Business-Level

Strategy
Creating and Sustaining Competitive
Advantages
Objectives:
1. The central role of competitive advantage in the study of strategic management
and the three generic strategies: overall cost leadership, differentiation, and
focus.
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.
3. The pitfalls managers must avoid in striving to attain generic strategies.
4. How firms can effectively combine the generic strategies of overall cost
leadership and differentiation.
5. What factors determine the sustainability of a firm’s competitive advantage.
6. 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.
7. The need for turnaround strategies that enable a firm to reposition its
competitive position in an industry.
TYPES OF COMPETITIVE ADVANTAGE
AND SUSTAINABILITY
Types of Competitive Advantage
and Sustainability
• Generic Strategies
• Basic types of business-level strategies based on breadth of target
market (industrywide versus narrow market segment) and type of
competitive advantage (low cost versus uniqueness).
• Three (3) Generic Strategies
• Overall cost leadership, is based on creating a low-cost position.
• Differentiation requires a firm to create products and/or services that
are unique and valued.
• Focus strategy directs attention (or “focus”) toward narrow product
lines, buyer segments, or targeted geographic markets, and they must
attain advantages through either differentiation or cost leadership.
Types of Competitive Advantage
and Sustainability
Overall Cost Leadership
• Overall Cost Leadership requires a tight set of interrelated tactics
that include:
• Aggressive construction of efficient-scale facilities.
• Vigorous pursuit of cost reductions from experience.
• Tight cost and overhead control.
• Avoidance of marginal customer accounts.
• Cost minimization in all activities in the firm’s value chain, such as R&D,
service, sales force, and advertising.
• One factor often central to an overall cost leadership strategy is the
experience curve, which 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.
Overall Cost Leadership
• To generate above-average performance, a firm following an
overall cost leadership position must attain competitive parity
on the basis of differentiation relative to competitors. In other
words, a firm achieving parity is similar to its competitors, or “on
par,” with respect to differentiated products.
• Competitive parity on the basis of differentiation permits a cost
leader to translate cost advantages directly into higher profits
than competitors. Thus, the cost leader earns above-average
returns.
Overall Cost Leadership
• Overall Cost Leadership: Improving Competitive Position
vis-à-vis the Five Forces
• An overall low-cost position enables a firm to achieve above-average
returns despite strong competition. It protects a firm against rivalry from
competitors, because lower costs allow a firm to earn returns even if its
competitors eroded their profits through intense rivalry. A low-cost
position also protects firms against powerful buyers. Buyers can exert
power to drive down prices only to the level of the next most efficient
producer. Also, a low-cost position provides more flexibility to cope with
demands from powerful suppliers for input cost increases. The factors
that lead to a low-cost position also provide a substantial entry barriers
position with respect to substitute products introduced by new and
existing competitors.
Overall Cost Leadership
• Potential Pitfalls of Overall Cost Leadership Strategies
• Too much focus on one or a few value-chain activities.
• Firms need to pay attention to all activities in the value chain.
• Managers should explore all value-chain activities, including relationships among
them, as candidates for cost reductions.
• Increase in the cost of the inputs on which the advantage is
based.
• Firms can be vulnerable to price increases in the factors of production.
• A strategy that can be imitated too easily.
• One of the common pitfalls of a cost leadership strategy is that a firm’s strategy
may consist of value-creating activities that are easy to imitate.
• A lack of parity on differentiation.
• Firms striving to attain cost leadership advantages must obtain a level of parity on
differentiation.
Overall Cost Leadership
• Reduced flexibility.
• Building up a low-cost advantage often requires significant investments in plant
and equipment, distribution systems, and large, economically scaled operations.
As a result, firms often find that these investments limit their flexibility, leading to
great difficulty responding to changes in the environment.
• Obsolescence of the basis of cost advantage.
• Ultimately, the foundation of a firm’s cost advantage may become obsolete. In
such circumstances, other firms develop new ways of cutting costs, leaving the
old cost leaders at a significant disadvantage. The older cost leaders are often
locked into their way of competing and are unable to respond to the newer,
lower-cost means of competing.
Differentiation
• A differentiation strategy consists of creating differences in the
firm’s product or service offering by creating something that is
perceived industrywide as unique and valued by customers.
