer to customers Differentiate themselves from their competitors
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3. 4.
Fine tune or radically alter business models and strategies to improve competitive position
Successful competitive positioning requires that a company achieve a fit between its strategies and its business model.
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that the company is optimally positioned against its rivals to compete for customers.