PART 2 - STRATEGIC FORMULATION

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

Michael Porter presented three generic strategies that a firm can use to overcome the five
forces and achieve competitive advantage.
1. Overall Cost Leadership
2. Differentiation
3. Focus

OVERALL COST LEADERSHIP

A firms generic strategy based on appeal to the industrywide market using a competitive
advantage based on low cost.
Overall cost leadership requires a tight 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 minimization in all activities in the firm’s value chain, such as R&D, service, sales force,
and advertising.

One factor often central to an overall cost leadership strategy is the experience curve
which 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.
Experience curve, developed by the Boston Consulting Group in 1968, is a way of looking
at efficiency gains that come with experience. For a range of products; as cumulative experience
doubles, costs and labor hours needed to produce a unit of product decline by 10 to 30 percent.
To generate above average performance, a firm following an overall cost leadership
position must attain competitive parity on the basis of differentiation relative to competitors. In
other words, a firm achieving parity is similar to its competitors, or “on par” with respects or
differentiated products.

Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces An overall low-
cost position

 Protects a firm against rivalry from competitors

 Protects a firm against powerful buyers

 Provides more flexibility to cope with demands from powerful suppliers for input cost increases.
 Provides substantial entry barriers from economies of scale and cost advantages.

 Puts the firm in a favorable position with respect to substitute products

 Potential Pitfalls of Overall Cost Leadership Strategies

 Too much focus on one or few value chain activities.

 Increase in the cost of the inputs on which the advantage is based

 A strategy that can be imitated too easily.

 A lack of parity on differentiation

 Reduced flexibility

 Obsolescence of the basis of cost advantage

Differentiation

Differentiation Strategy- consist of creating differences in the firm’s product or service

offering by creating something that is perceived industrywide as a unique and valued by the
customers.
Differentiation can take many forms:

 Prestige or Brand Image

 Quality

 Technology

 Innovation

 Features

 Customer Service

 Dealer Network

Differentiation: Improving Competitive Position vis-à-vis the five forces

 Creates a higher entry barrier due to customer loyalty

 Provides higher margins that enable the firm to deal with supplier power

 Reduces buyer power because buyer lack suitable alternative

 Reduces supplier power due to prestige associated with supplying to highly

differentiated products
 Established customer loyalty and hence less threat from substitute
Potential Pitfalls of Differentiation Strategies

Potential Pitfalls of a differentiation strategy include:

 Uniqueness that is not valuable.

 Too much differentiation.

 Too high a price premium.

 Differentiation that is not easily imitated.

 Dilution of brand identification through product-line extensions.

Focus

Focus Strategy- is based on the choice of narrow competitive scope within an industry.
Focus Strategy has two variants;
 Cost Focus-a firm strives to create a cost advantage in its target segment.

 Differentiation Focus- a firm seeks to differentiate on its target market.

Focus: Improving Competitive Position vis-à-vis the Five Forces

Focus requires that a firm have either a low-cost position with its strategic target, high
differentiation, or both.

Potential Pitfalls of Focus Strategies include:

1. Cost advantages may erode within the narrow segment.

2. Even product and service offerings that are highly focused are subject to competitive
from new entrants and from imitation.
3. Focusers can become too focused to satisfy buyer needs.
Combination Strategies: Integrating Overall Low Cost and Differentiation

The primary benefit to firms that integrated low-cost and differentiation strategies is the
difficulty for rivals to duplicate or imitate.
Two types of value to customer:

 Differentiated Attributes- high quality, brand identification and reputation

 Lower Price- the firm’s lower cost in value-creating activities.

Four approaches to combining overall low cost and differentiation

 Adopting Automated and Flexible Manufacturing Systems

Mass Customization- a firm’s ability to manufacture unique products in small quantities

at low cost.
 Using Data Analytics

 Exploiting the Profit Pool Concept for competitive Advantage

Profit Pool- the total profits in an industry at all points along the industry’s value chain.

 Coordinating the “Extended” Value Chain by Way of Information Technology.

Integrated Overall Low-Cost and Differentiation Strategies: Improving Competitive

Position vis-à-vis the Five Forces
Firms that successfully integrate both differentiation and cost advantages create an
enviable position.

Pitfalls of Integrated Overall Cost Leadership and Differentiation include:

 Failing to attain both strategies and possibly ending up with neither, leaving the firm
“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.

INDUSTRY LIFE CYCLE STAGES: STRATEGIC IMPLICATION

 The industry life cycle refers to the stages of introduction, growth, maturity and decline that
occur over the life of an industry. The industry life cycle concept can be explored from several
levels from the life cycle of an entire industry to the life cycle of a single variation or model of a
specific product or service.
Why are industry life cycles important? The emphasis on various generic strategies,
functional areas, value-creating activities, and overall objectives varies over the course of an
industry life cycle. Managers must become even more aware of their firm's strength and
weakness in many areas to attain competitive advantages.