Differentiation can take many forms:
• Prestige or brand image (BMW automobiles).
• Quality (Michelin tires).
• Technology (North Face camping equipment).
• Innovation (Tesla Motors).
• Features (Cannondale mountain bikes).
• Customer service.
• Dealer network (Lexus automobiles).
Differentiation
• Firms achieve and sustain differentiation advantages and attain above-average
performance when their price premiums exceed the extra costs incurred in being
unique.
• Thus, a differentiator will always seek out ways of distinguishing itself from similar
competitors to justify price premiums greater than the costs incurred by
differentiating. Clearly, a differentiator cannot ignore costs. After all, its premium
prices would be eroded by a markedly inferior cost position.
• Therefore, it must attain a level of cost parity relative to competitors. Differentiators
can do this by reducing costs in all areas that do not affect differentiation.
• Although a differentiation firm needs to be mindful of costs, it must also regularly
and consistently reinforce the foundations of its differentiation advantage. In doing
so, the firm builds a stronger reputation for differentiation, and this reputation can
be an enduring source of advantage in its market
Differentiation
• Differentiation: Improving Competitive Position vis-à-vis
the Five Forces
• Differentiation provides protection against rivalry since brand loyalty
lowers customer sensitivity to price and raises customer switching
costs. By increasing a firm’s margins, differentiation also avoids the
need for a low-cost position. Higher entry barriers result because of
customer loyalty and the firm’s ability to provide uniqueness in its
products or services. Differentiation also provides higher margins that
enable a firm to deal with supplier power. And it reduces buyer power,
because buyers lack comparable alternatives and are therefore less
price-sensitive. Supplier power is also decreased because there is a
certain amount of prestige associated with being the supplier to a
producer of highly differentiated products and services. Last,
differentiation enhances customer loyalty, thus reducing the threat from
substitutes.
Differentiation
• Potential Pitfalls of Differentiation Strategies
• Uniqueness that is not valuable.
• A differentiation strategy must provide unique bundles of products and/or services that
customers value highly. It’s not enough just to be “different.”
• Too much differentiation.
• Firms may strive for quality or service that is higher than customers desire. Thus, they
become vulnerable to competitors that provide an appropriate level of quality at a lower
price.
• Too high a price premium.
• This pitfall is quite similar to too much differentiation. Customers may desire the product,
but they are repelled by the price premium.
• Differentiation that is easily imitated.
• Resources that are easily imitated cannot lead to sustainable advantages. Similarly,
firms may strive for, and even attain, a differentiation strategy that is successful for a
time. However, the advantages are eroded through imitation.
Differentiation
• Dilution of brand identification through product-line extensions.
• Firms may erode their quality brand image by adding products or services with
lower prices and less quality. Although this can increase short-term revenues, it
may be detrimental in the long run.
• Perceptions of differentiation that vary between buyers and
sellers.
• The issue here is that “beauty is in the eye of the beholder.” Companies must
realize that although they may perceive their products and services as
differentiated, their customers may view them as commodities.
Differentiation
Focus
• A focus strategy is based on the choice of a narrow competitive
scope within an industry. A firm following this strategy selects a
segment or group of segments and tailors its strategy to serve them.
The essence of focus is the exploitation of a particular market niche.
• The focus strategy has two variants. In a cost focus, a firm strives to
create a cost advantage in its target segment. In a differentiation
focus, a firm seeks to differentiate in its target market. Both variants
of the focus strategy rely on providing better service than
broad-based competitors that are trying to serve the focuser’s target
segment. Cost focus exploits differences in cost behavior in some
segments, while differentiation focus exploits the special needs of
buyers in other segments.
Focus
• Focus: Improving Competitive Position vis-à-vis the Five
Forces
• Focus requires that a firm have either a low-cost position with its
strategic target, high differentiation, or both. These positions provide
defenses against each competitive force. Focus is also used to select
niches that are least vulnerable to substitutes or where competitors are
weakest.
Focus
• Focus: Improving Competitive Position vis-à-vis the Five
Forces
• Focus requires that a firm have either a low-cost position with its
strategic target, high differentiation, or both. These positions provide
defenses against each competitive force. Focus is also used to select
niches that are least vulnerable to substitutes or where competitors are
weakest.
• Potential Pitfalls of Focus Strategies
• Cost advantages may erode within the narrow segment.
