chapter 5 - business level strategy

Question 1

Michael Porter presented three generic strategies a firm can use to overcome the five forces and achieve competitive advantage..

Answer 1

1. cost leadership
2. differentiation
3. focus strategy

The first, overall cost leadership, is based on creating a low-cost position. Here a firm must manage the relationships throughout the value chain and lower costs throughout the entire chain.

Second, differentiation requires a firm to create products and/or services that are unique and valued. Here the primary emphasis is on “non-price” attributes for which customers will gladly pay a premium.

Third, a focus strategy directs attention (or focus) toward narrow product lines, buyer segments, or targeted geographic markets, and they must attain advantages through either differentiation or cost leadership.

Question 2

Each of Porter’s generic strategies has the potential to allow a firm to

Answer 2

outperform rivals in their industry.

Question 3

markets served vs competitive advantage:

broad target market + low cost position

Answer 3

overall cost leadership

Question 4

markets served vs competitive advantage:

broad target market + superior perceived value by customer

Answer 4

broad differentiation

Question 5

markets served vs competitive advantage:

narrow target market + low cost position

Answer 5

cost focus

Question 6

markets served vs competitive advantage:

narrow target market + superior perceived value by customer

Answer 6

differentiation focus

Question 7

stuck in the middle

Answer 7

unsuccessful in competitive advantage

Question 8

overall cost leadership

Answer 8

the first generic strategy as described by porter….

Aggressive construction of efficient-scale facilities.
Vigorous pursuit of cost reductions from experience.
Tight cost and overhead control.
Avoidance of marginal customer accounts.
Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising.

Question 9

The first generic strategy is overall cost leadership. Overall cost leadership requires a tight set of interrelated tactics that include:

Answer 9

Aggressive construction of efficient-scale facilities.
Vigorous pursuit of cost reductions from experience.
Tight cost and overhead control.
Avoidance of marginal customer accounts.
Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising.

Question 10

experience curve

Answer 10

A factor often central to an overall cost leadership strategy is the experience curve, which refers to how business learns to lower its costs as it gains experience with production processes. With experience, unit costs of production decline as output increases in most industries. The experience curve, developed by the Boston Consulting Group in 1968, is a way of looking at efficiency gains that come with experience

Question 11

cumulative experience (experience curve cont.)

Answer 11

“For a range of products, as cumulative experience doubles, costs and labor hours needed to produce a unit of product decline by 10 to 30 percent. There are a number of reasons why we find this effect.

Among the most common factors are workers getting better at what they do, product designs being simplified as the product matures, and production processes being automated and streamlined.

Question 12

competitive parity

Answer 12

To generate above-average performance, a firm following an overall cost leadership position must attain competitive parity on the basis of differentiation relative to competitors.

In other words, a firm achieving parity is similar to its competitors, or “on par,” with respect to differentiated products. Competitive parity on the basis of differentiation permits a cost leader to translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns above-average return

Question 13

failure to attain competitive parity example

Answer 13

The failure to attain parity on the basis of differentiation can be illustrated with an example from the automobile industry—the Tata Nano. Tata, an Indian conglomerate, developed the Nano to be the cheapest car in the world. At a price of about $2,000, the Nano was expected to draw in middle-class customers in India and developing markets as well as budget conscious customers in Europe and North America. However, it hasn’t caught on in either market. The Nano doesn’t have some of the basic features expected with cars, such as power steering and a passenger side mirror. It also faces concerns about safety. In crash tests, the Nano received zero stars for adult protection and didn’t meet basic UN safety requirements. Also, there were numerous reports of Nanos catching fire.

Question 14

competitive parity lesson

Answer 14

“The lesson is simple. Price is just one component of value. No matter how good the price, the most cost-sensitive consumer won’t buy a bad product.”

Question 15

2 firms that built cost leadership positions

Answer 15

aldi and zulily

Aldi, a discount supermarket retailer, has grown from its German base to the rest of Europe, Australia, and the United States by replicating a simple business format. Aldi limits the number of products (SKUs in the grocery business) in each category to ensure product turn, to ease stocking shelves, and to increase its power over suppliers

“Zulily, an online retailer, has built its business model around lower-cost operations in order to carve out a unique position relative to Amazon and other online retailers. Zulily keeps very little inventory and typically orders products from vendors only when customers purchase the product.

