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 management,
and the three
4-2
generic strategies: overall cost leadership,
differentiation, and focus.
LO5.2 How the successful attainment of generic
strategies can improve the firm’s relative power visà-vis the five forces that determine an industry’s
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
firm’s 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 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.
Sustaining a Competitive
Advantage
5-5
Consider…
The viability of a firm’s 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 Porter’s 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
firm’s peers
 Managing relationships throughout the
entire value chain to lower costs
 Differentiation
 Products
implies:
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:
McDonalds
 Wal-Mart


Companies pursuing a differentiation
strategy:
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
firm’s 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-à-vis the Five Forces
5-14
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
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-à-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
 Differentiates
focus
itself in its target market
 Exploits the special needs of buyers
Improving Competitive Position
vis-à-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-à-vis the Five Forces
5-26
An integrated overall low-cost &
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
value-creating activities in the extended
value chain
 Firms can also miscalculate sources of
revenue and profit pools in the firm’s
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”
Strategies in the Growth Stage
5-36
 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 valuechain activities
Strategies in the Maturity Stage
5-37
 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
Strategies in the Decline Stage
5-38
 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
A.
B.
C.
D.
markets mature,
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