Chapter 5 Business Level Strategy Creating and Sustaining

Chapter 5 Business Level Strategy: Creating and Sustaining Competitive Advantages

Learning Objectives 5 -2 After reading this chapter, you should have a good understanding of: 1. The central role of competitive advantage in the study of strategic management, and the three generic 4 -2 strategies: overall cost leadership, differentiation, and focus. 2. How the successful attainment of generic strategies can improve the firm’s relative power vis-à-vis the five forces that determine an industry’s average profitability.

Learning Objectives 3. The pitfalls managers must avoid in striving to attain generic strategies. 4. How firms can effectively combine the generic strategies of overall cost leadership and differentiation. 5. What factors determine the sustainability of a firm’s competitive advantage. 6. How Internet-enabled business models are being used to improve strategic positioning.

Learning Objectives 7. 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. 8. The need for turn around strategies that enable a firm to reposition its competitive position in an industry.

Sustaining a Competitive Advantage Consider… The viability of a firm’s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the environment. They also have a strategy…

Sustaining a Competitive Advantage ¥ Business-level strategies require a choice: ¥ How to overcome the five forces and achieve competitive advantage? ¥ Suggestion - use Porter’s three generic strategies: © Overall cost leadership © Differentiation © Focus

Three Generic Strategies 5 -7

Three Generic Strategies ¥ Overall cost leadership is based on: © Creating a low-cost position relative to a firm’s peers © Managing relationships throughout the entire value chain to lower costs ¥ Differentiation © Products implies: and/or services that are unique & valued © Emphasis on non-price attributes for which customers will gladly pay a premium

Three Generic Strategies ¥A focus strategy requires: © Narrow product lines, buyer segments, or targeted geographic markets © Advantages obtained either through differentiation or cost leadership

Overall Low-Cost Leadership ¥ Cost leadership involves © Aggressive construction of efficient scale facilities © Vigorous pursuit of cost reductions from experience © Tight cost & overhead control © Avoidance of marginal customer accounts © Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, & advertising

Overall Low-Cost Leadership ¥ Cost leadership requires © Learning to lower costs through experience: the experience curve With experience, unit costs of production processes decline as output increases © This strategy also requires competitive parity Being “on par” with competitors with respect to low-cost, differentiation, or other strategic product characteristics Permits cost leaders to translate cost advantages directly into higher profits

Improving Competitive Position vis-àvis the Five Forces An overall low-cost position ¥ ¥ ¥ Protects a firm against rivalry from competitors Protects the firm against powerful buyers Provides more flexibility to cope with demands from powerful suppliers who want to increase input costs ¥ ¥ Provides substantial entry barriers due to economies of scale and cost advantages Puts the firm in a favorable position with respect to substitute products

Pitfalls of Cost Leadership ¥ Too much focus on one or a few value chain activities. ¥ Increase in the cost of the inputs on which the advantage is based ¥ The strategy is imitated too easily ¥ A lack of parity on differentiation ¥ Reduced flexibility ¥ Obsolescence of the basis of a cost advantage

Differentiation ¥A differentiation strategy can take many forms: © Prestige or brand image © Technology © Innovation © Features © Customer service © Dealer network

Differentiation ¥ Differentiation requires: ©A level of cost parity relative to competitors © Integration of multiple points along the value chain Superior material handling operations to minimize damage Accurate and responsive order processing Personal relationships with key customers Rapid response to customer service requests © Differentiation along several different dimensions at once

Improving Competitive Position vis-à-vis the Five Forces An overall differentiation strategy ¥ ¥ Creates higher entry barriers due to customer loyalty Provides higher margins that enable the firm to deal with supplier power ¥ ¥ Reduces buyer power because buyers lack suitable alternatives Establishes customer loyalty and hence less threat from substitutes

Pitfalls of Differentiation ¥ Uniqueness that is not valuable ¥ Too much differentiation ¥ Too high a price premium ¥ Differentiation that is easily imitated ¥ Dilution of brand identification through product line extensions ¥ Perceptions of differentiation may vary between buyers and sellers

Focus ¥A focus strategy is based on the choice of a narrow competitive scope within an industry. ©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

Focus 5 -19 ¥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

Improving Competitive Position vis-àvis the Five Forces An overall focus strategy ¥ ¥ Creates higher entry barriers due to cost leadership or differentiation or both Can provide higher margins that enable the firm to deal with supplier power ¥ ¥ Reduces buyer power because the firm provides specialized products or services Focused niches are less vulnerable to substitutes

Pitfalls of Focus ¥ Erosion of cost advantages within the narrow segment. ¥ Highly focused products and services are still subject to competition from new entrants & from imitation. ¥ Focusers can become too focused to satisfy buyer needs.

Combination Strategies: Integrating Low. Cost & Differentiation ¥ 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 ¥ Combining overall low-cost and differentiation strategies can take several forms: ¥ Automated & flexible manufacturing systems allow for mass customization ¥ Exploitation of the profit pool concept creates a competitive advantage ¥ Using information technology, firms can integrate activities throughout the extended value chain

Improving Competitive Position vis-àvis the Five Forces An integrated overall low-cost & differentiation strategy ¥ ¥ Creates higher entry barriers due to both cost leadership & differentiation Can provide higher margins that enable the firm to deal with supplier power ¥ ¥ Reduces buyer power because of fewer competitors An overall value proposition reduces threat from substitutes

Pitfalls of Combination Strategies Firms that fail to attain both overall low-cost & differentiation strategies may end up with neither and become “stuck in the middle” ¥ Firms can also underestimate the challenges & expenses associated with coordinating value-creating activities in the extended value chain ¥ Firms can also miscalculate sources of revenue and profit pools in the firm’s industry ¥

Internet-Enabled Low-Cost Leader Strategies ¥ The Internet and digital technologies lower transaction costs: © No in-person sales calls © Paperless transactions ¥ Disintermediation or removing intermediaries also lowers transaction costs © Reduced search costs © No need for a permanent retail location

Internet-Enabled Differentiation Strategies ¥ The Internet and digital technologies have created new ways of differentiating by enabling mass customization ¥ Customers can judge the quality & uniqueness of a product or service by their ability to be involved in its planning & design ¥ Lowered transaction costs allow firms to achieve parity on cost while providing a unique experience

Internet-Enabled Focus Strategies ¥ The Internet and digital technologies have created new ways of competing in a narrow market segment ¥ Customers can access markets less expensively, and small firms can extend their reach ¥ Social media allows niche firms to solicit input and respond quickly to customer feedback

Internet-Enabled Combination Strategies ¥ The Internet and digital technologies have provided all companies with greater tools for managing costs ¥ With lower costs for all, the net effect is fewer rather than more opportunities for sustainable advantage ¥ The ease of comparison shopping also erodes differentiation advantages

Industry Life Cycle Stages ¥ 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

Strategies in the Introduction 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 ¥ 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 ¥ 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 © Adopt reverse or breakaway positioning

Strategies in the Decline Stage ¥ 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

Turnaround Strategies ¥A turnaround strategy involves reversing performance decline & reinvigorating growth toward profitability through © Asset & cost surgery © Selected market & product pruning © Piecemeal productivity improvements ¥ Example = Ford Motor Company ¥ Example = Jamba Juice