Because learning changes

everything. ®

CHAPTER 5
Business-Level Strategy:
Creating and Sustaining
Competitive Advantages

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Learning Objectives
After reading this chapter, 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. Explain 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.
3. Identify the pitfalls managers must avoid in striving to attain generic
strategies.
4. Explain how firms can effectively combine the generic strategies of
overall cost leadership and differentiation.
5. Identify which factors determine the sustainability of a firm’s
competitive advantage.
6. Understand 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. Understand the need for turnaround strategies that enable a firm to
reposition its competitive position in an industry.
© McGraw Hill
 Looking Ahead

Types of Competitive Advantage and

Sustainability.
Can Competitive Strategies Be Sustained?
Integrating and Applying Strategic
Management Concepts.
Industry Life-Cycle Stages: Strategic
Implications.

© McGraw Hill
 The Central Role of Competitive
Advantage
Consider …
In order to create and sustain a competitive
advantage, companies need to stay focused
on their customers’ evolving wants and needs
and not sacrifice their strategic position as
they mature and the market around them
evolves.
They also have to have a strategy…

© McGraw Hill
 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.
1. Overall cost leadership. 总体成本领先
2. Differentiation.
3. Focus.

© McGraw Hill
 Three Generic Strategies 1

Exhibit 5.1 Three Generic Strategies

Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors. Michael E
Porter, 1980, 1998, Free Press.
Access the text alternative for slide images.

© McGraw Hill
 Three Generic Strategies 2

1.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.

2.Differentiation implies （按下不表）

• Products and/or services that are unique and valued.
• Emphasis on nonprice attributes for which customers will
gladly pay a premium.

3.A focus strategy requires:

• Narrow product lines, buyer segments, or targeted
geographic markets.
▪ Advantages obtained either through differentiation or
cost leadership.
© McGraw Hill
 Three Generic Strategies
5-8

▪1.Overall cost leadership

▪Strategy based on appeal to the
industry-wide market using a
competitive advantage based on low
cost.

Q) How airline cut cost?

 1.Overall Low-Cost Leadership 1

Overall cost leadership involves:

1. Aggressive construction of efficient scale facilities.
2. Vigorous pursuit of cost reductions from experience.
3. Tight cost and overhead control.
4. Avoidance of marginal customer accounts.
5. Cost minimization in all activities in the firm’s value
chain, such as research and development, service,
sales force, and advertising.

© McGraw Hill
 1.Pitfalls of Cost Leadership
5-10

1. Too much focus on one or a few value chain

activities
2. Increase in the cost of the inputs on which the
advantage is based
3. The strategy is imitated too easily
4. A lack of parity on differentiation
5. Reduced flexibility
6. Obsolescence of the basis of a cost advantage
 2.Differentiation 1

A differentiation strategy can take many

forms:
1. Prestige or brand image.
2. Quality.
3. Technology.
4. Innovation.
5. Features.
6. Customer service.
7. Dealer network.

© McGraw Hill
 2.Pitfalls of Differentiation

1. Uniqueness that is not valuable.

2. Too much differentiation.
3. Too high a price premium.
4. Differentiation that is easily imitated.
5. Dilution of brand identification through
product line extensions.
6. Perceptions of differentiation may vary
between buyers and sellers.

© McGraw Hill
 3.Focus 1

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.

© McGraw Hill
 Focus 2

A focus strategy has two variants.

1. Cost focus.
• Creates a cost advantage in its target
segment.
• Exploits differences in cost behavior.
2. Differentiation focus.
• Differentiates itself in its target market.
• Exploits the special needs of buyers.

© McGraw Hill
 Pitfalls of Focus

1. Erosion of cost advantages within the

narrow segment.

2. Highly focused products and services still

subject to competition from new entrants
and from imitation.

3. Focusers too focused to satisfy buyer needs.

（顾客如果突然不想买了）

© McGraw Hill
 Sustaining a Competitive
5-16
Advantage
▪ Business-level strategies require a choice:
▪ How to achieve competitive advantage?

▪ Suggestion – use Porter’s （波特说不行） three generic

strategies
▪ Overall cost leadership
▪ Differentiation
▪ Focus
 Combination Strategies: Integrating
Low-Cost and 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.

