Ch. 5 Business-Level Strategy

*KEY TERMS*
business-level strategy
a strategy designed for a firm or a division of a firm that competes within a single business.
generic strategies
basic types of business level strategies based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low cost versus unique
overall cost leadership
a firm’s generic strategy based on appeal to the industrywide market using a competitive advantage based on low cost.
differentiation strategy
a firm’s generic strategy based on creating differences in the firm’s product or service offering by creating something that is perceived industrywide as unique and valued by customers.
focus strategy
a firm’s generic strategy based on appeal to a narrow market segment within an industry.
combination strategies
firms’ integrations of various strategies to provide multiple types of value to customers. LO5.4 How firms can effectively combine the generic strategies of overall cost leadership and differentiation.
profit pool
the total profits in an industry at all points along the industry’s value chain.
digital technologies
information that is in numerical form, which facilitates its storage, transmission, analysis and manipulation.
industry life cycle
the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry.
introduction stage
the first stage of the industry life cycle, characterized by (1) new products that are not known to customers, (2) poorly defined market segments, (3) unspecified product features, (4) low sales growth, (5) rapid technological change, (6) operating losses, and (7) a need for financial support.
growth stage
the second stage of the product life cycle, characterized by (1) strong increases in sales; (2) growing competition; (3) developing brand recognition; and (4) a need for financing complementary value-chain activities such as marketing, sales, customer service, and research and development.
reverse positioning
a break in industry tendency to continuously augment products, characteristic of the product life cycle, by offering products with fewer product attributes and lower prices.
decline stage
the fourth stage of the product life cycle, characterized by (1) falling sales and profits, (2) increasing price competition, and (3) industry consolidation.
consolidation strategy
a firm’s acquiring or merging with other firms in an industry in order to enhance market power and gain valuable assets.
turnaround strategy
a strategy that reverses a firm’s decline in performance and returns it to growth and profitability.
experience curve
the decline in unit costs of production as cumulative output increases.
competitive parity
a firm’s achievement of similarity, or being “on par,” with competitors with respect to low cost, differentiation, or other strategic product characteristic.
mass customization
a firm’s ability to manufacture unique products in small quantities at low cost.
harvesting strategy
a strategy of wringing as much profit as possible out of a business in the short to medium term by reducing costs.
maturity stage
the third stage of the product life cycle, characterized by (1) slowing demand growth, (2) saturated markets, (3) direct competition, (4) price competition, and (5) strategic emphasis on efficient operations.
breakaway positioning
a break in industry tendency to incrementally improve products along specific dimensions, characteristic of the product life cycle, by offering products that are still in the industry but that are perceived by customers as being different.
*SUMMARY REVIEW QUESTIONS*
1. Explain why the concept of competitive advantage is central to the study of strategic management.
SM involves creating and sustaining competitive advantages. These competitive advantages need to be developed and maintained sufficiently to overcome the 5 competitive forces. Only through overcoming competitive forces can firms achieve above-average returns. So, it’s all about making the organization perform successfully.
2. Briefly describe the 3 generic strategies– overall cost leadership, differentiation, and focus.
In each case, the generic strategies are defined by the type of competitive advantage, uniqueness perceived by the customer or low cost position, and the strategic target market, industry wide or focused on a particular market segment.
*The overall cost leadership generic strategy involves developing a competitive advantage based on low cost position while appealing to an industry wide market.
*The differentiation generic strategy involves developing a competitive advantage based on uniqueness perceived by the customer while appealing to industry wide market.
*The focus generic strategy involves focus on a narrow market segment while developing a competitive advantage of either uniqueness perceived by the customer or low cost position.
3. Explain the relationship between the 3 generic strategies and the 5 forces that determine the average profitability within an industry.
The 5 forces act to limit industry profitability. Research has shown that business units that identify with a generic strategy overcome the 5 forces and outperform business units that do not, or are stuck in the middle. Further, business units that identify with multiple generic strategies will have higher performance than those that identify with just one generic strategy. The highest performing business units identified with differentiation and overall cost leadership generic advantages.
4. What are some of the ways in which a firm can attain a successful turnaround strategy?
Turnaround strategies reverse a firm’s decline in performance and return it to growth and profitability. They are used by firms that are in industries in the decline stage of the industry life cycle. Research has shown there are 3 basic ways for turnaround strategies to work. *First* is asset and cost surgery, where firms sell off unproductive assets and outsource any activities in which they are not competitive. *Second* is product and market pruning, which is the reverse of diversification. Firms will sell off products and businesses in which it is not competitive and focus on select products and markets. *Third* is productivity improvements, which may involve examination examination of many businesses processes. But small productivity improvements in many processes can add up to substantial improvement overall.
5. Describe some of the pitfalls associated with each of the 3 generic strategies.

For overall cost leadership, firms will be scaling up production, learning to produce more efficiently, and minimizing costs on all activities of the value chain. The pitfalls include too much neglect on specific value chain activities such that competitive parity is not reached, vulnerability to an increase in price on inputs, imitation by competitors, insufficient differentiation such that buyers do not get acceptable quality even at the low price, and customer demands for the low prices, based on the ready availability of information on cost.