Question 16

A business that strives for a low-cost advantage must attain

Answer 16

an absolute cost advantage relative to its rivals.

This is typically accomplished by offering a no-frills product or service to a broad target market using standardization to derive the greatest benefits from economies of scale and experience. However, such a strategy may fail if a firm is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes

Question 17

Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces 

Answer 17

An overall low-cost position enables a firm to achieve above-average returns despite strong competition. It protects a firm against rivalry from competitors, because lower costs allow a firm to earn returns even if its competitors erode their profits through intense rivalry.

A low-cost position also protects firms against powerful buyers. Buyers can exert power to drive down prices only to the level of the next most efficient producer.

Also, a low-cost position provides more flexibility to cope with demands from powerful suppliers for input cost increases.

Question 18

Potential Pitfalls of Overall Cost Leadership Strategies

Answer 18

1. Too much focus on one or a few value-chain activities.
   - Would you consider a person to be astute if they canceled their newspaper subscription and quit eating out to save money but then maxed out several credit cards, requiring them to pay hundreds of dollars a month in interest charges? Of course not. Similarly, firms need to pay attention to all activities in the value chain
2. Increase in the cost of the inputs on which the advantage is based.
   - Firms can be vulnerable to price increases in the factors of production. For example, consider manufacturing firms based in China that rely on low labor costs.
3. A strategy that can be imitated too easily.
   - One of the common pitfalls of a cost leadership strategy is that a firm’s strategy may consist of value-creating activities that are easy to imitate. Such has been the case with online brokers in recent years.
4. A lack of parity on differentiation.
   - As noted earlier, firms striving to attain cost leadership advantages must obtain a level of parity on differentiation.20 Firms providing online degree programs may offer low prices. However, they may not be successful unless they can offer instruction that is perceived as comparable to traditional providers
5. reduced flexibility
   - Building up a low-cost advantage often requires significant investments in plant and equipment, distribution systems, and large, economically scaled operations. As a result, firms often find that these investments limit their flexibility, leading to great difficulty responding to changes in the environment.

Question 19

Obsolescence of the basis of cost advantage.

Answer 19

Ultimately, the foundation of a firm’s cost advantage may become obsolete. In such circumstances, other firms develop new ways of cutting costs, leaving the old cost leaders at a significant disadvantage. The older cost leaders are often locked into their way of competing and are unable to respond to the newer, lower-cost means of competing. This is the position that discount investment advisors now find themselves.

ex: Charles Schwab and TD Ameritrade challenged traditional brokers with lower cost business models. Now, they find themselves having to respond to a new class of robo-advisor firms, such as Betterment, that offer even lower cost investment advice using automated data analytic-based computer systems

Question 20

differentiation strategy

Answer 20

As the name implies, a differentiation strategy consists of creating differences in the firm’s a products or services by creating an image that is perceived industry wide as unique and valued by customers.

Question 21

differentiation forms

Answer 21

Prestige or brand image (Hotel Monaco, BMW automobiles).

Quality (Apple, Ruth’s Chris steak houses, Michelin tires).

Technology (Martin guitars, North Face camping equipment).

Innovation (Medtronic medical equipment, Tesla Motors).

Features (Cannondale mountain bikes, Ducati motorcycles).

Customer service (Nordstrom department stores, USAA financial services).

Dealer network (Lexus automobiles, Caterpillar earthmoving equipment).

Question 22

nike and differentiation

Answer 22

Beyond customer-specific learning, firms can gain great insights based on the collective behavior of customers.

For example, Nike can quickly detect how the population is shifting in levels of activity and time of use of its products. As the sensors in shoes indicated that people were doing more walking and hiking early in the COVID pandemic period, Nike was able to use that data to shift its product line and marketing to meet this emerging demand.

Question 23

differentiation and cost

Answer 23

Firms achieve and sustain differentiation advantages and attain above-average performance when their price premiums exceed the extra costs incurred in being unique. Thus, a differentiator will always seek out ways of distinguishing itself from similar competitors to justify price premiums greater than the costs incurred by differentiating. Clearly, a differentiator cannot ignore costs. After all, its premium prices would be eroded by a markedly inferior cost position.

