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

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Learning Objectives
After reading this chapter, you should be able to:
1. Describe the central role of competitive advantage in the study of
strategic management and the three generic strategies: overall cost
leadership, differentiation, and focus.
2. Explain how the successful attainment of generic strategies can
improve the firm’s relative power vis-à-vis the five forces that
determine an industry’s average profitability.
3. Identify the pitfalls managers must avoid in striving to attain
generic strategies.
4. Explain how firms can effectively combine the generic strategies of
overall cost leadership and differentiation.
5. Identify which factors determine the sustainability of a firm’s
competitive advantage.
6. Understand the importance of considering the industry life cycle to
determine a firm’s business-level strategy and its relative emphasis
on functional area strategies and value-creating activities.
7. Understand the need for turnaround strategies that enable a firm to
reposition its competitive position in an industry.
© McGraw Hill
 Looking Ahead

Types of Competitive Advantage and

Sustainability.
Can Competitive Strategies Be Sustained?
Integrating and Applying Strategic
Management Concepts.
Industry Life-Cycle Stages: Strategic
Implications.

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 The Central Role of Competitive
Advantage
Consider …
In order to create and sustain a competitive
advantage, companies need to stay focused
on their customers’ evolving wants and needs
and not sacrifice their strategic position as
they mature and the market around them
evolves.
They also have to have a strategy…

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 Sustaining a Competitive Advantage

Business-level strategies require a choice.

How to overcome the five forces and
achieve competitive advantage?
Suggestion – Use Porter’s three generic
strategies.
1. Overall cost leadership.
2. Differentiation.
3. Focus.

© McGraw Hill
 Three Generic Strategies 1

Exhibit 5.1 Three Generic Strategies

Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors. Michael E Porter,
1980, 1998, Free Press.
Access the text alternative for slide images.

© McGraw Hill
 Three Generic Strategies 2

Overall cost leadership is based on:

• Creating a low-cost position relative to a firm’s peers.
• Managing relationships throughout the entire value chain
to lower costs.

Differentiation implies:
• Products and/or services that are unique and valued.
• Emphasis on nonprice attributes for which customers will
gladly pay a premium.

A focus strategy requires:

• Narrow product lines, buyer segments, or targeted
geographic markets.
▪ Advantages obtained either through differentiation or
cost leadership.
© McGraw Hill
 Three Generic Strategies 3

Exhibit 5.2 Competitive Advantage and Business

Performance
Particulars Differentiation Differentiation Cost Differentiation Cost Stuck in
and Cost and Focus and the
Focus Middle

Return on 35.5 32.9 30.2 17.0 23.7 17.8

Investment
(%)

Sales 15.1 13.5 13.5 16.4 17.5 12.2

Growth (%)

Gain in 5.3 5.3 5.5 6.1 6.3 4.4

market
share (%)

Sample Size 123 160 100 141 86 105

© McGraw Hill
 Overall Low-Cost Leadership 1

Overall cost leadership involves:

• Aggressive construction of efficient scale facilities.
• Vigorous pursuit of cost reductions from experience.
• Tight cost and overhead control.
• Avoidance of marginal customer accounts.
• Cost minimization in all activities in the firm’s value
chain, such as research and development, service, sales
force, and advertising.

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 Overall Low-Cost Leadership 2

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.

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 Improving Competitive Position vis-à-vis
the Five Forces: Cost Leadership
An overall low-cost position:
Protects 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.
Provides substantial entry barriers due to economies
of scale and cost advantages.
Puts the firm in a favorable position with respect to
substitute products.

© McGraw Hill
 Pitfalls of Cost Leadership
Too much focus on one or a few value chain
activities.

Increase in the cost of the inputs on which the

advantage is based.

Strategy can be too easily imitated.

A lack of parity on differentiation.

Reduced flexibility.

Obsolescence of the basis of a cost advantage.

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 Differentiation 1

A differentiation strategy can take many

forms:
• Prestige or brand image.
• Quality.
• Technology.
• Innovation.
• Features.
• Customer service.
• Dealer network.

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 Differentiation 2

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.
• Low defect rates to improve quality.
• Accurate and responsive order processing.
• Personal relationships with key customers.
• Rapid response to customer service requests.
• Differentiation along several different dimensions at
once.

