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Business

Level
Strategy:
Creating and
Sustaining
Competitive
Advantages
chapter 5

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education

Learning Objectives
5-2

After reading this chapter, you should have


a good understanding of:
LO5.1 The central role of competitive advantage
in the study of strategic
4-2 management, and the
three generic strategies: overall cost leadership,
differentiation, and focus.

LO5.2 How the successful attainment of generic


strategies can improve the firms relative power
vis--vis the five forces that determine an
industrys average profitability.

Learning Objectives
5-3

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.

LO5.5 What factors determine the sustainability


of a firms competitive advantage.

LO5.6 How Internet-enabled business models are


being used to improve strategic positioning.

Learning Objectives
5-4

LO5.7 the importance of considering the industry


life cycle to determine a firms 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.

5-5

Sustaining a Competitive
Advantage
Consider
The viability of a firms success is driven
by both the internal operations of the firm
and the desires and preferences of the
market. Firms that succeed have the
appropriate resources and cost structure to
meet the needs of the environment.
They also have a strategy

Sustaining a Competitive
Advantage

5-6

Business-level strategies require a


choice:
How to overcome the five forces and
achieve competitive advantage?
Suggestion - use Porters three generic
strategies:

Overall cost leadership


Differentiation
Focus

Three Generic Strategies


5-7

Exhibit 5.1 Three Generic Strategies


Source: Adapted and reprinted with the permission of The Free Press, a division of Simon & Schuster Inc.
from Competitive Strategy: Techniques for Analyzing Industries and Competitors. Michael E Porter. Copyright
1980, 1998 by The Free Press. All rights reserved.

Three Generic Strategies


5-8

Overall cost leadership is based on:

Creating a low-cost position relative to a


firms peers
Managing relationships throughout the
entire value chain to lower costs

Differentiation implies:

Products and/or services that are unique


& valued
Emphasis on nonprice attributes for which
customers will gladly pay a premium

Three Generic Strategies


5-9

A focus strategy requires:

Narrow product lines, buyer segments, or


targeted geographic markets
Advantages obtained either through
differentiation or cost leadership

Examples: Three Generic


Strategies

5-10

Companies pursuing an overall cost


leadership strategy:

Companies pursuing a differentiation


strategy:

McDonalds
Wal-Mart

Apple
Target

Companies pursuing a focus strategy:

Ikea
Costco

Three Generic Strategies


5-11

Exhibit 5.2 Competitive Advantage and Business Performance

Overall Low-Cost
Leadership

5-12

Cost leadership involves

Aggressive construction of efficient scale


facilities
Vigorous pursuit of cost reductions from
experience
Tight cost & overhead control
Avoidance of marginal customer accounts
Cost minimization in all activities in the
firms value chain, such as R&D, service,
sales force, & advertising

Overall Low-Cost
Leadership

5-13

Cost leadership requires

Learning to lower costs through experience:


the experience curve
With

experience, unit costs of production


processes decline as output increases

This strategy also requires competitive


parity
Being

on par with competitors with respect to


low-cost, differentiation, or other strategic
product characteristics
Permits cost leaders to translate cost
advantages directly into higher profits

Improving Competitive
Position vis--vis the Five
Forces

5-14

An overall low-cost
Provides substantial
Protectsposition
a firm against
rivalry from competitors
Protects the firm
against powerful buyers
Provides more flexibility
to cope with demands
from powerful suppliers
who want to increase
input costs

entry barriers due to


economies of scale
and cost advantages
Puts the firm in a
favorable position with
respect to substitute
products

Pitfalls of Cost Leadership


5-15

Too much focus on one or a few value


chain activities.
Increase in the cost of the inputs on
which the advantage is based
The strategy is imitated too easily
A lack of parity on differentiation
Reduced flexibility
Obsolescence of the basis of a cost
advantage

Differentiation
5-16

A differentiation strategy can take


many forms:

Prestige or brand image


Technology
Innovation
Features
Customer service
Dealer network

Differentiation
5-17

Differentiation requires:

A level of cost parity relative to competitors


Integration of multiple points along the value
chain
Superior

material handling operations to


minimize damage
Accurate and responsive order processing
Personal relationships with key customers
Rapid response to customer service requests

Differentiation along several different


dimensions at once

Improving Competitive
Position vis--vis the Five
Forces

5-18

An overall differentiation
strategy

Creates higher
entry barriers due
to customer loyalty
Provides higher
margins that enable
the firm to deal with
supplier power

Reduces buyer
power because
buyers lack suitable
alternatives
Establishes
customer loyalty and
hence less threat
from substitutes

Pitfalls of Differentiation
5-19

Uniqueness that is not valuable


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

Focus
5-20

A focus strategy is based on the choice


of a narrow competitive scope within an
industry.