Therefore, it must attain a level of cost parity relative to competitors. Differentiators can do this by reducing costs in all areas that do not affect differentiation

Question 24

Differentiation: Improving Competitive Position vis-à-vis the Five Forces

Answer 24

Differentiation protects against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs.

By increasing a firm’s margins, differentiation also avoids the need for a low-cost position. Higher entry barriers result because of customer loyalty and the firm’s ability to provide uniqueness in its products or services.

Differentiation also provides higher margins that enable a firm to deal with supplier power. And it reduces buyer power because buyers lack comparable alternatives and are therefore less price-sensitive.

Supplier power is also decreased because there is a certain amount of prestige associated with being the supplier to a producer of highly differentiated products and services. Last, differentiation enhances customer loyalty, thus reducing threats from substitute

Question 25

Potential Pitfalls of Differentiation Strategies

Answer 25

1. Uniqueness that is not valuable.
   - A differentiation strategy must provide unique bundles of products and/or services that customers value highly. It’s not enough just to be different.
2. Too much differentiation.
   - Firms may strive for quality or service that is higher than customers desire. Thus, they become vulnerable to competitors that provide an appropriate level of quality at a lower price.
3. Too high a price premium.
   - This pitfall is quite similar to too much differentiation. Customers may desire the product, but they are repelled by the price premium.
4. Differentiation that is easily imitated. - As we noted in Chapter 3, resources that are easily imitated cannot lead to sustainable advantages. Similarly, firms may strive for, and even attain, a differentiation strategy that is successful for a time. However, the advantages are eroded through imitation.
5. Dilution of brand identification through product-line extensions.
   - Firms may erode their quality brand image by adding products or services with lower prices and less quality. Although this can increase short-term revenues, it may be detrimental in the long run. EX: Gucci and new line
6. Perceptions of differentiation that vary between buyers and sellers.
   - The issue here is that beauty is in the eye of the beholder. Companies must realize that although they may perceive their products and services as differentiated, their customers may view them as commodities. Indeed, in today’s marketplace, many products and services have been reduced to commodities.

Question 26

Potential pitfalls of overall cost leadership and differentiation strategies (SUMMARIZED)

Answer 26

1. overall cost leadership
   - too much focus on one or few-value chain activities
   - increase in the cost of the inputs on which the advantage is based
   - a strategy that can be imitated too easily
   - a lack of parity on differentiatio
   - reduced flexibility
   - obsolescence of the basis of cost advantage
2. difffertiation
   - uniqueness that is not valuable
   - too much diffrentiation
   - a price premium that is too high
   - differentiation that is easily imitated
   - dilution of brand identification through roduct0line extensions
   - perceptions of differentiation that vary between buyers and sellers

Question 27

focus strategy

Answer 27

A focus strategy is based on the choice of a narrow competitive scope within an industry. A firm following this strategy selects a segment or group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche.

As you might expect, narrow focus itself (like merely “being different” as a differentiator) is simply not sufficient for above-average performance.

Question 28

focus strategy 2 variants

Answer 28

1. In a cost focus, a firm strives to create a cost advantage in its target segment.
2. In a differentiation focus, a firm seeks to differentiate in its target market.

Both variants of the focus strategy rely on providing better service than broad-based competitors that are trying to serve the focuser’s target segment.

Cost focus exploits differences in cost behavior in some segments, while differentiation focus exploits the special needs of buyers in other segment

Question 29

Focus: Improving Competitive Position vis-à-vis the Five Forces 

Answer 29

Focus requires that a firm have either a low-cost position with its strategic target, high differentiation, or both. As we discussed with regard to cost and differentiation strategies, these positions provide defenses against each competitive force. Focus is also used to select niches that are least vulnerable to substitutes or where competitors are weakest.

