Business level strategy: Creating and Sustaining Competitive Advantages

Business-Level Strategy:Creating and Sustaining Competitive Advantages

Chapter Five

Reporters:Cayude, Jeisa

FerogeneDarnayla, Alvie

Lim, John MichaelMendez, Ria Beth

Rosales, Louie PatrickTeves, Charlston

This chapter focuses on:

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1st Generic Strategy

• Overall cost leadership Low-cost-position relative to a firm’s

peers Manage relationships throughout the

entire value chain

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Overall Cost Leadership

Tight set of interrelated tactics that include:

•Aggressive construction of efficient-scale

facilities

• Vigorous pursuit of cost reductions from

experience

• Tight cost and overhead control

• Avoidance of marginal customer accounts

• Cost minimizing in all activities in the firm’s

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

and advertising

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• Experience curve refers to 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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• Parity on the basis of differentiation Permits a cost leader to translate cost

advantages directly into higher profits than competitors

Allows firm to earn above-average profits

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Improving Competitive Position vis-à-vis the

Five Forces

overall low cost-position enables a firm to achieve above-average returns despite strong competition

Potential Pitfall

too much focus on one or few value chain-activities

all rivals share a common input or raw material

the strategy is imitated so easily

erosion of cost advantages when the pricing information available to customers increases

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2nd Generic Strategy

• Differentiation Create products and/or services that

are unique and valued Non-price attributes for which

customers will pay a premium

Differentiation

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

Firms achieve and sustain differentiation advantages and attain above-average performance when their price exceed the extra costs incurred in being unique.

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Firm Infrastructure

Human Resource Management

Technology Development

Procurement

Superior MIS – to integrate value-creating activities to improve quality

Facilities that promote firm image

Widely respected CEO enhances firm reputation

Programs to attract talented engineers and scientists

Provide training and incentives to ensure a strong customer service orientation

Superior material handling and sorting technology

Excellent applications engineering support

Purchase of high-quality components to enhance product image

Use of most prestigious outlets

Superior material handling operations to minimize damage

Quick transfer of inputs to manufacturing process

Flexibility and speed in responding to changes in manufacturing specificationsLow defect rates to improve quality

Accurate and responsive order processing

Effective product replenishment to reduce customer’s inventory

Creative and innovative advertising programs

Fostering of personal relationship with key customers

Rapid response to customer service requests.

Complete inventory of replacement parts and supplies

Inbound Logistics

Operations

Outbound Logistics

Marketing Sales

Service

Value Chain Activities: Differentiation

Differentiation


Five Forces

achieving differentiation is a viable strategy for earning above-average returns by creating a defensible position for overcoming Porter’s five competitive forces

Potential Pitfall

uniqueness that is not valuable

too much differentiation too high 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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Potential Pitfalls of Differentiation Strategies

1. Uniqueness that is not valuable. A differentiation strategy must provide unique bundles of products and/or services that customers highly value.

2. Too much differentiation. Firms may strive for quality or service that is higher than customer’s desire. Thus they are vulnerable to competitors who provide an appropriate level of quality at a lower price.

3. Differentiation that is easily imitated. Resources that are easily intimidated cannot lead to sustainable advantages.

4. Dilution of brand identification through product line extensions. Firms may erode their quality brand image by adding products or services with lower prices and less quality.

5. Perception of differentiation may vary between buyers and sellers.

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3rd Generic Strategy

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• Focus Strategy Narrow product lines, buyer segments,

or targeted geographic markets Attain advantages either through

differentiation or cost leadership

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

Cost Focus firms strives to

create a cost advantage in its target segment

Differentiation Focus firm seeks to

differentiate in its target market

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Focus


Five Forces

firms pursuing a focus strategy can earn above-average returns

Potential Pitfall

erosion of cost advantages within the narrow segment

even product and service offerings that are highly focused are subject to competition from new entrants and from imitation

focusers can become too focused to satisfy buyer needs

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Three Combination Approaches

• Automated and flexible manufacturing systems

• Exploiting the profit pool concept for competitive advantage

• Coordinating the “extended” value chain by way of information technology

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Integrated Overall low cost and Differentiation Strategies


Five Forces

create an enviable position relative to industry forces

serves to erect high entry barriers to potential competitors that have neither the financial nor physical resources to compete head to head

Potential Pitfall

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

underestimating the challenges and express 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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Industry Life-Cycle Stages: Strategic Implications

• Industry life cycle refers to the stages of introduction, growth,

maturity, and decline that occur over the life of an industry

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Industry Life-Cycle Strategies

In the Introduction Stage:

• Products are unfamiliar to consumers

• Market segments not well defined

• Product features not clearly specified

• Competition tends to be limited

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The Growth Stage is:• Characterized by

strong increases in sales

• Attractive to potential competitors

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For the Growth Stage:

• Brand recognition

• Differentiated products

• Financial resources to support value-chain activities

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In the Maturity stage:

• Aggregate industry demand slows

• Market becomes saturated, few new adopters

• Direct competition becomes predominant

• Marginal competitors begin to exit

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In the Decline Stage:

• Industry sales and profits begin to fall

• Strategic options become dependent on the actions of rivals

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Strategies in the Decline Stage

For the Decline Stage• Maintaining • Exiting the market• Harvesting• Consolidation

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Turnaround Strategies

Asset and cost surgery Selective product and marketing pruning Piecemeal productivity improvements

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It is more likely to occur during the maturity or decline stage

THANK YOU!

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Business level strategy: Creating and Sustaining Competitive Advantages

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