MODULE in

STRATEGIC MANAGEMENT

Department of Entrepreneurship, Human Resource Devt Mgmt, & Marketing

School of Accountancy, Management, Computing & Information Studies

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 “The early bird may
get the worm, but the
second mouse gets
the cheese.”
-Unknown-
STRAMA

COURSE LEARNING OUTCOMES

At the end of the module, you should be
able to:
1. Describe the central role of
competitive advantage in the study
of strategic management and the
three generic strategies: overall cost
leadership, differentiation, and focus
2. Analyze how the successful
attainment of generic strategies can
improve a firm’s relative power vis-a-
vis the five forces that determine an
industry’s average profitability
3. Realize the pitfalls managers must
avoid in striving to attain generic
strategies
4. Evaluate how firms can effectively
combine the generic strategies of
STRATEGIC overall cost leadership and
MANAGEMENT differentiation
5. Describe the factors determine the
sustainability of a firm’s competitive
advantage
6. Discuss 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
7. Analyze the need for turnaround
strategies that enable a firm to
reposition its competitive position in an
industry

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 “The best game plan in the world never
blocked or tackled anybody.”
-Vince Lombardi-

Module 5: Business-Level Strategy:

Creating and Sustaining Competitive Advantages

Discussion Outline

The first four modules cover the first of the ADA process which is the strategy analysis
part. This 5th Module kicks off the content for the decision/strategy formulation part up until
Module 8. In other words, in the previous modules, we have focused on the analysis of the
external (Module 2) and internal (Modules 3 and 4) of the firm. In this module 5, the
emphasis is on the formulation of strategies at the business level. Since the business level is
where competition takes place, a firm’s performance at this level is vital to its overall
success. This module is divided into two major sections:

1. The first section draws on Michael Porter’s framework of generic strategies—

overall cost leadership, differentiation, and focus. We describe each of these
strategies and provide examples of firms that have successfully used them to
outperform rivals. Then, we suggest some of the pitfalls that managers must
avoid to successfully pursue these strategies. We include a discussion of how
firms may combine generic strategies. We also discuss whether a strategy
can be sustainable—using the example of a manufacturing firm. We close
with a discussion of how competitive strategies should be revised and
redeployed in light of changes caused by the Internet and digital
technologies.

2. The second section addresses an important contingency in the effective use of

business-level strategies—industry life cycles. The stages of the life cycle—
introduction, growth, maturity, and decline—have important implications for
a firm’s relative emphasis on functional capabilities and value-creating
activities. It also discusses “turnaround strategies” which enable a firm to
reposition its competitive position in an industry and how such strategies can
lead to sustainable advantages.

The introductory case in LEARNING FROM MISTAKES of the 8th edition of the Strama
book of Dess, Mcnamara et al, it discusses the rise and fall of Crumbs Bake Shop and the
difficulty the firm had building a sustainable position as a differentiated cupcake provider.
Just like so many pastry or dessert place out there, one must present a unique selling
proposition for a product that one sells to attain a sustainable competitive advantage.

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  Discussion Question 1: What lessons can we take from Crumbs Bake Shop’s
experience?

The challenges the firm faces have grown out of factors both within the firm as well
as in its external environment. Inside the firm, the firm’s quest for growth to leverage the
value of its brand may have lessened the degree to which its products will be seen as
highly differentiated. First, when the bakery started, its founder, Jason Bauer, could oversee
all steps in the bakery product, but as the firm grew rapidly from a single outlet to 80
bakeries, his ability to ensure that the quality of the product as well as the quality of the
customer service would remain universally high was greatly reduced. Additionally, it may
be that after the firm went public and sold stock to investors on the stock market, it faced
increasing pressures to be profitable, which may have resulted in cost cutting efforts that
reduced its ability to produce as high quality a product or as high a level of customer
service. Finally, differentiation is about customer perception. Originally, the bakery was
seen as the quintessential New York experience due to its inclusion in the Sex and the City.
But as it grew nationally, it may have lost some of its cache as an exclusive to New York
product.

While the firm’s actions likely undercut the value of its differentiation position, it may
have been more greatly affected by external factors. The cupcake craze was a classic fad
product phenomenon. Buoyed by inclusion in pop culture shows, such as Sex and the City,
the jumbo cupcake became the must-have decadent product in the early- to mid-2000s,
but as the fad ran its course, customer demand for expensive and expansive cupcakes
predictably declined.

Overall, this case takes us to an awareness and appreciation of how both a firm’s
actions and its environment can interact to undercut the value of a firm’s strategic
position.

 Discussion Question 2: What actions can Crumbs take to increase its chances of
survival in a market that no longer puts a premium on high-end cupcakes?

