Business-Level Strategy:Creating and Sustaining Competitive

Advantages

Chapter Five

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Three Generic Strategies

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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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Example• Companies 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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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 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 (Cont.)

• Parity on the basis of differentiation Permits a cost leader to translate cost

advantages directly into higher profits than competitors

Allows firm to earn above-average profits

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Comparing Experience Curve Effects

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Improving Competitive Position vis-à-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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Differentiation

• Prestige or brand image

• Technology

• Innovation

• Features

• Customer service

• Dealer network

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Differentiation

• Firms may differentiate along several dimensions at once

• Successful differentiation requires integration with all parts of a firm’s value chain

• An important aspect of differentiation is speed or quick response

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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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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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U.S. Automobile Industry’s Profit Pool

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Internet-Enabled Low Cost Leader Strategies

• Online bidding and order processing are eliminating the need for sales calls and are minimizing sales force expenses.

• Online purchase orders are making many transactions paperless, thus reducing the costs of procurement and paper.

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Internet-Enabled Differentiation Strategies

• Internet-based knowledge management systems that link all parts of the organization are shortening response times and accelerating organization learning.

• Quick online responses to service requests and rapid feedback to customer surveys and product promotions are enhancing marketing efforts.

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Internet-Enabled Focus Strategies

• Permission marketing techniques are focusing sales efforts on specific customers who opt to receive advertising notices.

• Niche portals that target specific groups are providing advertisers with access to viewers with specialized interests.

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Industry Life-Cycle Stages: Strategic Implications

• Industry life cycle refers to the stages of introduction, growth,

maturity, and decline that occur over the life of an industry

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Stages of the Industry Life

Cycle

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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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Industry Life-Cycle Strategies

In the Introduction Stage:

• Products are unfamiliar to consumers

• Market segments not well defined

• Product features not clearly specified

• Competition tends to be limited

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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

The Growth Stage is:• Characterized by

strong increases in sales

• Attractive to potential competitors

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Industry Life-Cycle Strategies

For the Growth Stage:

• Brand recognition

• Differentiated products

• Financial resources to support value-chain activities

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Industry Life-Cycle Strategies

In the Maturity stage:

• Aggregate industry demand slows

• Market becomes saturated, few new adopters

• Direct competition becomes predominant

• Marginal competitors begin to exit

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Industry Life-Cycle Strategies

For the Maturity Stage:

• Efficient manufacturing operations and process engineering

• Low costs (customers become price sensitive)

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Industry Life-Cycle Strategies

In the Decline Stage:

• Industry sales and profits begin to fall

• Strategic options become dependent on the actions of rivals

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Strategies in the Decline Stage

For the Decline Stage• Maintaining • Exiting the market• Harvesting• Consolidation

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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 surgery• Selective product and market pruning• Piecemeal productivity improvements

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