A firm selects a segment or group of


segments (or niche) and tailors its strategy
to serve them
A firm achieves competitive advantages by
dedicating itself to these segments
exclusively

Focus
5-21

A focus strategy has two variants:

Cost focus
Creates

a cost advantage in its target segment


Exploits differences in cost behavior

Differentiation focus
Differentiates

itself in its target market


Exploits the special needs of buyers

Improving Competitive
Position vis--vis the Five
Forces

5-22

An overall focus
strategy

Creates higher
entry barriers due
to cost leadership
or differentiation or
both
Can provide higher
margins that enable
the firm to deal with
supplier power

Reduces buyer
power because the
firm provides
specialized products
or services
Focused niches are
less vulnerable to
substitutes

Pitfalls of Focus
5-23

Erosion of cost advantages within the


narrow segment
Highly focused products and services are
still subject to competition from new
entrants & from imitation
Focusers can become too focused to
satisfy buyer needs

Combination Strategies:
Integrating Low-Cost &
Differentiation

5-24

Integration of low-cost and


differentiation strategies makes it
difficult for competitors to duplicate or
imitate strategy
The goal of a combination strategy is
to provide unique value in an efficient
manner

Combination Strategies
5-25

Combining overall low-cost and


differentiation strategies can take
several forms:
Automated & flexible manufacturing
systems allow for mass customization
Exploitation of the profit pool concept
creates a competitive advantage
Using information technology, firms can
integrate activities throughout the
extended value chain

Improving Competitive
Position vis--vis the Five
Forces

5-26

An integrated overall lowcost & differentiation


strategy

Creates higher
entry barriers due
to both cost
leadership &
differentiation
Can provide higher
margins that enable
the firm to deal with
supplier power

Reduces buyer
power because of
fewer competitors
An overall value
proposition reduces
threat from
substitutes

Pitfalls of Combination
Strategies

5-27

Firms that fail to attain both overall low-cost


& differentiation strategies may end up with
neither and become stuck in the middle
Firms can also underestimate the challenges &
expenses associated with coordinating valuecreating activities in the extended value
chain
Firms can also miscalculate sources of revenue
and profit pools in the firms industry

Question?
5-28

Which statement regarding competitive


advantages is true?
A.

B.
C.

D.

If several competitors pursue similar differentiation


tactics, they may all be perceived as equals in the
mind of the consumer.
With an overall cost leadership strategy, firms need
not be concerned with parity on differentiation.
In the long run, a business with one or more
competitive advantages is probably destined to
earn normal profits.
Attaining multiple types of competitive advantage
is a recipe for failure.

Internet-Enabled Low-Cost
Leader Strategies

5-29

The Internet and digital technologies


lower transaction costs:

No in-person sales calls


Paperless transactions

Disintermediation or removing
intermediaries also lowers transaction
costs

Reduced search costs


No need for a permanent retail location

Internet-Enabled
Differentiation Strategies

5-30

The Internet and digital technologies


have created new ways of differentiating
by enabling mass customization
Customers can judge the quality &
uniqueness of a product or service by
their ability to be involved in its planning
& design
Lowered transaction costs allow firms
to achieve parity on cost while providing
a unique experience

Internet-Enabled Focus
Strategies

5-31

The Internet and digital technologies


have created new ways of competing in
a narrow market segment
Customers can access markets less
expensively, and small firms can extend
their reach
Social media allows niche firms to solicit
input and respond quickly to customer
feedback

Internet-Enabled
Combination Strategies

5-32

The Internet and digital technologies


have provided all companies with
greater tools for managing costs
With lower costs for all, the net effect is
fewer rather than more opportunities
for sustainable advantage
The ease of comparison shopping also
erodes differentiation advantages

Industry Life Cycle Stages


5-33

The industry life cycle

Introduction
Growth
Maturity
Decline

Generic strategies, value-creating


activities, & overall objectives all vary
over the course of an industry life cycle

Industry Life Cycle Stages


5-34

Exhibit 5.7 Stages of the Industry Life Cycle

Strategies in the
Introduction Stage

5-35

The introduction stage is when:

Products are unfamiliar to consumers


Market segments are not well-defined
Product features are not clearly specified
Competition tends to be limited

Strategies:

Develop a product and get users to try it


Generate exposure so the product becomes
standard

5-36

Strategies in the Growth


Stage

The growth stage is:

Characterized by strong increases in sales


Attractive to potential competitors
When firms can build brand recognition

Strategies:

Create branded differentiated products


Stimulate selective demand
Provide financial resources to support
value-chain activities

5-37

Strategies in the Maturity


Stage

The maturity stage is when:

Aggregate industry demand slows


Market becomes saturated, few new adopters
Direct competition becomes predominant
Marginal competitors begin to exit

Strategies:

Create efficient manufacturing operations


Lower costs as customers become pricesensitive
Adopt reverse or breakaway positioning

5-38

Strategies in the Decline


Stage

The decline stage is when:

Industry sales and profits begin to fall


Price competition increases
Industry consolidation occurs

Strategies:

Maintaining the product position


Harvesting profits & reducing costs
Exiting the market
Consolidating or acquiring surviving firms

Question?
5-39

As markets mature,
A.
B.
C.
D.

costs continue to increase.


applications for patents increase
differentiation opportunities increase.
there is increasing emphasis on
efficiency.

Turnaround Strategies
5-40

A turnaround strategy involves


reversing performance decline &
reinvigorating growth toward profitability
through

Asset & cost surgery


Selected market & product pruning
Piecemeal productivity improvements

Example = Ford Motor Company


Example = Jamba Juice