Dess10e IM Ch05 Final

Chapter 5: Business-Level Strategy: Creating and Sustaining Competitive Advantages
part 2 Strategic Formulation

Chapter 5
Business-Level Strategy: Creating and Sustaining
Competitive Advantages............................................................. 5-2
Types of Competitive Advantage and Sustainability.............................. 5-4
Overall Cost Leadership.................................................................................................. 5-5

Differentiation.................................................................................................................. 5-7
Focus................................................................................................................................ 5-10
Combination Strategies: Integrating Overall Low Cost and Differentiation.................. 5-12
Can Competitive Strategies Be Sustained? Integrating and

Applying Strategic Management Concepts............................................. 5-15
Strategies for Platform Markets ...................................................................................... 5-15
Industry Life-Cycle Stages: Strategic Implications................................ 5-15
Strategies in the Introduction Stage................................................................................. 5-16

Strategies in the Growth Stage........................................................................................ 5-17
Strategies in the Maturity Stage....................................................................................... 5-17
Strategies in the Decline Stage........................................................................................ 5-18
Turnaround Strategies..................................................................................................... 5-19
Issue for Debate.......................................................................................... 5-19
Reflecting on Career Implications............................................................ 5-21
Summary..................................................................................................... 5-22
End-of-Chapter Teaching Notes 5-26
Connect Resources
5-32
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Chapter 5
Business-Level Strategy:
Creating and Sustaining Competitive Advantages
Summary/Objectives
PowerPoint Slide 2: Learning Objectives
In the previous three chapters, we have focused on the analysis of the external
(Chapter 2) and internal (Chapters 3 and 4) of the firm. In this chapter, the emphasis is on the
formulation of strategies at the business level. Since the business level is where competition takes
place, a firm’s performance at this level is vital to its overall success. The chapter is divided into
two major sections:
1. The first section draws on Michael Porter’s framework of generic strategies—overall

cost leadership, differentiation, and focus. We describe each of these strategies and
provide examples of firms that have successfully used them to outperform rivals.
Then, we suggest some of the pitfalls that managers must avoid to successfully
pursue these strategies. We include a discussion of how firms may combine generic
strategies. We also discuss whether a strategy can be sustainable—using the
example of a manufacturing firm. We close with a discussion of how competitive
strategies should be revised and redeployed in light of changes caused by the
Internet and digital technologies.
2. The second section addresses an important contingency in the effective use of business-
level strategies—industry life cycles. The stages of the life cycle—introduction,
growth, maturity, and decline—have important implications for a firm’s relative
emphasis on functional capabilities and value-creating activities. It also discusses
“turnaround strategies” which enable a firm to reposition its competitive position in
an industry and how such strategies can lead to sustainable advantages.
Lecture/Discussion Outline
The introductory case in LEARNING FROM MISTAKES discusses the decline of A&P from
being the first successful supermarket chain into a bankrupt business. The example highlights the
need to reinvest and reinforce a firm’s cost leadership and differentiation, a course of action A&P
failed to do.
Discussion Question 1: What decisions did A&P make when it was successful that led to
its later failure?
Response guidelines: The main point here is that A&P failed to reinvest in its business to sustain
either its differentiation or its cost leadership. Instead of reinvesting to continue to refresh the
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interior of its stores, expand its stores to carry more products, or enhance the service level it
offered, A&P paid out large dividends to its shareholders. In short, A&P fell prey to a common
attitude of a market leader. It got complacent. This left an opportunity for aggressive competitors
to come in and take A&P’s business. As a result, A&P lost its differentiation advantage. As other
competitors grew larger and larger, A&P also lost its scale-based cost advantage. By the time the
company realized its mistakes, it no longer generated sufficient profits to invest enough to engineer
a turnaround. The discussion should increase students’ awareness and appreciation of how both a
firm’s actions and its rivals can interact to undercut the value of a firm’s strategic position.
Discussion Question 2: How should the firm have responded to the new competitive
challenges it faced?
Response guidelines: Students should develop at least two types of responses. First, as a successful
firm, A&P should have continued to improve its operations and store designs to offer a high level
of service to its customers. This would have helped reinforce customer loyalty. Second, A&P
should have learned from its competitors. For a firm to be successful, it has to understand both the
changing wants and needs of its customers and the strengths of its competitors. A&P should have
done competitive intelligence on the emergence of rivals and the successes and failures of rival
firm’s new product offerings. As the leading firm in the market, A&P did not have to be the first
mover in offering new products and services, but it had to match, and possibly even extend, the
new offerings of rivals. A&P could have taken the best successes of its rivals, tested these ideas in
a few stores in its networks, and rolled out across the entire chain the experiments that worked
best. In doing so, A&P could have maintained the loyalty of its customers.
Discussion Question 3: What firms do you see today that face similar challenges? How
should these firms respond to and act to reinforce their strategic positions?
Response guidelines: The most obvious examples today are the mainline supermarkets that
succeeded A&P, such as Kroger, as they face the challenge of Aldi, Walmart, and Amazon—with
its Whole Foods subsidiary. Students may also cite clothing retailers, such as A&F, and
department stores, such as JCPenney. Further afield, the discussion could lead to traditional auto
manufacturers as they face a range of challenges, including upstart competitors, such as Tesla, and
the looming threat of a shift from car ownership to auto sharing and autonomous car services. As
students discuss how these firms should respond, the instructor should challenge students to
consider how the market is changing, what the capabilities of competitors are, and offer a clear
understanding of the distinct strategic position of the focal firm. They should show they understand
the specific form of differentiation the firm is pursuing or the foundation of its cost leadership and
evaluate whether this is the correct path for the firm to continue to pursue, what the alternative
path might be, and the actions to take to develop or reinforce this strategic position.
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I. Types of Competitive Advantage and Sustainability
PowerPoint Slide 4: The Central Role of Competitive Advantage

PowerPoint Slide 5: Sustaining a Competitive Advantage
PowerPoint Slide 6, 7 and 8: Three Generic Strategies
PowerPoint Slide 9 and 10: Overall Low-Cost Leaderships
PowerPoint Slide 11: Improving Competitive Position vis-à-vis the Five Forces: Cost Leadership
PowerPoint Slide 12: Pitfalls of Cost Leaderships (1 of 2)
PowerPoint Slide 13 and 14: Differentiation (1 of 2)
PowerPoint Slide 15: Improving Competitive Position vis-à-vis the Five Forces: Differentiation
PowerPoint Slide 16: Pitfalls of Differentiation
PowerPoint Slide 17 and 18: Focus
PowerPoint Slide 19: Improving Competitive Position vis-à-vis the Five Forces: Focus
PowerPoint Slide 20: Pitfalls of Focus
Michael Porter presented three generic strategies that firms can use to overcome the five forces and
attain competitive advantage. The first, overall cost leadership, is based on creating a low-cost
position relative to one’s peers. The second, differentiation, requires that the firm (or business unit)
create products and/or services that are unique and valued. Third, firms following a focus strategy
must direct their attention (or “focus”) toward narrow product lines, buyer groups, or geographical
markets. Firms emphasizing a focus strategy must attain advantages either through differentiation
or a cost leadership approach.
EXHIBIT 5.1 illustrates these strategies on two dimensions: competitive advantage and
markets served.
Discussion Question 4: What are some examples of businesses that follow each of the four
strategies in Exhibit 5.1? Why are they successful (or unsuccessful)?
Before moving on to the discussion of each of the generic strategies, it is useful to point out
that a variety of research has supported the notion that firms that identify with one or more forms
of competitive advantage typically outperform those that do not. EXHIBIT 5.2 provides evidence
that businesses that combined multiple forms of competitive advantage were more successful than
those using only a single form. And the lowest performers where those that were “stuck in the
middle”; that is, they did not identify with a single type of strategy.
Discussion Question 5: What are some examples of firms that have successfully combined
multiple strategies? Does this seem to help their performance? Why?
Why not?
At this point, it is useful to point out that deciding what types of competitive advantage to
select requires making hard choices (a point driven home by Michael Porter in his 1996 Harvard
Business Review article: “What is strategy?”) In effect, a firm cannot be “all things to all people.”
We now discuss each of the types of generic strategies.
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A. Overall Cost Leadership
Cost leadership requires a tight set of interrelated tactics such as aggressive construction of
efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and
overhead control, avoidance of managerial customer accounts, and cost minimization in all
activities in a firm’s value chain.
EXHIBIT 5.3 uses the value-chain concept (from Chapter 3) to provide examples of how a
firm can attain an overall cost leadership strategy in its primary and support activities.
Discussion Question 6: What are some examples of firms that exemplify the items in
Exhibit 5.3? How do they improve the firm’s performance?
The SUPPLEMENT below discusses how a firm (Spirit Airlines) has been able to compete
successfully in an intensely competitive industry by means of an effective cost leadership strategy.
It serves to show how actions involve many primary and support activities in the value chain.
Extra Example: Spirit Airlines’ Successful Cost Leadership Strategy
Spirit Airlines is a controversial and successful firm in the highly competitive and often unprofitable airlines industry.
From 2012 to 2019, Spirit Airlines saw its sales grow by 150 percent, and its profits by 114 percent. Additionally, its
stock grew in value by over 135 percent from December 2012 to December 2019. However, staying successful
requires attention to every aspect of operations to continually squeeze out costs. This is especially true since Spirit’s
tickets average 30 percent less than its competition’s.
Below are some examples of how it employs a wide variety of value-chain activities in its efforts to cut costs:
 It keeps its firm infrastructure as small as possible. It operates from a simple, single story corporate
headquarters building. Additionally, there is no receptionist at the headquarters to welcome visitors. Ben
Baldanza, the firm’s CEO, comments that he only buys pens for the office when needed and instructs
employees to pick up pens at conferences to take back to the headquarters.
 It has limited marketing efforts, spending less than $10 million a year on advertising.
 It flies only two models of airplane, the Airbus 319 and 320, saving costs on employee training and tools.
 It has set up fast turnaround routines, often taking only 30 minutes to move from the landing of one flight to
the takeoff of the next.
 It stocks water and food onto its planes only once a day.
 Spirit removed the reclining mechanism on the seats on its A320 planes allowing them to move the rows
closer together, increasing the capacity of the plane to 178 seats, which is up to 40 seats more than its
competitors.
 It removed in-flight magazines from the planes to cut the weight of the plane and save fuel.
 It charges customers for both checked and carry-on luggage. This serves as a source of revenue, but the
airline has also found its flyers carry less luggage than passengers on other airlines, reducing plane weight
and saving fuel.
While Spirit has grown and experienced strong profitability, it was the lowest ranked airline in 2017’s American
Customer Satisfaction Index of U.S. based airlines.
Source: Nicas, J. 2012. A stingy Spirit lift’s airline’s profits. WSJ.com. May 11: np; Vasel, K. 2015. America’s worst
airline for customer satisfaction is… cnnmoney.com. April 21: np; cnnmoney.com; theasci.org; finance.yahoo.com.
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It is important to point out that in order to enjoy above-average performance, firms

