McGraw Hill

STRATEGIC MANAGEMENT
CREATING COMPETITIVE ADVANTAGE

Gregory Dess, Gerry McNamara, Alen Eisner, Seung-Hyung Lee

Tenth Edition
Chapter 5
Business-Level Strategy:
Creating and Sustaining Competitive Advantages
 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. Overall cost leadership.
2. Differentiation.
3. Focus.

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 Three Generic Strategies 1

Exhibit 5.1 Three Generic Strategies

Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors. Michael E
Porter, 1980, 1998, 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
Particulars Differentiation and Cost Differentiation Cost Differentiation and Cost and Stuck in the
Focus Focus Middle

Return on 35.5 32.9 30.2 17.0 23.7 17.8

Investment (%)

Sales Growth 15.1 13.5 13.5 16.4 17.5 12.2

(%)

Gain in market 5.3 5.3 5.5 6.1 6.3 4.4

share (%)

Sample Size 123 160 100 141 86 105

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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 along several different dimensions at once.

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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. 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. 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

Factor Introduction Growth Maturity Decline
Generic strategies Differentiation Differentiation Differentiation Overall cost leadership
Overall cost leadership Focus

Market growth rate Low Very large Low to moderate Negative

Number of segments Very few Some Many Few

Intensity of competition Low Increasing Very intense Changing

Emphasis on product Very high High Low to moderate Low

design

Emphasis on process Low Low to moderate High Low

design

Major functional area(s) of Research and Sales and marketing Production General management and
concern development finance

Overall objective Increase market Create consumer Defend market share and Consolidate, maintain,
awareness demand extend product life cycles harvest, or exit

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

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 Turnaround Strategies

A turnaround strategy involves reversing performance decline

and reinvigorating growth toward profitability through
• Asset and cost surgery.
• Selected market and product pruning.
• Piecemeal productivity improvements.

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