Business-Level Strategy:

Creating and Sustaining Competitive Advantages

Chapter Five

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
After reading this chapter, you should have a good understanding of:
LO5.1 The central role of competitive advantage in the study of strategic management and the three generic strategies: overall cost leadership, differentiation, and focus. LO5.2 How the successful attainment of generic strategies can improve a firms relative power vis--vis the five forces that determine an industrys average profitability. LO5.3 The pitfalls managers must avoid in striving to attain generic strategies. LO5.4 How firms can effectively combine the generic strategies of overall cost leadership and differentiation.
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Learning Objectives (cont.)

LO5.5 What factors determine the sustainability of a firms competitive advantage. LO5.6 How Internet-enabled business models are being used to improve strategic positioning. LO5.7 The importance of considering the industry life cycle to determine a firms business-level strategy and its relative emphasis on functional area strategies and value-creating activities. LO5.8 The need for turnaround strategies that enable a firm to reposition its competitive position in an industry.
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Three Generic Strategies

Exhibit 5.1
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Three Generic Strategies

Overall cost leadership
Low-cost-position relative to a firms peers Manage relationships throughout the entire value chain

Differentiation
Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium
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Three Generic Strategies

Focus strategy
Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership

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Example
Companies pursuing an overall cost
leadership strategy
McDonalds Wal-Mart

Companies pursuing a differentiation

strategy

Companies pursuing a focus strategy

Rolex Lamborghini
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Harley Davison Apple

Competitive Advantage and Business Performance

Exhibit 5.2
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Overall Cost Leadership

Tight set of interrelated tactics that includes:

Tight cost and overhead control Avoidance of marginal customer accounts Cost minimization in all activities in the firms
value chain

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Overall Cost Leadership

Experience curve
refers to how business learns to lower costs as it gains experience with production processes with experience, unit costs of production decline as output increases in most industries

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Overall Cost Leadership

Competitive parity
a firms achievement of similarity, or being on par, with competitors with respect to low cost, differentiation, or other strategic product characteristic.

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Comparing Experience Curve Effects

Exhibit 5.4

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Improving Competitive Position vis--vis the Five Forces

An overall low-cost position

Protects a firm against

rivalry from competitors Protects a firm against powerful buyers Provides more flexibility to cope with demands from powerful suppliers for input cost increases

Provides substantial entry

barriers from economies of scale and cost advantages Puts the firm in a favorable position with respect to substitute products

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Pitfalls of Overall Cost Leadership Strategies

Too much focus on one or a few value-chain
activities All rivals share a common input or raw material The strategy is imitated too easily A lack of parity on differentiation Erosion of cost advantages when the pricing information available to customers increases

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Differentiation
Differentiation strategy
a firms generic strategy based on creating differences in the firms product or service offering by creating something that is perceived industry-wide as unique and valued by customers.

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Differentiation
Prestige or brand image Technology Innovation Features Customer service Dealer network

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Differentiation: Improving Competitive Position

Creates higher entry barriers due to customer
loyalty Provides higher margins that enable the firm to deal with supplier power Establishes customer loyalty and hence less threat from substitutes

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Potential Pitfalls of Differentiation Strategies

Uniqueness that is not valuable Too much differentiation Too high a price premium Differentiation that is easily imitated Diffusion of brand identification through
product-line extensions Perceptions of differentiation may vary between buyers and sellers
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QUESTION
High product differentiation is generally accompanied by A. Higher market share B. Decreased emphasis on competition based on price C. Higher profit margins and lower costs D. Significant economies of scale
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Focus
Focus is based on the choice of a narrow
competitive scope within an industry
Firm selects a segment or group of segments (niche) and tailors its strategy to serve them Firm achieves competitive advantages by dedicating itself to these segments exclusively

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Focus
Cost focus
firm strives to create a cost advantage in its target segment

Differentiation
focus
firm seeks to differentiate in its target market

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Focus: Improving Competitive Position

Focus
Creates barriers of either cost leadership or differentiation, or both Used to select niches that are least vulnerable to substitutes or where competitors are weakest

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Pitfalls of Focus Strategies

Erosion of cost advantages within the narrow
segment Focused products and services still subject to competition from new entrants and from imitation Focusers can become too focused to satisfy buyer needs

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Three Combination Approaches

Automated and flexible manufacturing systems Exploiting the profit pool concept for competitive
advantage Coordinating the extended value chain by way of information technology

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U.S. Automobile Industrys Profit Pool

Exhibit 5.8
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Pitfalls of Combination Strategies

Firms that fail to attain both strategies may
end up with neither and become stuck in the middle Underestimating the challenges and expenses associated with coordinating value creating activities in the extended value chain Miscalculating sources of revenue and profit pools in the firms industry
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Internet-Enabled Low Cost Leader Strategies

Exhibit 5.9

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Internet-Enabled Differentiation Strategies

Exhibit 5.10

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Internet-Enabled Focus Strategies

Exhibit 5.11

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Industry Life-Cycle Stages: Strategic Implications

Industry life cycle

refers to the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry

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Stages of the Industry Life Cycle

Exhibit 5.12
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QUESTION
The most likely time to pursue a harvest strategy is in a situation of

A. High growth B. Strong competitive advantage C. Mergers and acquisitions D. Decline in the market life cycle
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Strategies in the Introduction Stage

Introduction stage
the first stage of the industry life cycle, characterized by (1) new products that are not known to customers, (2) poorly defined market segments, (3) unspecified product features, (4) low sales growth, (5) rapid technological change, (6) operating losses, and (7) a need for financial support.

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Industry Life-Cycle Strategies

For the Introduction Stage: Develop product and get users to try it Generate exposure so product becomes standard

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Industry Life-Cycle Strategies

Growth stage
The second stage of the product life cycle, characterized by (1) strong increases in sales; (2) growing competition; (3) developing brand recognition; and (4) a need for financing complementary value-chain activities such as marketing, sales, customer service, and research and development.

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Industry Life-Cycle Strategies

For the Growth Stage: Brand recognition Differentiated products Financial resources to support valuechain activities

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Industry Life-Cycle Strategies

Maturity stage
The third stage of the product life cycle, characterized by (1) slowing demand growth, (2) saturated markets, (3) direct competition, (4) price competition, and (5) strategic emphasis on efficient operations.

Reverse positioning, breakaway positioning

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Industry Life-Cycle Strategies

Decline stage
The fourth stage of the product life cycle, characterized by (1) falling sales and profits, (2) increasing price competition, and (3) industry consolidation.

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Strategies in the Decline Stage

For the Decline Stage Maintaining Harvesting Exiting the market Consolidation

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Turnaround Strategies in the Life Cycle

Turnaround strategy
a strategy that reverses a firms decline in performance and returns it to growth and profitability. Asset and cost surgery Selective product and market pruning Piecemeal productivity improvements

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