following a cost leadership position must attain parity or proximity on the basis of differentiation
relative to competitors. Proximity to differentiation means that the price discount necessary to get
an acceptable market share does not offset a cost leader’s cost advantage.
We next address two examples of how overall cost leadership strategies can help a firm to
enjoy advantages in their industry: Aldi (a hard discount supermarket chain) and Zulily (an online
retailer).
STRATEGY SPOTLIGHT 5.1 discusses Primark, a clothing retailer that has built a
successful cost leadership strategy while also striving for environmental sustainability.
Discussion Question 7: Do you think that Primark’s sustainability efforts are an important
element of its business? Does it help sustain or undercut its strategic position?
1. Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five

Forces
After discussing how an overall cost leadership position improves a firm’s position vis-à-
vis the five forces, we reintroduce the earlier examples of Aldi, Zulily, and Primark to illustrate the
concepts.
At this point, it might be helpful to reintroduce the example of Spirit Airlines discussed
above. After reviewing this example, ask:
Discussion Question 8: How does Spirit’s cost leadership strategy improve its competitive
position vis-à-vis the five forces?
Discussion Question 9: Is Spirit able to achieve parity on differentiation?
2. Potential Pitfalls of Overall Cost Leadership Strategies
This section addresses five pitfalls of following an overall cost leadership strategy:
1. Too much focus on one or a few value-chain activities

2. Increase in the cost of the inputs on which the advantage is based
3. The strategy is imitated too easily
4. A lack of parity on differentiation
5. Reduced flexibility
6. Obsolescence of the basis of cost advantage
The SUPPLEMENT below describes how TJX is staking out a strong position in discount
retailing.
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Extra Example: Winning in the Tough Retail Market with an Overall Cost Leadership Strategy
This firm is arguably the most successful low-cost retailer in the United States. Its sales have grown by over 25 percent
over the last three years, rising to nearly $39 billion, and its profits have grown 36 percent over the same period, to
nearly $3.1 billion in 2019. But the firm isn’t Walmart or Target. It is TJX, the parent firm for T.J. Maxx, Marshalls,
and HomeGoods. In the words of industry consultant and analyst Howard Davidowitz, “It’s the most consistent, most
powerful apparel retailer in the United States.”
TJX has a relatively simple but powerful model to succeed in the competitive apparel business. First, it focuses on
moving inventory through the firm and out its doors. TJX turns its inventory over every 55 days, compared to 85 for
its competitors. It quickly moves its orders through its distribution centers and out to its stores. It puts product right out
to its racks and shelves on the selling floor. Stores have very little backroom storage. As a result, TJX often sells its
merchandise before the firm has even paid its vendors.
Second, the firm emphasizes value with the products it sells. Rather than looking to sell the cheapest merchandise, it
looks to buy good merchandise at a steeply discounted price. Shoppers at its chains may find low-priced graphic t-
shirts, but they also may find a Stella McCartney dress that would retail for $1250 at a mainline department store
discounted to $499 at T.J. Maxx.
Third, the firm extensively trains its buyers, builds their expertise in very narrow product areas, and gives them
autonomy to make large purchases when they find attractive deals. Rather than buying for an entire season, TJX
buyers search for bargains on a weekly basis. The firm’s goal is to purchase products as late into the buying season as
possible so that they can turn the inventory quickly and get a better sense of fashion trends. Additionally, rather than
paying a wholesale price and then doubling it for the final retail price, TJX buyers estimate what price point TJX needs
to be at in the retail store and then work backwards to a purchase price they are willing to pay to a supplier.
Fourth, it serves as a reliable and discrete customer for apparel manufacturers. Unlike department stores that can be
fickle and cancel or change the quantity of orders when product sales fall short of their projections or require
advertising and markdown allowance from manufacturers, TJX offers straight forward and guaranteed deals with
suppliers. With its scale and ordering processes, TJX can say manufacturers’ favorite phrase, “We’ll take it all” and
rarely looks to change the terms of a deal after it is initially made. Also, the firm doesn’t advertise the brands it carries,
leaving name brands, such as Ralph Lauren, more willing to work with the firm. These choices by TJX make it a
favorite customer for apparel firms, resulting in more favorable pricing for the firm.
Sources: Kowitt, B. 2014. Is T.J. Maxx the best retail store in the land? Fortune.com. July 24: np; finance.yahoo.com.
Discussion Question 10: Do you think TJX will be able to sustain its position over time?
What are the greatest challenges the firm faces?
B. Differentiation
As the name implies, differentiation consists of creating differences in the firm’s products
or service offerings by creating something that is perceived industry-wide as being unique and
valued by customers. Differentiation can take many forms, such as prestige or brand image,
technology, innovation, features, customer service, or dealer networks.
The SUPPLEMENT below provides an example of a firm that has found the ability to
differentiate itself in a market where most of the time the product is free.
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Extra Example: Would You Pay for Sports News?
Most people looking for sports news turn to Web sites, such as ESPN, Fox Sports, or Bleacher Report. These Web
sites are mostly free for readers and generate their income from ads. But most of these Web sites are finding the
market challenging and have laid off staff.
One sports-news provider is taking a different tack. The Athletic aims to build a differentiated market position in the
sports-news market. It is differentiating itself in three key ways. First, by offering a subscription-based, ad-free Web
site, The Athletic is able to offer a clutter-free, clean Web site that is easy to navigate. Second, in writing articles, The
Athletic has emphasized in-depth analysis over quotes from star athletes. Third, the site builds staff of local
sportswriters in the cities in which it operates to provide true local sports news. In essence, customers are buying
access to a local sports page. With a subscription cost of $60 per year, The Athletic only needs between 8,000 and
12,000 subscribers in a city to turn a profit. So far, The Athletic has built its business in Chicago, Cleveland, Detroit,
and Toronto. As the other sports sites cut their staff, The Athletic is finding a ready pool of experienced sportswriters
to choose from as it grows its business.
Source: Anonymous. 2017. A New Sports Authority. Bloombergbusinessweek.com. July 31: np; www.bloomberg.com.
Discussion Question 11: Is there room for subscription services in today’s market of free
news and information?
Discussion Question 12: What types of customers are most likely to be attracted to The
Athletic? What actions should The Athletic take to meet the wants of these customers?
EXHIBIT 5.4 applies the value chain concept to illustrate how companies may differentiate
themselves in primary and support activities.
Discussion Question 13: What are some examples of companies that have successfully
incorporated some of the elements in EXHIBIT 5.4 into their differentiation strategy?
Discussion Question 14: What are some examples of companies that have been able to
combine/integrate some of the items in EXHIBIT 5.4?
As with overall cost leadership strategies, parity on the other dimension of strategy
becomes very important. That is, firms following differentiation strategies must strive to attain a
degree or level of parity on cost.
In this section, we provide many examples of firms that have successfully implemented a
differentiation strategy. These include Hotel Monaco and BMW automobiles (image and brand
identification) and Nordstrom department stores (customer service). We also use Porsche as an
example of how differentiators can look to differentiate on key dimensions that customers value
but look to manage costs in areas where customers put less emphasis.
Still, differentiators must be clear to not send mixed signals to customers about whether
their products or services are truly differentiated.
Teaching Tip: Another important aspect of differentiation in today’s markets is speed, or

