Chapter 6 Business-Level StrategyBusiness-Level Strategy

Learning Objectives

After reading this chapter, you should have a good understanding of:

The central role of competitive advantage in the study of strategic management.

The three generic strategies: overall cost leadership, differentiation, and focus.

How the successful attainment of generic strategies can improve a firm’s relative power vis-à-vis the five forces that determine an industry’s average profitability.

The pitfalls managers must avoid in striving to attain generic strategies.

How firms can effectively combine the generic strategies of overall cost leadership and differentiation.

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Types of Competitive Advantage and Sustainability

Three generic strategies

1. Overall cost leadership

Low-cost-position relative to a firm’s peers Manage relationships throughout the entire value chain

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Types of Competitive Advantage and Sustainability

2. Differentiation

Create products and/or services that are unique and valued Non-price attributes for which customers will pay a

premium

3. Focus strategy

Narrow product lines, buyer segments, or targeted geographic markets

Attain advantages either through differentiation or cost leadership

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Example

1. Companies pursuing an overall cost leadership strategy

McDonalds Wal-Mart

2. Companies pursuing a differentiation strategy Harley Davison Apple

3. Companies pursuing a focus strategy Rolex Lamborghini

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Overall Cost Leadership

Integrated tactics

Aggressive construction of efficient-scale facilities

Vigorous pursuit of cost reductions from experience

Tight cost and overhead controlAvoidance of marginal customer accountsCost minimization in all activities in the firm’s

value chain, such as R&D, service, sales force, and advertising

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Overall Cost Leadership

Experience Curve

How business “learns” to lower costs as it gains experience with production processes

With experience, unit costs of production decline as output increases in most industries

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Pitfalls of Overall Cost Leadership Strategies

Too much focus on one or a few value-chain activitiesToo often managers make big cuts in operating

expenses, but don’t question year-to-year spending on capital projects

Should explore all value-chain activities as candidates for cost reductions

All rivals share a common input or raw materialVulnerable to price increases

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Differentiation

Differentiation can take many forms

Prestige or brand imageTechnologyInnovationFeaturesCustomer serviceDealer network

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Differentiation

Firms may differentiate along several dimensions at once

Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique

Requires integration with all parts of a firm’s value chain

Important aspect is speed or quick response

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Potential Pitfalls of Differentiation Strategies

Uniqueness that is not valuableMust be unique and possess high customer value

Too much differentiationFirms may strive for too much quality

Too high a price premiumCustomers may desire product, but repelled by price

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Potential Pitfalls of Differentiation Strategies

Differentiation that is easily imitated Dilution of brand identification through product-

line extensionsIncrease short-term revenues, detrimental in long run

Perceptions of differentiation may vary between buyers and sellers“Beauty is in the eye of the beholder”

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Focus

Focus is based on the choice of a narrow competitive scope within an industry

Firm selects a segment or group of segments (niche) and tailors its strategy to serve them

Firm achieves competitive advantages by dedicating itself to these segments exclusively

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Focus

Two variants

Cost focusStrives to create a cost advantage in its target segment

Differentiation focusSeeks differentiate in target market

Both rely on providing better service than broad-based competitors who are trying to serve the focuser’s target segment

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Pitfalls of Focus Strategies

Erosion of cost advantages within the narrow segment

Focused products and services still subject to competition from new entrants and from imitation

Focusers can become too focused to satisfy buyer needs

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Example: Expensive Golf Gear

"For as long as golf has been played, golfers have been trying to buy a better game," says Steve Pike

Designer business with highest-end equipment from manufacturers such as Callaway, TaylorMade, and Titleist

Showing up with top-notch gear is like bringing a platinum-covered bazooka to a knife fight

Consumers think the higher the price, the better the equipment

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Combination Strategies: Integrating Overall Low Cost and Differentiation

Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy

Goal of combination strategy is to provide unique value in an efficient manner

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Combination Strategies: Integrating Overall Low Cost and Differentiation

Two types of value to customers

Differentiated attributesHigh quality Brand identificationReputation

Lower prices

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Combination Strategies: Improving Competitive Position vis-à-vis the Five Forces

Obtain advantages of competition from both approaches

High entry barriersBargaining power over suppliersReduces power of buyers (fewer competitors)Value position reduces threat from substitute productsReduces the possibility of head-to-head rivalry

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Pitfalls of Combination Strategies

Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”

Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain

Miscalculating sources of revenue and profit pools in the firm’s industry

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