• The advantages of a cost focus strategy may be fleeting if the cost advantages
are eroded over time.
Focus
• Even product and service offerings that are highly focused are
subject to competition from new entrants and from imitation.
• Some firms adopting a focus strategy may enjoy temporary advantages because
they select a small niche with few rivals. However, their advantages may be
short-lived.
• Focusers can become too focused to satisfy buyer needs.
• Some firms attempting to attain advantages through a focus strategy may have
too narrow a product or service.
Combination Strategies: Integrating
Overall Low Cost and Differentiation
• Perhaps the primary benefit to firms that integrate low-cost and
differentiation strategies is the difficulty for rivals to duplicate or
imitate. This strategy enables a firm to provide two types of value to
customers: differentiated attributes (e.g., high quality, brand
identification, reputation) and lower prices (because of the firm’s
lower costs in value-creating activities). The goal is thus to provide
unique value to customers in an efficient manner. Some firms are
able to attain both types of advantages simultaneously.
• For example, superior quality can lead to lower costs because of less
need for rework in manufacturing, fewer warranty claims, a reduced
need for customer service personnel to resolve customer complaints,
and so forth. Thus, the benefits of combining advantages can be
additive, instead of merely involving tradeoffs.
Combination Strategies: Integrating
Overall Low Cost and Differentiation
• Adopting Automated and Flexible Manufacturing Systems
• Given the advances in manufacturing technologies such as CAD/CAM
(computer aided design and computer aided manufacturing) as well as
information technologies, many firms have been able to manufacture
unique products in relatively small quantities at lower costs—a concept
known as mass customization.
• Using Data Analytics
• Corporations are increasingly collecting and analyzing data on their
customers, including data on customer characteristics, purchasing
patterns, employee productivity, and physical asset utilization. These
efforts have the potential to allow firms to better customize their product
and service offerings to customers while more efficiently and fully using
the resources of the company.
Combination Strategies: Integrating
Overall Low Cost and Differentiation
• Exploiting the Profit Pool Concept for Competitive Advantage
• Given the advances in manufacturing technologies such as CAD/CAM
(computer aided design and computer aided manufacturing) as well as
information technologies, many firms have been able to manufacture unique
products in relatively small quantities at lower costs—a concept known as
mass customization.
• Exploiting the Profit Pool Concept for Competitive Advantage
• A profit pool is defined as the total profits in an industry at all points along the
industry’s value chain. Although the concept is relatively straightforward, the
structure of the profit pool can be complex. The potential pool of profits will
be deeper in some segments of the value chain than in others, and the
depths will vary within an individual segment. Segment profitability may vary
widely by customer group, product category, geographic market, or
distribution channel. Additionally, the pattern of profit concentration in an
industry is very often different from the pattern of revenue generation.
Combination Strategies: Integrating
Overall Low Cost and Differentiation
• Coordinating the “Extended” Value Chain by Way of
Information Technology
• Many firms have achieved success by integrating activities throughout
the “extended value chain” by using information technology to link their
own value chain with the value chains of their customers and suppliers.
Combination Strategies: Integrating
Overall Low Cost and Differentiation
• Integrated Overall Low-Cost and Differentiation Strategies:
Improving Competitive Position vis-à-vis the Five Forces
• Firms that successfully integrate both differentiation and cost
advantages create an enviable position.
• Pitfalls of Integrated Overall Cost Leadership and
Differentiation Strategies
• Failing to attain both strategies and possibly ending up with
neither, leaving the firm “stuck in the middle.”
• A key issue in strategic management is the creation of competitive advantages
that enable a firm to enjoy above-average returns. Some firms may become stuck
in the middle if they try to attain both cost and differentiation advantages.
Combination Strategies: Integrating
Overall Low Cost and Differentiation
• Underestimating the challenges and expenses associated with
coordinating value-creating activities in the extended value chain.
• Integrating activities across a firm’s value chain with the value chain of suppliers and
customers involves a significant investment in financial and human resources. Firms
must consider the expenses linked to technology investment, managerial time and
commitment, and the involvement and investment required by the firm’s customers and
suppliers. The firm must be confident that it can generate a sufficient scale of operations
and revenues to justify all associated expenses.
