LP- 5

16-18 Oct 17

Ch 5 Creating and Sustaining CA through Business-Level Strategies

Learning Objectives
1. The central role of competitive advantage in the study of strategic
management, and the three generic strategies
2. How does the successful attainment of generic strategies improve a firms
relative power and industrys profitability.
3. How Internet-enabled business models are being used to improve strategic
positioning?
4. The importance of industry life cycle to determine a firms BL strategies and its
relative emphasis on value-creating activities.
5. The need for Turnaround Strategies to enable a firm to reposition its
competitive position
Learning Outcomes
Hopefully, students would have understood at the end of this lecture /
discussion the role played by BL Strategies in sustaining profitability, and CA
/CP

12/6/2017 25 slides 1
 Case Study ---- Food Lion

Few Corporations have rewarded their (100) original

backers as much as Food Lion has done.
A share bought for $10 in 1957 was split into more
than 12,000 shares by 1991 with a value of over
$200,000. But,
In 1967, The CEO lowered the prices of all its
products 3,000 in number and had its sales increased
by 50%.
In 1990, Food Lion opened 100 stores.
The first blow came in 1992.

12/6/2017 2
 Case Study ---- Food Lion
Bad publicity a real one --- a compromise on quality --
- a misadventure based on lack of control
By 1993, over 1,000 violations registered and being
countered
Problem
Management team out of touch with operations
Continued traditional methods and missed the message ---
for CA one should have greater product variety and a high
level of customer services (Outbound Logistics)
Net Results
In 1994, forced to retreat and closed down more than half
the stores it had opened in 1991.
Solution
Generate business strategies in line with the market forces

12/6/2017 3
 LEARNING FROM MISTAKES
Since the 1930s, Hostess Brands produced a range of popular
baked goods, including Wonder Bread, Twinkies, Ring Dings,
Yodels, Zingers, and many other products.
Even with its iconic brands and sales in of $2.5 billion a year,
Hostess Brands found itself in a perilous situation and went
into bankruptcy in 2012.
Unable to find a workable solution to remain viable, in
November 2012:
Hostess closed down all of its bakeries and was forced to
liquidate and sell off its brands to other bakeries.
With the strength of their brands and their longstanding
market position, it was a surprise to many seeing the firm
fail.
What went Wrong?
12/6/2017 4
 What went Wrong?
Hostess had long differentiated themselves in the baked goods business
by producing simple yet flavorful baked snack goods that were staples in
kids lunchboxes for generations.
Their strong position in the environment was undone by a combination of
forces.
Central to Hostesss decline was a change in customer preferences that
they did not effectively respond to.
As a result, their sales dropped by 28 percent from 2004 to 2011.
Hostesss workforce of 19,000 was mostly unionized. Rather than
having a single relationship with their workforce, they had 372
contractual agreements with dozens of different labor unions.
Hostess found itself with a high cost operating structure in a market
where their products were no longer highly differentiated and
experiencing reduced demand.
Internal analysis faulty?

12/6/2017 5
 SAMSUNG NOTE 7 A STORY
After 35 reported incidents of overheating smartphones worldwide,
Samsung made the unprecedented decision to recall every single one of
the Galaxy Note 7 smartphones sold. That's said to be 1 million of the 2.5
million that were manufactured. (Since the recall was first announced, the
number of explosive Note 7s was nearly quadrupled.)
The company stopped all sales and shipments of the Note 7, worked with
government agencies and cellular carriers around the world to provide
refunds and exchanges for the phone, and apparently it still wasn't
enough: By October 10, 2016 as many as five of the supposedly safe
replacement Note 7 phones had caught fire as well, and Samsung asked all
users to shut down their phones.
Samsung's official stance was that all Galaxy Note 7 owners of both old
and new phones should return their phones to the retailer they
purchased it from. Because of the ongoing situation with the phone there
were extended returns.
A press release from Samsung's Korean arm said, Returns will be possible
until at least December 31, 2016.
Samsung is now looking forward to its next flagship, the Galaxy S8, to
12/6/2017 6
rebuild consumer trust.
 THE THREE GENERIC BUSINESS STRATEGIES

Competitive Advantage
Uniqueness perceived
By the customer Low cost position

Overall Cost
Strategic Target

Differentiation Leadership Industry wide

(OCL)
Particular
Segment
Focus only

12/6/2017 7
 THE THREE GENERIC BUSINESS STRATEGIES
1. Overall Cost Leadership --- is based on creating a
low-cost position relative to a firms peers.
2. The firm must maintain the relationship throughout
its value chain and be devoted to lowering costs
throughout the entire chain.
3. Differentiation --- requires a firm to create products
/services that are valued and unique
4. Focus --- a firm must direct its attention toward:
1. Narrow product lines,
2. Buyer segments, and / or
3. Targeted geographic markets.
4. And simultaneously, it must take advantage of
Overall cost leadership and Differentiation
strategies.
12/6/2017 8
 THE VALUE CHAIN
General Admin
HRM

