1. Business-Level Strategy: Creating and Sustaining Competitive Advantages
Chapter Five
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
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 generic strategies: overall cost leadership, differentiation, and focus.
LO5.2 How the successful attainment of generic strategies can improve a firm’s relative power vis-à-vis the five forces that determine an industry’s average profitability.
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.

3. Learning Objectives (cont.)
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. 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.

4. Three Generic Strategies
Exhibit 5.1

5. 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

6. Three Generic Strategies
Focus strategy
Narrow product lines, buyer segments, or targeted geographic markets
Attain advantages either through differentiation or cost leadership

7. 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
Encourage students to evaluate these companies as you discuss these strategies further in the following slides. 7

8. Competitive Advantage and Business Performance
Exhibit 5.2

9. 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
Tight set of interrelated tactics that includes:
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

10. 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

11. Overall Cost Leadership
Competitive parity
a firm’s achievement of similarity, or being “on par,” with competitors with respect to low cost, differentiation, or other strategic product characteristic.
A firm must attain competitive parity on the basis of differentiation relative to competitors

12. Comparing Experience Curve Effects
Exhibit 5.4

13. 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

14. 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

15. Differentiation Differentiation strategy
a firm’s generic strategy based on creating differences in the firm’s product or service offering by creating something that is perceived industry-wide as unique and valued by customers.
Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique

16. Differentiation Prestige or brand image Technology Innovation Features
Customer service
Dealer network

17. 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
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 alternative
Reduces supplier power due to prestige associated with supplying to highly differentiated products
Establishes customer loyalty and hence less threat from substitutes

18. Potential Pitfalls of Differentiation Strategies
Uniqueness that is not valuable
Too much differentiation
Too high a price premium
Differentiation that is easily imitated
Diffusion of brand identification through product-line extensions
Perceptions of differentiation may vary between buyers and sellers
Dilution of brand identification through product-line extensions
Perceptions of differentiation may vary between buyers and sellers

19. QUESTION High product differentiation is generally accompanied by
Higher market share
Decreased emphasis on competition based on price
Higher profit margins and lower costs
Significant economies of scale
B. Decreased emphasis on competition based on price 19

20. 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

21. Focus Cost focus Differentiation focus
firm strives to create a cost advantage in its target segment
Differentiation focus
firm seeks to differentiate in its target market

22. Focus: Improving Competitive Position
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

23. 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

24. 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
Mass customization
a firm’s ability to manufacture unique products in small quantities at low cost.
Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy
Goal of combination strategy is to provide unique value in an efficient manner 24

25. U.S. Automobile Industry’s Profit Pool
Exhibit 5.8

26. Pitfalls of Combination Strategies
Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”
Underestimating the challenges and expenses associated with coordinating value creating activities in the extended value chain
Miscalculating sources of revenue and profit pools in the firm’s industry
Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain

27. Internet-Enabled Low Cost Leader Strategies
Direct access to progress reports and the ability for customers to periodically check work in progress is minimizing rework.
Collaborative design efforts using Internet technologies that link designers, materials suppliers, and manufacturers are reducing the costs and speeding the process of new product development.
Exhibit 5.9

28. Internet-Enabled Differentiation Strategies
Personalized online access provides customers with their own “site within a site” in which their prior orders, status of current orders, and requests for future orders are processed directly on the supplier’s website.
Online access to real-time sales and service information is being used to empower the sales force and continually update R&D and technology development efforts.
Exhibit 5.10

29. Internet-Enabled Focus Strategies
Virtual organizing and online “officing” are being used to minimize firm infrastructure requirements.
Procurement technologies that use Internet software to match buyers and sellers are highlighting specialized buyers and drawing attention to smaller suppliers.
Exhibit 5.11

30. Industry Life-Cycle Stages: Strategic Implications
refers to the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry
Emphasis on strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle 30

31. Stages of the Industry Life Cycle
Exhibit 5.12

32. QUESTION
The most likely time to pursue a harvest strategy is in a situation of 
High growth
Strong competitive advantage
Mergers and acquisitions
Decline in the market life cycle
D. Decline in the market life cycle 32

33. Strategies in the Introduction Stage
the first stage of the industry life cycle, characterized by (1) new products that are not known to customers, (2) poorly defined market segments, (3) unspecified product features, (4) low sales growth, (5) rapid technological change, (6) operating losses, and (7) a need for financial support.

34. Industry Life-Cycle Strategies
For the Introduction Stage:
Develop product and get users to try it
Generate exposure so product becomes “standard”

35. Industry Life-Cycle Strategies
Growth stage
The second stage of the product life cycle, characterized by (1) strong increases in sales; (2) growing competition; (3) developing brand recognition; and (4) a need for financing complementary value-chain activities such as marketing, sales, customer service, and research and development.

36. Industry Life-Cycle Strategies
For the Growth Stage:
Brand recognition
Differentiated products
Financial resources to support value-chain activities

37. Industry Life-Cycle Strategies
Maturity stage
The third stage of the product life cycle, characterized by (1) slowing demand growth, (2) saturated markets, (3) direct competition, (4) price competition, and (5) strategic emphasis on efficient operations.
Reverse positioning, breakaway positioning

38. Industry Life-Cycle Strategies
Decline stage
The fourth stage of the product life cycle, characterized by (1) falling sales and profits, (2) increasing price competition, and (3) industry consolidation.

39. Strategies in the Decline Stage
For the Decline Stage
Maintaining
Harvesting
Exiting the market
Consolidation

40. 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
• Asset and cost surgery. Very often, mature firms tend to have assets that do not produce
any returns. These include real estate, buildings, etc. Outright sales or sale and
leaseback free up considerable cash and improve returns. Investment in new plants
and equipment can be deferred. Firms in turnaround situations try to aggressively cut
administrative expenses and inventories and speed up collection of receivables. Costs
also can be reduced by outsourcing production of various inputs for which market
prices may be cheaper than in-house production costs.
• Selective product and market pruning. Most mature or declining firms have many
product lines that are losing money or are only marginally profitable. One strategy
is to discontinue such product lines and focus all resources on a few core profitable
areas. For example, in the early 1980s, faced with possible bankruptcy, Chrysler Corporation
sold off all its nonautomotive businesses as well as all its production facilities
abroad. Focus on the North American market and identification of a profitable
niche—namely, minivans—were keys to their eventual successful turnaround.
• Piecemeal productivity improvements. There are many ways in which a firm can
eliminate costs and improve productivity. Although individually these are small
gains, they cumulate over a period of time to substantial gains. Improving business
processes by reengineering them, benchmarking specific activities against industry
leaders, encouraging employee input to identify excess costs, increasing capacity utilization,
and improving employee productivity lead to a significant overall gain. 40