Chap 005

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 ObjectivesAfter 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 firm’s relative power vis-à-vis the five forces that determine an industry’s 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 firm’s 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 firm’s 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

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Exhibit 5.1

Three Generic Strategies

Overall cost leadership Low-cost-position relative to a firm’s 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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ExampleCompanies pursuing an overall cost

leadership strategy McDonalds Wal-Mart

Companies pursuing a differentiation strategy Harley Davison Apple

Companies pursuing a focus strategy Rolex Lamborghini

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Competitive Advantage and Business Performance

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Exhibit 5.2

Overall Cost Leadership

Tight set of interrelated tactics that includes:

Tight cost and overhead controlAvoidance of marginal customer accountsCost minimization in all activities in the firm’s

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 firm’s 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

Improving Competitive Position vis-à-vis the Five Forces

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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An overall low-cost position

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 materialThe strategy is imitated too easilyA lack of parity on differentiationErosion of cost advantages when the pricing

information available to customers increases

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Differentiation

Differentiation strategy a firm’s generic strategy based on creating

differences in the firm’s 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 imageTechnologyInnovationFeaturesCustomer serviceDealer 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 valuableToo much differentiationToo high a price premiumDifferentiation that is easily imitatedDiffusion of brand identification through

product-line extensionsPerceptions of differentiation may vary between

buyers and sellers

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QUESTION

High product differentiation is generally accompanied by A.Higher market shareB.Decreased emphasis on competition based on priceC.Higher profit margins and lower costsD.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 systemsExploiting the profit pool concept for competitive

advantageCoordinating the “extended” value chain by way

of information technology

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U.S. Automobile Industry’s Profit Pool

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Exhibit 5.8

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 firm’s industry

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Internet-Enabled Low Cost Leader Strategies

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Exhibit 5.9

Internet-Enabled Differentiation Strategies

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Exhibit 5.10

Internet-Enabled Focus Strategies

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Exhibit 5.11

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

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Exhibit 5.12

QUESTION

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

A.High growthB.Strong competitive advantageC.Mergers and acquisitionsD.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 itGenerate 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 recognitionDifferentiated productsFinancial resources to support value-

chain 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 StageMaintaining HarvestingExiting the marketConsolidation

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Turnaround Strategies in the Life Cycle

Turnaround strategy a strategy that reverses a firm’s decline in

performance and returns it to growth and profitability.

Asset and cost surgerySelective product and market pruningPiecemeal productivity improvements

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