I. Types of Competitive Advantage and Sustainability

Michael Porter presented three generic strategies that firms can use to overcome
the five forces and attain competitive advantage. The first, overall cost leadership, is based
on creating a low-cost position relative to one’s peers. The second, differentiation, requires
that the firm (or business unit) create products and/or services that are unique and valued.
Third, firms following a focus strategy must direct their attention (or “focus”) toward narrow
product lines, buyer groups, or geographical markets. Firms emphasizing a focus strategy
must attain advantages either through differentiation or a cost leadership approach.

TABLE 1 illustrates these strategies on two dimensions: competitive advantage and

markets served.

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 TABLE 1. Three Generic Strategies

 Discussion Question 3: What are some examples of businesses that follow each of
the four strategies in TABLE 1? Why are they successful (or unsuccessful)?

It is also useful to take note that a variety of research has supported the notion that
firms that identify with one or more forms of competitive advantage typically outperform
those that do not. TABLE 2 provides evidence that businesses that combined multiple forms
of competitive advantage were more successful than those using only a single form. And
the lowest performers where those that were “stuck in the middle”; that is, they did not
identify with a single type of strategy.

TABLE 2. Competitive Advantage and Business Performance

 Discussion Question 4: What are some examples of firms that have successfully
combined multiple strategies? Does this seem to help their performance? Why?
Why not?

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 Deciding what types of competitive advantage to select requires the making of
hard choices (a point driven home by Michael Porter in his 1996 Harvard Business Review
article: What is strategy?) In effect, a firm cannot be “all things to all people.”

A. Overall Cost Leadership

Cost leadership requires a tight set of interrelated tactics such as aggressive

construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience,
tight cost and overhead control, avoidance of managerial customer accounts, and cost
minimization in all activities in a firm’s value chain.

At this stage, examine and apply the value-chain concept (from Module 3) to
provide examples of how a firm can attain an overall cost leadership strategy in its primary
and support activities. Check out the likes of ALDi store in Europe, Southwest Airline and
Cebu Pacific in the Philippines.

 Discussion Question 5: What are some examples of firms that exemplify the items
(refer to TABLE 3 below) of cost leadership? How does it improve the firm’s
performance?

TABLE 3. Value Chain Activities: Examples of Overall Cost-Leadership

Support Activities
Firm Infrastructure
• Few management layers to reduce overhead costs
• 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
Primary Activities
Inbound Logistics
• Effective layout of receiving dock operations
Operations
• Effective use of quality control inspectors to minimize rework
Outbound Logistics
• Effective utilization of delivery fleets
Marketing and Sales
• Purchase of media in large blocks
• Sales force utilization is maximized by territory management
Service
• Thorough service repair guidelines to minimize repeat maintenance calls
• Use of single type of vehicle to minimize repair costs

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 The SUPPLEMENT/ EXTRA EXAMPLE below discusses how a firm (Spirit Airlines) has
been able to compete successfully in an intensely competitive industry by means of an
effective cost leadership strategy. It serves to show how actions involve many primary and
support activities in the value chain.

 Extra Example: Spirit Airlines’ Successful Cost Leadership Strategy

Spirit Airlines is a controversial and successful firm in the highly competitive and often
unprofitable airlines industry. From 2012 to 2014, Spirit Airlines saw its sales grow by 46%, and
its profits by 108%. Additionally, its stock grew in value by over 100% from June 2013 to June
2015. However, staying successful requires attention to every aspect of operations to
continually squeeze out costs. This is especially true since Spirit’s tickets average 30% less
than its competition’s.

Below are some examples of how it looks at a wide variety of value-chain activities in its
efforts to cut costs:

• It keeps its firm infrastructure as small as possible. It operates from a simple, single
story corporate headquarters building. Additionally, there is no receptionist at
the headquarters to welcome visitors. Ben Baldanza, the firm’s CEO, comments
that he only buys pens for the office when needed and instructs employees to
pick up pens at conferences to take back the headquarters.
• It has limited marketing efforts, spending only $2.5 million a year on advertising.
• It flies only two models of airplane, the Airbus 319 and 320, saving costs on
employee training and tools.
• It has set up fast turnaround routines, often taking only 30 minutes to move from the
landing of one flight to the takeoff of the next.
• It stocks water and food onto its planes only once a day.
• Spirit removed the reclining mechanism on the seats on its A320 planes allowing
them to move the rows closer together, increasing the capacity of the plane to
178 seats, which is up to 40 seats more than its competitors.
• It removed in-flight magazines from the planes to cut the weight of the plane and
save fuel.
• It charges customers for both checked and carry-on luggage. This serves as a
source of revenue, but the airline has also found its flyers carry less luggage than
passengers on other airlines, reducing plane weight and saving fuel.

While Spirit has grown and experienced strong profitability, it was the lowest ranked airline
in 2015’s American Customer Satisfaction Index of U.S. based airlines.

Source: Nicas, J. 2012. A stingy Spirit lift’s airline’s profits. WSJ.com. May 11: np; Vasel, K.
2015. America’s worst airline for customer satisfaction is… cnnmoney.com. April 21: np;
cnnmoney.com

It is important to point out that in order to enjoy above-average performance, firms

following a cost leadership position must attain parity or proximity on the basis of
differentiation relative to competitors. Proximity to differentiation means that the price

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 discount necessary to get an acceptable market share does not offset a cost leader’s cost
advantage.

