Strategic Management
Summary of Chapter-5 1. To create a successful business model, managers must choose business-level strategies that give the company a competitive advantage over its rivals; that is, they must optimize competitive positioning. They must first decide on (a) Customer needs, or what is to be satisfied; (b) Customer groups, or who is to be satisfied; and (c) Distinctive competencies, or how customer needs are to be satisfied. These decisions determine which strategies they formulate and implement to put a company’s business model into action. 2. Customer needs are desires, wants, or cravings that can be satisfied through the attributes or characteristics of a product. Customers choose a product based on (a) the way a product is differentiated from other products of its type and (b) the price of the product. Product differentiation is the process of designing products to satisfy customers’ needs in ways that competing products cannot. Companies that create something distinct or different can often charge a higher, or premium, price for their products. 3. If managers devise strategies to differentiate a product by innovation, excellent quality, or responsiveness to customers, they are choosing a business model based on offering customers differentiated products. If managers base their business model on finding ways to reduce costs, they are choosing a business model based on offering customers low-priced products. 4. The second main strategy in formulating a successful business model is to decide what kind of product(s) to offer to which customer group(s). Market segmentation is the way a company decides to group customers, based on important differences in their needs or preferences, to gain a competitive advantage. 5. There are three main approaches toward market segmentation. First, a company might choose to ignore differences and make a product targeted at the average or typical customer. Second, a company can choose to recognize the differences between customer groups and make a product targeted toward most or all of the different market segments. Third, a company might choose to target just one or two market segments. 6. To develop a successful business model, strategic managers have to devise a set of strategies that determine (a) how to differentiate and price their product and (b) how much to segment a market and how wide a range of products to develop. Whether these strategies will result in a profitable business model now depends on a strategic manager’s ability to provide customers with the most value while keeping the cost structure viable. 7. The 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 value frontier are those that have the most successful business models in a particular industry. 8. The value creation frontier can be reached by choosing among four generic competitive strategies: cost leadership, focused cost leadership, differentiation, and focused differentiation. 9. A cost-leadership business model is based on lowering the company’s cost structure so it can make and sell goods or services at a lower cost than its rivals. A cost leader is often a large, national company that targets the average customer. Focused cost leadership is developing the right strategies to serve just one or two market segments.
Department of Finance
Jagannath University, Dhaka.
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