Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
part 2 Strategic Formulation
Chapter 5
Business-Level Strategy: Creating and Sustaining Competitive Advantages...................... 146 (5-2)
Types of Competitive Advantage and Sustainability.............................................................. 148 (5-4)
Overall Cost Leadership............................................................................................................. 148 (5-5)
Differentiation............................................................................................................................ 153 (5-7)
Focus.......................................................................................................................................... 159 (5-11)
Combination Strategies: Integrating Overall Low Cost and Differentiation.............................. 161 (5-12)
Can Competitive Strategies Be Sustained? Integrating and Applying Strategic
Management Concepts............................................................................................................. 164 (5-15)
Industry Life-Cycle Stages: Strategic Implications............................................................... 167 (5-16)
Strategies in the Introduction Stage............................................................................................ 169 (5-16)
Strategies in the Growth Stage................................................................................................... 169 (5-17)
Strategies in the Maturity Stage................................................................................................. 169 (5-17)
Strategies in the Decline Stage................................................................................................... 171 (5-19)
Turnaround Strategies................................................................................................................ 173 (5-19)
Issue for Debate........................................................................................................................ 174 (5-20)
Reflecting on Career Implications........................................................................................... 175 (5-21)
Summary................................................................................................................................... 175 (5-23)
Chapter 5
Business-Level Strategy:
Creating and Sustaining Competitive Advantages
Summary/Objectives
In the previous three chapters, we have focused on the analysis of the external
(Chapter 2) and internal (Chapters 3 and 4) of the firm. In this chapter, the emphasis is on the formulation
of strategies at the business level. Since the business level is where competition takes place, a firm’s
performance at this level is vital to its overall success. The chapter is divided into two major sections:
1. The first section draws on Michael Porter’s framework of generic strategies—overall cost
leadership, differentiation, and focus. We describe each of these strategies and provide
examples of firms that have successfully used them to outperform rivals. Then, we
suggest some of the pitfalls that managers must avoid to successfully pursue these
strategies. We include a discussion of how firms may combine generic strategies. We also
discuss whether a strategy can be sustainable—using the example of a manufacturing
firm. We close with a discussion of how competitive strategies should be revised and
redeployed in light of changes caused by the Internet and digital technologies.
2. The second section addresses an important contingency in the effective use of business-level
strategies—industry life cycles. The stages of the life cycle—introduction, growth,
maturity, and decline—have important implications for a firm’s relative emphasis on
functional capabilities and value-creating activities. It also discusses “turnaround
strategies” which enable a firm to reposition its competitive position in an industry and
how such strategies can lead to sustainable advantages.
Lecture/Discussion Outline
The introductory case in LEARNING FROM MISTAKES discusses the rise and fall of Crumbs
Bake Shop and the difficulty the firm had building a sustainable position as a differentiated cupcake
provider.
Discussion Question 1: What lessons can we take from Crumbs Bake Shop’s experience?
Response guidelines: This question is an opportunity to review the situation Crumbs Bake Shop found
itself in. The challenges the firm faces has grown out of factors both within the firm as well as in its
external environment. Inside the firm, the firm’s quest for growth to leverage the value of its brand may
have lessened the degree to which its products will be seen as highly differentiated. First, when the bakery
While the firm’s actions likely undercut the value of its differentiation position, it may have been more
greatly affected by external factors. The cupcake craze was a classic fad product phenomenon. Buoyed by
Overall, this discussion should increase students’ awareness and appreciation of how both a firm’s actions
Discussion Question 2: What actions can Crumbs take to increase its chances of survival in a
market that no longer puts a premium on high-end cupcakes?