1. Overall Cost Leadership: Improving Competitive Position

vis-à-vis the Five Forces

After discussing how an overall cost leadership position improves a firm’s position vis-
à-vis the five forces (Module 2).

At this point, it might be helpful to review the example of Spirit Airlines discussed
above. After reviewing this example, ask:

 Discussion Question 6: How does Spirit’s cost leadership strategy improve its
competitive position vis-à-vis the five forces?

Discussion Question 7: Is Spirit able to achieve parity on differentiation?

2. Potential Pitfalls of Overall Cost Leadership Strategies

This section addresses five pitfalls of following an overall cost leadership strategy:

• Too much focus on one or a few value-chain activities;

• Increase in the cost of the inputs on which the advantage is based;
• The strategy is imitated too easily;
• A lack of parity on differentiation;
• Reduced flexibility;
• Obsolescence of the basis of cost advantage.

The SUPPLEMENT/EXTRA EXAMPLE below describes how TJX is staking out a strong
position in discount retailing.

 Extra Example: Winning in the Tough Retail Market with an Overall Cost Leadership
Strategy

This firm is arguably the most successful low-cost retailer in the United States. Its earnings-
per-share has increased for 18 consecutive years. Its sales have grown by over 50% over
the last six years, rising to nearly $30 billion, and its profits topped $2B in 2015. But the firm
isn’t Walmart or Target. It is TJX, the parent firm for T.J. Maxx, Marshalls, and HomeGoods. In
the words of industry consultant and analyst Howard Davidowitz, “It’s the most consistent,
most powerful apparel retailer in the United States.”

TJX has a relatively simple but powerful model to succeed in the competitive apparel
business. First, it focuses on moving inventory through the firm and out its doors. TJX turns its
inventory over every 55 days, compared to 85 for its competitors. It quickly moves its orders
through its distribution centers and out to its stores. It puts product right out to its racks and

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 shelves on the selling floor. Stores have very little backroom storage. As a result, TJX often
sells its merchandise before the firm has even paid its vendors.

Second, the firm emphasizes value with the products it sells. Rather than looking to sell the
cheapest merchandise, it looks to buy good merchandise at a steeply discounted price.
Shoppers at its chains may find low-priced graphic t-shirts, but they also may find a Stella
McCartney dress that would retail for $1250 at a mainline department store discounted to
$499 at T.J. Maxx.

Third, the firm extensively trains its buyers, builds their expertise in very narrow product
areas, and gives them autonomy to make large purchases when they find attractive deals.
Rather than buying for an entire season, TJX buyers search for bargains on a weekly basis.
The firm’s goal is to purchase products as late into the buying season as possible so that
they can turn the inventory quickly and get a better sense of fashion trends. Additionally,
rather than paying a wholesale price and then doubling it for the final retail price, TJX
buyers estimate what price point TJX needs to be at in the retail store and then work
backwards to a purchase price they are willing to pay to a supplier.

Fourth, it serves as a reliable and discrete customer for apparel manufacturers. Unlike
department stores that can be fickle and cancel or change the quantity of orders when
product sales fall short of their projections or require advertising and markdown allowance
from manufacturers, TJX offers straight forward and guaranteed deals with suppliers. With its
scale and ordering processes, TJX can say manufacturers’ favorite phrase, “We’ll take it all”
and rarely looks to change the terms of a deal after it is initially made. Also, the firm doesn’t
advertise the brands it carries, leaving name brands, such as Ralph Lauren, more willing to
work with the firm. These choices by TJX make it a favorite customer for apparel firms,
resulting in more favorable pricing for the firm.

Sources: Kowitt, B. 2014. Is T.J. Maxx the best retail store in the land? Fortune.com. July 24:
np; finance.yahoo.com.

 Discussion Question 8: Do you think TJX will be able to sustain its position over time?
What are the greatest challenges the firm faces?

B. Differentiation

As the name implies, differentiation consists of creating differences in the firm’s

products or service offerings by creating something that is perceived industry-wide as
being unique and valued by customers. Differentiation can take many forms, such as
prestige or brand image, technology, innovation, features, customer service, or dealer
networks.

The SUPPLEMENT/EXTRA EXAMPLE below provides what many may consider an

“extreme case” of differentiation—a cellphone that can cost in excess of $10,000!

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  Extra Example: Why Would You Pay $10,000 or More for a Cellphone?

How much are you willing to pay for a cellphone? More than a good used car? As much
as a full year of tuition? That’s what Vertu, a luxury electronics manufacturer, asks its
customers to pay, and many do. Over the last decade, the firm has sold over 320,000 of its
luxury phones and generated $342 million in sales in 2011. Its phones start at $9600 and are
hand crafted, including the titanium plate covering the SIM that bears the engraved name
of the craftsman who constructed the phone. Customers can even travel to the firm’s
manufacturing facility in England to see a craftsman build their phones. Customers can
also customize their phones, having the phones finished with calf leather or alligator skin
and even have the phone encrusted in diamonds. Some of Vertu’s phones have cost as
much as $300,000.

