1. Chapter 5
Business-Level Strategy: Creating and Sustaining Competitive Advantages

2. Perspective: Analysis (1-4) Formation (5-8) Chapter 5
Porter’s Generic Business Strategies
Industry Life Cycles

3. Business versus Corporate
How do we compete in this business?
How do we sustain competitive advantage in this business?
Corporate
What businesses should we be in?
How can our businesses work together?

4. I. Generic Strategies Definition Overall cost leadership Pros/Cons
Value-chain activities
Target Customer(s)
Businesses: (McDonald’s? Wal-Mart? Xerox? Rolex? Google? Apple? Target?)
Overall cost leadership
Differentiation
Focus
Combination

5. Three Generic Strategies
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6. 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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7. 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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8. Examples 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
Family Dollar
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9. Competitive Advantage and Business Performance
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10. Overall Cost Leadership
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
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11. 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 declines as output increases in most industries
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12. 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
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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
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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
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15. Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership
Primary Activities
Inbound Logistics
Marketing and Sales
Effective layout of receiving dock operations
Purchase of media in large blocks.
Sales force utilization is maximized by territory management.
Operations
Service
Effective use of quality control inspectors to minimize rework.
Thorough service repair guidelines to minimize repeat maintenance calls.
Use of single type of vehicle to minimize repair costs.
Outbound Logistics
Effective utilization of delivery fleets

16. Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership
Support Activities
Firm Infrastructure/ Gen Admin
Technology Development
Few management layers to reduce overhead costs.
Standardized accounting practices to minimize personnel required.
Effective use of automated technology to reduce scrappage rates.
Expertise in process engineering to reduce manufacturing costs.
Human Resource Management
Procurement
Minimize costs associated with employee turnover through effective policies.
Effective orientation and training programs to maximize employee productivity.
Effective policy guidelines to ensure low-cost raw materials (with acceptable quality levels).
Shared purchasing operations with other business units.

17. Differentiation
Creating something unique and valuable, perceived industrywide
Prestige or brand image
Technology
Innovation
Features
Customer service
Dealer network
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18. 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
Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique
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19. Differentiation: Improving Competitive Position
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
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20. Potential Pitfalls of Differentiation Strategies
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
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21. Ex 5.5 Value-Chain Activities: Examples of Differentiation
Primary Activities
Inbound Logistics
Outbound Logistics
Superior material handling operations to minimize damage.
Quick transfer of inputs to manufacturing process.
Accurate and responsive order processing.
Effective product replenishment to reduce customer inventory.
Operations
Marketing and Sales
Flexibility and speed in responding to changes in manufacturing specifications.
Low defect rates to improve quality.
Creative and innovative advertising programs.
Fostering of personal relationship with key customers.
Service
Rapid response to customer service requests.
Complete inventory of replacement parts and supplies.

22. Ex 5.5 Value-Chain Activities: Examples of Differentiation
Support Activities
Firm Infrastructure/ Gen Admin
Superior MIS: To integrate value-creating activities to improve quality.
Facilities that promote firm image.
Widely respected CEO enhances firm reputation.
Human Resource Management
Programs to attract talented engineers and scientists.
Provide training and incentives to ensure a strong customer service orientation.
Technology Development
Superior material handling and sorting technology.
Excellent applications engineering support.
Procurement
Purchase of high-quality components to enhance product image.
Use of most prestigious outlets.

23. 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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24. 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
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25. 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
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26. 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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27. 2.11 World Auto Industry: Strategic Groups
Ferrari
Lamborghini
Porsche
High
Mercedes
BMW
Toyota
Ford
General Motors
Chrysler
Honda
Nissan
Price
Hyundai
Kia
Chery
Geely
Tata Motors
Low
Low
Breadth of Product Line
High

28. 3 Combination Approaches
1. Automated and flexible manufacturing systems
Mass customization
Andersen Windows, Dell
MC: a firm’s ability to manufacture unique products in small quantities at low cost.
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29. 3 Combination Approaches
2. Exploiting the profit pool concept for competitive advantage
Value-chain, supply-chain
Automobile Industry (cross-over with corporate-level)
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30. U.S. Automobile Industry’s Profit Pool
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31. 3 Combination Approaches
3. Coordinating the “extended” value chain by way of information technology
Value-chain, supply-chain
Walmart
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32. Combination Approaches: TTKIM
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

33. Combination Strategies: Improving Competitive Position
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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34. 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
Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain
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35. Internet-Enabled Strategies
Low-Cost Leaders
Differentiation
Focus
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36. Internet-Enabled Low Cost Leader Strategies
Online bidding and order processing:
eliminating the need for sales calls and
minimizing sales force expenses
Online purchase orders are making many transactions paperless, thus reducing the costs of procurement and paper.
Direct access to progress reports and the ability for customers to periodically check work in progress is minimizing rework.
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37. Internet-Enabled Low Cost Leader Strategies (continued)
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.
Imitation
Overemphasis on one business activity
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38. Internet-Enabled Differentiation Strategies
Internet-based knowledge management systems that link all parts of the organization are:
shortening response times
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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39. Internet-Enabled Differentiation Strategies (continued)
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.
Ability to compare easily
Un-valued uniqueness
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40. 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.
Virtual organizing and online “officing” are being used to minimize firm infrastructure requirements.
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41. Internet-Enabled Focus Strategies (continued)
Procurement technologies that use Internet software to match buyers and sellers are highlighting specialized buyers and drawing attention to smaller suppliers.
Correctly assessing the size
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42. Strategic Implications
Industry Life Cycle
Strategic Implications

43. II. Industry Life-Cycle Stages: Strategic Implications
refers to the stages of introduction, growth, maturity, and decline that 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
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44. Stages of the Industry Life Cycle
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45. 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
Examples
Electric vehicles, Solar Panels
HDTV (?)
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46. 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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47. Industry Life-Cycle Strategies
The Growth Stage is:
Characterized by strong increases in sales
Attractive to potential competitors
Examples
HDTV (?), PDAs(?)
E-readers, Tablets
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48. Industry Life-Cycle Strategies
For the Growth Stage:
Brand recognition
Differentiated products
Financial resources to support value-chain activities
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49. 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
Examples
Beer, Automobiles, Televisions
Proctor & Gamble, Unilever
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50. Industry Life-Cycle Strategies
For the Maturity Stage:
Efficient manufacturing operations and process engineering
Low costs (customers become price sensitive)
Options: Reverse, Breakaway
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51. Industry Life-Cycle Strategies
In the Decline Stage:
Industry sales and profits begin to fall
Strategic options become dependent on the actions of rivals
Examples
Typewriters
Cassette tapes (video & audio)
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52. Strategies in the Decline Stage
For the Decline Stage
Maintaining
Exiting the market
Harvesting
Consolidation
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53. 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
Example
FORD
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