978-1259278211 Chapter 5 Solution Manual Part 1

Unlock access to all the studying documents.

View Full Document

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.