Business Level

Strategy:
Creating and
Sustaining
Competitive
Advantages

Module 5
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education .
 Learning Objectives
5-2

After reading this chapter, you should have a

good understanding of:
LO5.1 The central role of competitive advantage in
the study of strategic management,
4-2 and the three
generic strategies: overall cost leadership,
differentiation, and focus.
LO5.2 How the successful attainment of generic
strategies can improve the firm’s relative power vis-
à-vis the five forces that determine an industry’s
average profitability.
 Sustaining a Competitive
5-3
Advantage

 Business-levelstrategies require a choice:

 How to overcome the five forces and
achieve competitive advantage?
 Suggestion - use Porter’s three generic
strategies:
 Overall cost leadership
 Differentiation
 Focus
 Three Generic Strategies
5-4

Exhibit 5.1 Three Generic Strategies

Source: Adapted and reprinted with the permission of The Free Press, a division of Simon & Schuster Inc. from
Competitive Strategy: Techniques for Analyzing Industries and Competitors. Michael E Porter. Copyright © 1980,
1998 by The Free Press. All rights reserved.
 Three Generic Strategies
5-5

 Overall cost leadership is based on:

 Creating a low-cost position relative to a
firm’s peers
 Managing relationships throughout the
entire value chain to lower costs
 Differentiation implies:
 Products and/or services that are unique &
valued
 Emphasis on nonprice attributes for which
customers will gladly pay a premium
 Three Generic Strategies
5-6

A focus strategy requires:

 Narrow product lines, buyer segments, or
targeted geographic markets
 Advantages obtained either through
differentiation or cost leadership
 Overall Low-Cost Leadership
5-7

 Cost leadership involves

 Aggressive construction of efficient scale
facilities
 Vigorous pursuit of cost reductions from
experience
 Tight cost & overhead control
 Avoidance of marginal customer accounts
 Cost minimization in all activities in the
firm’s value chain, such as R&D, service,
sales force, & advertising
 Overall Low-Cost Leadership
5-8

 Cost leadership requires

 Learning to lower costs through experience:
the experience curve
 Withexperience, unit costs of production
processes decline as output increases
 This strategy also requires competitive parity
 Being “on par” with competitors with respect to
low-cost, differentiation, or other strategic
product characteristics
 Permits cost leaders to translate cost advantages
directly into higher profits
 Improving Competitive Position
5-9
vis-à-vis the Five Forces
An overall low-cost position
 Protects a firm against  Provides substantial
rivalry from competitors entry barriers due to
 Protects the firm economies of scale and
against powerful buyers cost advantages
 Provides more flexibility  Puts the firm in a
to cope with demands favorable position with
from powerful suppliers respect to substitute
who want to increase products
input costs
 Pitfalls of Cost Leadership
5-10

 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 a cost
advantage
 Differentiation
5-11

A differentiation strategy can take many

forms:
 Prestige or brand image
 Technology
 Innovation
 Features
 Customer service
 Dealer network
 Differentiation
5-12

 Differentiation requires:
A level of cost parity relative to competitors
 Integration of multiple points along the value
chain
 Superior material handling operations to
minimize damage
 Accurate and responsive order processing
 Personal relationships with key customers
 Rapid response to customer service requests

 Differentiation
along several different
dimensions at once
 Improving Competitive Position
5-13
vis-à-vis the Five Forces
An overall differentiation strategy

 Creates higher entry  Reduces buyer

barriers due to power because
customer loyalty buyers lack suitable
 Provides higher alternatives
margins that enable  Establishes customer
the firm to deal with loyalty and hence
supplier power less threat from
substitutes
 Pitfalls of Differentiation
5-14

 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
 Focus
5-15

A focus strategy is based on the choice of

a narrow competitive scope within an
industry.
A firm selects a segment or group of
segments (or niche) and tailors its strategy to
serve them
 A firm achieves competitive advantages by
dedicating itself to these segments
exclusively
 Focus
5-16

A focus strategy has two variants:

 Cost focus
 Creates a cost advantage in its target segment
 Exploits differences in cost behavior

 Differentiation focus
 Differentiates itself in its target market
 Exploits the special needs of buyers
 Improving Competitive Position
5-17
vis-à-vis the Five Forces
An overall focus strategy
 Creates higher entry  Reduces buyer
barriers due to cost power because the
leadership or firm provides
differentiation or specialized products
both or services
 Can provide higher  Focused niches are
margins that enable less vulnerable to
the firm to deal with substitutes
supplier power
 Pitfalls of Focus
5-18

 Erosion of cost advantages within the

narrow segment
 Highly focused products and services are
still subject to competition from new
entrants & from imitation
 Focusers can become too focused to
satisfy buyer needs
 Combination Strategies: Integrating
Low-Cost & Differentiation
5-19

 Integration of low-cost and differentiation

strategies makes it difficult for
competitors to duplicate or imitate
strategy
 The goal of a combination strategy is to
provide unique value in an efficient
manner
 Combination Strategies
5-20

 Combining overall low-cost and

differentiation strategies can take several
forms:
 Automated & flexible manufacturing
systems allow for mass customization
 Exploitation of the profit pool concept
creates a competitive advantage
 Using information technology, firms can
integrate activities throughout the
extended value chain
 Improving Competitive Position
5-21
vis-à-vis the Five Forces
An integrated overall low-cost &
differentiation strategy
 Creates higher entry  Reduces buyer
barriers due to both power because of
cost leadership & fewer competitors
differentiation  An overall value
 Can provide higher proposition reduces
margins that enable threat from
the firm to deal with substitutes
supplier power
 Pitfalls of Combination Strategies
5-22

 Firms that fail to attain both overall low-cost

& differentiation strategies may end up with
neither and become “stuck in the middle”
 Firms can also underestimate the challenges
& expenses associated with coordinating
value-creating activities in the extended
value chain
 Firms can also miscalculate sources of
revenue and profit pools in the firm’s
industry
 Industry Life Cycle Stages
5-23

 The industry life cycle

 Introduction
 Growth
 Maturity
 Decline

 Generic strategies, value-creating

activities, & overall objectives all vary over
the course of an industry life cycle
 Strategies in the Introduction
5-24
Stage
 The introduction stage is when:
 Products are unfamiliar to consumers
 Market segments are not well-defined
 Product features are not clearly specified
 Competition tends to be limited

 Strategies:
 Develop a product and get users to try it
 Generate exposure so the product becomes
“standard”
 Strategies in the Growth Stage
5-25

 The growth stage is:

 Characterized by strong increases in sales
 Attractive to potential competitors
 When firms can build brand recognition

 Strategies:
 Create branded differentiated products
 Stimulate selective demand
 Provide financial resources to support value-
chain activities
 Strategies in the Maturity Stage
5-26

 The maturity stage is when:

 Aggregate industry demand slows
 Market becomes saturated, few new adopters
 Direct competition becomes predominant
 Marginal competitors begin to exit

 Strategies:
 Create efficient manufacturing operations
 Lower costs as customers become price-
sensitive
 Adopt reverse or breakaway positioning
 Strategies in the Decline Stage
5-27

 The decline stage is when:

 Industry sales and profits begin to fall
 Price competition increases
 Industry consolidation occurs

 Strategies:
 Maintaining the product position
 Harvesting profits & reducing costs
 Exiting the market
 Consolidating or acquiring surviving firms