alternatively, quick response to changes in the marketplace/customer demands. You can
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provide examples like Amazon to show how companies can increase their competitive
position through speed and quick response to customers. (This may also provide another
example of how a seemingly “commodity” service can be differentiated, and premium
prices may be charged to customers.) Ask students what other companies use speed as a
means of differentiation.
The SUPPLEMENT below discusses how Anheuser-Busch is turning to sustainability to

differentiate its products.
Extra Example: Budweiser Goes Green
As its core beer business faces challenging conditions, Anheuser-Busch is pushing heavily to turn its U.S. beer
operations into sustainable ones. The firm stated that it is implementing sustainability efforts that, by 2025, will shift
the firm to using 100% renewable energy to manufacturer all of its classics, including Budweiser and Bud Light. This
will cut Anheuser-Busch’s carbon footprint by 25%.
This is part of an ongoing effort by the firm. As CEO Michel Doukeris stated, “It's not something that is new for us.
We've been working with sustainability goals for the last several years. As a matter of fact, we set some goals for 2020
which we achieved all of them ahead of schedule. So we are now raising the bar and coming up with these new 2025
sustainability goals,” Doukeris told FOX Business in an exclusive interview.
As part of this push, the brewer announced that it has ordered 40 of Tesla’s new electric semi-trucks at the estimated
price tag of $150,000 to $200,000 each in an effort to reduce its supply chain emissions.
While these efforts are socially responsible and are simply the right thing to do according to firm leaders, they also
may help the firm position itself with younger consumers who are increasingly concerned about the environmental
impact of products they purchase.
Source: Sciopini, J. 2018 Anheuser-Busch to turn its beers “green”. foxbusiness.com. April 17: np.
STRATEGY SPOTLIGHT 5.2 discusses how video game manufacturers create game features to
increase differentiation and keep gamers playing.
Discussion Question 15: Are the actions the game manufacturers are taking ethical? Why
or why not?
Discussion Question 16: In what other ways can game manufacturers increase their
differentiation?
1. Differentiation: Improving Competitive Position vis-à-vis the Five Forces.
We discuss how a differentiation strategy helps a firm to improve its position vis-à-vis
Porter’s five forces. We use Porsche and Zappos to illustrate our points.
2. Potential Pitfalls of Differentiation Strategies
Next, we address some of the pitfalls of a differentiation strategy:
 Uniqueness that is not valuable

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 Too much differentiation

 Too high a price premium
 Differentiation that is easily imitated
 Dilution of brand identification through product-line extensions
 Perceptions of differentiation may vary between buyers and sellers
The SUPPLEMENT below discusses how Pharmaceutical firms are finding that additional
differentiation of their products may not lead to market success.
Extra Example: Pharma Finds Innovation Doesn’t Always Pay Off
Novo Nordisk, a Danish drug firm, has found over its corporate history that innovation can provide continued market
leadership and financial success. The firm has specialized in diabetes treatment, and over the last several decades, has
developed successive generations of more effective version of its core product—insulin. However, the firm has now
found that customers don’t appear to value additional innovation. With its latest drug, Tresiba, Novo Nordisk has
found that, for many customers, it isn’t worth the increased price over the last generation of its insulin product. At a
cost that is 60 to 70 percent higher, “the incremental improvements don’t seem to justify the higher prices” according
to Steve Miller, chief medical officer of Express Scripts.
Other drug manufacturers have faced similar experiences. Sanofi SA and Amgen Inc. have found it hard to build
business for new cholesterol-lowering drugs the firms have brought to market. Novartis AG has similarly struggled to
grow the business for a new heart failure medicine. In some instances, insurers have incentivized doctors to prescribe
older, cheaper drugs. Customers are also reluctant to pay higher co-pays for the new drugs. In countries where the
government manages the healthcare system, some countries have refused to pay more for some newer drugs than they
did for the older medicines already available on the market.
The bottom line is that these new drugs are not seen as game changers. Though they offer incremental gains over prior
generations of medicine, the increased benefit isn’t large enough to convince a range of customers, including
governments, insurers, doctors, and patients, that the benefits are large enough to justify large price increases.
The effect is substantial on the pharmaceutical firms. Novo Nordisk has cut its long-term growth goal projection from
15 percent to 5 percent annually. It has also seen its stock price stay essentially flat from December 2015 to December
2019.
Source: Roland, D. 2017. Pharma’s new bind: Progress may not pay. Wall Street Journal. August 16: A1, A10;
finance.yahoo.com.
Discussion Question 17: What pitfalls of differentiation are the pharma firms
experiencing? How can they respond to this new reality?
Discussion Question 18: What are some examples of firms that achieved a level of
differentiation only to see it eroded? What pitfalls did these firms fall prey to?
EXHIBIT 5.5 points out potential pitfalls of overall cost leadership and differentiation
strategies.
C. Focus
The third generic strategy is based on the choice of a narrow competitive scope within an
industry. The focuser attains competitive advantages by dedicating itself to a segment or group of
segments and tailors its strategy to serving them.
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Discussion Question 19: What are some companies that have successfully implemented a
focus strategy?
The focus strategy, as indicated in EXHIBIT 5.1, 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.
We provide an example of a successful niche firm in both a service industry (LinkedIn) and
a manufacturing industry (Marlin Steel Wire Products).
STRATEGY SPOTLIGHT 5.3 discusses how Aston Martin has created extreme
differentiation with a niche product, its Valkyrie hypercar.
1. Focus: Improving Competitive Position vis-à-vis the Five Forces
We next discuss how an effective focus strategy can improve a firm’s position with regard
to the industry’s five forces. We draw on the previous examples of LinkedIn and Marlin Steel
Wire.
The SUPPLEMENT below points out how Hilton Hotels is developing a new chain that
employs a focus strategy.
Extra Example: Tru Hotels: Serving the Millennial Customer
You might expect that a fast-growing hotel chain aimed at Millennial customers would be emphasizing trendy, urban
neighborhoods. But the Tru Hotel chain is rapidly building new hotels near suburban freeway exits all across the
country. The first Tru was opened by its parent firm, Hilton Hotels, in May 2017 in Oklahoma City. Hilton planned to
have 137 locations of the hotel operating by the middle of 2020 and has over 400 sites at some stage of development.
The chain is specifically aiming for Millennial customers. To keep costs down to meet the needs of budget conscious
Millennials, the chain will have rooms 25 percent smaller than competing chains. Additionally, the rooms are designed
to be quick and easy to clean, with vinyl floors, rather than carpet, and no in-room coffee makers or desks. This seems
to fit the preferences of many younger customers. As one guest said, “What do I do when I go into a room? I’m
usually just hopping into the bed, watching some TV and going to sleep. That’s why it made sense.”
But Hilton is adding amenities that it believes will be valued by Millennial customers. Tru’s lobbies are 80 percent
bigger than similar hotels. The lobby includes a gourmet coffee area and a self-serve snack area. Lobbies also include
individual work pods with a fast Internet connection in case guests need a desk. When it’s time to relax, customers can
purchase craft beers to enjoy while they play on one of the pool tables in the lobby area.
Time will tell if this new design draws Millennial customers from other chains and lodge-sharing sites, such as Airbnb.
Source: Kirkham, C. 2017. Hilton sees room for growth with new low-price brand. wsj.com. July 6: np; hilton.com
Discussion Question 20: Is the Millennial customer a group with specific hotel wants and
needs? Does Tru have an effective business model to attract its targeted customers?
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2. Potential Pitfalls of Focus Strategies
The section closes by addressing some of the pitfalls of a focus strategy. These are:
 Erosion of cost advantages within the narrow segment
 Even product and service offerings that are highly focused are subject to
competition from new entrants and imitators
 Focusers can become too focused to satisfy buyer needs
D. Combination Strategies: Integrating Overall Low Cost and Differentiation
There has been a great deal of evidence—in both observation of business practice as well
as in research studies—about the strategic benefits of competitive positioning and resultant
performance implications that are inherent in combining generic strategies. In the beginning of this
section, we provided some evidence from nearly 2,000 strategic business units (EXHIBIT 5.2) to
support this contention.
In general, the key benefit to be enjoyed by firms that successfully integrate low cost and
differentiation strategies is that it is generally harder for competitors to duplicate or imitate them.
An integrated strategy enables a firm to provide two types of value to customers: differentiated
attributes and lower prices. Furthermore, the benefits of combining advantages can be additive,
instead of merely involving tradeoffs.
We next address three approaches that combine overall cost leadership and differentiation.
1. Automated and Flexible Manufacturing Systems
Given the advances in manufacturing technologies such as CAD/CAM, as well as

