Business Level
Strategy:
Creating and
Sustaining
Competitive
Advantages
Module 5
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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