Response guidelines: Instructors can pose this question to the class and ask students to develop
recommendations. Alternatively, instructors can break the class into small groups to develop ideas about
First, students should focus on the different forms of differentiation discussed on page 153 of the text to
identify the way in which Crumbs should build and reinforce its differentiation. This likely will focus on
Second, students can examine how focused the firm should be as it moves forward. From a product
perspective, should the firm continue to focus solely on cupcakes, or should it look to expand its bakery
offerings to match evolving customer tastes? There is an interesting trade-off here. By remaining focused,
the bakery would likely find it easier to retain a clear identity as “the cupcake bakery.” However, if the
I. Types of Competitive Advantage and Sustainability
Michael Porter presented three generic strategies that firms can use to overcome the five forces
and attain competitive advantage. The first, overall cost leadership, is based on creating a low-cost
position relative to one’s peers. The second, differentiation, requires that the firm (or business unit) create
EXHIBIT 5.1 illustrates these strategies on two dimensions: competitive advantage and markets
served.
Discussion Question 3: What are some examples of businesses that follow each of the four
strategies in Exhibit 5.1? Why are they successful (or unsuccessful)?
Before moving on to the discussion of each of the generic strategies, it is useful to point out that a
variety of research has supported the notion that firms that identify with one or more forms of competitive
Discussion Question 4: What are some examples of firms that have successfully combined
multiple strategies? Does this seem to help their performance? Why?
Why not?
At this point, it is useful to point out that deciding what types of competitive advantage to select
We now discuss each of the types of generic strategies.
A. Overall Cost Leadership
Cost leadership requires a tight set of interrelated tactics such as aggressive construction of
efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead
EXHIBIT 5.3 uses the value-chain concept (from Chapter 3) to provide examples of how a firm
Discussion Question 5: What are some examples of firms that exemplify the items in Exhibit 5.3?
How does it improve the firm’s performance?
The SUPPLEMENT below discusses how a firm (Spirit Airlines) has been able to compete
Extra Example: Spirit Airlines’ Successful Cost Leadership Strategy
Spirit Airlines is a controversial and successful firm in the highly competitive and often unprofitable
airlines industry. From 2012 to 2014, Spirit Airlines saw its sales grow by 46%, and its profits by 108%.
Additionally, its stock grew in value by over 100% from June 2013 to June 2015. However, staying
successful requires attention to every aspect of operations to continually squeeze out costs. This is
especially true since Spirit’s tickets average 30% less than its competition’s.
Below are some examples of how it looks at a wide variety of value-chain activities in its efforts to cut
costs:
It keeps its firm infrastructure as small as possible. It operates from a simple, single story
corporate headquarters building. Additionally, there is no receptionist at the headquarters to
welcome visitors. Ben Baldanza, the firm’s CEO, comments that he only buys pens for the office
when needed and instructs employees to pick up pens at conferences to take back the
headquarters.
It has limited marketing efforts, spending only $2.5 million a year on advertising.
It flies only two models of airplane, the Airbus 319 and 320, saving costs on employee training
and tools.
It has set up fast turnaround routines, often taking only 30 minutes to move from the landing of
one flight to the takeoff of the next.
It stocks water and food onto its planes only once a day.
Spirit removed the reclining mechanism on the seats on its A320 planes allowing them to move
the rows closer together, increasing the capacity of the plane to 178 seats, which is up to 40 seats
more than its competitors.
It removed in-flight magazines from the planes to cut the weight of the plane and save fuel.
It charges customers for both checked and carry-on luggage. This serves as a source of revenue,
but the airline has also found its flyers carry less luggage than passengers on other airlines,
reducing plane weight and saving fuel.
While Spirit has grown and experienced strong profitability, it was the lowest ranked airline in 2015’s
American Customer Satisfaction Index of U.S. based airlines.
Source: Nicas, J. 2012. A stingy Spirit lift’s airline’s profits. WSJ.com. May 11: np; Vasel, K. 2015.
America’s worst airline for customer satisfaction is… cnnmoney.com. April 21: np; cnnmoney.com
It is important to point out that in order to enjoy above-average performance, firms following a
cost leadership position must attain parity or proximity on the basis of differentiation relative to
We next address three examples of how overall cost leadership strategies can help a firm to enjoy
STRATEGY SPOTLIGHT 5.1 discusses Renault and its successful cost leadership strategy. It
Discussion Question 6: Do you think that Renault’s cost leadership model would work in the
North American car market? Why or why not?