Technological Development

Procurement

Marketing
Operations and
Inbound Service
Outbound sales
Logistics Logistics

Primary Activities

12/6/2017 9
 1. OVERALL COST LEADERSHIP (OCL)
Definition --- is based on creating a low-cost position relative
to a firms peers. The firm must maintain the relationship
throughout its value chain and be devoted to lowering costs
throughout the entire chain.
Interrelated Tactics to achieve OCL
1. Highly efficient economy of scale facilities
2. Vigorous pursuit of cost reductions from experience
3. Tight cost and O/H controls
4. Avoidance of marginal customer accounts
5. Cost minimization in all the activities in the value-chain of
the firm ---
6. Consult Exhibit 5.3, which provides sufficient details in each
segment of value chain
12/6/2017 10
POTENTIAL PITFALLS IN OVERALL COST LEADERSHIP STRATEGIES

Too much focus on one or few aspects of value-chain

activities (Example -----? )
All rivals share a common input or raw material ---
vulnerable to price fluctuations and quantities vis--
vis availability (Example--?)
The strategy is imitated too easily by competitors
(Example ---?)
A lack of parity on differentiation (Example --?)
Erosion of cost advantage v/s informed customer
(Example --?)

12/6/2017 11
 2. DIFFERENTIATION
Definition --- Creating differences in the firms product or
services by creating something that is perceived industry-
wide as unique and valued by customers.
(Example- Unilever Crowd Sourcing) --- (Ex 5.2 Pg150)
Creativity may include:
Prestige or brand image
Use of innovative Technology
Innovation coupled with Technology
Features ----
Customer Services
Dealer Network
Handling of Mistakes / Technical anomalies (Toyota in Jun
15 and VW in Sep 15)
12/6/2017 12
 TOYOTA AND VW ----- Creating Value?
Toyota:
Toyota had announced recalls of approximately 5.2 million
vehicles for the pedal entrapment / Floor mat problem, and an
additional 2.3 million vehicles for the accelerator pedal problem.
Sales of multiple recalled models were suspended for several
weeks as a result of the accelerator pedal recall with the vehicles
awaiting replacement parts.

VW
Volkswagen was poised to recall up to 11m vehicles as the
carmaker prepared its response to the emissions scandal that
had rocked the automotive industry.
Out of these affected, 5m are Volkswagen-branded cars,
including the sixth-generation Golf, the seventh-generation
Passat and the first-generation Tiguan. The other vehicles
include 2.1m Audis, 1.2m Skodas, 700,000 Seats, and 1.8m light
commercial vehicles.
12/6/2017 13
POTENTIAL PITFALLS IN DIFFERENTIATION STRATEGIES

Uniqueness that is not valuable to customers

Too much differentiation ---- Software Languages

Too high a price premium for a comparable worth

Easily imitable differentiation techniques / features

Losing CA (Brand Name) by adding new low cost

products

Varying of perceptions between buyers and sellers

12/6/2017 14
 THE use of VALUE CHAIN
Diff
Cost
Ldrship Low cost & Differentiation strategies strat

Reduce Mgmt levels ---- General Admin ---- Knowledge based activities
Low turnover --- HRM ---- enhance tech competence

Pursue process innovation ----Technological Development ---Use Cutting Edge Tech

Long term contracts ----Procurement----- TQM

Outbound Marketing Service
Inbound Operations
Logistics and
Logistics sales
Computerized Cooperative Sub
Online Economy routing Activities
suppliers Of scale contracting
Cost Leadership
Build Allow
Purchase High Coord Brand discretion
superior level of to service
quality TQM JIT Image
people
Material
Differentiation strategy

12/6/2017 15
 3. FOCUS STRATEGIES
Definition: A firm must direct its attention toward narrow
product lines, buyer segments, or targeted geographic
markets.
Strategies
It could be done by improving CA and CP by applying Porters
Five Forces. It requires:
Low cost position with a strategic target or the exploitation
of a particular market niche that is different from the rest
of the industry
High differentiation, i.e., Achieve CA by dedicating itself
exclusively to the segmented market

12/6/2017 16
 POTENTIAL PITFALLS IN FOCUS STRATEGIES

Erosion of cost advantage within the narrow

segment
Example ?
Competition / Threat to Focus Strategies
Example ?
Focusers can become too focused to satisfy
buyer needs
Example ?

