This point is part of a larger issue of having students examine and assess firms with which they are
Industry Life Cycle: If you sense that your career is maturing (or in the decline phase!),
what actions can you take to restore career growth and momentum (e.g., training,
mentoring, professional networking)? Should you actively consider professional
opportunities in other industries?
This is an excellent opportunity for the instructor to get the student thinking about the short-term
and long-term career implications of industry maturity and decline. It is important to emphasize
VII. Summary
How and why firms outperform each other goes to the heart of strategic management. In
this chapter, we identified three generic strategies and discussed how firms are able not only to
attain advantages over competitors, but also to sustain such advantages over time. Why do some
advantages become long lasting, while others are quickly imitated by competitors?
The three generic strategies—overall cost leadership, differentiation, and focus—form the
core of this chapter. We began by providing a brief description of each generic strategy (or
competitive advantage) and furnished examples of firms that have successfully implemented these
We discussed the viability of combining (or integrating) overall cost leadership and
differentiation generic strategies. If successful, such integration can enable a firm to enjoy superior
We also discussed the issue of the sustainability of a firm’s competitive advantage. We used
The concept of the industry life cycle is a critical contingency that managers must take into
account in striving to create and sustain competitive advantages. We identified the four stages of
When a firm’s performance severely erodes, turnaround strategies are needed to reverse its
Chapter 5: Business-Level Strategy: Creating and Sustaining Competitive Advantages
Select an industry (e.g., retail chain and restaurants). Identify an organization that
competes on the basis of overall cost leadership and one that is a differentiator. Are their
advantages sustainable? Why or why not? Are each of these organizations attaining parity on
the other type of competitive advantage?
Teaching suggestions:
You will have students referring to examples from a wide variety of industries. You can use this
The ‘overall cost leadership’ strategy is based on creating a low-cost position compared to the
other competitors in the industry (You might want to refer to Exhibit 5.3 in this section of the text
manner:
*Protects against rivalry from existing competitors because lower costs allow a firm to earn
*Protects against powerful buyers because buyers can exert their power to drive down
*Protects against powerful suppliers by providing greater flexibility to cope with their
*Serves as a substantial barrier to entry and thus lowers the threat of new entrants.
You can ask the students whether the firm pursuing overall cost leadership is realizing some or all
of these benefits. Overall cost leadership also has some pitfalls that need to be avoided:
*Too much focus on one or a few of value-chain activities.
Just focusing on one or few of value-chain activities for cost reduction might not
* The firm becomes vulnerable to price increases in the factors of production. The firm
An example is the challenge experienced by manufacturing firms based in China.
*The strategy can be imitated too easily if the activities contributing to cost reduction are
You might want to emphasize the importance of exploiting the linkages between various activities
*When you lack parity on differentiation, buyers may be willing to pay more for the
You might want to ask the students whether the firm pursuing the overall cost leadership strategy is
facing any of these difficulties.
The strategy of “differentiation” means creating differences in the firm’s product or service
offering by creating something that is perceived industry-wide as unique and is valued by the
Differentiation creates the following advantages:
*Provides protection against rivalry, since brand loyalty lowers customer sensitivity to
*Customer loyalty and the firm’s ability to provide uniqueness in its products or services
*Provides higher margins and thus enables the firm to deal with supplier power.
*Reduces buyer power because buyers lack comparable alternatives and therefore are less
*Lessens the threat from substitutes and in some cases the product or service may be so
You can ask the students whether the firm pursuing differentiation strategy is able to get any or all
of these benefits.
Differentiation comes with its own pitfalls such as the following:
*Creating uniqueness that is not valuable
*Too much differentiation that is too costly
*Differentiation that can be easily imitated
You might want to ask the students whether the firm pursuing differentiation is facing any or all of
You can also ask
*Whether the firms pursuing either the cost leadership or the differentiation strategy are achieving
competitive parity on the other strategy?
*Is it possible to pursue a strategy in earnest on the one hand and still achieve parity on the other?
Attention should also be drawn to the ‘focus’ strategy that is based on the choice of a narrow
*What would be the merits and demerits of “focus” strategy? Would high focus mean escaping
imitation and competition from new entrants? Is there a danger of getting excessively focused?
*What is a combination strategy?
A combination strategy means achieving both cost leadership and differentiation
simultaneously. Discussion can be directed to whether it would be feasible for a firm to
achieve both cost leadership and differentiation at the same time and sustain them. (You
Highlight the danger of getting “stuck in the middle” if the firm cannot achieve both. On the other
End of Chapter Teaching Notes
Chapter 5: Business-Level Strategy: Creating and Sustaining Competitive Advantages
Summary Review Questions
1. Explain why the concept of competitive advantage is central to the study of strategic
management.
Response:
Strategic management involves creating and sustaining competitive advantages. These competitive
advantages need to be developed and maintained sufficiently to overcome the five competitive
2. Briefly describe the three generic strategies—overall cost leadership, differentiation, and
focus.
Response:
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, industrywide or
focused on a particular market segment. The overall cost leadership generic strategy involves
3. Explain the relationship between the three generic strategies and the five forces that
determine the average profitability within an industry.