1. Overall Cost Leadership: Improving Competitive Position
vis-à-vis the Five Forces
After discussing how an overall cost leadership position improves a firm’s position vis-à-vis the
At this point, it might be helpful to reintroduce the example of Spirit Airlines discussed above.
After reviewing this example, ask:
Discussion Question 7: How does Spirit’s cost leadership strategy improve its competitive
position vis-à-vis the five forces?
Discussion Question 8: Is Spirit able to achieve parity on differentiation?
2. Potential Pitfalls of Overall Cost Leadership Strategies
This section addresses five pitfalls of following an overall cost leadership strategy:
Too much focus on one or a few value-chain activities;
Increase in the cost of the inputs on which the advantage is based;
The strategy is imitated too easily;
The SUPPLEMENT below describes how TJX is staking out a strong position in discount
retailing.
Extra Example: Winning in the Tough Retail Market with an Overall Cost Leadership Strategy
This firm is arguably the most successful low-cost retailer in the United States. Its earnings-per-share has
increased for 18 consecutive years. Its sales have grown by over 50% over the last six years, rising to
nearly $30 billion, and its profits topped $2B in 2015. But the firm isn’t Walmart or Target. It is TJX, the
parent firm for T.J. Maxx, Marshalls, and HomeGoods. In the words of industry consultant and analyst
Howard Davidowitz, “It’s the most consistent, most powerful apparel retailer in the United States.”
TJX has a relatively simple but powerful model to succeed in the competitive apparel business. First, it
focuses on moving inventory through the firm and out its doors. TJX turns its inventory over every 55
days, compared to 85 for its competitors. It quickly moves its orders through its distribution centers and
out to its stores. It puts product right out to its racks and shelves on the selling floor. Stores have very
little backroom storage. As a result, TJX often sells its merchandise before the firm has even paid its
vendors.
Second, the firm emphasizes value with the products it sells. Rather than looking to sell the cheapest
merchandise, it looks to buy good merchandise at a steeply discounted price. Shoppers at its chains may
find low-priced graphic t-shirts, but they also may find a Stella McCartney dress that would retail for
$1250 at a mainline department store discounted to $499 at T.J. Maxx.
Third, the firm extensively trains its buyers, builds their expertise in very narrow product areas, and gives
them autonomy to make large purchases when they find attractive deals. Rather than buying for an entire
season, TJX buyers search for bargains on a weekly basis. The firm’s goal is to purchase products as late
into the buying season as possible so that they can turn the inventory quickly and get a better sense of
fashion trends. Additionally, rather than paying a wholesale price and then doubling it for the final retail
price, TJX buyers estimate what price point TJX needs to be at in the retail store and then work
backwards to a purchase price they are willing to pay to a supplier.
Fourth, it serves as a reliable and discrete customer for apparel manufacturers. Unlike department stores
that can be fickle and cancel or change the quantity of orders when product sales fall short of their
projections or require advertising and markdown allowance from manufacturers, TJX offers straight
forward and guaranteed deals with suppliers. With its scale and ordering processes, TJX can say
manufacturers’ favorite phrase, “We’ll take it all” and rarely looks to change the terms of a deal after it is
initially made. Also, the firm doesn’t advertise the brands it carries, leaving name brands, such as Ralph
Lauren, more willing to work with the firm. These choices by TJX make it a favorite customer for apparel
firms, resulting in more favorable pricing for the firm.
Sources: Kowitt, B. 2014. Is T.J. Maxx the best retail store in the land? Fortune.com. July 24: np;
finance.yahoo.com.
Discussion Question 9: Do you think TJX will be able to sustain its position over time? What are
the greatest challenges the firm faces?
B. Differentiation
As the name implies, differentiation consists of creating differences in the firm’s products or
service offerings by creating something that is perceived industry-wide as being unique and valued by
The SUPPLEMENT below provides what many may consider an “extreme case” of
differentiation—a cellphone that can cost in excess of $10,000!
