Business-Level Strategy:
Creating and Sustaining Competitive
Advantages
Chapter Five
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
After reading this chapter, you should have a good
understanding of:
LO1 The central role of competitive advantage in the
study of strategic management.
LO2 The three generic strategies: overall cost
leadership, differentiation, and focus.
LO3 How the successful attainment of generic
strategies can improve a firm’s relative power vis-àvis the five forces that determine an industry’s
average profitability.
LO4 The pitfalls managers must avoid in striving to
attain generic strategies.
5-2
Learning Objectives (cont.)
LO5 How firms can effectively combine the generic
strategies of overall cost leadership and
differentiation.
LO6 How Internet-enabled business models are being
used to improve strategic positioning.
LO7 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.
LO8 The need for turnaround strategies that enable a
firm to reposition its competitive position in an
industry.
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Three Generic Strategies
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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
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Three Generic Strategies
• Focus strategy
 Narrow product lines, buyer segments, or
targeted geographic markets
 Attain advantages either through
differentiation or cost leadership
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Example
• Companies pursuing an overall cost
leadership strategy
 McDonalds
 Wal-Mart
• Companies pursuing a differentiation strategy
 Harley Davison
 Apple
• Companies pursuing a focus strategy
 Rolex
 Lamborghini
5-7
Competitive Advantage and
Business Performance
5-8
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
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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
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Overall Cost Leadership (Cont.)
• Parity on the basis of differentiation
 Permits a cost leader to translate cost
advantages directly into higher profits than
competitors
 Allows firm to earn above-average profits
5-11
Comparing Experience Curve Effects
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
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Differentiation
•
•
•
•
•
•
Prestige or brand image
Technology
Innovation
Features
Customer service
Dealer network
5-15
Differentiation
• Firms may differentiate along several
dimensions at once
• Successful differentiation requires integration
with all parts of a firm’s value chain
• An important aspect of differentiation is speed or
quick response
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
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Potential Pitfalls of
Differentiation Strategies
•
•
•
•
Uniqueness that is not valuable
Too much differentiation
Too high a price premium
Differentiation that is easily imitated
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QUESTION
High product differentiation is generally
accompanied by
A. Higher market share
B. Decreased emphasis on competition
based on price
C. Higher profit margins and lower costs
D. 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
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Focus
• Cost focus
 firm strives to create a cost advantage in its
target segment
• Differentiation focus
 firm seeks to differentiate in its target market
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Focus: Improving Competitive Position
• Focus
 Creates barriers of either cost leadership or
differentiation, or both
 Used to select niches that are least
vulnerable to substitutes or where
competitors are weakest
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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
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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
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U.S. Automobile Industry’s Profit Pool
5-25
Combination Strategies: Improving
Competitive Position
• Combination strategies
 High entry barriers
 Bargaining power over suppliers
 Reduces power of buyers (fewer
competitors)
 Value position reduces threat from substitute
products
 Reduces the possibility of head-to-head
rivalry
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Pitfalls of Combination Strategies
• Firms that fail to attain both strategies may
end up with neither and become “stuck in
the middle”
• Miscalculating sources of revenue and
profit pools in the firm’s industry
5-27
Internet-Enabled Low Cost Leader
Strategies
• Online bidding and
• Online purchase
order processing are
orders are making
eliminating the need
many transactions
for sales calls and are
paperless, thus
minimizing sales force
reducing the costs of
expenses.
procurement and
paper.
5-28
Internet-Enabled Differentiation
Strategies
• Internet-based
knowledge
management systems
that link all parts of
the organization are
shortening response
times and
accelerating
organization learning.
• Quick online
responses to service
requests and rapid
feedback to customer
surveys and product
promotions are
enhancing marketing
efforts.
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Internet-Enabled Focus Strategies
• Permission marketing techniques are
focusing sales efforts on specific
customers who opt to receive advertising
notices.
• Niche portals that target specific groups
are providing advertisers with access to
viewers with specialized interests.
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Industry Life-Cycle Stages:
Strategic Implications
• Industry life cycle
 refers to the stages of introduction, growth,
maturity, and decline that occur over the life
of an industry
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Stages of the
Industry Life
Cycle
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QUESTION
The most likely time to pursue a harvest
strategy is in a situation of
A. High growth
B. Strong competitive advantage
C. Mergers and acquisitions
D. Decline in the market life cycle
5-33
Industry Life-Cycle Strategies
In the Introduction Stage:
• Products are unfamiliar to consumers
• Market segments not well defined
• Product features not clearly specified
• Competition tends to be limited
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Industry Life-Cycle Strategies
For the Introduction Stage:
• Develop product and get users to try it
• Generate exposure so product becomes
“standard”
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Industry Life-Cycle Strategies
The Growth Stage is:
• Characterized by
strong increases in
sales
• Attractive to potential
competitors
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Industry Life-Cycle Strategies
For the Growth Stage:
• Brand recognition
• Differentiated products
• Financial resources to support value-chain
activities
5-37
Industry Life-Cycle Strategies
In the Maturity stage:
• Aggregate industry demand slows
• Market becomes saturated, few new
adopters
• Direct competition becomes predominant
• Marginal competitors begin to exit
5-38
Industry Life-Cycle Strategies
For the Maturity Stage:
• Efficient manufacturing operations and
process engineering
• Low costs (customers become price
sensitive)
5-39
Industry Life-Cycle Strategies
In the Decline Stage:
• Industry sales and profits begin to fall
• Strategic options become dependent on
the actions of rivals
5-40
Strategies in the Decline Stage
For the Decline Stage
• Maintaining
• Exiting the market
• Harvesting
• Consolidation
5-41
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
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