information technologies, many firms have been able to manufacture unique products in relatively
small quantities at lower costs. This is a concept known as “mass customization.”
We provide the example of Andersen Windows in Bayport, Minnesota—a $2.3 billion

manufacturer of windows for the building industry. Among the benefits are that the system is
virtually error free, the customers get exactly what they want, and the time to develop the design
and price quotation is cut by 75 percent.
2. Using Data Analytics
Firms are increasingly using the ability to analyze large sets of data on customer
preferences and choices to simultaneously minimize cost and increase differentiation. We briefly
discuss actions by Caterpillar to leverage the power of “big data.”
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3. Exploiting the Profit Pool Concept for Competitive Advantage
A profit pool can be defined as the total profits in an industry at all points along the
industry’s value chain. 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.
Our discussion of the profit pool concept can be illustrated more compellingly to the class
by emphasizing that this applies to virtually every industry. The SUPPLEMENT below describes
how Rolls-Royce is placing more emphasis on downstream (i.e., marketing, sales, and service)
profit opportunities.
Extra Example: Rolls-Royce Sells Services
Rolls-Royce has traditionally been a maker of airline jet engines. Given the growth in long-haul plane orders, which
use the firm’s engines in Asia, as well as a rebound in jet orders in the United States, the firm has seen improved sales
and strong earnings over the last few years. For example, its net income exceeded $1B a year from 2011 through 2015.
The company is in a strong competitive position, supplying engines to both the major jet manufacturers, Boeing and
Airbus. For some of these firms’ models, they are the sole supplier of engines.
But Rolls-Royce is changing the way it does business to extract more of the potential profit from the aircraft engine
business. Profits used to come primarily from selling engines and replacement parts. Now, they come from providing
long-term repair and maintenance. Rolls is steadily signing up customers for this sort of service. Margins are typically
higher for service than for hardware sales. Customers value these services since they offer peace of mind that Rolls
will keep the engines running.
However, if the economy declines again and airlines cut flights and aircraft orders, Rolls-Royce could be in a tough
position since this will cut the need for both new hardware and services.
Source: Anonymous. 2010. Rolls-Royce: The jet engine maker is soaring above its troubles. The Economist. February
5: 76; hoovers.com.
Discussion Question 21: Can you think of other industries where firms can benefit by
applying the profit pool idea?
Discussion Question 22: By exploiting the profit pool along the industry’s value chain, is
Rolls-Royce taking too high a level of risk? Do they have more control over how their
engines are maintained, therefore lowering their risk and increasing profits? Support your
answer.
3. Unscaling to Create a Combination Strategy
Firms are increasingly identifying ways to build small-scale operations that allow them to
be hyper-efficient while providing differentiated products or services to meet the needs of specific
customer segments. STRATEGY SPOTLIGHT 5.4 discusses the specific example of Indochino, a
menswear manufacturer that is using the unscaling concept to outcompete traditional retailers.
Discussion Question 23: What are some other examples of firms that are using unscaling
to create advantage with a combination strategy?
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4. Integrated Overall Cost Leadership and Differentiation Strategies: Improving

Competitive Position vis-à-vis the Five Forces
We next address how an integrated overall cost leadership and differentiation strategy helps
a firm to improve its position in regard to its industry’s five forces. We introduce the Walmart
example to illustrate these points. We discuss why its strategy is highly sustainable.
The SUPPLEMENT below describes how General Motors is using a combination strategy
to reduce competitive pressures in China.
Extra Example: GM Strives for Balance with its Baojun Brand
As the automotive market has grown rapidly in China, up-market brands, such as Mercedes-Benz, BMW, and Audi,
have seen tremendous growth. Looking to the future of the market, General Motors has gotten traction with a new
brand, Baojun, that aims to meet the needs of the emerging middle class in China.
This made-for-China brand manufactures cars that sell for as little as $6000. GM sees this brand as fitting the needs of
the rapidly growing secondary cities in China’s interior. While China’s economic growth has exploded in cities like
Shanghai and Beijing, it is also driving growth in smaller cities in the interior of the country. But many in the growing
middle class in these regions do not yet have the purchasing power for a BMW or an Audi. With Baojun, GM is
promising buyers a reliable car for a reasonable price. The firm’s advertising slogan is “Your Reliable Partner.” The
cars also come with air conditioning, power windows, and touch screen infotainment systems, features typically seen
in higher-priced vehicles. Thus, the firm is looking to maintain low costs in its operations while developing quality
vehicles. As one of its customers stated, “It is definitely not some premium brand, but it’s a good value.” This
impression of the brand is consistent with the name GM gave it. Baojun means “treasured horse” in Chinese.
By emphasizing geographic regions that were not the focus of its competitors and by combining desired features and
high quality with a reasonable price, Baojun has been able to carve out a position in the industry where the firm faces
reduced competition and lower buyer power. The value of this positioning is evident in Baojun’s success. The brand,
which was launched in 2010, grew to sales of over a million cars annually by 2017.
Source: Welch, D. & Zhang, Y. 2018. Where GM is moving down-market. Bloombergbusinessweek. May 28: 14-16.
5. Pitfalls of Integrated Overall Low Cost and Differentiation Strategies.
Firms that attain both types of competitive advantage enjoy high returns. However, as with
each generic strategy taken individually, there are some pitfalls to avoid:
 Firms that fail to attain both strategies may end up with neither and become “stuck
in the middle”
 Underestimating the challenges associated with coordinating value-creating
activities in the extended value chain
 Miscalculating sources of revenue and profit pools in your industry
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II. Can Competitive Strategies Be Sustained? Integrating and Applying

Strategic Management Concepts
PowerPoint Slide 21: Combination Strategies: Integrating Low-Cost and Differentiation

PowerPoint Slide 22: Combination Strategies
PowerPoint Slide 23: Improving Competitive Position vis-à-vis the Five Forces: Combination
PowerPoint Slide 24: Pitfalls of Combination Strategies
In this section, we integrate many of the key concepts in the first five chapters: stakeholder
analysis, external environmental analysis, five-forces analysis, value-chain analysis, resource-
based view of the firm (including the issue of sustainability). We provide the example of a
manufacturing firm (Atlas Door—a “real” company), which entered an industry and developed a
strategy that earned it very high returns and a very favorable competitive position.
The Atlas Door example provides an opportunity for students to get a more thorough
understanding of the aforementioned key concepts, as well as provides some insights on whether
or not a firm’s advantage is sustainable over a long period of time (rather strong arguments are
provided for both the “pro” and “con” positions) and offers potential sources of value
appropriation.
You might find it interesting to pose some very general questions to the class such as
whether or not they believe that Atlas Door’s advantages were sustainable, as well as any other
sources of value appropriation.
Strategies for Platform Markets
We discuss strategic actions to build a sustainable advantage in platform markets, where

the firm’s primary purpose is to serve as an intermediary between buyers and sellers. We identify a
number of prominent platform firms, including VISA, Amazon, Facebook, and Etsy.
We discuss key four strategy elements for platform firms:

1. Draw in users.
2. Create easy and informative customer interfaces.
3. Facilitate the best connections between suppliers and customers.
4. Sequencing the growth of the business.
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III. Industry Life Cycle Stages: Strategic Implications
PowerPoint Slide 26 and 27: Industry Life Cycle Stages

