CHAPTER 5

Business-Level
Strategy: Creating and
Sustaining Competitive
Advantages

Copyright Anatoli Styf/Shutterstock

 Learning Objectives

After reading this chapter, you should have a good understanding of:
5-1 The central role of competitive advantage in the study of strategic management
and the three generic strategies: overall cost leadership, differentiation, and
focus.
5-2 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.
5-3 The pitfalls managers must avoid in striving to attain generic strategies.
5-4 How firms can effectively combine the generic strategies of overall cost
leadership and differentiation.
5-5 What factors determine the sustainability of a firm’s competitive advantage.
5-6 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.
5-7 The need for turnaround strategies that enable a firm to reposition its
competitive position in an industry.

©McGraw-Hill Education.
 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 Education.
 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 Education.
 Three Generic Strategies
(1 of 3)

Exhibit 5.1 Three Generic Strategies

Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors. Michael E Porter, 1980, 1998,
Free Press.
©McGraw-Hill Education.
Jump to Appendix 1 for long image description.
 Three Generic Strategies
(2 of 3)

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 & 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 Education.
 Three Generic Strategies
(3 of 3)

Exhibit 5.2 Competitive Advantage and Business Performance

Particulars Differentiation Differentiation Cost Differentiation Cost and Stuck

and Cost and Focus Focus in the
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 5.3 5.3 5.5 6.1 6.3 4.4

market share
(%)

Sample Size 123 160 100 141 86 105

©McGraw-Hill Education.
 Overall Low-Cost Leadership
(1 of 2)

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 R&D, service, sales force, and
advertising

©McGraw-Hill Education.
 Overall Low-Cost Leadership
(2 of 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 Education.
 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 Education.
 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 Education.
 Differentiation
(1 of 2)

A differentiation strategy can take many forms:

• Prestige or brand image
• Quality
• Technology
• Innovation
• Features
• Customer service
• Dealer network

©McGraw-Hill Education.
 Differentiation
(2 of 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

©McGraw-Hill Education.
 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 Education.
 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 Education.
 Focus
(1 of 2)

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 Education.
 Focus
(2 of 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 Education.
 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 Education.
 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 Education.
 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 Education.
 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 information technology, firms can integrate
activities throughout the extended value chain.

©McGraw-Hill Education.
 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 Education.
 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 Education.
 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.
©McGraw-Hill Education.
 Industry Life Cycle Stages
(1 of 2)

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 Education.
 Industry Life Cycle Stages
(2 of 2)

Exhibit 5.6 Stages of the Industry Life Cycle

Factor 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 Consolidate,
awareness demand share and extend maintain, harvest,
product life cycles or exit
©McGraw-Hill Education.
 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 Education.
 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 Education.
 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 Education.
 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 Education.
 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 Education.
 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

©McGraw-Hill Education.