Business-Level Strategy Chapter 5

Chapter 5: Business-Level Strategy

• Business-level strategies are crucial for firms to achieve and maintain a competitive advantage.
• Three generic strategies are: overall cost leadership, differentiation, and focus.
• Successful generic strategies improve a firm's position against industry forces, enhancing profitability.
• Pitfalls to avoid while implementing generic strategies include: overly focusing on a single value chain activity, input cost increases, easily imitated strategies, lack of parity in other areas (such as differentiation), reduced flexibility, and obsolescence of the advantage's basis.

Learning Objectives

• Competitive advantage is central to strategic management
• The three generic strategies are overall cost leadership, differentiation, and focus
• Generic strategies improve a firm's power relative to the five forces of competition
• Managers must understand and avoid pitfalls in achieving generic strategies.
• Combining cost leadership and differentiation strategies can be a powerful approach
• Factors contributing to sustainable competitive advantage should be understood.
• Understanding the industry life cycle is essential for developing appropriate business-level strategies.
• Implementing turnaround strategies helps reposition a company within its industry.

Looking Ahead

• Defining and sustaining competitive advantages
• Evaluating the sustainability of competitive strategies
• Applying strategic management concepts
• Understanding the strategic implications of different industry life-cycle stages

The Central Role of Competitive Advantage

• Companies must focus on evolving customer needs and wants.
• Companies must maintain a well-defined strategic position in the market
• A successful company will have a well-defined business strategy.

Sustaining a Competitive Advantage

• Business-level strategies provide a framework to overcome competitive forces.
• Porter's three generic strategies – overall cost leadership, differentiation, focus – offer approaches to gain competitive advantages.

Three Generic Strategies

• A matrix illustrates the relationship between target market (broad or narrow) and competitive advantage (low cost or superior value) to define Porter's three generic strategies (overall cost leadership, differentiation, and focus).
• Cost focus and differentiation focus are narrow market strategies.

Overall Cost Leadership

• Key elements involve aggressive construction of cost-efficient facilities, the pursuit of cost reductions through experience, maintaining control of costs and overheads, and avoidance of marginal customer accounts.
• Minimizing costs across the entire value chain in R&D, service, sales force, and marketing are all examples of cost reduction measures.
• Experience curve effects contribute to lower unit costs with increased output.

Protecting Firm Against Forces via Cost Leadership

• This overall low-cost position protects the firm from rival competitors, powerful buyers, powerful suppliers, potential entrants, and substitute products.

Pitfalls of Cost Leadership

• Over-focusing on a limited number of value chain activities
• Increases in input costs
• Easily imitated strategies
• Lack of parity on other areas such as differentiation
• Reduced flexibility
• Obsolescence of the basis of the cost advantage

Differentiation

• Unique and valued products/services are key factors
• Non-price factors (quality, technology, innovation) drive differentiation
• Customer service and dealer networks are distinct differentiation factors

Improving Competitive Position vis à vis the Five Forces: Differentiation

• Customer loyalty provides higher entry barriers.
• Higher margins provide resilience to supplier power.
• Lack of suitable alternatives reduces buyer power.
• Customer loyalty mitigates the impact of substitute products.

Pitfalls of Differentiation

• Uniqueness may lack inherent value
• Excessive differentiation
• Premium prices might be easily imitated
• Product line expansion can dilute brand identification
• Diverse perceptions between buyers and sellers concerning product differentiation

Focus

• Competitive scope is narrowed to a specific segment or niche.
• Tailoring strategy to serve specific segments creates a unique value proposition.
• Firm achieves a competitive advantage by entirely concentrating on those specific segments

Improving Competitive Position vis à vis the Five Forces: Focus

• Cost leadership and differentiation in a narrow segment create high entry barriers.
• Higher margins within target segments combat supplier power.
• Narrow niches reduce buyer power due to specialized products.
• Specialized niches are resistant to substitutes due to limited availability

Pitfalls of Focus

• Erosion of cost advantages within the target market.
• Highly focused products/services remain susceptible to competitor entry and imitation
• Obsession with satisfying buyer needs may restrict the expansion of the business.

Combination Strategies

• Combining low cost and differentiation strategies creates a unique value proposition.
• This integrated approach makes it difficult to imitate.

Pitfalls of Combination Strategies

• Firms struggle to attain both low cost and differentiation.
• These companies may end up in the middle, having neither low cost nor differentiation effectively.
• Companies underestimate the difficulties, associated costs, and complexity of coordinating value-adding activities throughout the value chain.
• Firms' estimations of revenue and profit pools can be inaccurate.

Industry Life Cycle Stages

• The industry life cycle encompasses introduction, growth, maturity, and decline stages.
• Generic strategies, functional areas, and overall business objectives differ throughout each stage.

Industry Life Cycle Stages 2

• Specific factors (market growth, competitor intensity, design focus, functional aspects, etc) shift in varying stages of the industry life cycle.

Strategies in the Introduction Stage

• Products are unfamiliar, market segments aren't clearly defined, and competition is limited.
• Strategies involve introducing a product, creating awareness, and making the product a standard.

Strategies in the Growth Stage

• Strong sales increases, potential competitors, and opportunities for brand building
• Strategies involve creating differentiated products, promoting selective demand, and investing in value chain activities.

Strategies in the Maturity Stage

• Declining aggregate demand, saturated markets, increasing competition
• Strategies focus on efficient processes, lowering costs, or applying reverse engineering approaches.

Strategies in the Decline Stage

• Industry sales and profits fall, price competition intensifies, and industry consolidations occur.
• Strategies involve maintaining market position, harvesting profits, exiting or consolidating the market.

Question 2

• As markets mature, there's an increasing emphasis on efficiency. Applications for patents often increase.
• Differentiation opportunities increase. Cost often continues to increase.

Retrenchment Strategies

• Designed for firms experiencing declining performance.
• Strategies to improve profitability include asset and cost surgery, market pruning, and productivity improvements.

Reflecting on Career Implications

• Companies create competitive advantages through careful strategy.
• Analyze competitive advantage in your organization/department/career.
• Recognize your strengths and opportunities for improvement.
• Reflect on ways to create tangible differentiators.

Explore the key concepts of business-level strategies in Chapter 5, focusing on competitive advantage and the three generic strategies: overall cost leadership, differentiation, and focus. Understand how these strategies can enhance profitability and the pitfalls to avoid during implementation. Test your knowledge and comprehension of strategic management principles.