Question 30

Potential Pitfalls of Focus Strategies

Answer 30

1. Cost advantages may erode within the narrow segment.
   - The advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time.
   - For example, early pioneers in online education, such as the University of Phoenix, have faced increasing challenges as traditional universities have entered with their own online programs that allow them to match the cost benefits associated with online delivery systems.
2. Even product and service offerings that are highly focused are subject to competition from new entrants and from imitation.
   - Some firms adopting a focus strategy may enjoy temporary advantages because they select a small niche with few rivals. However, their advantages may be short-lived.
   - A notable example is the multitude of dot-com firms that specialize in very narrow segments such as pet supplies, ethnic foods, and vintage automobile accessories.
   - The entry barriers tend to be low, there is little buyer loyalty, and competition becomes intense. And since the marketing strategies and technologies employed by most rivals are largely nonproprietary, imitation is easy.
3. Focusers can become too focused to satisfy buyer needs.
   - Some firms attempting to attain advantages through a focus strategy may have too narrow a product or service. Consider many retail firms. Hardware chains such as Ace and True Value are losing market share to rivals such as Lowe’s and Home Depot that offer a full line of home and garden equipment and accessories.

Question 31

4 approaches to combination strategies: Overall Low Cost and Differentiation

1. Adopting Automated and Flexible Manufacturing Systems 

Answer 31

Given the advances in manufacturing technologies such as CAD/CAM (computer aided design and computer aided manufacturing) as well as information technologies, many firms have been able to manufacture unique products in relatively small quantities at lower costs—a concept known as mass customization

Question 32

4 approaches to combination strategies: Overall Low Cost and Differentiation

2. data analytics

Answer 32

Corporations are increasingly collecting and analyzing data on their customers, including data on customer characteristics, purchasing patterns, employee productivity, and physical asset utilization. These efforts have the potential to allow firms to better customize their product and service offerings to customers while more efficiently and fully using the resources of the company.

For example, Caterpillar collects and analyzes large volumes of data about how customers use their tractors. Since this data helps Caterpillar better assess the uses and limitations of their current tractors, the firm can use data analytics to employ more focused and timely product improvement efforts.

Question 33

4 approaches to combination strategies: Overall Low Cost and Differentiation

3. Exploiting the Profit Pool Concept for Competitive Advantage

Answer 33

A profit pool is defined as the total profits in an industry at all points along the industry’s value chain.49 Although the concept is relatively straightforward, the structure of the profit pool can be complex.50 The potential pool of profits will be deeper in some segments of the value chain than in others, and the depths will vary within an individual segment. Segment profitability may vary widely by customer group, product category, geographic market, or distribution channel. Additionally, the pattern of profit concentration in an industry is very often different from the pattern of revenue generation

Question 34

4 approaches to combination strategies: Overall Low Cost and Differentiation

4. unscaling to create a combination strategy

Answer 34

For decades, firms built large-scaled operations to run as efficiently as possible in order to dominate markets. Doing so allowed the firm to build cost advantages over rivals, but this large scale also led them to be slow to responding to market changes and limited in their ability to customize their products to specific customer needs. Unscaling turns this logic on its head. Rather than building scaled operations to meet general customer needs, unscaled firms look to build small scale operations that meet the needs of particular customers as efficiently or possible, at times even more efficiently than scaled competitors

Question 35

4 approaches to combination strategies: Overall Low Cost and Differentiation

Answer 35

1. Adopting Automated and Flexible Manufacturing Systems
2. Using Data Analytics 
3. Exploiting the Profit Pool Concept for Competitive Advantage 
4. Unscaling to Create a Combination Strategy

Question 36

Integrated Overall Low-Cost and Differentiation Strategies: Improving Competitive Position vis-à-vis the Five Forces

Answer 36

Firms that successfully integrate both differentiation and cost advantages create an enviable position. For example, Walmart’s integration of information systems, logistics, and transportation helps it drive down costs and offer outstanding product selection. This dominant competitive position serves to erect high entry barriers to potential competitors that have neither the financial nor physical resources to compete head-to-head.

EX: Walmart’s size—with over $559 billion in sales in 2021—gives the chain enormous bargaining power over suppliers. Its low pricing and wide selection reduce the power of buyers (its customers), because there are relatively few competitors that can provide a comparable cost/value proposition.

