Chapter 5 Business-Level Strategy: Creating and Sustaining Competitive Advantages McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

After studying this chapter, you should have a good understanding of: Learning Objectives After studying this chapter, you should have a good understanding of: The central role of competitive advantage The three generic strategies—overall cost leadership, differentiation, and focus How the successful attainment of generic strategies can improve a firm’s relative power vis á vis the five forces The pitfalls managers must avoid in striving to attain generic strategies How firms can effectively combine the generic strategies of overall cost leadership and differentiation The importance of considering the industry life cycle to determine a firm’s business-level strategy

Uniqueness Perceived By the Customer Particular Segment Only The Three Generic Strategies Exhibit 5.1 COMPETITIVE ADVANTAGE Uniqueness Perceived By the Customer Low Cost Position Differentiation Overall Cost Leadership STRATEGIC TARGET Industrywide Particular Segment Only Focus Source: Adapted from Porter, M.E. 1980. Competitive Strategy, New York: Free Press, page 39.

Competitive Advantage and Business Performance Exhibit 5.2 Competitive Advantage and Business Performance Performance Return on Investment (%) 35.5 32.9 30.2 17.0 23.7 17.8 Sales Growth (%) 15.1 13.5 13.5 16.4 17.5 12.2 Gain in Market Share (%) 5.3 5.3 5.5 6.1 6.3 4.4 Sample Size 123 160 100 141 86 105 Stuck-in-the- Middle Cost Focus Differentiation Focus Cost Differentiation Differentiation and Cost Competitive Advantage

Value Chain Activities: Examples of Overall Cost Leadership Exhibit 5.3 Value Chain Activities: Examples of Overall Cost Leadership Few management layers to reduce overhead costs Firm Infra-structure Standardized accounting practices to minimize personnel required Human Resource Management Minimize costs associated with employee turnover through effective policies Effective orientation and training programs to maximize employee productivity Technology development Effective use of automated technology to reduce scrappage rates Expertise in process engineering to reduce manufacturing costs Procurement Effective policy guidelines to ensure low cost raw materials (with acceptable quality levels) Shared purchasing operations with other business units Efficient layout of receiving dock operations Effective use of quality control inspectors to minimize rework on the final product Effective utilization of delivery fleets Purchase of media in large blocks Sales force utilization is maximized by territory management Thorough service repair guidelines to minimize repeat maintenance calls Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Use of single type of repair vehicle to minimize maintenance costs Margin Source: Adapted from Porter, M.E. 1985. Competitive Advantage, New York: Free Press. Source: Adapted from Porter, M.E. 1985. Competitive Advantage, New York: Free Press.

Comparing Experience Curve Effects Exhibit 5.4 $1 90¢ 81¢ 72.9¢ 80¢ 90% original cost Cost per Unit 70¢ 64¢ 51.2¢ 80% original cost 60¢ 49¢ 34.3¢ 70% original cost 36¢ 21.6¢ 64% original cost 0 units 1 million units 2 million units 4 million units Cumulative Volume

Value Chain Activities: Examples of Differentiation Exhibit 5.5 Value Chain Activities: Examples of Differentiation Firm Infra-structure 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 Margin Technology Development Superior material handling and sorting technology Excellent applications engineering support Purchase of high quality components to enhance product image Use of most prestigious outlets Procurement Superior material handling operations to minimize damage Quick trans- fer of inputs to manufacturing process Flexibility and speed in responding to changes in manufacturing specifications Low defect rates to improve quality Accurate and responsive order processing Effective product replenishment to reduce customer’s inventory Creative and innovative advertising programs Fostering of personal relationship with key customers Rapid response to customers’ service requests Complete inventory of replacement parts and supplies Margin Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Source: Adapted from Porter, M.E. 1985. Competitive Advantage, New York: Free Press.

Some Bases for Differentiation BMW automobiles Brand Image Nokia cell phones Innovation Honda Goldwing motorcycles Features Marantz stereo components Technology Nordstrom department stores Customer service

The Erosion of Product and Service Differentiation Exhibit 5.6 The Erosion of Product and Service Differentiation What are the raw commodities? Now Next? Personal computers Servers Hotel rooms Car rentals Legal services Credit Police cars Generic drugs Ocean shipping Insurance Bandwidth Pharmacy Services Network hosting Data-storage capacity Manufacturing capacity Multibillion-dollar infrastructure projects Source: Adapted from Colvin, G. 2000. You could be selling soybeans. Fortune: November 13:80.

The U.S. Auto Industry’s Profit Pool Exhibit 5.7 25% 20 15 10 5 Operating margin 100% Auto manufacturing New car dealers Used car dealers Auto loans Leasing Warranty Gasoline Auto insurance Service repair Aftermarket parts Auto rental Share of industry revenue Source: Gadiesh, O. & Gilbert, J.L. 1998. Profit pools: A fresh look at strategy. Harvard Business Review, 76(3): 144.

Combination Strategies Integrated Low Cost and Differentiation Succeeds at melding various generic strategies About Value Stuck-in-the-Middle Fails at melding various generic strategies Unclear basis for differentiation

Stages of the Industry Life Cycle Unit Sales Profits Stages of the Industry Life Cycle Exhibit 5.8 Overall Cost Leadership Focus Differentiation Overall Cost Leadership Differentiation Generic Strategies Consolidate, Maintain, Harvest, or Exit Defend Market Share and Extend Product Life Cycles Create Consumer Demand Increase Market Awareness Overall objective General Management and Finance Production Sales and Marketing Research and Development Major functional area(s) of concern Low High Low to Moderate Emphasis on process design Very High Emphasis on product design Changing Very Intense Increasing Intensity of competition Few Many Some Very Few Number of segments Negative Very Large Market growth rate DECLINE GROWTH INTRODUCTION STAGE MATURITY FACTOR

Timing of Market Entry Timing Risk Factors First Mover Brand Loyalty Difficulty of Imitation Second Mover Ability to Improve Product Barriers to Entry Late Mover Market Growth