Discussion

The Purpose of a Business-Level Strategy

The purpose of a business-level strategy is to create differences between the firm’s position and those of its competitors.36 To position itself differently from competitors, a firm must decide if it intends to perform activities differently or if it will perform different activities. Strategy defines the path that provides the direction of actions organizational leaders take to help their firm achieve success.37 In fact, “choosing to perform activities differently or to perform different activities than rivals” is the essence of a business-level strategy.38 Thus, the firm’s business-level strategy is a deliberate choice about how it will perform the value chain’s primary and support activities to create unique value. Indeed, in the current complex competitive landscape, successful use of a business-level strategy results from the firm learning how to integrate the activities it performs in ways that create superior value for customers.

The manner in which Southwest Airlines Co. has integrated its activities is the foundation for the firm’s ability to use the cost leadership strategy successfully (we discuss this strategy later in the chapter). However, as required by the cost leadership strategy, Southwest Airlines also provides customers with a set of features they find to be acceptable along with a low cost for its services. The tight integration among Southwest’s activities is a key source of the firm’s ability, historically, to operate more profitably than do its primary competitors. Today, Southwest flies more passengers in the United States than any other airline.39

Southwest Airlines has configured the activities it performs into six areas of strategic intent—limited passenger service; frequent, reliable departures; lean, highly productive ground and gate crews; high aircraft utilization with few aircraft models; very low ticket prices; and short-haul, point-to-point routes between mid-sized cities and secondary airports. Individual clusters of tightly linked activities enhance the likelihood the firm will execute its cost leadership strategy successfully. For example, no meals, no seat assignments, and no baggage transfers form a cluster of individual activities that support the objective of offering limited passenger service.

Southwest’s tightly integrated activities make it difficult for competitors to imitate the firm’s cost leadership strategy. The firm’s unique culture and customer service are sources of competitive advantage that rivals have been unable to imitate, although some tried and failed (e.g., US Airways’ MetroJet subsidiary, United Airlines’ Shuttle by United, Delta’s Song, and Continental Airlines’ Continental Lite). Hindsight shows that these competitors offered low prices to customers, but weren’t able to operate at costs close to those of Southwest or to provide customers with any notable sources of differentiation, such as a unique experience while in the air. The key to Southwest’s success has been its ability to maintain low costs across time while providing customers with acceptable levels of differentiation such as an engaging culture. Firms using the cost leadership strategy must understand that in terms of sources of differentiation accompanying the cost leader’s product, the customer defines acceptable. Fit among activities is a key to the sustainability of competitive advantage for all firms, including Southwest Airlines. Strategic fit among the many activities is critical for competitive advantage. It is more difficult for a competitor to match a configuration of integrated activities than to imitate a particular activity such as sales promotion, or a process technology.40

Next, we discuss business models, which are part of a comprehensive business-level strategy.41 While business models inform the development and use of the other types of strategies a firm may choose to implement, their primary use is with business-level strategies. The reason for this is that as noted previously in this chapter, a business-level strategy is the firm’s core strategy—the one the firm forms to describe how it intends to compete against rivals on a day-to-day basis in its chosen product market. As part of a firm’s business-level strategy, the chosen business model influences the implementation of strategy, especially in terms of the interdependent processes the firm uses during implementation.42 Developing and integrating a business model and a business-level strategy increases the likelihood of company success.43 We use a discussion of business models and their relationship with strategy as a foundation for then describing five types of business-level strategies firms may choose to implement.

4-3

Business Models and their Relationship with Business-Level Strategies

As is the case with strategy, there are multiple definitions of a business model.44 The consensus across these definitions is that a business model describes what a firm does to create, deliver, and capture value for its stakeholders.45 As explained in Chapter 1, stakeholders value related yet different outcomes. For example, for shareholders, the firm captures and distributes value to them in the form of a return on their investment. For customers, the firm creates and delivers value in the form of a product featuring the combination of price and features for which they are willing to pay. For employees, the firm creates and delivers value in the form of a job about which they are passionate as well as through which they have opportunities to develop their skills by participating in continuous learning experiences. In a sense then, a business model is a framework for how the firm will create, deliver, and capture value while a business-level strategy is the set of commitments and actions that yields the path a firm intends to follow to gain a competitive advantage by exploiting its core competencies in a specific product market. Understanding customers in terms of who, what, and how is foundational to developing and using successfully both a business model and a business-level strategy. 46

A business model describes what a firm does to create, deliver, and capture value for its stakeholders.