Strategies in introduction stage

In the introduction stage, products are unfamiliar to consumers. Market segments are not
well defined, and product features are clearly specified. The early development of an industry
typically involves low sales growth, rapid technological change, operating losses, and the need
for strong sources of cash to finance operations. Since there are few players and not much
growth, competition tends to be limited success requires an emphasis on research and
development and marketing activities to enhance awareness.
The challenge becomes one of the (1) developing the product and finding a way to get
users to try it and (2) generating enough exposure so the product emerges as the "standard" by
which all other rival's product are evaluated.

Strategies in the growth stage

The growth stage is characterized by strong increase in sales. Such potential attracts other
rivals. In the growth stage, the primary key to success is to build consumer preferences for
specific brands. This requires strong brand recognition, differentiated products, and the financial
resources to support a variety of value-chain activities such as marketing and sales, and
research and development. Whereas marketing and sales initiatives were mainly directed at
spurring aggregate demand (that is, demand for all such products in the introduction stage)
efforts in the growth stage are directed toward stimulating selective demand, in which a firm's
product offerings are chosen instead of a rival.
Revenues increase at an accelerating rate because:

● new consumers are trying the product and

● a growing proportion of satisfied consumers are making repeat purchases.

In general, as a product moves through its life cycle, the proportion of repeat buyers to new
purchases increase. Conversely, new products and services often fail if there are relatively few
repeat purchases.
Strategies in maturity stage

In maturity stage aggregate industry demand softens. As markets become saturated, there
are few new adopters. It's no longer possible to "grow around" the competition, so direct
competition becomes predominant. With few attractive prospects, marginal competitors exit the
market. rivalry among existing rivals intensifies because of fierce price competition at the same
time that expenses associated with attracting new buyers are rising advantages based on
efficient manufacturing operations and process engineering become more important for keeping
cost low as customer become more present active it also becomes more difficult for him to
differentiate their offerings because users have a greater understanding of product and
services.
Firms do not need to be "held hostage" to their life cycle curve. By positioning or
repositioning their products in unexpected ways, firms can change how customers mentally
categorize them. Thus, firms are able to rescue products floundering in the maturity phase of
their life cycles and return them to the growth phase. Two positioning strategies that managers
can use to affect consumers mental shifts are reverse positioning, which strips away "sacred"
product attributes while adding new ones and breakaway positioning, which associates the
product with a radically different category.

Strategies in Decline Stage

The decline stage occurs when the industry sales and profit began to fall. Typically,
changes in the business environment are the root of an industry or product group entering this
stage. Changes in consumer taste or a technological innovation can push a product into decline.
Products in the decline stage often consume a large share of management time and
financial resources relative to their potential worth. Sales and profits decline. Also, competitors
may start drastically cutting their prices to raise cash and remain solvent. The situation is further
aggravated by the liquidation of assets, including inventory, of some of the competitors that
have failed. This further intensifies price competition.
Also, the firms strategic option became dependent on the action of rivals. If many
competitor leave the market, sales and profit opportunities increase. On the other hand,
prospects are limited if all competitors remain. If some competitors merge their increased
market power may erode the opportunities for the remaining players. Manager must carefully
monitor the action and intentions of competitors before deciding on a course of action.

There are four strategies that are available in decline phase:

1. Maintaining refers to keep a product going without significally reducing marketing support,
technological development, or other investment, in the hope that competitors will eventually exit
the market.
2. Harvesting involves obtaining as much as profit as possible and requires that costs can be
reduced quickly. Managers should consider the firm's value-creating activities and cut
associated
budgets. Value chain activities to consider our primary and support. The objective
is to writing out as much as profit as possible.
3. Exciting the market involves dropping the product from a firm's portfolio. Since
a residual core of a consumes exist, eliminating it should be carefully considered. If
the firm's exit involves product market that affect important relationship with other
product market in the corporation’s overall portfolio, an exit could have
repercussions for the whole corporation.
4. Consolidation involves one firm acquiring at a responsible price the best of the
surviving firms in an industry. This enables you to enhance market power and
acquire valuable assets.

TURNAROUND STRATEGIES

A turnaround strategy involves reversing performance decline and

reinvigorating growth toward profitability. A need for turnaround may occur at any
stage in the life cycle but is more likely to occur during maturity or decline.
Most turnarounds require a firm to carefully analyze the external and internal
environments. the external analysis leads to identification of market segments or
customer groups that may still find the product attractive. Internal analysis result in
action aimed at reduce cost and higher efficiency. A firm needs to undertake a mix
of both internally and externally oriented actions to effect to a turnaround. In effect,
the cliche "You can't shrink yourself to greatness" applies.
● Assets and surgery. Very often, mature firms tend to have acids that do not
produce any returns. These include real estate, buildings, and so on. Outside sales
or sale and lease back free app considerable cash and improvement returns.
● Selective product and market pruning. Most mature or declining firms have
many product lines that are losing money or are only marginally profitable. One
strategy is still discontinued search product lines and focus other sources on a few
cores’ profitable areas.
● Piecemeal productivity improvements. There are many ways in which a firm
can eliminate cost and improve productivity. Although individually these are small
gains, They accumulate over a period of time to sustain gains.