Response:
The five forces act to limit industry profitability. Research has shown that business units that
identify with a generic strategy overcome the five forces and outperform business units that do not,
4. What are some of the ways in which a firm can attain a successful turnaround strategy?
Response:
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 three basic ways for turnaround strategies to work. First is
5. Describe some of the pitfalls associated with each of the three generic strategies.
Response:
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
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
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,
6. Can firms combine the generic strategies of overall cost leadership and differentiation?
Why or why not?
Response:
Yes, there are examples of firms that serve the industrywide target market by providing products
that are differentiated by, say, high quality or brand equity. Firms can do this by providing unique
7. Explain why the industry life cycle concept is an important factor in determining a firm’s
business-level strategy.
Response:
The industry life cycle explains patterns of critical aspects of the industry and external
environment, including market size, growth potential, characteristics of customers, establishment
Experiential Exercise
What are some examples of primary and support activities that enable Nucor, a $19-billion
steel manufacturer, to achieve a low-cost strategy? (Fill in table below.)
Response:
Despite its size, Nucor is not the biggest steel manufacturer in the industry. What Nucor does do is
to take as input primarily recycled products with steel in them. As a result, Nucor adapts its
(Note to instructor) Students will probably come up with other examples than those listed above,
which is fine. Nucor has refined its competitiveness in many ways across all activities of the value
Value-Chain Activity Yes/No How Does Nucor Create Value for the
Customer?
Primary:
Inbound logistics Yes Focus on deliveries in the form of scrap iron and
Operations Yes Focus operations on efficiently reprocessing steel,
Outbound logistics Yes Outbound logistics are adapted to efficient delivery
Marketing and sales Yes Marketing focused on appeals to customers who
Service No
Support:
Procurement Yes Efficient procurement of scrap iron required
developing relationships with various suppliers of
Technology development Yes Nucor has developed specialized and unique steel
Human resource management Yes Talent is needed for Nucor to develop and sustain its
General administration Yes All activities listed above need to be organized,
Application Questions and Exercises
1. Go to the Internet and look up www.Walmart.com. How has this firm been able to
combine overall cost leadership and differentiation strategies?
Response:
The combination of cost leadership and differentiation strategies requires providing unique value
to customers efficiently. Walmart is unique by being the largest retailer in the world, which enables
(Note to instructor) Students may answer this question in a number of ways. Generally, students
may be aware of Walmart as a low-cost store. It is well know for its ability to exploit bargaining
power. So you might challenge them to study Walmart as a differentiated store. Look at the brand-
2. Choose a firm with which you are familiar in your local business community. Is the firm
successful in following one (or more) generic strategies? Why or why not? What do you think
are some of the challenges it faces in implementing these strategies in an effective manner?
Response:
(Note to instructor) The following three steps might be useful for bringing out students’ responses.
Step 1 is to identify the firm and assess the five competitive forces that it faces. Step 2 is to ask the
student to identify the firm’s generic strategy. You need to get students to agree on the strategic
target market, narrow or industrywide, and source of competitive advantage (low-cost or
uniqueness). The answers will determine the generic strategy (or strategies) that the firm follows.
Step 3 is to link the generic strategy(ies) to the five forces model. Are there competitive forces that
remain strong threats? How could a competitor threaten the firm? And how should the firm
respond to the threats?
These are the basics. There are probably many challenges you can identify. Look at the challenges
3. Think of a firm that has attained a differentiation focus or cost focus strategy. Are their
advantages sustainable? Why? Why not? (Hint: Consider its position vis-à-vis Porter’s five
forces.)
Response:
(Note to instructor) We suggest the following three steps. First is to identify the sources of
sustainable competitive advantage (valuable, rare, costly to imitate, and costly to substitute). Ask
4. Think of a firm that successfully achieved a combination overall cost leadership and
differentiation strategy. What can be learned from this example? Are these advantages
sustainable? Why? Why not? (Hint: Consider its competitive position vis-à-vis Porter’s five
forces.)
Response:
(Note to instructor) Firms that have achieved a combination overall cost leadership and
differentiation strategy usually have some sort of unique capability (discussed in the text and above
in response to summary review question 6). Ask students to identify this capability and evaluate it
with respect to the characteristics of a sustainable competitive advantage. Then, as for the above
Ethics Questions
1. Can you think of a company that suffered ethical consequences as a result of an
overemphasis on a cost leadership strategy? What do you think were the financial and
nonfinancial implications?
Response:
The ethical consequences of overemphasis on a cost leadership strategy may be associated with
cost-cutting measures or reliance on experience curve effects. The strategy may not work because a
competitor or substitute was able to offer a product or service that was more desirable to
customers. Often, following a cost leadership strategy involves making a large investment to build
Such a situation has potential to cause unethical behavior, or wrong behavior according to business
norms. Suppliers may not be paid on time. Customers may be promised unrealistic prices.
2. In the introductory stage of the product life cycle, what are some of the unethical practices
that managers could engage in to enhance their firm’s market position? What could be some
of the long-term implications of such actions?
Response:
In the introductory stage, uncertainty abounds. Customers are uncertain about the value of the new
Unethical practices by managers may include some sort of misleading promises regarding
product/service capabilities or cost. Of course, long-term implications include legal action for