Regardless of the business model chosen, those leading a company should view that selection as one that will require adjustment in response to conditions that change from time to time in the firm’s external environment (e.g., an opportunity to enter a new region surfaces) and its internal environment (e.g., the development of new capabilities).47 Particularly because it is involved primarily with implementing a business-level strategy, the operational mechanics of a business model should change given the realities a firm encounters while engaging rivals in marketplace competitions.

There is an array of different business models, from which firms select one to use.48 A franchise business model, for example, finds a firm licensing its trademark and the processes it follows to create and deliver a product to franchisees. In this instance, the firm franchising its trademark and processes captures value by receiving fees and royalty payments from its franchisees.

McDonald’s and Panera Bread both use the franchise business model. McDonald’s uses the model as part of its cost leadership strategy while Panera Bread uses it to implement a differentiation strategy (we discuss both strategies in detail in the next major section). McDonald’s’ cost leadership strategy finds it using processes detailed in its franchise business model to deliver food items to its customers that are offered at a low price but with acceptable levels of differentiation. Customers receive acceptable levels of differentiation in terms of taste quality, service quality, the cleanliness of the firm’s units, and the value the customers believe they receive when buying McDonald’s food.49 (Additional information about McDonald’s and its cost leadership strategy appear later in the chapter in a Strategic Focus.)

Panera Bread also uses a franchise business model, but its model differs from the McDonald’s franchise business model. One difference is that a person can purchase a single McDonald’s unit. This is not the case for Panera Bread: “Panera Bread does not sell single-unit franchises, so it is not possible to open just one bakery-café. Rather, we have chosen to develop by selling market areas which require the franchise developer to open a number of units, typically 15 bakery-cafes in a period of 6 years.”50 Operating in the fast-casual part of the restaurant industry (McDonald’s operates in the fast food part of the industry), Panera implements the differentiation strategy to provide customers “with good food (that) they can feel good about.”51 Through the differentiation strategy, Panera uses a carefully designed set of processes to offer differentiated food items in a differentiated setting to provide customers with value for which they are willing to pay and at a cost that is acceptable to them. Thus, while McDonald’s and Panera Bread use the same business model, the franchising business model these firms use differ in actions the firms take to implement different business-level strategies.

As mentioned, there are multiple kinds of business models, such as the subscription model. In this instance, the business model finds a firm offering a product to customers on a regular basis such as once-per-month, once-per-year, or upon demand. Netflix uses a subscription business model as does Blue Apron, a firm founded on the belief that the way food is grown and distributed is complicated, making it difficult for families to make “good” choices about what they eat. Blue Apron delivers food directly to consumers, eliminating the “middleman” by doing so. The firm partners with farmers who are committed to sustainable production processes “to raise the highest-quality ingredients.” Thus, Blue Apron combines the differentiation strategy with a subscription model to create, deliver, and capture value for the stakeholders (e.g., customers, suppliers, employees, and local communities) with whom the firm interacts while implementing its business-level strategy. 52 Other business models that also support the use of any of the five generic business-level strategies we discuss next include the following: (1) a freemium model (here the firm provides a basic product to customers for free and earns revenues and profits by selling a premium version of the service—examples include Dropbox and MailChimp); (2) an advertising model (where for a fee, firms provide advertisers with high-quality access to their target customers—Google and Pinterest are examples of firms using this business model); and (3) a peer-to-peer model (where a business matches those wanting a particular service with those providing that service—two examples are Task Rabbit and Airbnb).

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Types of Business-Level Strategies

Firms choose between five business-level strategies to establish and defend their desired strategic position against competitors: cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation (see Figure 4.1). Each business-level strategy can help the firm establish and exploit a competitive advantage (either lowest cost or distinctiveness) as the basis for how it will create value for customers within a particular competitive scope (broad market or narrow market). How firms integrate the activities they complete within each business level strategy demonstrates how they differ from one another.53 For example, firms have different activity maps, and thus, a Southwest Airlines activity map differs from those of competitors JetBlue, United Airlines, American Airlines, and so forth. Superior integration of activities increases the likelihood a firm will develop an advantage relative to competitors as a path to earning above-average returns.