PowerPoint Slide 28: Strategies in the Introduction Stage
PowerPoint Slide 29: Strategies in the Growth Stage
PowerPoint Slide 30: Strategies in the Maturity Stage
PowerPoint Slide 31: Strategies in the Decline Stage
PowerPoint Slide 33: Turnaround Strategies
The life cycle of an industry refers to the stages of introduction, growth, maturity, and decline that
occur over the life of an industry. In considering the industry life cycle, it’s useful to think in terms
of broad product lines such as personal computers, photocopiers, or long-distance telephone
service.
Why is it important to consider industry life cycles? The emphasis on various generic
strategies, functional areas, value-creating activities, and overall objectives vary over the course of
the industry life cycle. Managers must become even more aware of their firm’s strengths and
weaknesses in many areas to attain competitive advantages.
EXHIBIT 5.6 depicts the four stages of the industry life cycle and how factors such as
generic strategies, market growth rate, intensity of competition, and overall objectives change over
time.
Be sure to point out an important caveat regarding the key limitation of the industry life
cycle concept. That is, products and services go through many cycles of innovation and renewal.
And, for the most part, only fad products have a single life cycle. We provide the example of how
the cereal industry got a boost in sales when medical research indicated that oat consumption
reduced a person’s cholesterol.
Teaching Tip: In the textbook, we discuss what may be considered as the “generic”
industry life cycle. Ask students for examples of how technological or product market
innovations have abruptly truncated or extended an industry’s life cycle. (Examples would
include how the technological innovation of subscription music services, such as Spotify,
truncated the life cycle of digital music sales, and how Nike’s product innovation enhanced
the life cycle of the athletic shoe industry.)
Next, we address each of the four stages of the industry life cycle.
A. 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. The early development of an industry
typically involves 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.
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There’s an advantage to being a “first mover” in the market. We address the examples of
Coca Cola’s global brand and Caterpillar’s ability to get a lock on overseas sales channels and
service capabilities.
Discussion Question 24: What are some other firms that benefited from being a “first
mover” in their industry?
However, there are also benefits to being a “late mover.” We address how Target benefited
from its delayed Internet strategy.
B. Strategies in the Growth Stage
The second stage of the industry life cycle, growth, is characterized by strong increases in
sales. The potential for strong sales (and profits) attracts other rivals who also want to benefit.
Whereas marketing and sales initiatives were mainly directed at spurring aggregate demand,
defined as 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 with
those of its rivals.
Revenues in the growth stage 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, new products and services often fail if there are relatively few repeat
purchases. (We provide the example of Alberto-Culver’s introduction of Mr. Sparklers, which
were sold as solid air fresheners that looked like stained glass.)
Discussion Question 25: What are some examples of products/industries in the growth
stage of their life cycle? How long do you think the growth stage will last?
C. Strategies in the Maturity Stage
In the third stage, maturity, aggregate industry demand begins to slow. Since markets are
becoming saturated, there are few opportunities to attract new adopters. Because it is no longer
possible to “grow around” competition, direct competition becomes more predominant—and
competition intensifies (often on the basis of price).
We address the example of the intense competition between AB InBev and MillerCoors
and Gamble in the beer business. This slow growth business in the maturity stage puts enormous
pressure on both players to attack each other to grow sales.
The SUPPLEMENT below provides examples of how General Mills continues to renew a
very established brand with new versions of its flagship cereal, Cheerios.
5-17
Extra Example: Cheerios New Flavors
General Mills introduced the Cheerios brand of cereal in 1941 and has seen it take on a central position in the breakfast
food market. The Cheerios brand accounts for 13 percent of all cold cereal sold in the United States, over twice the
share of its nearest competitor. Although the brand is over 75 years old, General Mills has not accepted that the growth
potential for the mature brand is over, and it continues to spin out new variants of the venerable cereal to stoke up new
demand. There are now 18 different varieties of Cheerios, with five new types of Cheerios introduced after 2007. The
latest to arrive are Dulce de Leche and Multi Grain Peanut Butter Cheerios. By extending the brand with new flavors,
General Mills has found a way to generate modest growth in a very mature market. For example, Chocolate Cheerios,
introduced in 2010, has been a very successful launch and added to sales by adding a chocolate flavor to the family-
cereal market. Prior to this launch, chocolate-flavored cereals were largely limited to the kids’ cereal market. General
Mills has even took inspiration from Reese’s candies and added another variant of this cereal, Chocolate Peanut Butter
Cheerios in 2017.
There is one additional benefit to launching new versions of established brands. Every new version of Cheerios on the
shelf represents an inch of territory extracted from some other brand. Shelf space is so tight in retail stores these days
that each Cheerios product has the potential to take the shelf space of competing cereal brands.
Source: Hughlett, M. 2012. General Mills makes Cheerios a serial business. Startribune.com. March 3: np;
cheerios.com.
Discussion Question 26: What are some industries in the maturity phase of the life cycle?
How intense is the competition? How difficult is it to differentiate products and services?
Two positioning strategies that managers can use in the maturity stage include:
a) Reverse positioning—a change in industry tendencies to continuously improve products by

offering products with fewer product attributes and lower prices.
b) Breakaway positioning—a break in industry tendencies to incrementally improve by offering

products that are still in the industry but are perceived by customers as being different.
Discussion Question 27: What are some examples of companies that used breakaway or
reverse positioning strategies to distinguish themselves from other companies in their
industry?
Discussion Question 28: What are some of the risks associated with breaking away from
other similar companies in an industry? What are the benefits?
D. Strategies in the Decline Stage
Decisions in the decline phase of the industry life cycle become particularly important.
Hard choices must be made, and firms must face up to the fundamental strategic choices of either
exiting or staying and attempting to consolidate the industry.
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There are four basic strategies available in the decline phase: maintaining, harvesting,
exiting, or 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 leave the market.
Harvesting involves obtaining as much profit as possible and requires that costs in the
decline stage be decreased quickly.
Exiting the market involves dropping the product from a firm’s portfolio.
Consolidating involves one firm acquiring the best of the surviving firms in an industry at
a reasonable price. (We provide the example of Lockheed Martin, the giant in the defense
industry.)
Discussion Question 29: What are some examples of industries in the decline stage? What
strategies are the incumbent firms following?
We also address three ways in which old technologies can enjoy a “last gasp” in the
marketplace. These are: retreating to a more defensible ground, using the old to replace the new,
and improving the price-performance trade-off.
STRATEGY SPOTLIGHT 5.5 discusses how disposable battery firms generate profits even as
demand for their products wind down.
E. Turnaround Strategies
We discuss three turnaround strategies:

1. Asset and cost surgery
2. Selective product and market pruning
3. Piecemeal productivity improvements
Discussion Question 30: Can you think of other successful (or unsuccessful) turnarounds?
IV. Issue for Debate
The case discusses how Nordstrom is trying to respond to the retail apocalypse that is challenging
a wide range of retail chains The case should trigger discussion about how and whether brick-and-
mortar retailers can leverage technology and convenience to respond to the online retailing threat.
Discussion Question 32: Keeping in mind why shoppers choose online vs. in store
shopping, do you think the type of technology investments Nordstrom is making will allow
it to compete effectively against online retailers?
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As a starting point, students should discuss why customers choose online purchases vs. in store
shopping. Online is especially beneficial when customers are familiar with products, know what
they want, and don’t need it immediately. In store retailing works better when customers want to
test out or experience products, need advice, or need the product immediately.
The different investments Nordstrom is trying out seem to hit some of these elements but miss on
others. For example, a number of their initiatives allow customers to order products that are not in
stock (either by design in their Nordstrom’s Local stores or with the QR scanning technology they
are employing). These do not allow customers to have products immediately. However, they do
let customers try on products, a key advantage of brick-and-mortar stores. These initiatives seem
to have mixed benefits. The app that allows personal shoppers to suggest new products seems
more on point since it allows the firm to provide advice, informs customers on products they can
buy today, and allows them to come in and try them on.
It may make sense to allow the class to vote on the degree to which each initiative would draw
them in to Nordstrom and use that to kick off a discussion of the plusses and minuses of each.
Discussion Question 33: As the firm is cutting down on its capital expenditures, should it
invest heavily in technology or the stores themselves? What are the benefits and risks of
each?
The answer here is likely predicated on where students see retail going in the future. While online
retailing has rapidly expanded, it still accounts for less than 12% of all retail sales. If online sales
continue to explode and take a larger slice of sales, then technology investments are likely critical.
However, students may argue that investments in stores, keeping them fresh and clean is critical to
the retail experience. Shoddy stores with advanced technology likely won’t sustain customer
interest. One can look to the decline of Sears to see the cost of allowing stores to get old and worn
out. With limited capital investment funding, students will have to decide whether the in store
experience is key. If so, technology is a complementary investment, but the stores need to be the
primary investment.
Discussion Question 34: Are investors impatient in wanting returns from these
investments? Would Nordstrom be better off if it were owned by private investors, rather
than as a publicly-traded firm since this would lessen the pressure the firm would face for
short-term profitability?
The pressure from public investors keeps firm managers disciplined and focused on generating
value, but it can lead them to sacrifice long-term value to make short-term numbers. As a result,
we have seen an increasing number of firms go to private ownership structures. In fact, there are
fewer publicly traded firms now than there were fifteen years ago.
Nordstrom would probably benefit from being able to take a longer term perspective since many of
the initiatives they undertake will not pay off. This will put a squeeze on short-term profits, but
the risk of not investing in these initiatives is likely a slow and painful decline, as we have seen
with Sears and JC Penney.
5-20
V. Reflecting on Career Implications
Below, we provide some suggestions on how you can lead the discussion on the career
implications for the material in Chapter 5.
 Types of Competitive Advantage: Are you aware of your organization’s business-level

