Chapter Five

Business-Level Strategy:Creating and Sustaining Competitive Advantages

CHAPTER 5

McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

After studying this chapter, you should have a good understanding of:

• The central role of competitive advantage in the study of strategic management

• The three generic strategies—overall cost leadership, differentiation, and focus

• How the successful attainment of generic strategies can improve a firm’s relative power vis á vis the five forces that determine an industry’s average profitability

• The pitfalls managers must avoid in striving to attain generic strategies

• How firms can effectively combine the generic strategies of overall cost leadership and differentiation

• The importance of considering the industry life cycle to determine a firm’s business-level strategy and its relative emphasis on functional area strategies and value creating activities

Learning Objectives

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CHAPTER 5

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STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

Three Generic Strategies

COMPETITIVE ADVANTAGE

Overall

Cost LeadershipDifferentiation

Uniqueness PerceivedBy the Customer Low Cost Position

Industrywide

ParticularSegment Only Focus

STR

AT

EG

IC T

AR

GE

T

Source: Adapted from Porter, M.E. 1980. Competitive Strategy, New York: Free Press, page 39.

Exhibit 5.1TRANSPARENCY-42

CHAPTER 5

McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

Competitive Advantage and Business Performance

Performance

Return on Investment 35.5 32.9 30.2 17.0 23.7 17.8

Sales Growth 15.1 13.5 13.5 16.4 17.5 12.2

Gain in Market Share 5.3 5.3 5.5 6.1 6.3 4.4

Sample Size 123 160 100 141 86 105

Stuck-in-the- Middle

Cost Focus

Differentiation FocusCostDifferentiation

Differentiation and Cost

Exhibit 5.2

Competitive Advantage

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STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

Value Chain Activities: Examples of Overall Cost Leadership

Few management layers to reduce overhead costs

Firm Infra-structure

Standardized accounting practices to minimize personnel required

Human Resource

Management

Minimize costs associated with employee turnover through effective policies

Effective orientation and training programs to maximize employee productivity

Technology development

Effective use of automated technology to reduce scrappage rates

Expertise in process engineering to reduce manufacturing costs

ProcurementEffective policy guidelines to ensure low cost raw materials (with acceptable quality levels)

Shared purchasing operations with other business units

Efficient layout of receiving dock operations

Effective use of quality control inspectors to minimize rework on the final product

Effective utilization of delivery fleets

Purchase of media in large blocks

Sales force utilization is maximized by territory management

Thorough service repair guidelines to minimize repeat maintenance calls

Inbound Logistics

Operations Outbound Logistics

Marketing and Sales

Service

Use of single type of repair vehicle to minimize maintenance costs

Margin

Margin

Exhibit 5.3

Source: Adapted from Porter, M.E. 1985. Competitive Advantage, New York: Free Press.

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STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

Comparing Experience Curve Effects

Cos

t p

er U

nit

0 units 1 millionunits

2 millionunits

4 millionunits

Cumulative Volume

$1

90¢

80¢

70¢

60¢

81¢

64¢

49¢

36¢

72.9¢

51.2¢

34.3¢

21.6¢

90% original cost

80% original cost

70% original cost

64% original cost

Exhibit 5.4TRANSPARENCY-45

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STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

Value Chain Activities: Examples of Differentiation

Firm Infra-structure

Human Resource Management

Technology Development

Procurement

Superior material handling operations to minimize damage

Quick trans-fer of inputs to manufacturing process

Inbound Logistics

Superior MIS – To integrate value-creating activities to improve quality

Facilities that promote firm image

Programs to attract talented engineers and scientists

Provide training and incentives to ensure a strong customer service orientation

Superior material handling and sorting technology

Excellent applications engineering support

Purchase of high quality components to enhance product image

Use of most prestigious outlets

Flexibility and speed in responding to changes in manufacturing specifications

Low defect rates to improve quality

Accurate and responsive order processing

Effective product replenishment to reduce customer’s inventory

Creative and innovative advertising programs

Fostering of personal relationship with key customers

Rapid response to customers’ service requests

Operations Outbound Logistics

Marketing and Sales

Service

Complete inventory of replacement parts and supplies

Margin

Margin

Widely respected CEO enhances firm reputation

Exhibit 5.5

Source: Adapted from Porter, M.E. 1985. Competitive Advantage, New York: Free Press.

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STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

The Erosion of Product and Service Differentiation

What are the raw commodities?

Now Next?

Personal computers Servers

Hotel rooms Car rentals

Legal services Credit

Police cars Generic drugs

Ocean shipping Insurance

Bandwidth Pharmacy Services

Network hosting Data-storage capacity

Manufacturing capacity Multibillion-dollar infrastructure projects

Source: Adapted from Colvin, G. 2000. You could be selling soybeans. Fortune: November 13:80.

Exhibit 5.6TRANSPARENCY-47

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STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

The U.S. Auto Industry’s Profit Pool

25%

20

15

10

5

0

Op

erat

ing

mar

gin

0 100%Auto manufacturing

New car dealersUsed car dealers Auto loans

Leasing

Warranty

Gasoline

Auto insuranceService repair

Aftermarket parts

Auto rental

Share of industry revenue

Source: Gadiesh, O. & Gilbert, J.L. 1998. Profit pools: A fresh look at strategy. Harvard Business Review, 76(3): 144.

Exhibit 5.7TRANSPARENCY-48

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STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

Stages of the Industry Life Cycle

Unit Sales

Profits

Overall Cost Leadership

Focus

Differentiation Overall Cost Leadership

DifferentiationDifferentiationGeneric Strategies

Consolidate, Maintain, Harvest, or Exit

Defend Market Share and Extend Product Life Cycles

Create Consumer Demand

Increase Market Awareness

Overall objective

General Management and Finance

ProductionSales and MarketingResearch and Development

Major functional area(s) of concern

LowHighLow to ModerateLowEmphasis on process design

LowLow to ModerateHigh Very HighEmphasis on product design

ChangingVery IntenseIncreasingLowIntensity of competition

FewManySomeVery FewNumber of segments

NegativeLow to ModerateVery LargeLowMarket growth rate

DECLINEGROWTHINTRODUCTIONSTAGE MATURITY

FACTOR

Exhibit 5.8TRANSPARENCY-49