Figure 4.1 Five Business-Level Strategies

When selecting a business-level strategy, firms evaluate two types of potential competitive advantages: “lower cost than rivals or the ability to differentiate and command a premium price that exceeds the extra cost of doing so.”54 Lower costs result from the firm’s ability to perform activities differently than rivals; being able to differentiate indicates the firm’s capacity to perform different (and valuable) activities. Thus, based on the nature and quality of its internal resources, capabilities, and core competencies, a firm seeks to form either a cost competitive advantage or a distinctiveness competitive advantage as the basis for implementing its business-level strategy.55

Two types of target markets are broad market and narrow market segment(s) (see Figure 4.1). Firms serving a broad market seek to use their capabilities to create value for customers on an industry-wide basis. A narrow market segment means that the firm intends to serve the needs of a narrow customer group. With focus strategies, the firm “selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.”56 Buyers with special needs and buyers located in specific geographic regions are examples of narrow customer groups. As shown in Figure 4.1, a firm could also strive to develop a combined low cost/distinctiveness value creation approach as the foundation for serving a target customer group that is larger than a narrow market segment but not as comprehensive as a broad (or industry-wide) customer group. In this instance, the firm uses the integrated cost leadership/differentiation strategy.

None of the five business-level strategies shown in Figure 4.1 is inherently or universally superior to the others. The effectiveness of each strategy is contingent on the opportunities and threats in a firm’s external environment and the strengths and weaknesses derived from its resource portfolio. It is critical, therefore, for the firm to select a business-level strategy that represents an effective match between the opportunities and threats in its external environment and the strengths of its internal organization based on its core competencies. After the firm chooses its strategy, it should consistently emphasize actions that are required to implement it successfully.

4-4a

Cost Leadership Strategy

The cost leadership strategy is an integrated set of actions taken to produce products with features that are acceptable to customers at the lowest cost, relative to that of competitors.57 Firms using the cost leadership strategy commonly sell standardized goods or services, but with competitive levels of differentiation, to the industry’s most typical customers. Process innovations, which are newly designed production and distribution methods and techniques that allow the firm to operate more efficiently, are critical to a firm’s efforts to use the cost leadership strategy successfully. Commonly, firms using the cost leadership strategy scour the world to find low-cost producers to which they outsource various functions (e.g., manufacturing goods) as a means of keeping their costs low relative to competitors’ costs.58

The cost leadership strategy is an integrated set of actions taken to produce products with features that are acceptable to customers at the lowest cost, relative to that of competitors.

As we have noted, firms implementing the cost leadership strategy strive constantly to drive their costs lower and lower relative to competitors so they can sell their products to customers at a low and perhaps the lowest cost. Charles Schwab competes against low-cost competitor Vanguard Group (and others) to sell an array of financial products. Both firms offer numerous “passively managed” rather than “actively managed” funds to customers. Recently, Schwab claimed that the costs of its market cap index mutual funds were “lower than comparable competitor funds with the lowest investment minimums.”59 To offer a source of differentiation that customers wanting to buy low-cost products with acceptable levels of differentiation would find interesting, Schwab announced in January of 2018 that the expense ratio it would charge for three new equity index funds would be zero until June 30, 2018. At that time, the expense ratios for the three new funds would increase from zero to .04 or .05 percent.60 Along with Vanguard and other competitors such as Fidelity, Schwab also offers commission-free ETF (exchange-traded funds) trades for a number of its ETFs. As an example of a source of differentiation, waiving Schwab’s standard trade commission of $4.95 per transaction for a number of ETFs allows customers to save money when buying the firm’s products. Now the fifth largest U.S. ETF sponsor, analysts suggest that “one of the primary reasons Schwab has been able to ascend to the upper echelon of ETF issuers in terms of size is the provider’s willingness to compete with and in many cases beat rival sponsors when it comes to low fees.”61

As primary activities, inbound logistics (e.g., materials handling, warehousing, and inventory control) and outbound logistics (e.g., collecting, storing, and distributing products to customers) often account for significant portions of the total cost to produce some products. Research suggests that having a competitive advantage in logistics creates more value with a cost leadership strategy than with a differentiation strategy.62

Thus, cost leaders seeking competitively valuable ways to reduce costs may want to concentrate on the primary activities of inbound logistics and outbound logistics. An example of this is the decision by a number of low-cost producers to outsource their manufacturing operations to low-cost firms with low-wage employees (e.g., China).63 However, outsourcing also makes the firm more dependent on suppliers over which they may have little control. Because of this, firms analyze outsourcing possibilities carefully prior to committing to any of them. Outsourcing creates interdependencies between the outsourcing firm and the suppliers. If dependencies become too great, supplier power may result in higher costs for the outsourcing firm. Such actions could harm the cost leader’s ability to maintain a low-cost competitive advantage.64 Cost leaders also examine all support activities to find additional potential cost reductions. Developing new systems for finding the optimal combination of low cost and acceptable levels of differentiation in the raw materials required to produce the firm’s products is an example of how the procurement support activity can help when implementing the cost leadership strategy.