Source: Vella, M. 2013. The Ultra-Luxe Phone. Fortune.com. April 29: np.

 Discussion Question 9: Why are customers attracted to Vertu’s phones?

Discussion Question 10: In general, what are the pros and cons of marketing high-
end luxury products? Are strategies based on the sale of such products sustainable?

Discussion Question 11: What are some examples of other companies that have
successfully implemented a strategy of extreme differentiation?

Apple is a company admired by its customers and its rivals for its ability to come up
with an unending stream of highly innovative products that combine user friendliness,
aesthetic design, and uncommon functionality. The SUPPLEMENT/EXTRA EXAMPLE below
provides comments by leaders of three different companies explaining why they admire
Apple.

 Extra Example: Why Corporate Leaders Admire Apple

James A. Skinner, CEO, McDonald’s: Apple moves faster than anyone in its industry, with
the ability to innovate quickly and constantly. And if it finds success, it never stays satisfied.

Kris Gopalakrishnan, CEO, Infosys Technologies: From Apple notebooks to iPods and Apple
stores to iTunes, Apple consistently demonstrates it understands and, more important,
anticipates customer wants and needs.

Craig R. Barrett, Chairman, Intel: Brings out new, exciting products by combining excellent
design, integrated offerings (hardware, software, and content), and strong marketing.
Apple continually demonstrates the ability to change market dynamics and gain
significant market share with new product offerings.

Source: Anonymous. 2009. There is no more normal. Businessweek. April 20: 56.

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  Discussion Question 12: Do you agree with the above comments? Has the death of
Steve Jobs and the changes in leadership at Apple lessened its ability to lead
markets and develop market changing new products?

TABLE 4 applies the value chain concept to illustrate how companies may
differentiate themselves in primary and support activities.

TABLE 4. Value Chain Activities: Examples of Differentiation

Support Activities
Firm Infrastructure
• Support MIS – to integrate value creating activities to improve quality
• Facilities’ that promote firm image
• Widely respected CEO who enhances firm reputation
Human Resource Management
• Programs to attract talented engineers and scientist
• Provision of 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
Primary Activities
Inbound Logistics
• Superior material handling operations to minimize damage
• Quick transfer of inputs to manufacturing process
Operations
• Flexibility and speed in responding to changes in manufacturing specifications
• Low defect rates to improve quality
Outbound Logistics
• Accurate and responsive order processing
• Effective product replenishment to reduce customer inventory
Marketing and Sales
• Creative and innovative advertising programs
• Fostering of personal relationships with key customers
Service
• Rapid response to customer service requests
• Complete inventory of replacement parts and supplies

 Discussion Question 13: What are some examples of companies that have
successfully incorporated some of the elements in TABLE 4 into their differentiation
strategy?

Discussion Question 14: What are some examples of companies that have been
able to combine/integrate some of the items in TABLE 4?

As with overall cost leadership strategies, parity on the other dimension of strategy
becomes very important. That is, firms following differentiation strategies must strive to
attain a degree or level of parity on cost.

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 There are many examples of firms that have successfully implemented a
differentiation strategy. These include such firms as Hotel Monaco and BMW automobiles
(image and brand identification) and Nordstrom department stores (customer service). We
also use Porsche as an example of how differentiators can look to differentiate on key
dimensions that customers value but look to manage costs in areas in which customers put
less emphasis.

Still, differentiators must be clear to not send mixed signals to customers about
whether their products or services are truly differentiated.

Another important aspect of differentiation in today’s markets is speed, or

alternatively, quick response to changes in the marketplace/customer demands. You can
provide examples such as Fed Ex to show how companies can increase their competitive
position through speed and quick response to customers. (This may also provide another
example of how a seemingly “commodity” service can be differentiated and premium
prices may be charged to customers.) Think of what other companies may use speed as a
means of differentiation.

1. Differentiation: Improving Competitive Position vis-à-vis the Five Forces.

We discuss how a differentiation strategy helps a firm to improve its position vis-à-vis
Porter’s five forces. We introduce the example of Lexus to illustrate this point.

2. Potential Pitfalls of Differentiation Strategies

Next, we address some of the pitfalls of a differentiation strategy:

• 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

 Discussion Question 15: What are some examples of firms that achieved a level of
differentiation only to see it eroded? What pitfalls did these firms fall prey to?

Even if a firm has what may appear to be a highly differentiated position, it may still
struggle to be highly successful in the market place. You may be familiar with Bang &
Olufsen, a well-regarded manufacturer of high-end consumer electronics. While B&O has
been a viable competitor in its markets, it has found it difficult to translate creative design
and technologically capable products into strong market success. The firm has
experienced flat sales over the past four years and lost money in both 2013 and 2014.

