5

Business-Level Strategy

McGraw-Hill/Irwin
Strategic Management: Text and Cases, 4e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives

• After reading this chapter, you should have a good

understanding of:
- The central role of competitive advantage in the study of strategic
management.
- The three generic strategies: overall cost leadership, differentiation,
and focus.
- How the successful attainment of generic strategies can improve a
firm’s relative power vis-à-vis the five forces that determine an
industry’s average profitability.
- The pitfalls managers must avoid in striving to attain generic
strategies.
- How firms can effectively combine the generic strategies of overall
cost leadership and differentiation.
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Learning Objectives

• After reading this chapter, you should have a good

understanding of:
- How Internet-enabled business models are being used to improve
strategic positioning.
- 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.
- The need for turnaround strategies that enable a firm to reposition its
competitive position in an industry.
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Types of Competitive Advantage

and Sustainability
• Three generic strategies to overcome the five forces and
achieve competitive advantage
- 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
- Focus strategy
• Narrow product lines, buyer segments, or targeted geographic
markets
• Attain advantages either through differentiation or cost leadership
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Example

• Companies pursuing an overall cost leadership

strategy
- McDonalds
- Wal-Mart
• Companies pursuing a differentiation strategy
- Harley Davison
- Apple
• Companies pursuing a focus strategy
- Rolex
- Lamborghini
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Three Generic Strategies

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Competitive Advantage and

Business Performance

Differentiation Cost Stuck in

Differentiation Cost Focus Focus the Middle

Adapted from Exhibit5.2 Competitive advantage and business performance

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Overall Cost Leadership

• Integrated tactics
- Aggressive construction of efficient-scale facilities
- Vigorous pursuit of cost reductions from experience
- Tight cost and 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, and advertising
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Value-Chain Activities:
Overall Cost Leadership

Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership

Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior
Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter.
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Overall Cost Leadership (Cont.)

• A firm following an overall cost leadership position

- Must attain parity on the basis of differentiation relative to
competitors
- Parity on the basis of differentiation
• 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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Comparing Experience Curve Effects

Exhibit 5.4 Comparing Experience Curve Effects

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Overall Cost Leadership: Improving

Competitive Position vis-à-vis the Five Forces

• An overall low-cost position

- 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
- Provides substantial entry barriers from economies of scale
and cost advantages
- Puts the firm in a favorable position with respect to
substitute products
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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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Question

Do Wal-Mart and McDonald’s follow overall cost

leadership strategy? Explain.
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Differentiation

• Differentiation can take many forms

- Prestige or brand image
- Technology
- Innovation
- Features
- Customer service
- Dealer network
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Value-Chain Activities: Differentiation

Exhibit 5.5 Value-Chain Activities: Examples of Differentiation

Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by
Michael E. Porter. Copyright © 1985 by Michael E. Porter.
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Differentiation

• Firms may differentiate along several dimensions at

once
• Firms achieve and sustain differentiation and above-
average profits when price premiums exceed extra
costs of being unique
• Successful differentiation requires integration with all
parts of a firm’s value chain
• An important aspect of differentiation is speed or
quick response
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Differentiation: Improving Competitive

Position vis-à-vis the Five Forces
• Differentiation
- 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
alternative
- Reduces supplier power due to prestige associated with
supplying to highly differentiated products
- Establishes customer loyalty and hence less threat from
substitutes
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Potential Pitfalls of
Differentiation Strategies
• 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
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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
• Two variants
- Cost focus
- Differentiation focus
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Focus: Improving Competitive Position

vis-à-vis the Five Forces
• 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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Combination Strategies: Integrating

Overall Low Cost and Differentiation
• Primary benefit of successful integration of low-cost
and differentiation strategies is difficulty it poses for
competitors to duplicate or imitate strategy
• Goal of combination strategy is to provide unique
value in an efficient manner
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Three Combination Approaches

• Automated and flexible manufacturing systems

• Exploiting the profit pool concept for competitive
advantage
• Coordinating the “extended” value chain by way of
information technology
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Combination Strategies: Improving

Competitive Position vis-à-vis the Five Forces

• Firms that successfully integrate differentiation and

cost strategies obtain advantages of competition from
both approaches
- High entry barriers
- Bargaining power over suppliers
- Reduces power of buyers (fewer competitors)
- Value position reduces threat from substitute products
- Reduces the possibility of head-to-head rivalry
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Pitfalls of Combination Strategies

• Firms that fail to attain both strategies may end up

with neither and become “stuck in the middle”
• Underestimating the challenges and expenses
associated with coordinating value-creating activities
in the extended value chain
• Miscalculating sources of revenue and profit pools in
the firm’s industry
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Internet-Enabled Low Cost Leader Strategies

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Internet-Enabled Differentiation Strategies

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Internet-Enabled Focus Strategies

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Industry Life-Cycle Stages:

Strategic Implications
• Life cycle of an industry
- Introduction
- Growth
- Maturity
- Decline
• Emphasis on strategies, functional areas, value-
creating activities, and overall objectives varies over
the course of an industry life cycle
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Stages of the Industry Life Cycle

Adapted from Exhibit 5.11 Stages of the Industry Life Cycle

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Question

At what stage of the industry life cycle is the computer

industry?
A) Introduction
B) Growth
C) Maturity
D) Decline
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Strategies in the Introduction Stage

• Products are unfamiliar to consumers

• Market segments not well defined
• Product features not clearly specified
• Competition tends to be limited
Strategies

•Develop product and get users to try it

•Generate exposure so product becomes “standard”
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Strategies in the Growth Stage

• Characterized by strong increases in sales

• Attractive to potential competitors
• Primary key to success is to build consumer
preferences for specific brands
Strategies

•Brand recognition
•Differentiated products
•Financial resources to support value-chain activities
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Strategies in the Maturity Stage

• Aggregate industry demand slows

• Market becomes saturated, few new adopters
• Direct competition becomes predominant
• Marginal competitors begin to exit
Strategies

•Efficient manufacturing operations and process

engineering
•Low costs (customers become price sensitive)
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Strategies in the Decline Stage

• Industry sales and profits begin to fall

• Strategic options become dependent on the actions of
rivals

Strategies

• Maintaining • Harvesting
• Exiting the market • Consolidation
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Turnaround Strategies in the Life Cycle

• Asset and cost surgery

• Selective product and market pruning
• Piecemeal productivity improvements
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Example

• When the Sony Playstation 2 entered into the decline

stage of its life cycle, Sony had to select a turnaround
strategy
• Sony’s response: Introduce a slim Playstation 2
• This strategy enabled Sony to extend the life of its
Playstation 2 until the release of their new next
generation system, the Playstation 3

Source: www.sony.com