As described in Chapter 3, firms use value-chain analysis to identify the parts of the company’s operations that create value and those that do not. Figure 4.2 demonstrates the value-chain activities and support functions that allow a firm to create value when implementing the cost leadership strategy. Companies lacking the ability to integrate the activities and functions shown in this figure typically lack the core competencies needed to use the cost leadership strategy successfully.

Effective use of the cost leadership strategy allows a firm to earn above-average returns in spite of the presence of strong competitive forces (see Chapter 2). The next sections (one for each of the five forces) explain how firms seek to earn above-average returns by implementing the cost leadership strategy.

Figure 4.2 Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

Rivalry with Existing Competitors

Having the low-cost position is valuable when dealing with rivals. Because of the cost leader’s advantageous position, rivals hesitate to compete on the price variable, especially before evaluating the potential outcomes of such competition.65 Walmart and Dollar General use the cost leadership strategy. Successfully executing their strategies causes competitors to avoid focusing on the price variable as a means—and certainly as the primary means—of competing against Walmart and Dollar General.

A number of factors influence the degree of rivalry that firms encounter when implementing the cost leadership strategy. Examples of these factors include organizational size, resources possessed by rivals, a firm’s dependence on a particular market, location and prior competitive interactions between firms, and a firm’s reach, richness, and affiliation with its customers.66 Walmart’s size deters some competitors from competing against this firm. The richness and affiliation Amazon has with its customers create competitive challenges for competitors, even Walmart as it ramps up its effort through Walmart.com to challenge Amazon’s superiority in online sales.

Those using the cost leadership strategy may also try to reduce the amount of rivalry they experience from competitors. Firms may decide to form collaborations, such as joint ventures and strategic alliances (see Chapter 9), to reduce rivalry.67 In other instances, cost leaders try to develop strong and mutually supportive relationships with stakeholders (e.g., important government officials, suppliers, and customers) to reduce rivalry and lower their cost as a result. As noted in Chapter 2, guanxi is the name used to describe relationships that Chinese firms develop with others to reduce rivalry.68

Bargaining Power of Buyers (Customers)

Powerful customers (e.g., those purchasing a significant amount of the focal firm’s output) can force a cost leader to reduce its prices. However, prices will not be reduced below the level at which the cost leader’s next-most-efficient industry competitor can earn average returns. Although powerful customers might be able to force the cost leader to reduce prices below this level, they probably would not choose to do so. Prices that are low enough to prevent the next-most-efficient competitor from earning average returns would force that firm to exit the market, leaving the cost leader with less competition and an even stronger bargaining position. When customers are able to purchase only from a single firm operating in an industry lacking rivals, they pay more for products. In some cases, rather than forcing firms to reduce their prices, powerful customers may pressure firms to provide innovative products and services.

Bargaining Power of Suppliers

The cost leader generally operates with margins greater than the margins earned by its competitors. Commonly, the cost leader maintains a strong commitment to reducing its costs further as a means of increasing its margins. Among other benefits, higher gross margins relative to those of competitors make it possible for the cost leader to absorb its suppliers’ price increases. When an industry faces substantial increases in the cost of its supplies, only the cost leader may be able to pay the higher prices and continue to earn either average or above average returns. Alternatively, a powerful cost leader may be able to force its suppliers to hold down their prices, which would reduce the suppliers’ margins in the process.

