Business Level

Strategy:
Creating and
Sustaining
Competitive
Advantages

chapter 5
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education .
 Business-level strategies
5-2

 Business-level strategies detail actions

taken to provide value to customers and
gain a competitive advantage by
exploiting core competencies in specific,
individual product or service markets.
 Three generic strategies:
 Overall cost leadership
 Differentiation
 Focus
 Cost Leadership
5-3

 Overall cost leadership is based on:

 Creating a low-cost position relative to a
firm’s peers
 Firms can achieve cost reduction from
both primary and support activities.
 E.g., lower the cost of production, lower the
cost of distribution…
Some Tactics of Cost leadership
#-4
 Some Tactics of Cost
#-5
leadership
 Cost Leadership
5-6

 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
 Differentiation
5-7

A differentiation strategy: a firm’s generic

strategy based on creating differences in the
firm’s product or service offering by creating
something that is perceived industrywide as
unique and valued by customers
 Prestige or brand image
 Technology
 Innovation
 Features
 Customer service
 Some Tactics of Differentiation
#-8
 Some Tactics of Differentiation
#-9
 Differentiation
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 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
 Three Generic Strategies
5-11

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.
 Focus Strategy
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A focus strategy:
 Generic strategy based on appeal to a narrow
market segment within an industry.
 Requires narrow product lines, buyer
segments, or targeted geographic markets
 Advantages obtained either through
differentiation or cost leadership—cost focus
and differentiation-focus
 Cost focus: create a cost advantage in its target
market.
 Differentiation focus: differentiate in its target
market.
 Focus Strategy
5-13

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
 Example: LinkedIn
 Focus Strategy
5-14

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
 Focus Strategy
#-15

 Focus requires that a firm either have a

low-cost position with its strategic target,
high differentiation, or both.
 Together with cost leadership and
differentiation strategy, focus strategy
defense against each competitive force.
 Focus is also used to select niches that are
least vulnerable to substitutes or where
competitors are weakest. (LinkedIn)
 Focus Strategy
#-16

 LinkedIn:
 By providing a platform for a targeted
customer group, business people, to share
key work information, LinkedIn insulated
itself from rivalrous pressure from existing
social networks, such as Facebook. It also
felt little threat from new generalist social
networks, such as Google+.
 Three Generic Strategies
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Exhibit 5.2 Competitive Advantage and Business Performance

 Combination Strategies: Integrating
Low-Cost & Differentiation
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 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
5-19

 Combining overall low-cost and

differentiation strategies
 Automated & flexible manufacturing
systems allow for mass customization
 Mass customization = a firm’s ability to
manufacture unique products in small
quantities at low cost.
 Example: Dell
 Improving Competitive Position
5-20
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
 Industry Life Cycle Stages
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 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
 Industry Life Cycle Stages
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Exhibit 5.7 Stages of the Industry Life Cycle

 Strategies in the Introduction
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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
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 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
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 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
#-26
 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