Sustaining a Competitive Advantage

Business-level strategies 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

Three Generic Strategies

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

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

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

Cost leadership requires

Learning to lower costs through experience: the experience curve
With experience, 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 vis-à-vis the Five Forces
An overall low-cost position

Protects a firm against rivalry from

competitors Protects the firm
against powerful buyers Provides
more flexibility to cope with demands from
powerful suppliers who want to increase
input costs
Provides substantial entry barriers due
to economies of scale and cost
advantages
Puts the firm in a favorable position
with respect to substitute products
Pitfalls of Cost Leadership

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

A differentiation strategy can take many forms:

Prestige or brand image
Technology
 Innovation
Features
Customer service
Dealer network
Differentiation

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 vis-à-vis the Five Forces

An overall differentiation strategy

Creates higher entry barriers due to

customer loyalty
Provides higher margins that enable
the firm to deal with supplier power
Reduces buyer
power because
buyers lack suitable alternatives
Establishes customer loyalty and
hence less threat from
substitutes
Pitfalls of Differentiation

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
 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

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 vis-à-vis the Five Forces

An overall focus strategy

Creates higher entry barriers due to

cost leadership or
differentiation or both
Can provide higher margins that
enable the firm to deal with
supplier power
Reduces buyer
power because the firm
provides
specialized products or services
Focused niches are less
vulnerable to substitutes
Pitfalls of Focus

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
 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

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 vis-à-vis the Five Forces

An integrated overall low-cost &

differentiation strategy

Creates higher entry barriers due to

both cost leadership &
differentiation
Can provide higher margins that
enable the firm to deal with
supplier power
Reduces buyer power
because of fewer
competitors
An overall value proposition reduces
threat from
substitutes
Pitfalls of Combination Strategies

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
 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 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
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

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

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