Question 37

Pitfalls of Integrated Overall Cost Leadership and Differentiation Strategies

Answer 37

1. Failing to attain both strategies and possibly ending up with neither, leaving the firm “stuck in the middle.”
   - A key issue in strategic management is the creation of competitive advantages that enable a firm to enjoy above-average returns. Some firms may become stuck in the middle if they try to attain both cost and differentiation advantages.
2. Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain.
   - Integrating activities across a firm’s value chain with the value chain of suppliers and customers involves a significant investment in financial and human resources. Firms must consider the expenses linked to technology investment, managerial time and commitment, and the involvement and investment required by the firm’s customers and suppliers.
3. Miscalculating sources of revenue and profit pools in the firm’s industry.
   - Firms may fail to accurately assess sources of revenue and profits in their value chain. This can occur for several reasons. For example, a manager may be biased due to their functional area background, work experiences, and educational background. If the manager’s background is in engineering, they might perceive that proportionately greater revenue and margins were being created in manufacturing, product, and process design than a person whose background is in a “downstream” value-chain activity such as marketing and sales

Question 38

How Did Atlas Door Create Its Competitive Advantages in the Marketplace?

Answer 38

First, Atlas built just-in-time factories.
- Although simple in concept, they require extra tooling and machinery to reduce changeover times. Further, the manufacturing process must be organized by product and scheduled to start and complete with all of the parts available at the same time.

Second, Atlas reduced the time to receive and process an order.
- Traditionally, when customers, distributors, or salespeople called a door manufacturer with a request for price and delivery, they would have to wait more than one week for a response. In contrast, Atlas first streamlined and then automated its entire order-entry, engineering, pricing, and scheduling process. Atlas can price and schedule 95 percent of its incoming orders while the callers are still on the telephone. “

“Third, Atlas tightly controlled logistics so that it always shipped only fully complete orders to construction sites.
- Orders require many components, and gathering all of them at the factory and making sure that they are with the correct order can be a time-consuming task. Of course, it is even more time-consuming to get the correct parts to the job site after the order has been shipped. Atlas developed a system to track the parts in production and the purchased parts for each order

Question 39

result of atlas door’s competitive advantage

Answer 39

when Atlas began operations, distributors had little interest in its product. The established distributors already carried the door line of a much larger competitor and saw little to no reason to switch suppliers except, perhaps, for a major price concession.

But as a startup, Atlas was too small to compete on price alone. Instead, it positioned itself as the door supplier of last resort—the company people came to if the established supplier could not deliver or missed a key date

Question 40

Are Atlas Door’s Competitive Advantages Sustainable?”

Pro Position: The Strategy Is Highly Sustainable

Answer 40

Drawing on Chapter 2, it is quite evident that Atlas Door has attained a very favorable position vis-à-vis the five forces of industry competition.

For example, it is able to exert power over its customers (distributors) because of its ability to deliver a quality product in a short period of time. Also, its dominance in the industry creates high entry barriers for new entrants. It is also quite evident that Atlas Door has been able to successfully integrate many value-chain activities within the firm—a fact that is integral to its just-in-time strategy.

Question 41

Are Atlas Door’s Competitive Advantages Sustainable?”

Con Position: The Strategy Can Be Easily Imitated or Substituted

Answer 41

An argument could be made that much of Atlas Door’s strategy relies on rather well-known and nonproprietary technologies. Over time, a well-financed rival could imitate its strategy (via trial and error), achieve a tight integration among its value-creating activities, and implement a just-in-time manufacturing process. Because human capital is highly mobile (Chapter 4), a rival could hire away Atlas Door’s talent, and these individuals could aid the rival in transferring Atlas Door’s best practices.”

Question 42

Are Atlas Door’s Competitive Advantages Sustainable?”

THE VERDICT

Answer 42

Both positions have merit. Over time, it would be rather easy to see how a new rival could achieve parity with Atlas Door—or even create a superior competitive position with new technologies or innovative processes.

However, two factors make it extremely difficult for a rival to challenge Atlas Door in the short term:
(1) The success that Atlas Door has enjoyed with its just-in-time scheduling and production ­systems—which involve the successful integration of many value-creating ­activities—helps the firm not only lower costs but also respond quickly to customer needs, and
(2) the strong, positive reputational effects that it has earned with its customers increases their loyalty and would take significant time for rivals to match

Question 43

But how do firms position themselves to succeed in these two-sided markets?

