Chapter Five Business-Level Strategy: Creating and Sustaining Competitive Advantages

CHAPTER 5 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin After studying this chapter, you should have a good understanding of: The central role of competitive advantage in the study of strategic management The three generic strategies—overall cost leadership, differentiation, and focus How the successful attainment of generic strategies can improve a firm’s relative power vis á vis the five forces that determine an industry’s average profitability The pitfalls managers must avoid in striving to attain generic strategies How firms can effectively combine the generic strategies of overall cost leadership and differentiation The importance of considering the industry life cycle to determine a firm’s business-level strategy and its relative emphasis on functional area strategies and value creating activities Learning Objectives TRANSPARENCY-41

CHAPTER 5 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Three Generic Strategies COMPETITIVE ADVANTAGE Overall Cost Leadership Differentiation Uniqueness Perceived By the Customer Low Cost Position Industrywide Particular Segment Only Focus STRATEGIC TARGET Source: Adapted from Porter, M.E Competitive Strategy, New York: Free Press, page 39. Exhibit 5.1 TRANSPARENCY-42

CHAPTER 5 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Competitive Advantage and Business Performance Performance Return on Investment Sales Growth Gain in Market Share Sample Size Stuck- in-the- Middle Cost Focus Differentiation FocusCostDifferentiation Differentiation and Cost Exhibit 5.2 Competitive Advantage TRANSPARENCY-43

CHAPTER 5 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Value Chain Activities: Examples of Overall Cost Leadership Source: Adapted from Porter, M.E Competitive Advantage, New York: Free Press. Few management layers to reduce overhead costs Firm Infra- structure Standardized accounting practices to minimize personnel required Human Resource Management Minimize costs associated with employee turnover through effective policies Effective orientation and training programs to maximize employee productivity Technology development Effective use of automated technology to reduce scrappage rates Expertise in process engineering to reduce manufacturing costs Procurement Effective policy guidelines to ensure low cost raw materials (with acceptable quality levels) Shared purchasing operations with other business units Efficient layout of receiving dock operations Effective use of quality control inspectors to minimize rework on the final product Effective utilization of delivery fleets Purchase of media in large blocks Sales force utilization is maximized by territory management Thorough service repair guidelines to minimize repeat maintenance calls Inbound Logistics OperationsOutbound Logistics Marketing and Sales Service Use of single type of repair vehicle to minimize maintenance costs Margin Exhibit 5.3 Source: Adapted from Porter, M.E Competitive Advantage, New York: Free Press. TRANSPARENCY-44

CHAPTER 5 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Comparing Experience Curve Effects Cost per Unit 0 units1 million units 2 million units 4 million units Cumulative Volume $1 90¢ 80¢ 70¢ 60¢ 81¢ 64¢ 49¢ 36¢ 72.9¢ 51.2¢ 34.3¢ 21.6¢ 90% original cost 80% original cost 70% original cost 64% original cost Exhibit 5.4 TRANSPARENCY-45

CHAPTER 5 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Value Chain Activities: Examples of Differentiation Firm Infra- structure Human Resource Management Technology Development Procurement Superior material handling operations to minimize damage Quick trans- fer of inputs to manufacturing process Inbound Logistics Superior MIS – To integrate value- creating activities to improve quality Facilities that promote firm image Programs to attract talented engineers and scientists Provide training and incentives to ensure a strong customer service orientation Superior material handling and sorting technology Excellent applications engineering support Purchase of high quality components to enhance product image Use of most prestigious outlets Flexibility and speed in responding to changes in manufacturing specifications Low defect rates to improve quality Accurate and responsive order processing Effective product replenishment to reduce customer’s inventory Creative and innovative advertising programs Fostering of personal relationship with key customers Rapid response to customers’ service requests OperationsOutbound Logistics Marketing and Sales Service Complete inventory of replacement parts and supplies Margin Widely respected CEO enhances firm reputation Exhibit 5.5 Source: Adapted from Porter, M.E Competitive Advantage, New York: Free Press. TRANSPARENCY-46

CHAPTER 5 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin The Erosion of Product and Service Differentiation What are the raw commodities? NowNext? Personal computersServers Hotel roomsCar rentals Legal servicesCredit Police carsGeneric drugs Ocean shippingInsurance BandwidthPharmacy Services Network hostingData-storage capacity Manufacturing capacityMultibillion-dollar infrastructure projects Source: Adapted from Colvin, G You could be selling soybeans. Fortune: November 13:80. Exhibit 5.6 TRANSPARENCY-47

CHAPTER 5 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin The U.S. Auto Industry’s Profit Pool 25% Operating margin 0 100% Auto manufacturing New car dealers Used car dealersAuto loans Leasing Warranty Gasoline Auto insurance Service repair Aftermarket parts Auto rental Share of industry revenue Source: Gadiesh, O. & Gilbert, J.L Profit pools: A fresh look at strategy. Harvard Business Review, 76(3): 144. Exhibit 5.7 TRANSPARENCY-48

CHAPTER 5 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Stages of the Industry Life Cycle Unit Sales Profits Overall Cost Leadership Focus Differentiation Overall Cost Leadership Differentiation Generic Strategies Consolidate, Maintain, Harvest, or Exit Defend Market Share and Extend Product Life Cycles Create Consumer Demand Increase Market Awareness Overall objective General Management and Finance ProductionSales and MarketingResearch and Development Major functional area(s) of concern LowHighLow to ModerateLowEmphasis on process design LowLow to ModerateHighVery HighEmphasis on product design ChangingVery IntenseIncreasingLowIntensity of competition FewManySomeVery Few Number of segments NegativeLow to ModerateVery LargeLowMarket growth rate DECLINEGROWTHINTRODUCTIONSTAGEMATURITY FACTOR Exhibit 5.8 TRANSPARENCY-49