strategy? What do you do to help your firm either increase differentiation or lower costs?
Can you demonstrate to your superiors how you have contributed to the firm’s chosen
business-level strategy?
This would be an opportunity for the student to see if his or her own actions at work are leading to
competitive advantage for the firm. Although at first sight this might appear to be difficult for the
student to figure out, it’s easy to walk the student through his/her activities at work even if they are
only entry-level employees. For example, you may have a student who is a waiter/waitress at an
upscale restaurant and someone who has worked in a fast-food restaurant during their high school
years. The instructor can help the class understand that their activities were very dissimilar because
their organizations were attempting very different kinds of competitive advantage.
 Types of Competitive Advantage: What is your own competitive advantage? What

opportunities does your current job provide to enhance your competitive advantage? Are
you making best use of your competitive advantage? If not, what organizations might
provide you with better opportunities for doing so? Does your resume clearly reflect your
competitive advantage? Or are you “stuck in the middle?”
Since students are unlikely to stay with the same company or in the same position for their entire
career, it is important for students to think about how they are positioning themselves. Specifically,
push students to consider how their training and experiences can help them differentiate
themselves from their peers or others with whom they will compete for positions. Students can
also think about whether they are striving to focus their skill set on specific industries or types of
positions or if they are striving to build a broader set of skills that will allow them to be a
generalist employee, capable of handling a wider range of responsibilities or varying types of work
and industry environments.
 Understanding your Differentiation: When looking for a new job or for advancement in
your current firm, be conscious of being able to identify what differentiates you from other
applicants. Consider the items in Exhibit 5.4 as you work to identify what distinguishes you
from others.
Once you have walked the student through Question 2, this question would become more relevant.
Students often assert they are differentiated from competing applicants and co-workers, but it is
important that they can clearly articulate how they are different.
 Industry Life Cycle: Before you go for a job interview, identify the life cycle stage of the
industry within which your firm is located. You are more likely to have greater
opportunities for career advancement in an industry in the growth stage than in the decline
stage.
5-21
This point is part of a larger issue of having students examine and assess firms with which they are
interviewing. They should think of how the firm and its position provide opportunities for them.
Also, they can determine if there is a good fit between them and the firms to which they are
applying.
 Industry Life Cycle: If you sense that your career is maturing (or in the decline phase!),
what actions can you take to restore career growth and momentum (e.g., training,
mentoring, professional networking)? Should you actively consider professional
opportunities in other industries?
This is an excellent opportunity for the instructor to get the student thinking about the short-term
and long-term career implications of industry maturity and decline. It is important to emphasize
that (a) even if an industry is declining, many of their skills can be transferred to other industries
(with some “switching costs” of course!), and (b) that there many avenues available to them to
develop new skill sets.
VI. Summary
How and why firms outperform each other goes to the heart of strategic management. In
this chapter, we identified three generic strategies and discussed how firms are able not only to
attain advantages over competitors, but also to sustain such advantages over time. Why do some
advantages become long lasting, while others are quickly imitated by competitors?
The three generic strategies—overall cost leadership, differentiation, and focus—form the
core of this chapter. We began by providing a brief description of each generic strategy (or
competitive advantage) and furnished examples of firms that have successfully implemented these
strategies. Successful generic strategies invariably enhance a firm’s position vis-à-vis the five
forces of that industry—a point that we stressed and illustrated with examples. However, as we
pointed out, there are pitfalls to each of the generic strategies. Thus, the sustainability of a firm’s
advantage is always challenged because of imitation or substitution by new or existing rivals. Such
competitor moves erode a firm’s advantage over time.
We discussed the viability of combining (or integrating) overall cost leadership and
differentiation generic strategies. If successful, such integration can enable a firm to enjoy superior
performance and improve its competitive position. However, this is challenging, and managers
must be aware of the potential downside risks associated with such an initiative.
We also discussed the issue of the sustainability of a firm’s competitive advantage. We

used the example of a manufacturing firm—Atlas Door—to illustrate our key concepts in the first
five chapters in the book.
The concept of the industry life cycle is a critical contingency that managers must take into
account in striving to create and sustain competitive advantages. We identified the four stages of
the industry life cycle—introduction, growth, maturity, and decline—and suggested how these
5-22
stages can play a role in decisions that managers must make at the business level. These include
overall strategies as well as the relative emphasis on functional areas and value-creating activities.
When a firm’s performance severely erodes, turnaround strategies are needed to reverse its
situation and enhance its competitive position. We have discussed three approaches—asset cost
surgery, selective product and market pruning, and piecemeal productivity improvements.
Select an industry (e.g., retail chain and restaurants). Identify an organization that
competes on the basis of overall cost leadership and one that is a differentiator. Are their
advantages sustainable? Why or why not? Are each of these organizations attaining parity on
the other type of competitive advantage?
Teaching suggestions:
You will have students referring to examples from a wide variety of industries. You can use this
question for stimulating discussion on the merits, demerits and the organizational implications of
overall cost leadership and differentiation strategies.
The ‘overall cost leadership’ strategy is based on creating a low-cost position compared to the
other competitors in the industry (You might want to refer to Exhibit 5.3 in this section of the text
to look at how firms can achieve low cost in their value-chain activities). This strategy helps in
improving the competitive position vis-à-vis the five-forces in the industry in the following
manner:
 Protects against rivalry from existing competitors because lower costs allow a firm
to earn profits even when its competitors are losing money
 Protects against powerful buyers because buyers can exert their power to drive
down prices only to the level of the next most efficient producer and here there is
none
 Protects against powerful suppliers by providing greater flexibility to cope with
their demands for input cost increases
 Serves as a substantial barrier to entry and thus lowers the threat of new entrants
 Puts the firm in a favorable position with respect to substitute products
You can ask the students whether the firm pursuing overall cost leadership is realizing some or all
of these benefits. Overall cost leadership also has some pitfalls that need to be avoided:
 Too much focus on one or a few value-chain activities
Just focusing on one or a few value-chain activities for cost reduction might not
help much. Managers need to explore all value-chain activities and the relationships
between them for cost reduction.
5-23
 The firm becomes vulnerable to price increases in the factors of production. The
firm may not always be able to pass the price increases to the customers and could
face serious problems.
An example is the challenge experienced by manufacturing firms based in China.

These firms rely on a common input—low labor costs. Given demographic factors
(causing labor shortages) firms have been forced to raise wages.
 The strategy can be imitated too easily if the activities contributing to cost reduction
are easily imitable.
You might want to emphasize the importance of exploiting the linkages between various activities
of the value chain so that the advantage cannot be easily imitated.
 When you lack parity on differentiation, buyers may be willing to pay more for the
differentiated product and thus, cost leadership may not create a competitive
advantage.
You might want to ask the students whether the firm pursuing the overall cost leadership strategy
is facing any of these difficulties.
The strategy of “differentiation” means creating differences in the firm’s product or service
offering by creating something that is perceived industry-wide as unique and is valued by the
customers (You might want to refer to Exhibit 5.4 in this section of the text to see how firms can
achieve differentiation in their value-chain activities).
Differentiation creates the following advantages:
 Provides protection against rivalry, since brand loyalty lowers customer sensitivity
to price and raises customer switching costs
 Customer loyalty and the firm’s ability to provide uniqueness in its products or
services, creating higher entry barriers
 Provides higher margins and thus enables the firm to deal with supplier power
 Reduces buyer power because buyers lack comparable alternatives and therefore are
less sensitive to price
 Lessens the threat from substitutes, and in some cases the product or service may be
so unique that there are no substitutes at all.
You can ask the students whether the firm pursuing differentiation strategy is able to get any or all
of these benefits.
Differentiation comes with its own pitfalls such as the following:

 Creating uniqueness that is not valuable
 Too much differentiation that is too costly
 Differentiation that can be easily imitated
 Dilution of brand identification through product-line extension
5-24
 The seller may consider it as differentiation whereas buyers do not perceive it the
same way.
You might want to ask the students whether the firm pursuing differentiation is facing any or all of
these problems, and if so, how to address them.
You can also ask:
 Whether the firms pursuing either the cost leadership or the differentiation strategy are
achieving competitive parity on the other strategy
 If it is possible to pursue a strategy in earnest on one hand and still achieve parity on the
other
Attention should also be drawn to the ‘focus’ strategy that is based on the choice of a narrow
competitive scope within an industry.
 What are the merits and demerits of “focus” strategy? Would high focus mean escaping
imitation and competition from new entrants? Is there a danger of getting excessively
focused?
 What is a combination strategy?
A combination strategy means achieving both cost leadership and differentiation

simultaneously. Discussion can be directed at whether it would be feasible for a firm to
achieve both cost leadership and differentiation at the same time and sustain them. (You
might also discuss the concept of the “profit pool”—and our example of the automobile
industry to demonstrate that usually there is not a one-to-one relationship between
revenues and profits along the value chain in an industry.)
Highlight the danger of getting “stuck in the middle” if the firm cannot achieve both. On the other
hand, if the firm is successful, it may be creating competitive advantages that cannot be easily
imitated.
5-25
End-of-Chapter Teaching Notes
Summary Review Questions
1. Explain why the concept of competitive advantage is central to the study of strategic
management. (In text, Types of Competitive Advantage and Sustainability, LO 5-1)
Response:
Strategic management involves creating and sustaining competitive advantages. These competitive
advantages need to be developed and maintained sufficiently to overcome the five competitive
forces. Only through overcoming competitive forces can firms achieve above-average returns. So,
it’s all about making the organization perform successfully.
2. Briefly describe the three generic strategies—overall cost leadership, differentiation, and
focus. (In text, Types of Competitive Advantage and Sustainability, LO 5-2)
Response:
In each case, the generic strategies are defined by the type of competitive advantage, uniqueness
perceived by the customer or low-cost position, and the strategic target market, industrywide or
focused on a particular market segment. The overall cost leadership generic strategy involves
developing a competitive advantage based on low-cost position while appealing to an industrywide
market. The differentiation generic strategy involves developing a competitive advantage based on
uniqueness perceived by the customer while appealing to industrywide market. The focus generic
strategy involves focus on a narrow market segment while developing a competitive advantage of
either uniqueness perceived by the customer or low-cost position.
3. Explain the relationship between the three generic strategies and the five forces that
determine the average profitability within an industry. (In text, Types of Competitive
Advantage and Sustainability, LO 5-3)
Response:
The five forces act to limit industry profitability. Research has shown that business units that
identify with a generic strategy overcome the five forces and outperform business units that do not
or are stuck in the middle. Further, business units that identify with multiple generic strategies will
have higher performance than those that identify with just one generic strategy. The highest
performing business units identified with differentiation and overall cost leadership have generic
advantages.
4. What are some of the ways in which a firm can attain a successful turnaround strategy?
(In text, Industry Life-Cycle Stages: Strategic Implications, LO 5-7)
5-26
Response:
Turnaround strategies reverse a firm’s decline in performance and return it to growth and
profitability. They are used by firms that are in industries in the decline stage of the industry life
cycle. Research has shown there are three basic ways for turnaround strategies to work. First is
asset and cost surgery, where firms sell off unproductive assets and outsource any activities in
which they are not competitive. Second is product and market pruning, which is the reverse of
diversification. Firms will sell off products and businesses in which they are not competitive and
focus on select products and markets. Third is productivity improvements, which may involve
examination of many businesses processes. But small productivity improvements in many
processes can add up to substantial improvement overall.
5. Describe some of the pitfalls associated with each of the three generic strategies. (In text,
Can Competitive Strategies Be Sustained? Integrating and Applying Strategic Management
Concepts, LO 5-5)
Response:
For overall cost leadership, firms will be scaling up production, learning to produce more
efficiently, and minimizing costs on all activities of the value chain. The pitfalls include so much
neglect on specific value chain activities that competitive parity is not reached, vulnerability to an
increase in price on inputs, imitation by competitors, insufficient differentiation for buyers to get
acceptable quality even at the low price, reduced strategic flexibility, and obsolescence of the basis
of a cost advantage.
For differentiation, firms tend to charge higher prices for their goods, but offer customers some
quality or perceived quality advantage for the extra price. The pitfalls include providing a
difference that is not perceived to be valuable by customers, differentiating more than customers
desire, charging too high a price, imitation by rivals, dilution of brand image, and difference in
quality perception between the firm and its buyers.
For focus strategies, firms will appeal to a narrow segment of the market using either a low-cost or
product uniqueness appeal. The pitfalls include an erosion of price advantages over competitors,
imitation of product and service offerings, and loss of focus advantage as less focused competitors
offer products and services at prices that the niche customers prefer.
6. Can firms combine the generic strategies of overall cost leadership and differentiation?
Why or why not? (In text, Types of Competitive Advantage and Sustainability, LO 5-4)
Response:
Yes, there are examples of firms that serve the industrywide target market by providing products
that are differentiated by, for instance, high quality or brand equity. Firms can do this by providing
unique value to customers efficiently. Methods include use of manufacturing systems that are
flexible and automated, exploiting profit pools, seamlessly integrating operations with suppliers
and customers, and exploiting profit pools.
5-27
7. Explain why the industry life-cycle concept is an important factor in determining a firm’s
business-level strategy. (In text, Industry Life-Cycle Stages: Strategic Implications, LO 5-6)
Response:
The industry life cycle explains patterns of critical aspects of the industry and external
environment, including market size, growth potential, characteristics of customers, establishment
and volatility of the technology, and amount of competition. For each stage of the industry life
cycle, there are associated strategies that have proved effective.
Experiential Exercises and Application Questions
1. In Learning from Mistakes at the opening of the chapter, we discussed the struggles of
A&P supermarket chain. Today, we see a number of retailers (e.g., J.C. Penney, Macy’s,
Sears, Southeastern Grocers, Tesco) struggling with similar challenges. Pick a struggling
retailer and analyze its strategy and value chain. Discuss how each activity in its value
chain supports or does not support its generic strategy. What recommendations would
you have regarding what generic strategy should be pursued and changes in the value
chain needed to succeed with that strategy.
The key in this analysis is to clearly identify the type of the strategy the firm is pursuing, including
the bases of their strategy (ex. Differentiation based on service, cost leadership based on scale,
etc.). Students should assess if this is the correct strategy for the firm or if they should migrate to a
different strategy. This could include the change in generic strategy and/or changes in the bases
for that strategy (an example is shifting from differentiation based on service to differentiation
based on features). They should then analyze the value chain of the firm to see where the strong
and weak elements of the firm are. Needed investments and changes will logically flow from this
analysis.
2. What are some examples of primary and support activities that enable Nucor, a $25-
billion steel manufacturer, to achieve a low-cost strategy? (Fill in table below.)
Response:
Despite its size, Nucor is not the biggest steel manufacturer in the industry. What Nucor does do is
to take as input primarily recycled products with steel in them. As a result, Nucor adapts its
inbound logistics to taking in recycled steel, which is very different from taking in iron ore and
other inputs associated with traditional steel manufacturers. Production operations focus on
processing, or reprocessing, refined steel. It requires less energy to reprocess refined steel than to
make steel out of iron ore, and the savings are passed on to customers. For technology
development, Nucor focuses on steel refining technologies that are efficient and adapted to
refining steel.
(Note to instructor) Students will probably come up with other examples than those listed above,
which is fine. Nucor has refined its competitiveness in many ways across all activities of the value
chain. For each student example, we suggest that the student first explain exactly what it is, where
5-28
he or she found out about the example, and then in what activity of the value chain the example
belongs.
Value-Chain Activity Yes/No How Does Nucor Create Value for the Customer?
Primary:
Inbound logistics Yes Focus on deliveries in the form of scrap iron and other refuse
made of steel.
Operations Yes Focus operations on efficiently reprocessing steel, which requires
specially adapted furnaces and other associated processes.
Outbound logistics Yes Outbound logistics are adapted to efficient delivery of specialty
steel products rather than less refined steel.
Marketing and sales Yes Marketing focused on appeals to customers who require specialty
steel products.
Service No
Support:
Procurement Yes Efficient procurement of scrap iron required developing
relationships with various suppliers of recycled steel, specialized
transportation equipment, and the like. Also, procurement of
capital goods such as specialized furnaces contributes to Nucor’s
competitive advantage.
Technology development Yes Nucor has developed specialized and unique steel processing
technologies that enable it to refine steel efficiently.
Human resource management Yes Talent is needed for Nucor to develop and sustain its advantages
in all activities.
General administration Yes All activities listed above need to be organized, supported, and
sustained through strategic investments and support systems.
3. Research Amazon. How has this firm been able to combine overall cost leadership and
differentiation strategies?
Response:
The combination of cost leadership and differentiation strategies requires providing unique value
to customers efficiently. Amazon is unique in its ability to develop proprietary technology to ease
customers’ purchasing processes, including its patented one-click ordering system, and the
immense range of products available to customers along with the tremendous efficiencies built into
its warehouse system. Amazon also uses its large size to develop other advantages related to
buying power. It offers its suppliers large volume purchases but demands low prices.
Note to instructor: Students may answer this question in a number of ways. Generally, students
may be aware of Amazon as a low-price store for books and other staple products. Amazon is also
well known for its ability to deliver quickly. You might challenge them to look a bit deeper into
Amazon’s operations to understand the full range of ways in which Amazon is both trying to
improve its efficiency while also enhancing its customer service. Ask students what the brand
means to them and how this grows out of Amazon’s actions to both cut costs and offer
differentiated service.
5-29
4. Choose a firm with which you are familiar in your local business community. Is the firm
successful in following one (or more) generic strategies? Why or why not? What do you think
are some of the challenges it faces in implementing these strategies in an effective manner?
Response:
(Note to instructor) The following three steps might be useful for bringing out students’ responses.
Step 1 is to identify the firm and assess the five competitive forces that it faces. Step 2 is to ask the
student to identify the firm’s generic strategy. You need to get students to agree on the strategic
target market, narrow or industrywide, and source of competitive advantage (low-cost or
uniqueness). The answers will determine the generic strategy (or strategies) that the firm follows.
Step 3 is to link the generic strategy(ies) to the five forces model. Are there competitive forces that
remain strong threats? How could a competitor threaten the firm? And how should the firm
respond to the threats?
These are the basics. There are probably many challenges you can identify. Look at the challenges
associated with the development of intellectual capital and the potential pitfalls of each of the
generic strategies.
5. Think of a firm that has attained a differentiation focus or cost focus strategy. Are their
advantages sustainable? Why? Why not? (Hint: Consider its position vis-à-vis Porter’s five
forces.)
Response:
(Note to instructor) We suggest the following three steps. First, identify the sources of sustainable
competitive advantage (valuable, rare, costly to imitate, and costly to substitute). Ask students to
articulate these sources, with emphasis on the cost to imitate and cost to substitute. Second,
consider the firms associated with each of Porter’s five forces, including suppliers, buyers,
potential entrants, substitutes, and rivals, especially rivals that follow other generic strategies. And
third, assess the potential of each of these other firms for imitating or substituting the firm’s
product or service. Note that in a dynamic context, these other firms are constantly striving to
imitate or substitute the advantages of any successful firm, so the challenge is making the right
investments to maintain the advantages. It is therefore useful to ask students what kind of
investments firms can make to leverage, extend, or otherwise maintain their advantages.
6. Think of a firm that successfully achieved a combination overall cost leadership and
differentiation strategy. What can be learned from this example? Are these advantages
sustainable? Why? Why not? (Hint: Consider its competitive position vis-à-vis Porter’s five
forces.)
Response:
(Note to instructor) Firms that have achieved a combination overall cost leadership and
differentiation strategy usually have some sort of unique capability (discussed in the text and
5-30
above in response to summary review question 6). Ask students to identify this capability and
evaluate it with respect to the characteristics of a sustainable competitive advantage. Then, as for
the above question, ask students to assess the ability of suppliers, buyers, potential entrants,
substitutes, and rivals to imitate or substitute for this unique capability. Then ask them to assess the
possibility for acquisition. Another line of questioning is to ask about other strategic capabilities
the firm could be developing to sustain its competitive advantage. And ask students if the firm is
maintaining its cost leadership and differentiation strategies equally. If one is weaker, then discuss
how the firm can avoid becoming stuck in the middle. There are no right answers to these
questions! The end result should be to raise students’ awareness of the vulnerabilities and strengths
of this combination strategy.
Ethics Questions
1. Can you think of a company that suffered ethical consequences as a result of an