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 C. Focus

The third generic strategy is based on the choice of a narrow competitive scope
within an industry. The focuser attains competitive advantages by dedicating itself to a
segment or group of segments and tailors its strategy to serving them.

 Discussion Question 16: What are some companies that have successfully
implemented a focus strategy?

The focus strategy, as indicated in TABLE 1 above, has two variants. In a cost focus,
a firm strives to create a cost advantage in its target segment. In a differentiation focus, a
firm seeks to differentiate in its target market.

We provide an example of a successful niche firm in a service industry (LinkedIn) to

demonstrate this strategy.

1. Focus: Improving Competitive Position vis-à-vis the Five Forces

An effective focus strategy can improve a firm’s position with regard to the industry’s
five forces as shown by the example of LinkedIn.

The SUPPLEMENT/ EXTRA EXAMPLE below points out how a consulting firm enjoys a
successful differentiation focus strategy. It operates in two dissimilar fields, is able to provide
its customers with superior services, by customizing its offerings and by forecasting future
industry trends.

 Extra Example: Customized Consulting

Dr. Paul Eckbo is the Chairman of Marsoft, a shipping consultancy, and Preferred Global
Health, an advisory health service specializing in critical illness. He constantly searches for
more effective ways to serve the customers of both companies.

Marsoft’s shipping customers want help in timing their decisions, and for this, they need very
good forecasts of the factors that affect shipping prices, such as levels of exports and
needs for raw materials. But rather than providing relatively inexpensive reports on business
cycles to shipping companies and/or banks, Eckbo has been advocating how “cycle
management” can be broadened to include not only developments within shipping
market cycles but also financial considerations, potential future regulatory changes that
might significantly impact the industry (a past example was the introduction of the
requirement for double hulls in oil tankers), and how increasing focus on the environmental
impacts of transportation might impact the customers of shipping companies. In a sense,
Marsoft’s business is becoming more relationship-oriented, and the company is developing
stronger association with fewer customers, similar to a management consultant.

Similarly, for Preferred Global Health, Eckbo has pioneered a concept of “seeking wellness”
rather than “healing illness.” Medical tests are seen as indicators for strengthening
appropriate lifestyles, rather than as a basis for medical intervention.

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 Source: Lorange, P. 2010. Leading in turbulent times. Lessons learnt and implications for the
future. Bingley, UK: Emerald Group.

 Discussion Question 17: Would customers be willing to pay higher prices for such
customized services?

Discussion Question 18: Do you believe that this approach might fit a majority or a
minority of firms that seek consulting services? What type of firms (and what type of
industries) may be more interested?

2. Potential Pitfalls of Focus Strategies

The section closes by addressing some of the pitfalls of a focus strategy. These are:
• Erosion of cost advantages within the narrow segment.
• Even product and service offerings that are highly focused are subject to
competition from new entrants and imitators
• Focusers can become too focused to satisfy buyer needs.

D. Combination Strategies: Integrating Overall Low Cost and Differentiation

There has been a great deal of evidence—in both observation of business practice
as well as in research studies—about the strategic benefits of competitive positioning and
resultant performance implications that are inherent in combining generic strategies.

In general, the key benefit to be enjoyed by firms that successfully integrate low cost
and differentiation strategies is that it is generally harder for competitors to duplicate or
imitate them. An integrated strategy enables a firm to provide two types of value to
customers: differentiated attributes and lower prices. Furthermore, the benefits of
combining advantages can be additive, instead of merely involving tradeoffs.

We next address three approaches that combine overall cost leadership and
differentiation.

1. Automated and Flexible Manufacturing Systems

Given the advances in manufacturing technologies such as CAD/CAM, as well as

information technologies, many firms have been able to manufacture unique products in
relatively small quantities at lower costs. This is a concept known as “mass customization.”

We provide the example of Andersen Windows in Bayport, Minnesota—a $2.3 billion

manufacturer of windows for the building industry. Among the benefits are that the system
is virtually error free, the customers get exactly what they want, and the time to develop
the design and price quotation are cut by 75 percent.

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 2. Using Data Analytics

Firms are increasingly using the ability to analyze large sets of data on customer
preferences and choices to simultaneously minimize cost and increase differentiation. We
briefly discuss actions by Pepsi to leverage the power of “big data.”

3. Exploiting the Profit Pool Concept for Competitive Advantage

A profit pool can be defined as the total profits in an industry at all points along the
industry’s value chain. The potential pool of profits will be deeper in some segments of the
value chain than in others, and the depths will vary within an individual segment.

Firms can generate and capture profits by offering services related to their core
products. The key implication is that retailers often find much higher margins on their
services than with their core retailing operations.

Discussion Question 19: What are some other examples of firms that generate higher
returns by identifying and leveraging opportunities by expanding their scope of
operations to capture more of the overall profit pool?

