Business-Level Strategy: Competitive Advantages PDF

Because learning changes everything.® CHAPTER 5 Business-Level Strategy: Creating and Sustaining Competitive Advantages © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Anatoli Styf/Shutterstock  Learning Objectiv...

Because learning changes everything.® CHAPTER 5 Business-Level Strategy: Creating and Sustaining Competitive Advantages © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Anatoli Styf/Shutterstock  Learning Objectives After reading this chapter, you should be able to: 1. Describe the central role of competitive advantage in the study of strategic management and the three generic strategies: overall cost leadership, differentiation, and focus. 2. Explain 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. 3. Identify the pitfalls managers must avoid in striving to attain generic strategies. 4. Explain how firms can effectively combine the generic strategies of overall cost leadership and differentiation. 5. Identify which factors determine the sustainability of a firm’s competitive advantage. 6. Understand 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. 7. Understand the need for turnaround strategies that enable a firm to reposition its competitive position in an industry. © McGraw Hill LLC.  Looking Ahead Types of Competitive Advantage and Sustainability. Can Competitive Strategies Be Sustained? Integrating and Applying Strategic Management Concepts. Industry Life-Cycle Stages: Strategic Implications. © McGraw Hill LLC.  The Central Role of Competitive Advantage Consider … In order to create and sustain a competitive advantage, companies need to stay focused on their customers’ evolving wants and needs and not sacrifice their strategic position as they mature and the market around them evolves. They also have to have a strategy… © McGraw Hill LLC.  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. 1. Overall cost leadership. 2. Differentiation. 3. Focus. © McGraw Hill LLC.  Three Generic Strategies 1 Exhibit 5.1 © McGraw Hill LLC. Access the text alternative for slide images.  Three Generic Strategies 2 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 implies: Products and/or services that are unique and valued. Emphasis on nonprice attributes for which customers will gladly pay a premium. A focus strategy requires: Narrow product lines, buyer segments, or targeted geographic markets. ▪ Advantages obtained either through differentiation or cost leadership. © McGraw Hill LLC.  Three Generic Strategies 3 Exhibit 5.2 Competitive Advantage and Business Performance Particulars Differentiation Differentiation Cost Differentiation Cost Stuck in and Cost and Focus and the Focus Middle Return on 35.5 32.9 30.2 17.0 23.7 17.8 Investment (%) Sales 15.1 13.5 13.5 16.4 17.5 12.2 growth (%) Gain in 5.3 5.3 5.5 6.1 6.3 4.4 market share (%) Sample size 123 160 100 141 86 105 © McGraw Hill LLC.  Overall Low-Cost Leadership 1 Overall cost leadership involves: 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 firm’s value chain, such as research and development, service, sales force, and advertising. © McGraw Hill LLC.  Overall Low-Cost Leadership 2 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. © McGraw Hill LLC.  Improving Competitive Position vis-à-vis the Five Forces: Cost Leadership 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. © McGraw Hill LLC.  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. Strategy can be too easily imitated. A lack of parity on differentiation. Reduced flexibility. Obsolescence of the basis of a cost advantage. © McGraw Hill LLC.  Differentiation 1 A differentiation strategy can take many forms: Prestige or brand image. Quality. Technology. Innovation. Features. Customer service. Dealer network. © McGraw Hill LLC.  Differentiation 2 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. Low defect rates to improve quality. Accurate and responsive order processing. Personal relationships with key customers. Rapid response to customer service requests. Differentiation on multiple fronts. © McGraw Hill LLC.  Improving Competitive Position vis-à-vis the Five Forces: Differentiation 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. © McGraw Hill LLC.  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. © McGraw Hill LLC.  Focus 1 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. © McGraw Hill LLC.  Focus 2 A focus strategy has two variants. 1. Cost focus. Creates a cost advantage in its target segment. Exploits differences in cost behavior. 2. Differentiation focus. Differentiates itself in its target market. Exploits the special needs of buyers. © McGraw Hill LLC.  Improving Competitive Position vis-à-vis the Five Forces: Focus 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 less vulnerable to substitutes. © McGraw Hill LLC.  Pitfalls of Focus Erosion of cost advantages within the narrow segment. Highly focused products and services still subject to competition from new entrants and from imitation. Focusers too focused to satisfy buyer needs. © McGraw Hill LLC.  Combination Strategies: Integrating Low- Cost and 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. © McGraw Hill LLC.  Combination Strategies Combining overall low-cost and differentiation strategies can take several forms. Automated and flexible manufacturing systems allow for mass customization. Data analytics allows firms to customize product and services while using resources efficiently. Exploitation of the profit pool concept creates a competitive advantage. © McGraw Hill LLC.  Improving Competitive Position vis-à-vis the Five Forces: Combination An integrated/combination overall low-cost and differentiation strategy Creates higher entry barriers due to both cost leadership and differentiation. Can provide higher margins that enable the firm to deal with supplier power. Reduces buyer power because of fewer competitors. Overall value proposition reduces threat from substitutes. © McGraw Hill LLC.  Pitfalls of Combination Strategies Firms that fail to attain both overall low-cost and differentiation strategies may end up with neither and become “stuck in the middle.” Firms can also underestimate the challenges and 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. © McGraw Hill LLC.  Question 1 Which statement regarding competitive advantages is true? A. If several competitors pursue similar differentiation tactics, they may all be perceived as equals in the mind of the consumer. B. With an overall cost leadership strategy, firms need not be concerned with parity on differentiation. C. In the long run, a business with one or more competitive advantages is probably destined to earn normal profits. D. Attaining multiple types of competitive © McGraw Hill LLC. advantage is a recipe for failure.  Industry Life-Cycle Stages 1 The industry life cycle: Introduction. Growth. Maturity. Decline. Generic strategies, functional areas, value- creating activities, and overall objectives all vary over the course of an industry life cycle. © McGraw Hill LLC.  Industry Life-Cycle Stages 2 Exhibit 5.6 Stages of the Industry Life Cycle Factor/Stage Introduction Growth Maturity Decline Generic strategies Differentiation Differentiation Differentiation Overall cost Overall cost leadership leadership Focus Market growth rate Low Very large Low to moderate Negative Number of Very few Some Many Few segments Intensity of Low Increasing Very intense Changing competition Emphasis on Very high High Low to moderate Low product design Emphasis on Low Low to moderate High Low process design Major functional Research and Sales and Production General area(s) of concern development marketing management and finance Overall objective Increase market Create consumer Defend market share Consolidate, awareness demand and extend product maintain, harvest, life cycles or exit © McGraw Hill LLC.  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.” © McGraw Hill LLC.  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. © McGraw Hill LLC.  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. © McGraw Hill LLC.  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 and reducing costs. Exiting the market. Consolidating or acquiring surviving firms. © McGraw Hill LLC.  Question 2 As markets mature, A. costs continue to increase. B. applications for patents increase C. differentiation opportunities increase. D. there is increasing emphasis on efficiency. © McGraw Hill LLC.  Retrenchment Strategies A retrenchment strategy involves electively cutting unprofitable market segments and asset investments to reverse performance decline and improve a firm’s profitability through Asset and cost surgery. Selected market and product pruning. Piecemeal productivity improvements. © McGraw Hill LLC.  Reflecting on Career Implications This chapter discusses how firms build competitive advantage in the marketplace. Consider the following questions: Types of Competitive Advantage: What is your organization’s business-level strategy? How can you help? What is your own competitive advantage? Understanding Your Differentiation: © McGraw Hill LLC. What differentiates you from others? ‹#›  End of Main Content Because learning changes everything.® www.mheducation.com © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.