Walmart is the largest retailer in North America. Because of this, Walmart is sometimes able to use its power to force suppliers to reduce the price of products it buys from them. Walmart is the largest supermarket operator in the United States, and its Sam’s Club division is the second largest warehouse club in the United States. Its sales revenue of $495.76 billion in 2018 makes the firm an attractive outlet for suppliers to place their products. Because of its size (recently, there were 11,695 Walmart stores and 665 Sam’s Club units located in 28 countries) and reach with customers (approximately 260 million customers shop at Walmart’s stores weekly),69 Walmart historically has been able to bargain for low prices from its suppliers. However, in light of increasing competition with Amazon in terms of online sales and because of the possibility of Amazon establishing storefronts, Walmart may find in the future that it has less bargaining power with suppliers than has been the case historically.70

To reduce costs, some firms may outsource an entire function such as manufacturing to a single or a small number of suppliers.71 Outsourcing may take place in response to earnings pressure as expressed by shareholders, particularly institutional investors.72 In the face of earnings pressure, a firm’s decision-makers may conclude that outsourcing will be less expensive, allowing it to reduce its products’ prices as a result.73 This is not a risk-free decision though. For example, some businesspeople believe that “outsourcing can create new costs, as suppliers and partners demand a larger share of the value created.”74 This possibility highlights how important it is for the firm to select the most appropriate company to engage in outsourcing and then to manage its relationship with that company. Through effective management of the relationship between a firm and the one to which it outsources an activity, trust can develop. In turn, trust may be the foundation on which a firm might choose to integrate an outsourcing firm into its value chain to find ways to reduce its costs further.75

Potential Entrants

Through continuous efforts to reduce costs to levels that are lower than those against whom it competes, a cost leader becomes highly efficient. Increasing levels of efficiency (e.g., economies of scale) enhance profit margins. In turn, attractive profit margins create an entry barrier to potential competitors.76 New entrants must be willing to accept less than average returns until they gain the experience required to approach the cost leader’s efficiency. To earn even average returns, new entrants must have the competencies required to match the cost levels of competitors other than the cost leader. The low profit margins (relative to margins earned by firms implementing the differentiation strategy) make it necessary for the cost leader to sell large volumes of its product to earn above-average returns. However, firms striving to be the cost leader must avoid pricing their products so low that they cannot operate profitably, even though volume increases.

Product Substitutes

Compared with its industry rivals, the cost leader also holds an attractive position relative to product substitutes. A product substitute becomes a concern for the cost leader when its features and characteristics, in terms of cost and levels of differentiation that are acceptable to customers, are potentially attractive to the firm’s customers. When faced with possible substitutes, the cost leader has more flexibility than do its competitors. To retain customers, it often can reduce its product’s price. With still lower prices and competitive levels of differentiation, the cost leader increases the probability that customers will continue to prefer its product rather than a substitute.

Competitive Risks of the Cost Leadership Strategy

The cost leadership strategy is not risk-free. One risk is that the processes used by the cost leader to produce and distribute its product could become obsolete because of competitors’ innovations.77 These innovations may allow rivals to produce products at costs lower than those of the original cost leader, or to provide additional differentiated features without increasing the product’s price to customers.

A second risk is that too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers’ perceptions of “competitive levels of differentiation.” Some believe, for example, that Walmart often has too few salespeople available to help customers and too few individuals at checkout registers. These complaints suggest that there might be a discrepancy between how Walmart’s customers define “minimal acceptable levels of service” and the firm’s attempts to drive its costs increasingly lower.

Imitation is a final risk of the cost leadership strategy. Using their own core competencies, competitors sometimes learn how to imitate the cost leader’s strategy. When this happens, the cost leader must increase the value its product provides to customers. Commonly, the cost leader increases the value it creates by selling the current product at an even lower price or by adding differentiated features that create value for customers while maintaining price.

4-4b

Differentiation Strategy

The differentiation strategy is an integrated set of actions taken to produce products (at an acceptable cost) that customers perceive as being different in ways that are important to them.78 While cost leaders serve a typical customer in an industry, differentiators target customers for whom the firm creates value because of the manner in which its products differ from those produced and marketed by competitors. Product innovation, which is “the result of bringing to life a new way to solve the customer’s problem—through a new product or service development—that benefits both the customer and the sponsoring company,”79 is critical to successful use of the differentiation strategy.80

The differentiation strategy is an integrated set of actions taken to produce products (at an acceptable cost) that customers perceive as being different in ways that are important to them.