© McGraw Hill
 Improving Competitive Position vis-à-vis
the Five Forces: Differentiation
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.

© McGraw Hill
 Pitfalls of Differentiation

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.

© McGraw Hill
 Focus 1

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.

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 Focus 2

A focus strategy has two variants.

1. Cost focus.
• Creates a cost advantage in its target
segment.
• Exploits differences in cost behavior.
2. Differentiation focus.
• Differentiates itself in its target market.
• Exploits the special needs of buyers.

© McGraw Hill
 Improving Competitive Position vis-à-vis
the Five Forces: Focus
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 less vulnerable to substitutes.

© McGraw Hill
 Pitfalls of Focus

Erosion of cost advantages within the narrow

segment.

Highly focused products and services still

subject to competition from new entrants
and from imitation.

Focusers too focused to satisfy buyer needs.

© McGraw Hill
 Combination Strategies: Integrating
Low-Cost and Differentiation

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.

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 Combination Strategies

Combining overall low-cost and differentiation

strategies can take several forms.

Automated and flexible manufacturing systems allow for

mass customization.

Data analytics allows firms to customize product and

services while using resources efficiently.

Exploitation of the profit pool concept creates a

competitive advantage.

Using technology, firms can unscale, relying on suppliers

or customers to provide critical inputs to the process.

© McGraw Hill
 Improving Competitive Position vis-à-vis
the Five Forces: Combination
An integrated/combination overall low-cost
and differentiation strategy
Creates higher entry barriers due to both cost
leadership and differentiation.
Can provide higher margins that enable the firm to
deal with supplier power.
Reduces buyer power because of fewer competitors.
Overall value proposition reduces threat from
substitutes.

© McGraw Hill
 Pitfalls of Combination Strategies

Firms that fail to attain both overall low-cost

and differentiation strategies may end up with
neither and become “stuck in the middle.”
Firms can also underestimate the challenges
and expenses associated with coordinating
value-creating activities in the extended value
chain.
Firms can also miscalculate sources of revenue
and profit pools in the firm’s industry.

© McGraw Hill
 Question 1
Which statement regarding competitive advantages
is true?
A. If several competitors pursue similar differentiation
tactics, they may all be perceived as equals in the
mind of the consumer.
B. With an overall cost leadership strategy, firms need
not be concerned with parity on differentiation.
C. In the long run, a business with one or more
competitive advantages is probably destined to
earn normal profits.
D. Attaining multiple types of competitive advantage
is a recipe for failure.

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 Industry Life Cycle Stages 1

The industry life cycle:

• Introduction.
• Growth.
• Maturity.
• Decline.
Generic strategies, functional areas, value-
creating activities, and overall objectives all vary
over the course of an industry life cycle.

© McGraw Hill
 Industry Life Cycle Stages 2

Exhibit 5.6 Stages of the Industry Life Cycle

Factor Introduction Growth Maturity Decline
Generic strategies Differentiation Differentiation Differentiation Overall cost
Overall cost leadership
leadership Focus
Market growth rate Low Very large Low to moderate Negative

Number of Very few Some Many Few

segments

Intensity of Low Increasing Very intense Changing

competition

Emphasis on Very high High Low to moderate Low

product design

Emphasis on Low Low to moderate High Low

process design

Major functional Research and Sales and Production General

area(s) of concern development marketing management and
finance
Overall objective Increase market Create consumer Defend market share Consolidate,
awareness demand and extend product maintain, harvest,
life cycles or exit
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 Strategies in the Introduction Stage

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.”

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 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.

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 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 price-sensitive.
• Adopt reverse or breakaway positioning.

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 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 and reducing costs.
• Exiting the market.
• Consolidating or acquiring surviving firms.

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 Question 2

As markets mature,
A. costs continue to increase.
B. applications for patents increase
C. differentiation opportunities increase.
D. there is increasing emphasis on efficiency.

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 Turnaround Strategies

A turnaround strategy involves reversing

performance decline and reinvigorating growth
toward profitability through
• Asset and cost surgery.
• Selected market and product pruning.
• Piecemeal productivity improvements.

© McGraw Hill
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