© McGraw Hill
Combination Strategies: Integrating Low-
Cost and Differentiation
Combining
5-18
overall low-cost and differentiation
strategies can take several forms:
1. Automated & flexible manufacturing systems allow
for mass customization
2. Exploitation of the profit pool concept creates a
competitive advantage
3. Coordinating the “extended” value chain by way of
information technology
 2.U.S. Automobile Industry’s Profit Pool
5-19

Exhibit 5.8
 Pitfalls of Combination Strategies
5-20

1. Firms that fail to attain both overall low-cost &

differentiation strategies may end up with neither
and become “stuck in the middle”
2. Underestimate the challenges & expenses
associated with coordinating value-creating activities
in the extended value chain
3. Firms can also miscalculate sources of revenue and
profit pools in the firm’s industry
• - Ignore core business
 Three Generic Strategies （略） 3

Exhibit 5.2 Competitive Advantage and Business

Performance
Particulars Differentiation Differentiatio Cost Differentiatio Cost Stuck in
and Cost n n and Focus and the
Focus Middle

Return on 35.5 （高） 32.9 30.2 17.0 （低） 23.7 17.8

Investment
(%)

Sales 15.1 13.5 13.5 16.4 （高） 17.5 12.2

Growth (%) （低）

Gain in 5.3 5.3 5.5 6.1 6.3 （高） 4.4 （低）

market
share (%)

Sample 123 160 （高） 100 141 86 （低） 105

Size

© McGraw Hill
 Industry Life Cycle Stages 1

The industry life cycle:

• Introduction.
• Growth.
• Maturity.
• Decline.
Generic strategies, functional areas,
value-creating activities, and overall objectives
all vary over the course of an industry life cycle.

© McGraw Hill
 Strategies in the Introduction Stage

The introduction stage is when:

1. Products are unfamiliar to consumers.
2. Market segments are not well-defined.
3. Product features are not clearly specified.
4. Competition tends to be limited.

© McGraw Hill
 Industry Life-Cycle Strategies
5-24

For the Introduction Stage:

▪Develop product
▪Stimulate trial
▪Generate exposure so product becomes
“standard”
▪Aggregate demand
 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.

© McGraw Hill
 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.
• Offer less attributes and lower prices
• Offer products perceived as being different

© McGraw Hill
 Strategies in the Decline Stage

The decline stage is when:

• Industry sales and profits begin to fall.
• Price competition increases.
• Industry consolidation occurs. （ M&A merge and
acquisition ）

© McGraw Hill
 Strategies in the Decline Stage

Strategies:
• Maintaining the product position.
• Harvesting profits and reducing costs.( 不再投资，杀掉金蛋
鹅)
• Exiting the market.
• Consolidating or acquiring surviving firms.

© McGraw Hill
 Industry Life Cycle Stages 2

Exhibit 5.6 Stages of the Industry Life Cycle

Factor Introduction Growth Maturity Decline
Generic strategies Differentiation Differentiation Differentiation Overall cost
Overall cost leadership
leadership Focus
Market growth rate Low Very large Low to moderate Negative

Number of Very few Some Many Few

segments

Intensity of Low Increasing Very intense Changing

competition

Emphasis on Very high High Low to moderate Low

product design

Emphasis on Low Low to moderate High Low

process design

Major functional Research and Sales and Production General

area(s) of concern development marketing management and
finance
Overall objective Increase market Create consumer Defend market share Consolidate,
awareness demand and extend product maintain, harvest,
life cycles or exit

© McGraw Hill
 Turnaround Strategies
5-30

▪Turnaround strategy
▪a strategy that reverses a firm’s decline in performance and
returns it to growth and profitability.
▪ 使用时期： Maturity & decline stage （其他时期也可以）
▪ Require to study external & internal environment
 Turnaround Strategies
5-31

Strategies
▪Asset and cost surgery
▪Selective product and market pruning
▪Discontinue (money-losing) product lines and focus
all resources on few core profitable areas
▪Piecemeal productivity improvements
▪Many ways to cut cost and improve productivity
▪Including re-engineering business process;
encourage employee inputs to identify excess
costs; increase capacity utilization; improve
employee productivity
 End of Main Content

Because learning changes

everything. ®

www.mheducation.com