Firms must be able to provide customers with differentiated products at competitive costs to reduce upward pressure on the price they pay. When a firm produces differentiated features for its products at non-competitive costs, the price for the product may exceed what target customers are willing to pay. If firms have a thorough understanding of the value its target customers seek, the relative importance they attach to the satisfaction of different needs and for what they are willing to pay a premium, the differentiation strategy can be effective in helping them earn above-average returns. Of course, to achieve these returns, the firm must apply its knowledge capital (knowledge held by its employees and managers) to provide customers with a differentiated product that provides them with value for which they are willing to pay.81

Through the differentiation strategy, the firm produces distinctive products for customers who value differentiated features more than low cost. For example, superior product reliability, durability, and high-performance sound systems are among the differentiated features of Toyota Motor Corporation’s Lexus products. (Nevertheless, Lexus does offer its vehicles to customers at a competitive purchase price relative to other luxury automobiles.)

As with Lexus products, a product’s unique attributes, rather than its purchase price, provide the value for which customers are willing to pay. Now the second-largest luxury brand by revenue behind only Louis Vuitton, Gucci relies today on innovative and unique product designs from Alessandro Michele. These new designs “mix colorful streetwear, historical references and garish animal prints.”82 The firm believes that these unique designs, for which customers are willing to pay, will help it defy what is typically a boom-bust cycle with fashion-based products.

To maintain success by implementing the differentiation strategy, the firm must consistently upgrade differentiated features that customers value and/or create new valuable features (i.e., innovate) without significant cost increases.83 This approach requires firms to change their product lines frequently.84 These firms may also offer a portfolio of products that complement each other, thereby enriching the differentiation for the customer and perhaps satisfying a portfolio of consumer needs. Because a differentiated product satisfies customers’ unique needs, firms following the differentiation strategy are able to charge premium prices. The ability to sell a product at a price that substantially exceeds the cost of creating its differentiated features allows the firm to outperform rivals and earn above-average returns. Rather than costs, a firm using the differentiation strategy primarily concentrates on investing in and developing features that differentiate a product in ways that create value for customers.85 Overall, a firm using the differentiation strategy seeks to be different from its competitors in as many dimensions as possible. The less similarity between a firm’s goods or services and those of its competitors, the more buffered it is from rivals’ actions. Still, customers must view the prices they are paying for the differentiated products they buy from a firm as acceptable to them in order for this strategy to succeed. Commonly recognized differentiated goods include those offered by Gucci and Louis Vuitton, men’s suits tailored by Brioni, Caterpillar’s heavy-duty earth-moving equipment, and the differentiated consulting services McKinsey & Co. offers clients.

A runway model wearing creations by Alessandro Michele, Gucci’s Creative Director.

Many dimensions are available to firms seeking to differentiate their products from competitors’ offerings. Unusual features, responsive customer service, rapid product innovations, technological leadership, perceived prestige and status, different tastes, and engineering design and performance are examples of approaches to differentiation.86 While the number of ways to reduce costs may be finite, virtually anything a firm can do to create real or perceived value in consumers’ eyes is a basis for differentiation. Consider product design as a case in point. Because it can create a positive experience for customers, design is an important source of differentiation (even for cost leaders seeking to find ways to add functionalities to their low-cost products as a way of differentiating their products from competitors) and, hopefully for firms emphasizing it, of competitive advantage.87 Examples of other competitive dimensions firms use to differentiate their products include Halliburton’s (an oil-field services company) focus on superior execution of projects88 and Subaru’s focus on product longevity and durability.89

Firms use the value chain to determine if they are able to link the activities required to create value by using the differentiation strategy. In Figure 4.3, we show examples of value chain activities and support functions that firms use commonly to differentiate a product. Companies without the skills needed to link these activities cannot expect to use the differentiation strategy successfully.

Figure 4.3 Examples of Value-Creating Activities Associated with the Differentiation Strategy

Next, we explain how firms using the differentiation strategy can successfully position themselves in terms of the five forces of competition (see Chapter 2) to earn above-average returns.

Rivalry with Existing Competitors

Customers tend to be loyal purchasers of products differentiated in ways that are meaningful to them. As their loyalty to a brand increases, customers become less sensitive to price increases. The relationship between brand loyalty and price sensitivity insulates a firm from competitive rivalry. Thus, positive reputations with customers sustain the competitive advantage of firms using a differentiation strategy.90 Nonetheless, firms using a differentiation strategy must be aware of imitation efforts by rivals and aware of any resulting successes. This is the case between Samsung and Apple as Samsung seeks to improve on Apple’s products, potentially creating value for customers when doing so. In the context of competitive rivalry (see Chapter 5), Apple must respond to imitation efforts to improve the value its products create for customers. Simultaneously, as a firm using the differentiation strategy, Apple must develop new and novel products to maintain its