Extra Example: Why Would You Pay $10,000 or More for a Cellphone?
How much are you willing to pay for a cellphone? More than a good used car? As much as a full year of
tuition? That’s what Vertu, a luxury electronics manufacturer, asks its customers to pay, and many do.
Over the last decade, the firm has sold over 320,000 of its luxury phones and generated $342 million in
sales in 2011. Its phones start at $9600 and are hand crafted, including the titanium plate covering the
SIM that bears the engraved name of the craftsman who constructed the phone. Customers can even travel
to the firm’s manufacturing facility in England to see a craftsman build their phones. Customers can also
customize their phones, having the phones finished with calf leather or alligator skin and even have the
phone encrusted in diamonds. Some of Vertu’s phones have cost as much as $300,000.
Source: Vella, M. 2013. The Ultra-Luxe Phone. Fortune.com. April 29: np.
Discussion Question 10: Why are customers attracted to Vertu’s phones?
Discussion Question 11: In general, what are the pros and cons of marketing high-end luxury
products? Are strategies based on the sale of such products sustainable?
Discussion Question 12: What are some examples of other companies that have successfully
implemented a strategy of extreme differentiation?
Apple is a company admired by its customers and its rivals for its ability to come up with an
unending stream of highly innovative products that combine user friendliness, aesthetic design, and
Extra Example: Why Corporate Leaders Admire Apple
James A. Skinner, CEO, McDonald’s: Apple moves faster than anyone in its industry, with the ability to
innovate quickly and constantly. And if it finds success, it never stays satisfied.
Kris Gopalakrishnan, CEO, Infosys Technologies: From Apple notebooks to iPods and Apple stores to
iTunes, Apple consistently demonstrates it understands and, more important, anticipates customer wants
and needs.
Craig R. Barrett, Chairman, Intel: Brings out new, exciting products by combining excellent design,
integrated offerings (hardware, software, and content), and strong marketing. Apple continually
demonstrates the ability to change market dynamics and gain significant market share with new product
offerings.
Source: Anonymous. 2009. There is no more normal. Businessweek. April 20: 56.
Discussion Question 13: Do you agree with the above comments? Has the death of Steve Jobs
and the changes in leadership at Apple lessened its ability to lead markets and develop market
changing new products?
EXHIBIT 5.4 applies the value chain concept to illustrate how companies may differentiate
themselves in primary and support activities.
Discussion Question 14: What are some examples of companies that have successfully
incorporated some of the elements in EXHIBIT 5.4 into their differentiation strategy?
Discussion Question 15: What are some examples of companies that have been able to
combine/integrate some of the items in EXHIBIT 5.4?
As with overall cost leadership strategies, parity on the other dimension of strategy becomes very
In this section we provide many examples of firms that have successfully implemented a
differentiation strategy. These include such firms as Hotel Monaco and BMW automobiles (image and
Still, differentiators must be clear to not send mixed signals to customers about whether their
Discussion Question 16: How can Quiznos bounce back and rebuild its position as a
differentiated sandwich chain?
Teaching Tip: Another important aspect of differentiation in today’s markets is speed, or
alternatively, quick response to changes in the marketplace/customer demands. You can provide
examples such as Fed Ex to show how companies can increase their competitive position through
The SUPPLEMENT below discusses how BMW used crowdsourcing to vision the car of the
future.
Extra Example: Using the Crowd to Envision the City Car of 2025
Typically cars are designed by a team of experienced designers and engineers, but BMW decided to break
that mold as it looks far into the future. BMW teamed up with an upstart automaker Local Motors to put
on the “Urban Driving Experience Challenge.” The purpose of the challenge was to have individuals and
teams in the Local Motors crowd-sourcing community “identify and design the premium vehicle features
and functions that will enhance the urban driving experience of the future.”
The challenge had two phases. In September 2012, individuals and teams wishing to compete submitted
their ideas. The ideas were posted on the competition website and BMW engineers picked ten finalists.
