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Creating and Sustaining Competitive Advantages
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
After reading this chapter, you should have a good understanding of:
LO5.1 The central role of competitive advantage in the study of strategic management and the three generic strategies: overall cost leadership, differentiation, and focus. LO5.2 How the successful attainment of generic strategies can improve a firm’s relative power vis-à-vis the five forces that determine an industry’s average profitability. LO5.3 The pitfalls managers must avoid in striving to attain generic strategies. LO5.4 How firms can effectively combine the generic strategies of overall cost leadership and differentiation.
Learning Objectives (cont.)
LO5.5 What factors determine the sustainability of a firm’s competitive advantage. LO5.6 How Internet-enabled business models are being used to improve strategic positioning. LO5.7 The importance of considering the industry life cycle to determine a firm’s business-level strategy and its relative emphasis on functional area strategies and value-creating activities. LO5.8 The need for turnaround strategies that enable a firm to reposition its competitive position in an industry.
Three Generic Strategies
Three Generic Strategies Overall cost leadership Low-cost-position relative to a firm’s peers Manage relationships throughout the entire value chain Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 5-5 .
or targeted geographic markets Attain advantages either through differentiation or cost leadership 5-6 .Three Generic Strategies Focus strategy Narrow product lines. buyer segments.
Example Companies pursuing an overall cost leadership strategy McDonalds Wal-Mart Companies pursuing a differentiation strategy Companies pursuing a focus strategy Rolex Lamborghini 5-7 Harley Davison Apple .
2 5-8 .Competitive Advantage and Business Performance Exhibit 5.
Overall Cost Leadership Tight set of interrelated tactics that includes: Tight cost and overhead control Avoidance of marginal customer accounts Cost minimization in all activities in the firm’s value chain 5-9 .
Overall Cost Leadership Experience curve refers to how business “learns” to lower costs as it gains experience with production processes with experience. unit costs of production decline as output increases in most industries 5-10 .
or being “on par. or other strategic product characteristic.” with competitors with respect to low cost. differentiation. 5-11 .Overall Cost Leadership Competitive parity a firm’s achievement of similarity.
Comparing Experience Curve Effects Exhibit 5.4 5-12 .
Improving Competitive Position vis-à-vis the Five Forces An overall low-cost position Protects a firm against rivalry from competitors Protects a firm against powerful buyers Provides more flexibility to cope with demands from powerful suppliers for input cost increases Provides substantial entry barriers from economies of scale and cost advantages Puts the firm in a favorable position with respect to substitute products 5-13 .
Pitfalls of Overall Cost Leadership Strategies Too much focus on one or a few value-chain activities All rivals share a common input or raw material The strategy is imitated too easily A lack of parity on differentiation Erosion of cost advantages when the pricing information available to customers increases 5-14 .
5-15 .Differentiation Differentiation strategy a firm’s generic strategy based on creating differences in the firm’s product or service offering by creating something that is perceived industry-wide as unique and valued by customers.
Differentiation Prestige or brand image Technology Innovation Features Customer service Dealer network 5-16 .
Differentiation: Improving Competitive Position Creates higher entry barriers due to customer loyalty Provides higher margins that enable the firm to deal with supplier power Establishes customer loyalty and hence less threat from substitutes 5-17 .
Potential Pitfalls of Differentiation Strategies Uniqueness that is not valuable Too much differentiation Too high a price premium Differentiation that is easily imitated Diffusion of brand identification through product-line extensions Perceptions of differentiation may vary between buyers and sellers 5-18 .
Higher profit margins and lower costs D. Higher market share B.QUESTION High product differentiation is generally accompanied by A. Decreased emphasis on competition based on price C. Significant economies of scale 5-19 .
Focus Focus is based on the choice of a narrow competitive scope within an industry Firm selects a segment or group of segments (niche) and tailors its strategy to serve them Firm achieves competitive advantages by dedicating itself to these segments exclusively 5-20 .
Focus Cost focus firm strives to create a cost advantage in its target segment Differentiation focus firm seeks to differentiate in its target market 5-21 .
or both Used to select niches that are least vulnerable to substitutes or where competitors are weakest 5-22 .Focus: Improving Competitive Position Focus Creates barriers of either cost leadership or differentiation.
Pitfalls of Focus Strategies Erosion of cost advantages within the narrow segment Focused products and services still subject to competition from new entrants and from imitation Focusers can become too focused to satisfy buyer needs 5-23 .
Three Combination Approaches Automated and flexible manufacturing systems Exploiting the profit pool concept for competitive advantage Coordinating the “extended” value chain by way of information technology 5-24 .
U.S.8 5-25 . Automobile Industry’s Profit Pool Exhibit 5.
Pitfalls of Combination Strategies Firms that fail to attain both strategies may end up with neither and become “stuck in the middle” Underestimating the challenges and expenses associated with coordinating value creating activities in the extended value chain Miscalculating sources of revenue and profit pools in the firm’s industry 5-26 .
9 5-27 .Internet-Enabled Low Cost Leader Strategies Exhibit 5.
10 5-28 .Internet-Enabled Differentiation Strategies Exhibit 5.
11 5-29 .Internet-Enabled Focus Strategies Exhibit 5.
growth. and decline that typically occur over the life of an industry 5-30 . maturity.Industry Life-Cycle Stages: Strategic Implications Industry life cycle refers to the stages of introduction.
12 5-31 .Stages of the Industry Life Cycle Exhibit 5.
Decline in the market life cycle 5-32 .QUESTION The most likely time to pursue a harvest strategy is in a situation of A. Strong competitive advantage C. Mergers and acquisitions D. High growth B.
and (7) a need for financial support. 5-33 .Strategies in the Introduction Stage Introduction stage the first stage of the industry life cycle. characterized by (1) new products that are not known to customers. (3) unspecified product features. (2) poorly defined market segments. (4) low sales growth. (5) rapid technological change. (6) operating losses.
Industry Life-Cycle Strategies For the Introduction Stage: Develop product and get users to try it Generate exposure so product becomes “standard” 5-34 .
and (4) a need for financing complementary value-chain activities such as marketing. (3) developing brand recognition. characterized by (1) strong increases in sales. customer service. and research and development. sales. 5-35 .Industry Life-Cycle Strategies Growth stage The second stage of the product life cycle. (2) growing competition.
Industry Life-Cycle Strategies For the Growth Stage: Brand recognition Differentiated products Financial resources to support valuechain activities 5-36 .
Reverse positioning. characterized by (1) slowing demand growth. (2) saturated markets.Industry Life-Cycle Strategies Maturity stage The third stage of the product life cycle. breakaway positioning 5-37 . (3) direct competition. and (5) strategic emphasis on efficient operations. (4) price competition.
Industry Life-Cycle Strategies Decline stage The fourth stage of the product life cycle. characterized by (1) falling sales and profits. 5-38 . and (3) industry consolidation. (2) increasing price competition.
Strategies in the Decline Stage For the Decline Stage Maintaining Harvesting Exiting the market Consolidation 5-39 .
Turnaround Strategies in the Life Cycle Turnaround strategy a strategy that reverses a firm’s decline in performance and returns it to growth and profitability. Asset and cost surgery Selective product and market pruning Piecemeal productivity improvements 5-40 .
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