• Miscalculating sources of revenue and profit pools in the firm’s
industry.
• Firms may fail to accurately assess sources of revenue and profits in their value chain.
This can occur for several reasons. For example, a manager may be biased due to his
or her functional area background, work experiences, and educational background. If
the manager’s background is in engineering, he or she might perceive that
proportionately greater revenue and margins were being created in manufacturing,
product, and process design than a person whose background is in a “downstream”
value-chain activity such as marketing and sales.
Combination Strategies: Integrating
Overall Low Cost and Differentiation
• Underestimating the challenges and expenses associated with
coordinating value-creating activities in the extended value chain.
• Integrating activities across a firm’s value chain with the value chain of suppliers and
customers involves a significant investment in financial and human resources. Firms
must consider the expenses linked to technology investment, managerial time and
commitment, and the involvement and investment required by the firm’s customers and
suppliers. The firm must be confident that it can generate a sufficient scale of operations
and revenues to justify all associated expenses.
• Miscalculating sources of revenue and profit pools in the firm’s
industry.
• Firms may fail to accurately assess sources of revenue and profits in their value chain.
This can occur for several reasons. For example, a manager may be biased due to his
or her functional area background, work experiences, and educational background. If
the manager’s background is in engineering, he or she might perceive that
proportionately greater revenue and margins were being created in manufacturing,
product, and process design than a person whose background is in a “downstream”
value-chain activity such as marketing and sales.
INDUSTRY LIFE-CYCLE STAGES:
STRATEGIC IMPLICATIONS
Industry Life-cycle Stages:
Strategic Implications
• The industry life cycle refers to the stages of introduction,
growth, maturity, and decline that occur over the life of an
industry.
• Yet the industry life-cycle concept can be explored from several
levels, from the life cycle of an entire industry to the life cycle of
a single variation or model of a specific product or service.
Industry Life-cycle Stages:
Strategic Implications
• Why are industry life cycles important?
• The emphasis on various generic strategies, functional areas,
value-creating activities, and overall objectives varies over the course
of an industry life cycle.
• Managers must become even more aware of their firm’s strengths and
weaknesses in many areas to attain competitive advantages.
Industry Life-cycle Stages:
Strategic Implications
Industry Life-cycle Stages:
Strategic Implications
Industry Life-cycle Stages:
Strategic Implications
• Strategies in the Introduction Stage
• In the introduction stage, products are unfamiliar to consumers.
• Market segments are not well defined, and product features are not
clearly specified.
• Has low sales growth, rapid technological change, operating losses,
and the need for strong sources of cash to finance operations.
• Since there are few players and not much growth, competition tends to
be limited.
Industry Life-cycle Stages:
Strategic Implications
• Success requires an emphasis on research and development and
marketing activities to enhance awareness.
• The challenge becomes one of
(1) developing the product and finding a way to get users to try it and
(2) generating enough exposure so the product emerges as the “standard” by
which all other rivals’ products are evaluated.
Industry Life-cycle Stages:
Strategic Implications
• Strategies in the Growth Stage
• The growth stage is characterized by strong increases in sales. Such
potential attracts other rivals.
• In the growth stage, the primary key to success is to build consumer
preferences for specific brands. This requires strong brand recognition,
differentiated products, and the financial resources to support a variety
of value-chain activities such as marketing and sales, and research and
development.
• Whereas marketing and sales initiatives were mainly directed at
spurring aggregate demand—that is, demand for all such products in
the introduction stage—efforts in the growth stage are directed toward
stimulating selective demand, in which a firm’s product offerings are
chosen instead of a rival’s.
Industry Life-cycle Stages:
Strategic Implications
• Revenues increase at an accelerating rate because:
(1) new consumers are trying the product and
(2) a growing proportion of satisfied consumers are making repeat purchases.
• In general, as a product moves through its life cycle, the proportion of
repeat buyers to new purchasers increases. Conversely, new products
and services often fail if there are relatively few repeat purchases.
Industry Life-cycle Stages:
Strategic Implications
• Strategies in the Maturity Stage
• In the maturity stage aggregate industry demand softens.
• As markets become saturated, there are few new adopters.
• It’s no longer possible to “grow around” the competition, so direct
competition becomes predominant.
