3 After studying this chapter, you should have a good understanding of: Learning ObjectivesAfter studying this chapter, you should have a good understanding of:The central role of competitive advantageThe three generic strategies—overall cost leadership, differentiation, and focusHow the successful attainment of generic strategies can improve a firm’s relative power vis á vis the five forcesThe pitfalls managers must avoid in striving to attain generic strategiesHow firms can effectively combine the generic strategies of overall cost leadership and differentiationThe 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 StrategiesExhibit 5.1COMPETITIVE ADVANTAGEUniqueness Perceived By the CustomerLow Cost PositionDifferentiationOverallCost LeadershipSTRATEGIC TARGETIndustrywideParticular Segment OnlyFocusSource: Adapted from Porter, M.E Competitive Strategy, New York: Free Press, page 39.
5 Competitive Advantage and Business Performance Exhibit 5.2Competitive Advantage and Business PerformancePerformanceReturn on Investment (%)Sales Growth (%)Gain in Market Share (%)Sample SizeStuck-in-the- MiddleCost FocusDifferentiation FocusCostDifferentiationDifferentiation and CostCompetitive Advantage
6 Value Chain Activities: Examples of Overall Cost Leadership Exhibit 5.3Value Chain Activities: Examples of Overall Cost LeadershipFew management layers to reduce overhead costsFirm Infra-structureStandardized accounting practices to minimize personnel requiredHuman Resource ManagementMinimize costs associated with employee turnover through effective policiesEffective orientation and training programs to maximize employee productivityTechnology developmentEffective use of automated technology to reduce scrappage ratesExpertise in process engineering to reduce manufacturing costsProcurementEffective policy guidelines to ensure low cost raw materials (with acceptable quality levels)Shared purchasing operations with other business unitsEfficient layout of receiving dock operationsEffective use of quality control inspectors to minimize rework on the final productEffective utilization of delivery fleetsPurchase of media in large blocksSales force utilization is maximized by territory managementThorough service repair guidelines to minimize repeat maintenance callsInbound LogisticsOperationsOutbound LogisticsMarketing and SalesServiceUse of single type of repair vehicle to minimize maintenance costsMarginSource: 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$190¢81¢72.9¢80¢90% original costCost per Unit70¢64¢51.2¢80% original cost60¢49¢34.3¢70% original cost36¢21.6¢64% original cost0 units1 million units2 million units4 million unitsCumulative Volume
8 Value Chain Activities: Examples of Differentiation Exhibit 5.5Value Chain Activities: Examples of DifferentiationFirm Infra-structureSuperior MIS – To integrate value-creating activities to improve qualityFacilities that promote firm imageWidely respected CEO enhances firm reputationHuman Resource ManagementPrograms to attract talented engineers and scientistsProvide training and incentives to ensure a strong customer service orientationMarginTechnology DevelopmentSuperior material handling and sorting technologyExcellent applications engineering supportPurchase of high quality components to enhance product imageUse of most prestigious outletsProcurementSuperior material handling operations to minimize damageQuick trans- fer of inputs to manufacturing processFlexibility and speed in responding to changes in manufacturing specificationsLow defect rates to improve qualityAccurate and responsive order processingEffective product replenishment to reduce customer’s inventoryCreative and innovative advertising programsFostering of personal relationship with key customersRapid response to customers’ service requestsComplete inventory of replacement parts and suppliesMarginInbound LogisticsOperationsOutbound LogisticsMarketing and SalesServiceSource: Adapted from Porter, M.E Competitive Advantage, New York: Free Press.
9 Some Bases for Differentiation BMW automobilesBrand ImageNokia cell phonesInnovationHonda Goldwing motorcyclesFeaturesMarantz stereo componentsTechnologyNordstrom department storesCustomer service
10 The Erosion of Product and Service Differentiation Exhibit 5.6The Erosion of Product and Service DifferentiationWhat are the raw commodities?NowNext?Personal computersServersHotel roomsCar rentalsLegal servicesCreditPolice carsGeneric drugsOcean shippingInsuranceBandwidthPharmacy ServicesNetwork hostingData-storage capacityManufacturing capacityMultibillion-dollar infrastructure projectsSource: Adapted from Colvin, G You could be selling soybeans. Fortune: November 13:80.
11 The U.S. Auto Industry’s Profit Pool Exhibit 5.725%2015105Operating margin100%Auto manufacturingNew car dealersUsed car dealersAuto loansLeasingWarrantyGasolineAuto insuranceService repairAftermarket partsAuto rentalShare of industry revenueSource: 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 DifferentiationSucceeds at melding various generic strategiesAbout ValueStuck-in-the-MiddleFails at melding various generic strategiesUnclear basis for differentiation
13 Stages of the Industry Life Cycle Unit SalesProfitsStages of the Industry Life CycleExhibit 5.8Overall Cost LeadershipFocusDifferentiation Overall Cost LeadershipDifferentiationGeneric StrategiesConsolidate, Maintain, Harvest, or ExitDefend Market Share and Extend Product Life CyclesCreate Consumer DemandIncrease Market AwarenessOverall objectiveGeneral Management and FinanceProductionSales and MarketingResearch and DevelopmentMajor functional area(s) of concernLowHighLow to ModerateEmphasis on process designVery HighEmphasis on product designChangingVery IntenseIncreasingIntensity of competitionFewManySomeVery FewNumber of segmentsNegativeVery LargeMarket growth rateDECLINEGROWTHINTRODUCTIONSTAGEMATURITYFACTOR
14 Timing of Market Entry Timing Risk Factors First Mover Brand Loyalty Difficulty of ImitationSecond MoverAbility to Improve ProductBarriers to EntryLate MoverMarket Growth