overemphasis on a cost leadership strategy? What do you think were the financial and
nonfinancial implications?
Response:
The ethical consequences of overemphasis on a cost leadership strategy may be associated with
cost-cutting measures or reliance on experience curve effects. The strategy may not work because
a competitor or substitute could offer a product or service more desirable to customers. Often,
following a cost leadership strategy involves making a large investment to build scale efficient
facilities, and the lag between investment and product delivery gives competitors an opportunity to
enter the market with better products or services. Making such large-scale investments may
involve substantial borrowing. The financial implications could be that cash flow is not sufficient
to cover the interest and principle payments. Perhaps excessive borrowing to cover these financial
costs could saddle the firm with an unsustainable debt burden. The nonfinancial implications may
involve stress for top management.
Such a situation has potential to cause unethical behavior, or wrong behavior according to business
norms. Suppliers may not be paid on time. Customers may be promised unrealistic prices.
Financiers could be promised payment or collateral fraudulently. And employees may be
squeezed.
2. In the introductory stage of the product life cycle, what are some of the unethical practices
that managers could engage in to enhance their firm’s market position? What could be some
of the long-term implications of such actions?
Response:
In the introductory stage, uncertainty abounds. Customers are uncertain about the value of the new
product. The technology is not developed. Costs are not established. And product capabilities are
not established.
5-31
Unethical managerial practices may include misleading promises regarding product/service

capabilities or cost. Of course, long-term implications include legal action for fraud, loss of
reputation and brand equity, and loss of sales. All these can threaten the life of the firm and, by
extension, the industry.
CONNECT RESOURCES
Comprehension Case
Renault: Low Cost in Europe
Case Analysis
Renault: Electric Business Model Innovation
Mini: Compact Car Niche
Video Case
Differences in Differentiation Strategy and Cost Leadership Strategy
5-32

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Chapter 5: Business-Level Strategy: Creating and Sustaining Competitive Advantages

part 2 Strategic Formulation

Types of Competitive Advantage and Sustainability.............................. 5-4

Overall Cost Leadership.................................................................................................. 5-5

Can Competitive Strategies Be Sustained? Integrating and

Strategies for Platform Markets ...................................................................................... 5-15

Industry Life-Cycle Stages: Strategic Implications................................ 5-15

Strategies in the Introduction Stage................................................................................. 5-16

Issue for Debate.......................................................................................... 5-19

Reflecting on Career Implications............................................................ 5-21

PowerPoint Slide 2: Learning Objectives

1. The first section draws on Michael Porter’s framework of generic strategies—overall

I. Types of Competitive Advantage and Sustainability

PowerPoint Slide 4: The Central Role of Competitive Advantage

We now discuss each of the types of generic strategies.

A. Overall Cost Leadership

Extra Example: Spirit Airlines’ Successful Cost Leadership Strategy

It is important to point out that in order to enjoy above-average performance, firms

1. Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five

Discussion Question 9: Is Spirit able to achieve parity on differentiation?

2. Potential Pitfalls of Overall Cost Leadership Strategies

1. Too much focus on one or a few value-chain activities

Extra Example: Would You Pay for Sports News?

Teaching Tip: Another important aspect of differentiation in today’s markets is speed, or

The SUPPLEMENT below discusses how Anheuser-Busch is turning to sustainability to

Extra Example: Budweiser Goes Green

1. Differentiation: Improving Competitive Position vis-à-vis the Five Forces.

2. Potential Pitfalls of Differentiation Strategies

Next, we address some of the pitfalls of a differentiation strategy:

 Uniqueness that is not valuable

 Too much differentiation

Extra Example: Pharma Finds Innovation Doesn’t Always Pay Off

1. Focus: Improving Competitive Position vis-à-vis the Five Forces

Extra Example: Tru Hotels: Serving the Millennial Customer

2. Potential Pitfalls of Focus Strategies

D. Combination Strategies: Integrating Overall Low Cost and Differentiation

1. Automated and Flexible Manufacturing Systems

Given the advances in manufacturing technologies such as CAD/CAM, as well as

We provide the example of Andersen Windows in Bayport, Minnesota—a $2.3 billion

2. Using Data Analytics

3. Exploiting the Profit Pool Concept for Competitive Advantage

Extra Example: Rolls-Royce Sells Services

3. Unscaling to Create a Combination Strategy

4. Integrated Overall Cost Leadership and Differentiation Strategies: Improving

Extra Example: GM Strives for Balance with its Baojun Brand

5. Pitfalls of Integrated Overall Low Cost and Differentiation Strategies.

II. Can Competitive Strategies Be Sustained? Integrating and Applying

PowerPoint Slide 21: Combination Strategies: Integrating Low-Cost and Differentiation

Strategies for Platform Markets

We discuss strategic actions to build a sustainable advantage in platform markets, where

We discuss key four strategy elements for platform firms:

III. Industry Life Cycle Stages: Strategic Implications

PowerPoint Slide 26 and 27: Industry Life Cycle Stages

A. Strategies in the Introduction Stage

B. Strategies in the Growth Stage

C. Strategies in the Maturity Stage

Extra Example: Cheerios New Flavors

a) Reverse positioning—a change in industry tendencies to continuously improve products by

b) Breakaway positioning—a break in industry tendencies to incrementally improve by offering

D. Strategies in the Decline Stage

Maintaining refers to keeping a product going without significantly reducing marketing

We discuss three turnaround strategies:

IV. Issue for Debate