For differentiation, firms tend to charge higher prices for their goods, but offer customers some quality or perceived quality advantage for the extra price. The pitfalls include providing a difference that is not perceived to be valuable by customers, differentiating more than customers desire, charging too high a price, imitation by rivals, dilution of brand image, and difference in quality perception between the firm and its buyers.

For focus strategies, firms will appeal to a narrow segment of the market using either a low cost or product uniqueness appeal. The pitfalls include an erosion of price advantages over competitors, imitation of product and service offerings, and loss of focus advantage as less focused competitors offer products and services at prices that the niche customers prefer.

6. Can firms combine the generic strategies of overall cost leadership and differentiation? Why or why not?
Yes, there are examples of firms that serve the industry wide target market by providing products that are differentiated by, say, high quality or brand equity. Firms can do this by providing unique value to customers efficiently. Methods included use of manufacturing systems that are flexible and automated, exploiting profit pools, seamlessly integrating operation with suppliers and customers, and exploiting profit pools.
7. Explain why the industry life cycle concept is an important factor in determining a firm’s business-level strategy.
The industry life cycle explains patterns of critical aspects of the industry and external environment, including market size, growth potential, characteristics of customers, establishment and volatility of the technology, and amount of competition. For each stage of the industry life cycle, there are associated strategies that have been shown to be effective.
*PRACTICE QUIZ*
1. The three generic strategies presented by Michael Porter can be shown on two dimensions: competitive advantage and strategic target.
A) True
B) False
A) True; Michael Porter presented three generic strategies that a firm can use to achieve competitive advantage. They can be illustrated on two dimensions: competitive advantage and strategic target.
2. Firms that compete on overall cost leadership are vulnerable if there is a decrease in the cost of the inputs on which the advantage is based.
A) True
B) False
B) False; Firms can be vulnerable to price increases in the factors of production. For example, consider manufacturing firms based in China which rely on low labor costs. Due to demographic factors, the supply of workers 16 to 24 years old has peaked and will drop by a third in the next 12 years, thanks to stringent family-planning policies that have sharply reduced population growth in China. This is leading to upward pressure on labor costs in Chinese factories, undercutting the cost advantage of firms producing there.
3. Too little focus on one or a few value-chain activities can be a pitfall of the overall cost leadership strategy.
A) True
B) False
B) False; Managers should explore all value-chain activities, including relationships among them, as candidates for cost reductions.
4. A disadvantage of firms that successfully integrate overall cost leadership and a differentiation strategies is that they are relatively difficult for competitors to imitate.
A) True
B) False
A) True; Perhaps the primary benefit to firms that integrate low-cost and differentiation strategies is the difficulty for rivals to duplicate or imitate. This strategy enables a firm to provide two types of value to customers: differentiated attributes (e.g., high quality, brand identification, reputation) and lower prices (because of the lower costs for the firm in value-creating activities).
5.Which of the following is not a reason for the possible erosion of company competitive advantage?
A) rapid change in technology
B) globalization
C) actions by rivals from within and outside of the industry
D) length of time a company is in business
D) length of time a company is in business; Nothing is forever, when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within and outside of the industry can quickly erode company advantages. It is becoming increasingly important to recognize that the duration of competitive advantages is declining, especially in technology intensive industries.
6. Which of the following methods of implementing a differentiation strategy has been greatly enhanced because of Internet technologies?
A) celebrity endorsements
B) enabling of mass customization
C) prestige packaging
D) exceptional service
B) enabling of mass customization; Among the most striking differentiation trends are new ways to interact with consumers. In particular, the Internet has created new ways of differentiating by enabling mass customization, which improves the response to customer wishes.
7. An important advantage of first movers in a market is that they cannot establish brand recognition.
A) True
B) False
B) False; There is an advantage to being the first mover in a market. It led to the success of Coca Cola in becoming the first soft-drink company to build a recognizable global brand and enabled Caterpillar to get a lock on overseas sales channels and service capabilities.
8. In the __________ stage of the industry life cycle, products are unfamiliar to consumers.
A) growth
B) maturity
C) introduction
(D) decline
C) introduction; In the introduction stage, products are unfamiliar to consumers. Market segments are not well defined, and product features are not 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.
9. Research shows that which of the following is not a strategy used by firms engaged in successful turnarounds?
A) asset and cost surgery
B) global expansion
C) selective product and market pruning
D) piecemeal productivity improvements
B) global expansion; A study of 260 mature businesses in need of a turnaround identified three strategies used by successful companies: asset and cost surgery, selective product and market pruning, and piecemeal productivity improvements.
10. Many firms facing a turnaround situation try to increase their costs by insourcing the production of many inputs.
A) True
B) False
B) False; Firms in turnaround situations try to aggressively cut administrative expenses and inventories and speed up collection of receivables. Costs also can be reduced by outsourcing production of various inputs for which market prices may be cheaper than in-house production costs.