Chapter 5
Building Competitive Advantage
Through Business-Level Strategy
Business Level Strategy
How are we going to compete in our
industry/segment?
Improving the firm’s competitive
position
Competitive advantages are the
single most dependable contributor
to above-average profitability
Porter’s Generic Strategies
 Two fundamental issues
 Competitive advantage - low cost vs.
differentiation
 Strategic Target - broad based vs.
segment
 Pursuit of the generic strategies provides
protection from each of the five forces
Porter’s Generic Strategies
Low Cost
Competitive
Advantage
Differentiation
Porter’s Generic Strategies
Broad
Segment/Focus
Strategic Target
Porter’s Generic Strategies
Low Cost
Competitive
Advantage
Differentiation
Broad
Segment/Focus
Strategic Target
Differentiation
 Offer attributes that customers want, and
are willing to pay for. Leads to premium
price, higher volume, loyalty
 Maintaining uniqueness can be a challenge
 Kodak, Wrigley’s, Campbell’s, Coca-Cola, Gillette,
Del Monte, and Nabisco all leaders since 1923
 Marginal revenue must exceed the costs of
differentiation
Differentiation (cont.)
 What firms pursue differentiation?
 How or on what basis do they achieve differentiation?
Differentiation (cont.)
 Signalling important when:
 nature of differentiation difficult to quantify
 first-time purchase - re-purchase infrequent
 buyers unsophisticated
Differentiation (cont.)
 Risky when:

no value in uniqueness - over
differentiation




premium price too high
quick imitation
poorly understood/changing customer
needs


cell phones
Minivan, FAO Schwartz
Costs/price become more important
than uniqueness
Problems with P&G’s Differentiation Strategy
How has P&G responded?
Introduction of new, higher margined
products like battery powered
toothbrush and white strips
Introduction of “Rejuvenating Effects,” a
toothpaste for women marketed as a
beauty product
Using Emeril Lagasse to hawk their
citrus, cinnamon, and herbal mint
toothpastes
How can Differentiation protect against…?
New Entrants
Starbuck’s
$1.80
Profit
Costs
Price
How can Differentiation protect against…?
New Entrants
Joe’s Coffee
Starbuck’s
$1.80
Assume
Equal
Costs
How can Differentiation protect against…?
New Entrants
Joe’s Coffee
99 cents
Starbuck’s
$1.80
How can Differentiation protect against…?
New Entrants
Joe’s Coffee
99 cents
Starbuck’s
$1.80
Extra Profits
How can Differentiation protect against…?
Rivals
Joe’s Coffee
99 cents
Starbuck’s
$1.80
How can Differentiation protect against…?
Joe’s Coffee
99 cents
Starbuck’s
$1.80
Advertising
& Promotions
drive costs UP
How can Differentiation protect against…?
Joe’s Coffee
99 89 cents
Starbuck’s
$1.80 $1.70
Discounts
and sales drive
prices DOWN
How can Differentiation protect against…?
Substitutes
Starbuck’s
$1.80
How can Differentiation protect against…?
Starbuck’s
$1.80
There is no
substitute for the
truly differentiated
product
How can Differentiation protect against…?
Power of Buyers - How do powerful buyer’s
leverage their power?
Lower Prices, Higher Quality
How can Differentiation protect against…?
Joe’s Coffee Lower
99 89 cents Prices
Raise
Quality
Starbuck’s
$1.80 $1.70
How can Differentiation protect against…?
Power of Suppliers - How do powerful
suppliers leverage their power?
Drive up costs
How can Differentiation protect against…?
Starbuck’s
$1.70
Joe’s Coffee
89 cents
Raise
Costs
How can Differentiation protect against…?
Differentiation does not eliminate any
of these forces, it just allows the
differentiated firm to more easily
deal with these forces, or offset the
power of these forces, and
potentially, remain profitable.
Low Cost Leadership
Design, produce, and market a comparable product at a
lower cost
Effective utilization of value-chain
 capital intensive mfg processes - efficient scale
 process, not product engineering - cost reductions
 products designed for simple assembly and
sharing common components
 procurement and materials handling
 low cost distribution
Requires organizational culture to support
 close supervision, cost controls
Low Cost Leadership (cont.)
Attractive when price is dominant consideration
 commodity
 low switching costs
 powerful buyers
Low Cost Leadership (cont.)
What firms pursue a low cost
strategy?
How do they drive their costs
down
Risky when:




technology breakthroughs frequent
easy to imitate
costs advantages erode more
quickly than differentiation
causes near-sightedness on a few
activities/sunk costs
How can Low Costs provide protection from….
New Entrants
Rubbermaid
Tub
$1.99
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.99
Higher
costs
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rivalry
Rubbermaid
Tub
$1.99
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.89
…can push
prices down….
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.99
… or push
costs up
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Substitutes
Rubbermaid
Tub
$1.99
Wal-Mart
Joes
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.89
…can push
prices down….
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.99
… or push
costs up
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Power of Buyers
Rubbermaid
Tub
$1.99
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.89
…can push
prices down….
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Power of Suppliers
Rubbermaid
Tub
$1.99
Wal-Mart
Joe’s
How can Low Costs provide protection from….
Rubbermaid
Tub
$1.99
… can push
costs up
Wal-Mart
Joe’s
How can Low Costs protect against…?

Low cost leadership does not
eliminate any of these forces, it just
allows the low costs firm to more
easily deal with these forces, or
offset the power of these forces,
and potentially, remain profitable.
Focus
 Emphasizing a market niche where
customers have unique preferences or
requirements. Either focus-low cost or
focus-differentiation
 Profitable when
 niche is large, growing
 niche is not crucial to broad-based
competitors
 firm is able to defend position
Focus (cont.)
 What firms pursue a focus strategy?
 What is their niche?
 Risky when:




competitor “outfocuses the focuser”
broad based competitors have deep pockets
homogenization of customer needs
economies of scope becomes a dominant KSF
Integrated Low Cost-Differentiation
 Combines both generic strategies
 Difficult to implement
Stuck in the Middle
 Firm’s offering are too costly to
compete with low costs provider’s
product, and too undifferentiated to
command the price premium gained
by the differentiated firm