12/6/2017 17
 USE OF VALUE CHAIN (CA)
Use of Combination of BL Strategies
Firms that identify with one or more of the forms of
competitive advantage outperform those that do
not. One study analyzed:
1,789 strategic business units and found that
businesses combining multiple forms of competitive
advantage (differentiation and overall cost
leadership) outperformed businesses that used only
a single form.
The lowest performers were those that did not
identify with any type of advantage. They were
classified as stuck in the middle.
12/6/2017 18
 COMBINATION STRATEGIES*

Integrated strategy is the best strategy

Remain Innovative
Adopt modern day automated and
manufacturing systems
Continue to REVISE / REVISIT Processes and
Procedures
Exploit the profit pool concept across the
industry

12/6/2017 19
 COMBINATION STRATEGIES

Ideal Solution: Integrating Overall Low

Cost and Differentiation Strategies
The successful combination is harder for the
competitors to imitate.
An integrated strategy enables a firm to
provide two types of value to customers:
Differentiated attributes like quality, features etc
Lower Prices due firms Overall Low Cost strategy
How can we achieve the above ---- next slide
12/6/2017 20
 OPTIONS TO ACHIEVE CA THROUGH INTEGRATED
BUSINESS STRATEGIES

Adopt Automatic and Flexible Manufacturing

Systems
Exploit the Profit Pool concept
Exploit full benefits of Information Technology
Make use of Porters Five Forces

12/6/2017 21
 POTENTIAL PITFALLS IN ADOPTING
INTEGRATED STRATEGIES
Get stuck in the middle.
Understand challenges and expenses associated with
coordinating activities in the extended value chain
Miscalculating sources of revenue and profit pools in
the firms industry
What did J C Penny did between 1998 - 2000?
Improved Store presentations
Radically re-thought of merchandise
Marketed the company brand items more effectively
Slashed costs, closed down 44 stores, and cut 5,000 jobs

12/6/2017 22
 CAN CA BE SUSTAINED?
Nothing is forever -----
Dell v/s HP and others --- selling computers
Amazons v/s Barnes & Nobel --- selling books
Netflex v/s Redbox video rental industry
Atlas Doors --- Producer of industrial doors of variety
of sizes has outperformed all others growing @
steady 15%
Just in time inventory
Cost cutting techniques
Controlling logistics

12/6/2017 23
IMPACT OF INTERNET & DIGITAL STRATEGIES OF BL STRATEGIES

Low Cost Leadership

Cost cutting in each segment of primary and
support activities
Unable to manage threat of imitation
Differentiation
Enhanced firms abilities to build brand name etc
Mass customization has challenged certain
techniques
Focus
New world of opportunities
12/6/2017 ELAN LAWN 24
 INDUSTRY LIFE CYCLE STAGES --- STRATEGIC
IMPLICATIONS
Introduction Stage
Developing the product and finding a way to get the
customers to try it
Generating enough exposure so the product emerges as
the standard by which all other competitors products are
evaluated
Growth Stage
Strong increase in sales
Primary concern is to build consumer preferences fro
specific brands
Revenues increase at an accelerated rate
Competitors attempt to manipulate the business situation
by brining in substitute and alternative products
Contd

12/6/2017 25
 INDUSTRY LIFE CYCLE STAGES --- STRATEGIC IMPLICATIONS ---
Contd

Maturity Stage
Demands begin to slow down
Innovative measures are required to re-coup the
sales
Decline Stage
Maintain the product
Harvest the profits from the firms portfolios
Consider Exiting from the market
Consolidate with other firms

12/6/2017 26
 INDUSTRY LIFE CYCLE STAGES & STRATEGIES
Stage / Factor Introduction Growth Maturity Decline

Generic Differentiation Differentiation Differentiation Overall cost

Strategies Overall cost leadership
leadership Focus

Mkt 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 areas of R&D Sales & Production General
concern Marketing management &
finance
Overall objective Increase market Create consumer Demand Mkt Consolidate,
awareness demand share & extend maintain, harvest
12/6/2017 product Life cycle or exit 27
 TURNAROUND STRATEGIES
Carefully analyze internal and external
environment
Generalized Strategies
Asset and Cost surgery to raise cash
Undertake selective product and market pruning
Consider Piecemeal productivity improvements
Business strategies
Re-engineering
Divestment
Outsourcing
Privatization etc etc