Our discussion of the profit pool concept can be illustrated more compellingly by
emphasizing that this applies to virtually every industry. The SUPPLEMENT/EXTRA EXAMPLE
below describes how Rolls-Royce is placing more emphasis on downstream (i.e., marketing,
sales, and service) profit opportunities.

 Extra Example: Rolls-Royce Sells Services

Rolls-Royce has traditionally been a maker of airline jet engines. Given the growth in long-
haul plane orders, which use the firm’s engines in Asia, as well as rebound in jet orders in
the United States, the firm has seen improved sales and strong earnings over the last few
years. For example, its net income exceeded $1B a year in 2011, 2012, and 2013. The
company is in a strong competitive position, supplying engines to both the major jet
manufacturers, Boeing and Airbus. For some of these firms’ models, they are the sole
supplier of engines.

But Rolls-Royce is changing the way it does business to extract more of the potential profit
from the aircraft engine business. Profits used to come primarily from selling engines and
replacement parts. Now, they come from providing long-term repair and maintenance.
Rolls is steadily signing up customers for this sort of service. Margins are typically higher for
service than for hardware sales. Customers value these services since they offer peace of
mind that Rolls will keep the engines running.

However, if the economy declines again and airlines cut flights and aircraft orders, Rolls-
Royce could be in a tough position since this will cut the need for both new hardware and
services.

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 Source: Anonymous. 2010. Rolls-Royce: The jet engine maker is soaring above its troubles.
The Economist. February 5: 76; hoovers.com.

 Discussion Question 20: Can you think of other industries where firms can benefit by
applying the profit pool idea?

Discussion Question 21: By exploiting the profit pool along the industry’s value chain,
is Rolls-Royce taking too high a level of risk? Do they have more control over how
their engines are maintained, therefore lowering their risk and increasing profits?
Support your answer.

The profit pool concept and the example of the electronics retailing industry can
help us realize that the share of revenues within an industry will typically not be
equivalent to the share of profits in an industry. Can you think of other industries in
which there is no direct relationship between share of revenues and share of
margins? (Example: Google is investing in building high-speed fiber networks in cities
to enhance Internet capabilities. They are willing to lose money in providing Internet
services to make it up with advertising revenue due to increased clicks on Google
searches and revenue from providing other services, such as a cable TV
replacement service.)

3. Coordinating the ‘Extended’ Value Chain Via Information Technology

Many firms have achieved success by integrating activities throughout the

“extended value chain” by using information technology to link their own value chain with
the value chains of their customers and suppliers. As noted in Module 3, this approach
enables a firm not only to add value via its own value-creating activities but also for its
customers and suppliers.

We discuss Walmart and how it has been able to combine differentiation (e.g.,
quick response to customer demand) and overall cost leadership to become the
dominant mass retailer in the world. Its emphasis on information technology and logistics
are keys to its remarkable success.

4. Integrated Overall Cost Leadership and Differentiation Strategies: Improving

Competitive Position vis-à-vis the Five Forces

We next address how an integrated overall cost leadership and differentiation

strategy helps a firm to improve its position in regard to its industry’s five forces. We
introduce the Walmart example to illustrate these points. We discuss why its strategy is
highly sustainable.

5. Pitfalls of Integrated Overall Low Cost and Differentiation Strategies.

Firms that attain both types of competitive advantage enjoy high returns. However,
as with each generic strategy taken individually, there are some pitfalls to avoid:

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 • Firms that fail to attain both strategies may end up with neither and become
“stuck in the middle.”
• Underestimating the challenges associated with coordinating value-creating
activities in the extended value chain.
• Miscalculating sources of revenue and profit pools in your industry.

II. Can Competitive Strategies Be Sustained? Integrating and Applying Strategic

Management Concepts

In this section we integrate many of the key concepts in the first five modules:
stakeholder analysis, external environmental analysis, five-forces analysis, value-chain
analysis, resource-based view of the firm (including the issue of sustainability). We provide
the example of a manufacturing firm (Atlas Door—a “real” company), which entered an
industry and developed a strategy that earned it very high returns and a very favorable
competitive position.

The Atlas Door example provides an opportunity for students to get a more thorough
understanding of the aforementioned key concepts, as well as provides some insights on
whether or not a firm’s advantage is sustainable over a long period of time (rather strong
arguments are provided for both the “pro” and “con” positions) and offers potential
sources of value appropriation.

You might find it interesting to pose some very general questions to the class such as
whether or not they believe that Atlas Door’s advantages were sustainable as well as any
other sources of value appropriation.

III. Industry Life Cycle Stages: Strategic Implications

The life cycle of an industry refers to the stages of introduction, growth, maturity, and
decline that occur over the life of an industry. In considering the industry life cycle, it’s
useful to think in terms of broad product lines such as personal computers, photocopiers, or
long-distance telephone service.