• With few attractive prospects, marginal competitors exit the market. At the same
time, rivalry among existing rivals intensifies because of fierce price competition
at the same time that expenses associated with attracting new buyers are rising.
• Advantages based on efficient manufacturing operations and process
engineering become more important for keeping costs low as
customers become more price-sensitive. It also becomes more difficult
for firms to differentiate their offerings, because users have a greater
understanding of products and services.
Industry Life-cycle Stages:
Strategic Implications
• Firms do not need to be “held hostage” to the life-cycle curve. By
positioning or repositioning their products in unexpected ways, firms
can change how customers mentally categorize them. Thus, firms are
able to rescue products floundering in the maturity phase of their life
cycles and return them to the growth phase.
• Two positioning strategies that managers can use to affect consumers’
mental shifts are reverse positioning, which strips away “sacred”
product attributes while adding new ones, and breakaway positioning,
which associates the product with a radically different category.
Industry Life-cycle Stages:
Strategic Implications
• Reverse Positioning
• This strategy assumes that although customers may desire more than the
baseline product, they don’t necessarily want an endless list of features. With
reverse positioning, companies make the creative decision to step off the
augmentation treadmill and shed product attributes that the rest of the industry
considers sacred. Then, once a product is returned to its baseline state, the
stripped-down product adds one or more carefully selected attributes that would
usually be found only in a highly augmented product.
Industry Life-cycle Stages:
Strategic Implications
• Breakaway Positioning
• With breakaway positioning, a product escapes its category by deliberately
associating with a different one. Thus, managers leverage the new category’s
conventions to change both how products are consumed and with whom they
compete. Instead of merely seeing the breakaway product as simply an
alternative to others in its category, consumers perceive it as altogether different.
• When a breakaway product is successful in leaving its category and joining a new
one, it is able to redefine its competition. Similar to reverse positioning, this
strategy permits the product to shift backward on the life-cycle curve, moving from
the rather dismal maturity phase to a thriving growth opportunity.
Industry Life-cycle Stages:
Strategic Implications
• Strategies in the Decline Stage
• Although all decisions in the phases of an industry life cycle are
important, they become particularly difficult in the decline stage. Firms
must face up to the fundamental strategic choices of either exiting or
staying and attempting to consolidate their position in the industry.
• The decline stage occurs when industry sales and profits begin to fall.
• Typically, changes in the business environment are at the root of an industry or
product group entering this stage.
• Changes in consumer tastes or a technological innovation can push a product
into decline.
• Ex. Newspapers
Industry Life-cycle Stages:
Strategic Implications
• Four basic strategies are available in the decline phase:
maintaining, harvesting, exiting, and consolidating.

• Maintaining refers to keeping a product going without significantly

reducing marketing support, technological development, or other
investments, in the hope that competitors will eventually exit the
market.
• Harvesting involves obtaining as much profit as possible and requires
that costs be reduced quickly. Managers should consider the firm’s
value-creating activities and cut associated budgets. Value-chain
activities to consider are primary (e.g., operations, sales and marketing)
and support (e.g., procurement, technology development). The
objective is to wring out as much profit as possible.
Industry Life-cycle Stages:
Strategic Implications
• Exiting the market involves dropping the product from a firm’s portfolio.
Since a residual core of consumers exist, eliminating it should be
carefully considered. If the firm’s exit involves product markets that
affect important relationships with other product markets in the
corporation’s overall portfolio, an exit could have repercussions for the
whole corporation.
• Consolidation involves one firm acquiring at a reasonable price the
best of the surviving firms in an industry. This enables firms to enhance
market power and acquire valuable assets.
• Retreating to more defensible ground
• Using the new to improve the old
• Improving the price-performance trade-off
Industry Life-cycle Stages:
Strategic Implications
• Turnaround Strategies
• A turnaround strategy involves reversing performance decline and
reinvigorating growth toward profitability.
• Most turnarounds require a firm to carefully analyze the external and
internal environments.
• The external analysis leads to identification of market segments or customer
groups that may still find the product attractive. Internal analysis results in actions
aimed at reduced costs and higher efficiency. A firm needs to undertake a mix of
both internally and externally oriented actions to effect a turnaround.
Industry Life-cycle Stages:
Strategic Implications
• Asset and cost surgery.
• Selective product and market pruning.
• Piecemeal productivity improvements.