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

3. 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

4. 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 Competitive Strategy, New York: Free Press, page 39.

5. Competitive Advantage and Business Performance
Exhibit 5.2
Competitive Advantage and Business Performance
Performance
Return on Investment (%)
Sales Growth (%)
Gain in Market Share (%)
Sample Size
Stuck-in-the- Middle
Cost Focus
Differentiation Focus
Cost
Differentiation
Differentiation and Cost
Competitive Advantage

6. 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 Competitive Advantage, New York: Free Press.
Source: Adapted from Porter, M.E Competitive Advantage, New York: Free Press.

7. 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

8. 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 Competitive Advantage, New York: Free Press.

9. 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

10. 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 You could be selling soybeans. Fortune: November 13:80.

11. 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 Profit pools: A fresh look at strategy. Harvard Business Review, 76(3): 144.

12. 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

13. 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

14. 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