Why is it important to consider industry life cycles? The emphasis on various generic
strategies, functional areas, value-creating activities, and overall objectives vary over the
course of the industry life cycle. Managers must become even more aware of their firm’s
strengths and weaknesses in many areas to attain competitive advantages.

TABLE 5 depicts the four stages of the industry life cycle and how factors such as
generic strategies, market growth rate, intensity of competition, and overall objectives
change over time.

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 TABLE 5. Stages of the Industry Life Cycle

An important caveat regarding the key limitation of the industry life cycle concept.
Is that products and services go through many cycles of innovation and renewal. And, for
the most part, only fad products have a single life cycle.

A. Strategies in the Introduction Stage

In the introduction stage, products are unfamiliar to consumers. Market segments

are not well defined and product features are not clearly specified. The early development
of an industry typically involves low sales growth, rapid technological change, operating
losses, and the need for strong sources of cash to finance operations. Since there are few
players and not much growth, competition tends to be limited.

There’s an advantage to being a “first mover” in the market. We address the

examples of Coca Cola’s global brand and Caterpillar’s ability to get a lock on overseas
sales channels and service capabilities.

 Discussion Question 22: What are some other firms that benefited from being a “first
mover” in their industry?

However, there are also benefits to being a “late mover.” We address how Target
benefited from its delayed Internet strategy.

The SUPPLEMENT/EXTRA EXAMPLE below addresses some of the advantages to

being a late mover in the context of international business.

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  Extra Example: The Advantages of Being a Late Mover

Emerging multinationals often exploit late-mover advantages in one of two ways. Some
start by benchmarking the established global players and then maneuvering around them,
often by exploiting niches that the larger companies had overlooked. Other companies
adopt an alternative, though riskier strategy. They use their newcomer status to challenge
the rules of the game, capitalizing on the inflexibilities in the existing players’ business
models.

Source: Bartlett, C. A. & Ghoshal, S. 2000. Going global: Lessons from late movers. Harvard
Business Review, 78(2): 138.

B. Strategies in the Growth Stage

The second stage of the industry life cycle, growth, is characterized by strong
increases in sales. The potential for strong sales (and profits) attracts other rivals who also
want to benefit. Whereas marketing and sales initiatives were mainly directed at spurring
aggregate demand, that is, demand for all such products in the introduction stage, efforts
in the growth stage are directed toward stimulating selective demand, in which a firm’s
product offerings are chosen with those of its rivals.

Revenues in the growth stage increase at an accelerating rate because (1) new
consumers are trying the product, and (2) a growing proportion of satisfied consumers are
making repeat purchases. In general, new products and services often fail if there are
relatively few repeat purchases.

 Discussion Question 23: What are some examples of products/industries in the

growth stage of their life cycle? How long do you think the growth stage will last?

C. Strategies in the Maturity Stage

In the third stage, maturity, aggregate industry demand begins to slow. Since
markets are becoming saturated, there are few opportunities to attract new adopters.
Since it is no longer possible to “grow around” competition, direct competition becomes
more predominant—and competition intensifies (often on the basis of price).

We address the example of the intense competition between Unilever and Procter
and Gamble in the laundry soap business. This slow growth business in the maturity stage
puts enormous pressure on both players to make even small gains in market share. Also,
given the slow growth, all gains are essentially at the rival’s expense, since there are few
unexplored niches to exploit.

The SUPPLEMENT/EXTRA EXAMPLE below provides examples of how General Mills

continues to renew a very established brand with new versions of its flagship cereal,
Cheerios.

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  Extra Example: Cheerios New Flavors

General Mills introduced the Cheerios brand of cereal in 1941 and has seen it take on a
central position in the breakfast food market. The Cheerios brand accounts for 13% of all
cold cereal sold in the United States, over twice the share of its nearest competitor.
Although the brand is over 70 years old, General Mills has not accepted that the growth
potential for the mature brand is over, and it continues to spin out new variants of the
venerable cereal to stoke up new demand. There are now 13 different varieties of
Cheerios, with five new types of Cheerios introduced after 2007. The latest to arrive are
Dulce de Leche and Multi Grain Peanut Butter Cheerios. By extending the brand with new
flavors, General Mills has found a way to generate modest growth in a very mature market.
For example, Chocolate Cheerios, introduced in 2010, has been a very successful launch
and added to sales by adding a chocolate flavor to the family-cereal market. Prior to this
launch, chocolate-flavored cereals were largely limited to the kids’ cereal market.

There is one additional benefit to launching new versions of established brands. Every new
version of Cheerios on the shelf represents an inch of territory extracted from some other
brand. Shelf space is so tight in retail stores these days that each Cheerios product has the
potential to take the shelf space of competing cereal brands.

Source: Hughlett, M. 2012. General Mills makes Cheerios a serial business. Startribune.com.
March 3: np.

 Discussion Question 24: What are some industries in the maturity phase of the life
cycle? How intense is the competition? How difficult is it to differentiate products
and services?

