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Study Guide in (CBMEC 102 Strategic Management)

Module No. 01

STUDY GUIDE FOR MODULE NO. 05

Business-Level Strategy: Creating and Sustaining Competitive

Advantages
MODULE OVERVIEW

Overview
In the previous three modules, we have focused on the analysis of the external
(Module 2) and internal (Modules 3 and 4) of the firm. In this module, 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. The 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.

MODULE LEARNING OBJECTIVES

After reading this module, the students are able to:

1. Recognize the central role of competitive advantage in the study of strategic
management and the three generic strategies: overall cost leadership, differentiation
and focus.
2. Determine the successful attainment of generic strategies that can improve a firm’s
relative power vis-à-vis the Michael Porter (Five Forces Model).

3. Identify the factors to determine the sustainability of a firm’s competitive advantage.

4. Understand the need for turnaround strategies that enable a firm to reposition its
competitive position in an industry.

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Module No. 01

LEARNING CONTENTS (Strategic Management: Creating Competitive Advantage)

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.
At this point, it is useful to point out that 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.”

Types of the three generic strategies:

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, and cost minimization in all activities in a
firm’s value chain.
Methods used in the application or adaption of Overall Cost Leadership
1. Competitive Parity
It refers to the firm’s achievement of similarly, or being “on par” with competitors with
respect to low cost, differentiation, or strategic product characteristic.
2. Experience Curve
A company may also make use of their experience based on the previous data they
have in order to lower the cost for them to gain experience with production processes.
Based on their experience unit cost of production it possibly decline as output increase
in most industries.
Improving Competitive Position vis-à-vis the Five Forces

• 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

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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;

• 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 pricing information available to customers
increases.
B. Differentiation
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.
They are non-price attributes for which customers will pay a premium.

Differentiation: Improving Competitive Position

Differentiation strategy helps a firm to improve its position vis-à-vis Porter’s five
forces through:
1. Creates higher entry due to customer loyalty
2. Provides higher margin that enable the firm to deal with supplier power
3. Establishes customer loyalty and hence less threat from substitute
Potential Pitfalls of Differentiation Strategies
➢ Uniqueness that is not valuable
➢ Too much differentiation
➢ Too high a price premium
➢ Differentiation that is easily imitated
➢ Diffusion of brand identification through product-line extensions
➢ Perceptions of differentiation may vary between buyers and sellers
C. Focus
The third generic strategy is based on the choice of a narrow competitive scope
within an industry. Focus attains competitive advantages by dedicating itself
exclusively to a particular segment or group of segments and tailors its strategy to
serving them.
Focus: Improving Competitive Position

➢ Focus creates barriers of either cost leadership or differentiation, or both.

➢ It also used select niches that are least vulnerable to substitute or where
competitors are weakest.

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Potential Pitfalls of Focus Strategies

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.
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”.
2. 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
to focus solely on manufacturing and leaving downstream operations to others through
outsourcing.
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 Chapter 3, this
approach enables a firm not only to add value via its own value creating activities, but
also for its customers and suppliers.
4. Integrated of Overall Cost Leadership and Differentiation Strategies using
the Internet
Integrated overall cost leadership and differentiation strategy using internet helps a firm
to improve its position in regard to its industry’s five forces. These strategy is highly
sustainable in terms of:

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➢ Online bidding and order processing eliminate the need for sales and
minimize sales-force expenses
➢ Online purchase of orders has made many transactions paperless, thus
reducing the cost of procurement
➢ Direct access to progress reports and the ability of customers to periodically
check work in progress minimize rework.
➢ Collaborate design efforts using internet technologies that link designers,
materials suppliers and manufacturers reduce the costs and speed the
processes of new product development
➢ 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 by the supplier’s website.
➢ Online access to realtime sales and service information is being used to
empower the sales force and continually update R&D and technology
development efforts.
➢ Internet-based knowledge management systems that link all parts of the
organization are shortening response times and accelerating organizations
learning.
➢ Quick online responses to service requests and rapid feedback to customer
surveys and product promotions are enhancing marketing efforts.
➢ 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 to access
viewers with specialized interest.
➢ Virtual organizing and online “work from home” are being used to minimize firm
infrastructure requirements.
➢ Procurement technologies that uses internet software to match buyers and
sellers are highlighting specialized buyers and drawing attention to smaller
suppliers.
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:
• 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.

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II. How the Internet and Digital Technologies Are Affecting the Competitive
Strategies
To stay competitive, firms must update their strategies to reflect the new possibilities and
constraints that the Internet and Web-based technologies represent. In this section, we
review the impact of the Internet on overall cost leadership, differentiation, and focus strategy
formulation. We also address Internet-related value chain activities that firms can implement
to enhance their strategic success.
A. Overall Cost Leadership
An overall low-cost leadership strategy involves managing costs in every activity of a
firm’s value chain and offering no-frills products that are an exceptional value at the best
possible price. Internet technologies now provide more opportunities to manage costs and
achieve greater efficiencies. But these capabilities are available to many firms and may
provide only short-lived advantage.
Most analysts agree that the Internet’s ability to lower transaction costs will transform
business. Transaction costs refer to various expenses associated with conducting
business. It applies not just to buy-sell transactions but to the costs of interacting with every
part of a firm’s value chain, both within and outside the firm.
The process of disintermediation lowers costs. Each time intermediaries are used in a
transaction; additional costs are added. Removing those intermediaries lowers transaction
costs. The Internet may also reduce the costs of traveling, and the cost of maintaining a
physical address.
Potential Internet-Related Pitfalls for Low Cost Leaders
Internet-related pitfalls include the threat of imitation by competitors who can quickly
duplicate capabilities without threat of infringement on proprietary information. Other
pitfalls include the availability of information online that increases buyer power, excessive
cost cutting, and offering too many free or low-cost products or services.
B. Differentiation
A differentiation strategy involves providing unique, high-quality products and services
that promote a favorable reputation and strong brand identity and usually command a
premium price. Internet technologies are being used to threaten the position of companies
that have traditionally maintained the best reputations. Other technologies are being
employed by industry leaders to make their position stronger.
One way the Internet is creating differentiation advantages is by enabling mass
customization. Mass customization is not new, but the Internet has generated a giant leap
forward in the amount of control customers can have in influencing the process. Many
consumers now judge the quality and uniqueness of a product or service by their ability to be
involved in planning and design, combined with factors such as speed of delivery and
reliability of results. Such capabilities are changing the way companies develop unique
products and services, make their reputation, preserve their brand image, and achieve
superior service.

