Business-Level Strategy: Creating and Sustaining Competitive Advantages Chapter Five Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Three Generic Strategies 5-2

Three Generic Strategies 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 5-3

Three Generic Strategies Focus strategy  Narrow product lines, buyer segments, or targeted geographic markets  Attain advantages either through differentiation or cost leadership 5-4

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 5-5

Competitive Advantage and Business Performance 5-6

Overall Cost Leadership Tight set of interrelated tactics that includes: Tight cost and overhead control Avoidance of marginal customer accounts Cost minimization in all activities in the firm’s value chain 5-7

Overall Cost Leadership Experience curve  refers to how business “learns” to lower costs as it gains experience with production processes  with experience, unit costs of production decline as output increases in most industries 5-8

Overall Cost Leadership (Cont.) 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 5-9

Comparing Experience Curve Effects 5-10

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 5-11

Differentiation Prestige or brand image Technology Innovation Features Customer service Dealer network 5-12

Differentiation Firms may differentiate along several dimensions at once Successful differentiation requires integration with all parts of a firm’s value chain An important aspect of differentiation is speed or quick response 5-13

Differentiation: Improving Competitive Position Creates higher entry barriers due to customer loyalty Provides higher margins that enable the firm to deal with supplier power Establishes customer loyalty and hence less threat from substitutes 5-14

QUESTION High product differentiation is generally accompanied by A. Higher market share B. Decreased emphasis on competition based on price C. Higher profit margins and lower costs D. Significant economies of scale 5-15

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 5-16

Focus Cost focus  firm strives to create a cost advantage in its target segment Differentiation focus  firm seeks to differentiate in its target market 5-17

Focus: Improving Competitive Position 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 5-18

U.S. Automobile Industry’s Profit Pool 5-19

Internet-Enabled Low Cost Leader Strategies Online bidding and order processing are eliminating the need for sales calls and are minimizing sales force expenses. Online purchase orders are making many transactions paperless, thus reducing the costs of procurement and paper. 5-20

Internet-Enabled Differentiation Strategies Internet-based knowledge management systems that link all parts of the organization are shortening response times and accelerating organization learning. Quick online responses to service requests and rapid feedback to customer surveys and product promotions are enhancing marketing efforts. 5-21

Internet-Enabled Focus Strategies Permission marketing techniques are focusing sales efforts on specific customers who opt to receive advertising notices. Niche portals that target specific groups are providing advertisers with access to viewers with specialized interests. 5-22

Industry Life-Cycle Stages: Strategic Implications Industry life cycle  refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry 5-23

Stages of the Industry Life Cycle 5-24

QUESTION The most likely time to pursue a harvest strategy is in a situation of A. High growth B. Strong competitive advantage C. Mergers and acquisitions D. Decline in the market life cycle 5-25

Industry Life-Cycle 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 5-26

Industry Life-Cycle Strategies For the Introduction Stage: Develop product and get users to try it Generate exposure so product becomes “standard” 5-27

Industry Life-Cycle Strategies The Growth Stage is: Characterized by strong increases in sales Attractive to potential competitors 5-28

Industry Life-Cycle Strategies For the Growth Stage: Brand recognition Differentiated products Financial resources to support value-chain activities 5-29

Industry Life-Cycle Strategies In the Maturity stage: Aggregate industry demand slows Market becomes saturated, few new adopters Direct competition becomes predominant Marginal competitors begin to exit 5-30

Industry Life-Cycle Strategies For the Maturity Stage: Efficient manufacturing operations and process engineering Low costs (customers become price sensitive) 5-31

Industry Life-Cycle Strategies In the Decline Stage: Industry sales and profits begin to fall Strategic options become dependent on the actions of rivals 5-32

Strategies in the Decline Stage For the Decline Stage Maintaining Exiting the market Harvesting Consolidation 5-33

Turnaround Strategies in the Life Cycle Turnaround strategy  a strategy that reverses a firm’s decline in performance and returns it to growth and profitability. Asset and cost surgery Selective product and market pruning Piecemeal productivity improvements 5-34