Two positioning strategies that managers can use in the maturity stage include

a) Reverse positioning—a change in industry tendencies to continuously improve

products by offering products with fewer product attributes and lower prices.

b) Breakaway positioning—a break in industry tendencies to incrementally improve by

offering products that are still in the industry but are perceived by customers as being
different.

 Discussion Question 25 What are some examples of other companies that used
breakaway or reverse positioning strategies to distinguish themselves from other
companies in their industry?

Discussion Question 26: What are some of the risks associated with breaking away
from other similar companies in an industry? What are the benefits?

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 D. Strategies in the Decline Stage

Decisions in the decline phase of the industry life cycle become particularly
important. Hard choices must be made and firms must face up to the fundamental
strategic choices of either exiting or staying and attempting to consolidate the industry.

There are four basic strategies available in the decline phase: maintaining,
harvesting, exiting, or consolidating.

Maintaining refers to keeping a product going without significantly reducing

marketing support, technological development, or other investments in the hope that
competitors will eventually leave the market.

Harvesting involves obtaining as much profit as possible and requires that costs in
the decline stage be decreased quickly.

Exiting the market involves dropping the product from a firm’s portfolio.

Consolidating involves one firm acquiring the best of the surviving firms in an industry
at a reasonable price. (We provide the example of Lockheed Martin, the giant in the
defense industry.)

 Discussion Question 27: What are some examples of industries in the decline stage?
What strategies are the incumbent firms following?

We also address three ways in which old technologies can enjoy a “last gasp” in the
marketplace. These are: retreating to a more defensible ground, using the old to replace
the new, and improving the price-performance trade-off.

E. Turnaround Strategies

We discuss three turnaround strategies:

• Asset and cost surgery;
• Selective product and market pruning;
• Piecemeal productivity improvements.

 Discussion Question 28: Can you think of other successful (or unsuccessful)
turnarounds? (Note: It might be interesting to get their perspectives on General
Motors and Chrysler as they have rebounded from bankruptcy.)

IV. Summary

How and why firms outperform each other goes to the heart of strategic
management. In this module, we identified three generic strategies and discussed how
firms are able not only to attain advantages over competitors, but also to sustain such
advantages over time. Why do some advantages become long lasting, while others are
quickly imitated by competitors?

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 The three generic strategies—overall cost leadership, differentiation, and focus—
form the core of this module. We began by providing a brief description of each generic
strategy (or competitive advantage) and furnished examples of firms that have
successfully implemented these strategies. Successful generic strategies invariably
enhance a firm’s position vis-à-vis the five forces of that industry—a point that we stressed
and illustrated with examples. However, as we pointed out, there are pitfalls to each of the
generic strategies. Thus, the sustainability of a firm’s advantage is always challenged
because of imitation or substitution by new or existing rivals. Such competitor moves erode
a firm’s advantage over time.

We discussed the viability of combining (or integrating) overall cost leadership and
differentiation generic strategies. If successful, such integration can enable a firm to enjoy
superior performance and improve its competitive position. However, this is challenging
and managers must be aware of the potential downside risks associated with such an
initiative.

We also discussed the issue of the sustainability of a firm’s competitive advantage.

We used the example of a manufacturing firm—Atlas Door—to illustrate our key concepts
in the first five modules.

The concept of the industry life cycle is a critical contingency that managers must
take into account in striving to create and sustain competitive advantages. We identified
the four stages of the industry life cycle—introduction, growth, maturity, and decline—and
suggested how these stages can play a role in decisions that managers must make at the
business level. These include overall strategies as well as the relative emphasis on functional
areas and value-creating activities.

When a firm’s performance severely erodes, turnaround strategies are needed to

reverse its situation and enhance its competitive position. We have discussed three
approaches—asset cost surgery, selective product and market pruning, and piecemeal
productivity improvements.

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 Application Questions and Exercises

1. Reflecting on Career Implications

 Industry Life Cycle: Given that you are going for a job interview, identify the life
cycle stage of the industry within which your target firm is located. You are more
likely to have greater opportunities for career advancement in an industry in the
growth stage than in the decline stage.

Think of how the firm and its position provide opportunities for you. Also, determine if there
is a good fit between you and the firm to which you are applying.

2. Select an industry (e.g., retail chain and restaurants). Identify an organization that
competes on the basis of overall cost leadership and one that is a differentiator. Are
their advantages sustainable? Why or why not? Are each of these organizations
attaining parity on the other type of competitive advantage?

3. Explain why the concept of competitive advantage is central to the study of strategic
management.

4. Go to the Internet and look up www.Walmart.com. How has this firm been able to
combine overall cost leadership and differentiation strategies?

5. Choose a firm with which you are familiar in your local business community. Is the firm
successful in following one (or more) generic strategies? Why or why not? What do you
think are some of the challenges it faces in implementing these strategies in an
effective manner?

6. Can you think of a company that suffered ethical consequences as a result of an

overemphasis on a cost leadership strategy? What do you think were the financial and
nonfinancial implications?

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