Business-Level Strategy:

Creating and Sustaining Competitive

Advantages

Chapter Five

McGraw-Hill/Irwin Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

 Learning Objectives
LO1 The three generic strategies: overall cost leadership,
differentiation, and focus

LO2 How the three generic strategies can improve a firm’s

relative power vis-à-vis the five forces and their pitfalls

LO3 How industry life cycles determine a firm’s business-

level strategy and its relative emphasis on functional
area strategies and value-creating activities

LO4 The need for turnaround strategies that enable a firm

to reposition its competitive position

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Three Generic Strategies

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 Three Generic Strategies
• Overall cost leadership
 Low-cost-position relative to a firm’s peers
 Manage relationships throughout the entire
value chain
• Differentiation
 Create products and/or services that are
unique and valued
 Non-price attributes for which customers will
pay a premium

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 Three Generic Strategies
• Focus strategy
 Narrow product lines, buyer segments, or
targeted geographic markets
 Attain advantages either through
differentiation or cost leadership

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Competitive Advantage and
Business Performance

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 Overall Cost Leadership
Tight set of interrelated tactics that
includes:
• Cost minimization in all activities in the firm’s
value chain
• Aggressive construction of efficient-scale
facilities
• Vigorous pursuit of cost reductions from
experience
• Tight cost and overhead control
• Avoidance of marginal customer accounts
顾客要求多，但是支付很谨慎

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 Overall Cost Leadership (Cont.)
竞争平衡：指企业在市场上与竞争对手保持同等
• competitive parity 水平的能力，包括产品、价格、营销等方面的竞
争力。
 A firm’s achievement of similarity with
competitors with respect to low cost,
differentiation, or other strategic product
characteristics
 Permits a cost leader to translate cost
advantages directly into higher profits than
competitors
 Allows firm to earn above-average profits

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 Overall Cost Leadership
Experience curve
refers to how business “learns” to lower
costs as it gains experience with production
processes
with experience, unit costs of production
decline as output
increases in most
industries

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Comparing Experience Curve Effects

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Improving Competitive Position vis-à-vis the Five
Forces
An overall low-cost position

Protects a firm against Provides substantial entry

rivalry from competitors barriers from economies of
Protects a firm against scale and cost advantages
powerful buyers Puts the firm in a favorable
Provides more flexibility to position with respect to
cope with demands from substitute products
powerful suppliers for input
cost increases

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 Pitfalls of Overall Cost
Leadership Strategies
• 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 the pricing
information available to customers increases

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 Differentiation
• Prestige or brand image 奢侈品
• Technology
• Innovation
• Features
• Customer service
• Dealer network
• Design
• Materials & packaging

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Differentiation: Improving Competitive
Position
• Provides protection against rivalry since brand
loyalty lowers customer sensitivity to price and
raises customer switching costs
• Creates higher entry barriers due to customer
loyalty
• Provides higher margins and high prestige that
enable the firm to deal with supplier power
• Reduces buyer power because buyers lack
suitable alternative
• Establishes customer loyalty and hence less
threat from substitutes

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 Potential Pitfalls of
Differentiation Strategies
• Uniqueness that is not
valuable （ communication)
• Too much differentiation (costly)
• 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

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 QUESTION

High product differentiation is generally

accompanied by
A. Higher market share
B. Decreased emphasis on competition
based on price
C. Higher profit margins and lower costs
D. Significant economies of scale

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 Focus
• Focus is based on the choice of a narrow
competitive scope within an industry
 Firm selects a segment or group of segments
(niche) and tailors its strategy to serve them
 Firm achieves competitive advantages by
dedicating itself to these segments
exclusively

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 Focus
Cost focus
firm strives to create a cost advantage in its
target segment
Differentiation focus
firm seeks to differentiate in its target market

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Focus: Improving Competitive Position
• Focus
 Creates barriers of either cost leadership or
differentiation, or both
 Used to select niches that are least
vulnerable to substitutes or where
competitors are weakest
 …

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 Pitfalls of Focus Strategies
• Erosion of cost advantages within the narrow
segment

• Focused products and services still subject to

competition from new entrants and from imitation

• Focusers can become too focused to satisfy

buyer needs

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 external analysis
Industry Life-Cycle Stages:
Strategic Implications
• Industry life cycle
 refers to the stages of introduction, growth,
maturity, and decline that occur over the life
of an industry
 Emphasis on strategies, functional areas,
value-creating activities, and overall
objectives varies over the course of an
industry life cycle

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 Industry Sales
The Industry Life Cycle

Introduction Growth Maturity Decline

Time
Drivers of industry evolution :
 demand growth
 creation and diffusion of knowledge
 Intensity of competition
© 2010 Robert M. Grant 3
www.contemporarystrategyanalysis.com
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 Industry Life-Cycle Strategies

In the Introduction Stage:

• Products are unfamiliar to consumers
• Market segments not well defined
• Product features not clearly specified
• Low sales growth
• Rapid tech changes
• High operating cost need financial support
• Competition tends to be limited
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 Industry Life-Cycle Strategies
For the Introduction Stage:
• Develop product and get users to try it
• Generate exposure so product becomes
“standard”

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 Industry Life-Cycle Strategies

The Growth Stage is:

• Characterized by
strong increases in
sales
• Attractive to potential
competitors

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 Industry Life-Cycle Strategies
For the Growth Stage:
• Brand recognition
• Differentiated products
• Financial resources to support value-chain
activities such as marketing, customer
service and R&D

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 Industry Life-Cycle Strategies
In the Maturity stage:
• Aggregate industry demand slows
• Market becomes saturated, few new
adopters
• Direct competition becomes predominant
• Marginal competitors begin to exit

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 Industry Life-Cycle Strategies
For the Maturity Stage:
• Efficient manufacturing operations and
process engineering
• Low costs (customers become price
sensitive)
• Strategic decisions

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 Industry Life-Cycle Strategies
For the Maturity Stage:
• Reverse positioning
 Offering products with fewer attributes and
lower prices

• Breakaway positioning
 Offering products that are still in the industry
but that are perceived by customers as being
different
function 变了
 Industry Life-Cycle Strategies
In the Decline Stage:
• Industry sales and profits begin to fall
• Increasing price competition
• Industry consolidation
• Strategic options become dependent on
the actions of rivals

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Strategies in the Decline Stage
For the Decline Stage
• Maintaining
• Exiting the market
• Harvesting
• Consolidation

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Turnaround Strategies in the Life Cycle
• Turnaround strategy
 a strategy that reverses a firm’s decline in
performance and returns it to growth and
profitability.
• Asset and cost surgery
• Selective product and market pruning
• Piecemeal productivity improvements

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