Chapter 5

Business-level strategy

A strategy designed for a firm or a division of a

firm that competes within a single business.
 Types of competitive advantage and sustainability
Each of Porters generic strategies has the potential to allow a
firm to outperform rivals in its industry.

1. Overall cost leadership

2. Differentiation
3. Focus
Whereas the overall cost leadership and differentiation
strategies strive to attain advantages industrywide, focusers
have a narrow target market in mind.
One study analyzed 1,789 strategic business units and found that
businesses combining multiple forms of competitive
advantage outperform businesses that used only a single
form.
 Three generic strategies
Overall cost leadership: A firms generic strategy based on appeal
to the industrywide market using a competitive advantage
based on low cost.
• 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 firms value chain, such
as R&D, service, sales force, and advertising.
Key to an overall cost leadership strategy is the experience curve,
which refers to how business learn to lower costs as it gains
experience with production process.
 Three generic strategies: Overall cost leadership
Experience curve
 Potential pitfalls of overall cost leadership strategy

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

2. All rivals share a common input or raw material
3. The strategy is limited too easily
4. A lack of parity on differentiation
5. Erosion of cost advantages when the pricing information
available to customers increases
 Three generic strategies: Differentiation strategy

A firms generic strategy based on creating differences in the

firms product or service offering by creating something that is
perceived industrywide as unique and valued by customers.
• Prestige or brand image (Rolex watches)
• Innovation (LG air conditioners)
• Customer service (American express)
 Potential pitfalls of differentiation strategy

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. Perception of differentiation may vary between buyer and
sellers.
 Three generic strategies: Focus strategy

Firms generic strategy based on appeal to a narrow market

segment within an industry.
The essence of focus is the exploitation of a particular market
niche.
Potential pitfalls of focus strategies:
1. Erosion of cost advantages within the narrow segment
2. Even product and service offerings that are highly focused
are subject to competition from new entrants and from
imitation
3. Focusers can become too focused to satisfy buyer needs.
 Industry life cycle stages: strategic implications
The stages of introduction, growth, maturity, and decline that
typically occur over the life of an industry.

Exhibit: 5.12
 Strategies in the introduction stage
The first stage of the industry life cycle, characterized by:
1. New products that are known to customers
2. Poorly defined market segments
3. Unspecified product features
4. Low sales growth
5. Rapid technological change
6. Operating losses
7. A need for financial support.
 Strategies in the growth stage
Second stage of the product life cycle, characterized by
1. Strong increases in sales
2. Growing competition
3. Developing brand recognition
4. A need for financing complementary value-chain activities
such as marketing, sales, customer services, and research
and development.
 Strategies in the maturity stage
The third stage of the product life cycle, characterized by
1. Slowing demand growth
2. Saturated markets
3. Direct competition
4. Price competition
5. Strategic emphasis on efficient operations.
 Strategies in the maturity stage
Firms are able to rescue products floundering in the maturity
phase of their life cycles and return them to the growth
phase:
1. Reverse positioning: a break in industry tendency to
continuously augment products, characteristics of the
product life cycle, by offering products with fewer product
attributes and lower prices.
2. Breakway positiuoning: a break in industry tendency to
incrementally improve products along specific dimensions,
characteristics of the product life cycle, by offering products
that are still in the industry but that are perceived by
customers as being different.
 Strategies in the decline stage
The fourth stage of the product life cycle, characterized
by
1. Falling sales and profits
2. Increasing price competition
3. Industry consolidation
 Strategies in the decline stage
In this stage managers must carefully monitor the actions and
intentions of competitors before deciding on a course of
action. Four basic strategies are available in the decline phase:
1. Maintaining: refers to keeping a product going without
significantly reducing marketing support, technological
development, or other investments, in the hope that
competitors will eventually exit the market.
2. Harvesting: a strategy of wringing as much profit as possible
out of a business in the short to medium term by reducing
costs.
 Strategies in the decline stage
3. Exiting the market: dropping the product from a firm’s
portfolio.
4. Consolidating: a firm’s acquiring or merging with other firms in
an industry in order to enhance market power and gain
valuable assets.
 Turnaround strategy
A strategy that reverses a firm’s decline in performance and
returns it to growth and profitability. A study of 260 mature
businesses in need of a turnaround identified three strategies
used by successful companies.
1. Asset and cost surgery:
• Mature firms tend to have assets that do not produce any
returns.
• Investment in new plants and equipment can be deferred.
• Cutting administrative cost, speed up collection of
receivables, outsourcing production of various inputs.
 Turnaround strategy
2. Selective product and market pruning
• Discontinue marginally profitable product lines and
focus all resources on a few core profitable areas.
3. Piecemeal productivity improvements:
• Improving business processes by reengineering
them, benchmarking specific activities against
industry leaders, encouraging employees input to
identify excess costs, increasing capacity utilization
and improving employee productivity lead to a
significant overall gain.