The ten finalists then refined their ideas based on online feedback that they received. Online members of
Local Motors community then voted on the finalists. The first, second, and third place winners received
monetary rewards and were invited to travel to Munich, Germany to meet with BMW’s Director of
Research and Development. The winners came from Romania, Spain, and the United States.
Source: Kennedy, G. 2012. BMW taps Local Motors crowd-sourcing community to design the city car of
2025. Autoblog.com. September 20: np; localmotors.com.
In the INSIGHTS FROM RESEARCH section, we discuss how standardizing the way customer
service agents interact with customers can lead to lower customer service experiences. In contrast, firms
STRATEGY SPOTLIGHT 5.3 discusses how Unilever, the global consumer products company,
uses crowdsourcing to enhance its sustainability.
Discussion Question 17: What are some of the benefits and risks for Unilever in using
crowdsourcing to build its sustainability efforts? (e.g., benefits: innovative product ideas, process
innovations that could result in reduced costs, free advertising in popular press articles,
1. Differentiation: Improving Competitive Position vis-à-vis the Five Forces.
We discuss how a differentiation strategy helps a firm to improve its position vis-à-vis Porter’s
five forces. We introduce the example of Lexus to illustrate our points.
2. Potential Pitfalls of Differentiation Strategies
Next, we address some of the pitfalls of a differentiation strategy:
Uniqueness that is not valuable
Too much differentiation
Too high a price premium
Discussion Question 18: What are some examples of firms that achieved a level of differentiation
only to see it eroded? What pitfalls did these firms fall prey to?
Teaching Tip: It is useful to point out that even if a firm has what may appear to be a highly
differentiated position, it may still struggle to be highly successful in the market place. Some
students may be familiar with Bang & Olufsen, a well-regarded manufacturer of high-end
EXHIBIT 5.5 points out potential pitfalls of overall cost leadership and differentiation strategies.
C. Focus
The third generic strategy is based on the choice of a narrow competitive scope within an
Discussion Question 19: What are some companies that have successfully implemented a focus
strategy?
The focus strategy, as indicated in EXHIBIT 5.1, has two variants. In a cost focus, a firm strives
We provide an example of a successful niche firm in both a service industry (LinkedIn) and a
STRATEGY SPOTLIGHT 5.4 examines Yoox, a firm that has staked out an interesting
1. Focus: Improving Competitive Position vis-à-vis the Five Forces
We next discuss how an effective focus strategy can improve a firm’s position with regard to the
industry’s five forces. We draw on the previous examples of LinkedIn and Marlin Steel Wire.
The SUPPLEMENT below points out how a consulting firm enjoys a successful differentiation focus
Extra Example: Customized Consulting
Dr. Paul Eckbo is the Chairman of Marsoft, a shipping consultancy, and Preferred Global Health, an
advisory health service specializing in critical illness. He constantly searches for more effective ways to
serve the customers of both companies.
Marsoft’s shipping customers want help in timing their decisions, and for this, they need very good
forecasts of the factors that affect shipping prices, such as levels of exports and needs for raw materials.
But rather than providing relatively inexpensive reports on business cycles to shipping companies and/or
banks, Eckbo has been advocating how “cycle management” can be broadened to include not only
developments within shipping market cycles but also financial considerations, potential future regulatory
changes that might significantly impact the industry (a past example was the introduction of the
requirement for double hulls in oil tankers), and how increasing focus on the environmental impacts of
transportation might impact the customers of shipping companies. In a sense, Marsoft’s business is
becoming more relationship-oriented, and the company is developing stronger association with fewer
customers, similar to a management consultant.
Similarly, for Preferred Global Health, Eckbo has pioneered a concept of “seeking wellness” rather than
“healing illness.” Medical tests are seen as indicators for strengthening appropriate lifestyles, rather than
as a basis for medical intervention.
Source: Lorange, P. 2010. Leading in turbulent times. Lessons learnt and implications for the future.
Bingley, UK: Emerald Group.