12/6/2017 28
 Assign-2 Mba STM
1. Choose a firm with which you are familiar in your local business
community. Answer the following:
Is the firm successful in following one (or more) generic (BL)
strategies? Why or why not?
What do you think are some of the challenges it faces in implementing
these strategies in an effective manner?
2. Think of a local firm that has attained a differentiation focus or Cost /
Focus strategy. Are their advantages sustainable? Why? Why not?
3. Think of a local firm that successfully achieved a combination of overall
cost leadership and differentiation strategies. And answer the following:
What can be learned from this example? Are these advantages sustainable?
Why? Why not?
4. Must introduce the firms. Indicate their products / services and some
financial data.
5. May be done in groups of 4s
5. Submit by 30 Oct 17
12/6/2017 29
 SUMMARY
How and why firms outperform each other goes to the heart of strategic
management.
We identified three generic strategies ---strategiesoverall cost leadership,
differentiation and focus --- and discussed how firms are able not only to
attain advantages over competitors, but also to sustain such advantages
over time.
The three generic strategies Successful generic strategies invariably
enhance a firms position vis--vis the five forces of that industrya point
that we stressed and illustrated with examples.
However, as we pointed out, there are pitfalls to each of the generic
strategies. Thus, the sustainability of a firms advantage is always
challenged because of imitation or substitution by new or existing rivals.
Such competitor moves erode a firms advantage over time.
We also discussed the viability of combining (or integrating) overall cost
leadership and generic differentiation strategies. If successful, such
integration can enable a firm to enjoy superior performance and improve its
competitive position. However, this is challenging, and managers must be
aware of the potential downside risks associated with such an initiative.
12/6/2017 30
 Summary --- contd
The concept of the industry life cycle is a critical contingency
that managers must take into account in striving to create and
sustain competitive advantages. We identified the four stages
of the industry life cycle introduction, growth, maturity, and
declineand suggested how these stages can play a role in
decisions that managers must make at the business level.
These include overall strategies as well as the relative
emphasis on functional areas and valuecreating activities.
When a firms performance severely erodes, turnaround
strategies are needed to reverse its situation and enhance its
competitive position. We have discussed three approaches
asset cost surgery, selective product and market pruning, and
piecemeal productivity improvements.

12/6/2017 31
 Summary --- contd
We addressed the challenges inherent in determining the
sustainability of competitive advantages. Drawing on an example
from a manufacturing industry, we discussed both the pro and
con positions as to why competitive advantages are sustainable
over a long period of time.
The way companies formulate and deploy strategies is changing
because of the impact of the Internet and digital technologies in
many industries.
Further, Internet technologies are enabling the mass customization
capabilities of greater numbers of competitors. Focus strategies are
likely to increase in importance because the Internet provides highly
targeted and lower-cost access to narrow or specialized markets.
These strategies are not without their pitfalls, however, and firms
need to understand the dangers as well as the potential benefits of
Internet-based approaches.
12/6/2017 32
 Additional Reading

12/6/2017 33
 Competitive Intelligence Daily dawn 16 March 16
SBP Questions:
THE corporate sector has a few questions to answer after the
State Bank pointed out that it is sitting on
a pool of investible resources that could be as large as Rs3.7tr
almost 14pc of the total GDP. Moreover, the central bank also
pointed out that corporate entities are putting money in
government securities instead of real economic activities,
preferring the risk-free route of lending to government rather
than pursuing profits through investing activities.
CEO Fraud and BD Bank
The theft took place over several days early February through
a series of about three dozen electronic fund transfers from
the bank to New York Federal Reserve for a total amount
anywhere between $850 million to $870 million. The money
ended up in casinos of Thailand
12/6/2017 34
 Time Modi took on crony capitalism
VIJAY Mallya, the liquor baron who was called the `King of Good Times`, now
knows that his luck may not last forever. The flamboyant businessman turned
politician and member of parliament who left the country on March 2 for
London owes about INR 9,000 crore (US $1 billion) to a consortium of banks in
India. The banks and the government are twiddling their thumbs as to how to
bring him back. His Kingfisher Airlines was grounded in October 2012 because
of his huge debt and he knew that it was only a question of time before the
law caught up with him, His flight out of India has led to a political slugfest
inside and outside parliament with both the Congress and the BJP accusing
each other.
Pakistan received $751m as FDI during the last eight months
Three investors to acquire 51% of Singer Pakistan and they are:
Poseidon Synergies and 2 individuals Haroon Ahmed Khan and Nighat Haroon
Khan. They already hold 13 m shares plus 23.2m shares through public
offering.
VW sued for $3.7Bn over diesel scandal. VW failed to publish emission data in
time.

12/6/2017 35
 ETHICAL QUESTIONS

1. Can you think of a company that suffered ethical

consequences as a result of an overemphasis on a cost
leadership strategy? What do you think were the
financial and nonfinancial implications?
2. In the introductory stage of the product life cycle,
what are some of the unethical practices that managers
could engage in to enhance their firms market
position? What could be some of the long term
implications of such actions?

12/6/2017 36
 Thank You, for investing your time
with me.
Now go to the Library and do
additional reading pertaining to
Business Level Strategies including
Turn Around Strategies

12/6/2017 37