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Potential Internet-Related Pitfalls for Differentiators

Internet-related pitfalls include overspending differentiating features that customers don’t
want or creating a sense of uniqueness that customers don’t value. This happened with some
personalization and customization software that early dot-com companies added at great
expense. Other problems can result from overpricing products and services or developing
brand extensions that dilute a company’s image or reputation.
C. Focus
A focus strategy involves targeting a narrow market segment with customized products
and/or specialized services. The Internet has opened up new opportunities for niche players
who seek to access small markets in a highly specialized fashion.
Focusers face many of the same problems as low cost leaders and differentiators. To
create focus strategies that work, firms must use the kind of singlemindedness that is
characteristic of a focus strategy throughout every value-creating activity.

Focusers can use Internet technologies to achieve cost savings and unique advantages
– such as specialized knowledge, rapid response, and strong customer service – in niche
markets.
Potential Internet-Related Pitfalls for Focusers
Internet-related pitfalls include focusing on segments that are too narrow to be
profitable or trying to appeal to niches that are overly broad. When focus strategies become
too narrow, they may have trouble generating enough activity to justify the expense of
operating. Focusers that try to extend to a broader audience — by offering additional
inventory, content, or services — can lose the cost advantages associated with a narrow
focus and become vulnerable to imitators or new entrants.

D. Are Combination Strategies the Key to E-Business Success?

Many experts agree that the net effect of the Internet is fewer rather than more
opportunities for sustainable advantages. Therefore, new strategic combinations that make
the best use of the competitive strategies may hold the greatest promise for future success.
The Internet has provided all companies with greater tools for managing costs. This
may be good in general for the efficiency of the economy. But for individual companies, it
may shave profit margins and make creating a sustainable advantage more difficult.
Many differentiation advantages are diminished by the Internet. The ability to
comparatively shop, for example, is depriving some companies of unique advantages. In the
Internet age, the best approach may be to combine differentiation with other competitive
strategies.

The greatest benefit may be in using the Internet to focus on a niche. However, an
incumbent firm that previously thought a given niche market was not worth the effort may use
Internet technologies to enter the segment for a lower cost than it could in the past.

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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.
Be sure to point out an important caveat regarding the key limitation of the industry life
cycle concept. That is, products and services go through many cycles of innovation and
renewal. And, for the most part, only fad products have a single life cycle. We provide the
example of how the cereal industry got a boost in sales when medical research indicated that
oat consumption reduced a person’s cholesterol.
The four stages of the industry 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.
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.
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.

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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.
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.)
E. Turnaround Strategies
Three turnaround strategies:
• Asset and cost surgery;
• Selective product and market pruning;
• Piecemeal productivity improvements.

LEARNING ACTIVITY

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

2. Think of a firm that has attained a differentiation focus or cost focus strategy. Are their
advantages sustainable? Why? Why not? (Hint: Consider its position vis-à-vis Porter’s
five forces.)
3. Think of a firm that successfully achieved a combination overall cost leadership and
differentiation strategy. What can be learned from this example? Are these advantages
sustainable? Why? Why not? (Hint: Consider its competitive position vis-à-vis Porter’s
five forces.)

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SUMMARY

How and why firms outperform each other goes to the heart of strategic management. In
this chapter, 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?
The three generic strategies — overall cost leadership, differentiation, and focus —
form the core of this chapter. 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.
The way companies formulate and deploy strategies is also changing because of the
impact of the Internet and digital technologies on many industries. Overall low cost strategies
may be more important as some firms use Internet technologies to lower transaction costs
and increase the efficiency of their operations. Differentiation strategies may be harder to
achieve for many firms because the Internet is eroding some of their most unique features.
Further, Internet technologies are enabling the mass customization capabilities of greater
numbers of competitors. Focus strategies are likely to increase in importance because the
Internet provides highly targeted and lower-cost access to narrow or specialized markets.
These strategies are not without their pitfalls, however, and firms need to understand the
dangers as well as the potential benefits of Internet-based approaches.
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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REFERENCES

Dess, Gregory G., Lumpkin G.T. Eisner, Alan B., eBook Online Access for Strategic
Management: Text and Cases 2019 Edition
Dess, Gregory G., eBook Online Access for Strategic Management: Creating
Competitive Advantage, 2019 Edition
Gamble, John, Thompson, Arthur, and Peteraf, Essentials of Strategic Management 4th
Edition
Clerc, Strategic Intelligence For The Future 1: A New Strategic and Operational
Approach
Yjone, Gareth. And Hill Charles W.L. Strategic Management Theory and Cases,
Cengage Asia Pte. 10th Edition
Ireland Duane R., Hoskisson Robert E., & Hitt, Michael E., The Management of Strategy
Concepts and Cases, Cengage Learning Asia Pte Ltd. 12th Edition
David, Fred R., Strategic Management An Integrated Approach, Pearson Education
South Asia Pte Ltd. 2018 Edition

Prepared By:

NARCISO F. CASTRO, DBA

Associate Professor V

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