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CHAPTER 5
Business-Level Strategy:
Creating and Sustaining
Competitive Advantages

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 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.

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 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.

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 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…

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 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.

1. Overall cost leadership.

2. Differentiation.
3. Focus.

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 Three Generic Strategies 1

Exhibit 5.1 Three Generic Strategies

Source: Adapted from Porter, M.E. 1980, 1998. Competitive Strategy: Techniques for Analyzing Industries
and Competitors. Free Press.
Access the text alternative for slide images.

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 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.
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 Three Generic Strategies 3

Exhibit 5.2 Competitive Advantage and Business

Performance

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 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.

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 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.

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 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.

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 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.

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 Differentiation 1

A differentiation strategy can take many

forms:
.

Prestige or brand image.

Quality.
Technology.
Innovation.
Features.
Customer service.
Dealer network.

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 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.

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 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.

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 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.

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 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.

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 Focus 2

A focus strategy has two variants.

1.

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.

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 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.

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 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.

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 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.

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 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.
Using technology, firms can unscale, relying on suppliers
or customers to provide critical inputs to the process.

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 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.

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 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.

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 Question 1
Which statement regarding competitive
advantages is true?
A.

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
advantage is a recipe for failure.

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 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.

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 Industry Life-Cycle Stages 2

Exhibit 5.6 Stages of the Industry Life Cycle

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 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.”

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 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.

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 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.

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 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.

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 Question 2

As markets mature,
A.

A. costs continue to increase.

B. applications for patents increase
C. differentiation opportunities increase.
D. there is increasing emphasis on efficiency.

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 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.

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 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:

What differentiates you from others?

Industry Life Cycle:

What life-cycle stage of the industry within which the organization is located?
If your career is maturing or in the decline phase, what actions can you take to
restore career growth and momentum?

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 Three Generic Strategies Text Alternative
Return to parent-slide containing images.

An illustration shows the generic strategies plotted on two

dimensions: competitive advantage and market served.
Overall cost leadership leads to low cost position and broad
target market.
Cost focus leads to low cost position and narrow target
markets.
Broad differentiation leads to superior perceived value by
customer and broad target market.
Differentiation focus leads to superior perceived value by
customer and narrow target markets.

Return to parent-slide containing images.

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