Answer 43

it involves a combination of actions to build a strong position and facilitate optimal interactions between suppliers and users. In doing so, these firms strive to simultaneously limit costs to users and also provide differentiated service

1. Draw in users.
   » The key to success in platform models is to generate the best (and often biggest) base of suppliers and customers. Thus, firms must develop effective pricing and incentives for users to attract and retain them. This typically involves subsidizing early and price-sensitive user
2. Create easy and informative customer interfaces.
   » Platform business providers need to make it easy for users to plug into the platform. For example, Quicken Loans strives to differentiate itself with its Rocket Mortgage product, arguing it is the easiest and quickest system for applying for a home mortgage
3. Facilitate the best connections between suppliers and customers.
   »Platform businesses can learn a great deal about their suppliers and customers by observing their search and usage patterns.
4. Sequencing the growth of the business.
   » To maximize the chance of success, platform firms must consciously plan out the sequence of their businesses. This involves thinking in terms of both geographic and product market expansion

Question 44

the industry life cycle

Answer 44

refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry.
(IGMD)

Yet the industry life-cycle concept can be explored from several levels, from the life cycle of an entire industry to the life cycle of a single variation or model of a specific product or service.

Why are industry life cycles important? The emphasis on various generic strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle

Question 45

the industry life cycle: 1- introduction stage

Answer 45

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.

Success requires an emphasis on research and development and marketing activities to enhance awareness. The challenge becomes one of:
(1) developing the product and finding a way to get users to try it, and
(2) generating enough exposure so the product emerges as the standard by which all other rivals’ products are evaluated

There’s an advantage to being the “first mover” in a market… It led to Coca-Cola’s success in becoming the first soft-drink

being a “late mover” also has its advantages. Target carefully considered its decision to delay its internet strategy. Compared to its competitors Walmart and Kmart,

Question 46

the industry life cycle: 2- growth stage

Answer 46

The growth stage is characterized by strong increases in sales. Such potential attracts other rivals. In the growth stage, the primary key to success is to build consumer preferences for specific brands. This requires strong brand recognition, differentiated products, and the financial resources to support a variety of value-chain activities such as marketing and sales, and research and development.

Whereas marketing and sales initiatives were mainly directed at spurring aggregate demand—that is, demand for all such products in the introduction stage—efforts in the growth stage are directed toward stimulating selective demand, in which a firm’s product offerings are chosen instead of a rival’s

Revenues increase at an accelerating rate because
(1) new consumers are trying the product and
(2) a growing proportion of satisfied consumers are making repeat purchase

Question 47

the industry life cycle: 3 - maturity stage

Answer 47

In the maturity stage aggregate industry demand softens. As markets become saturated, there are few new adopters. It’s no longer possible to “grow around” the competition, so direct competition becomes predominant.

With few attractive prospects, marginal competitors exit the market. At the same time, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price-sensitive. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services

**Two positioning strategies that managers can use to affect consumers’ mental shifts are reverse positioning, which strips away sacred product attributes while adding new ones, and breakaway positioning, which associates the product with a radically different category

Question 48

reverse positioning (maturity stage)

Answer 48

This strategy assumes that although customers may desire more than the baseline product, they don’t necessarily want an endless list of features.

With reverse positioning, companies make the creative decision to step off the augmentation treadmill and shed product attributes that the rest of the industry considers sacred. Then, once a product is returned to its baseline state, the stripped-down product adds one or more carefully selected attributes that would usually be found only in a highly augmented product.

Question 49

breakaway positioning (maturity stage)

Answer 49

As noted previously, with reverse positioning, a product establishes a unique position in its category but retains a clear category membership. However, with breakaway positioning, a product escapes its category by deliberately associating with a different one.

Thus, managers leverage the new category’s conventions to change both how products are consumed and with whom they compete. Instead of merely seeing the breakaway product as simply an alternative to others in its category, consumers perceive it as altogether different

Question 50

the industry life cycle: 4 - decline stage

Answer 50

Although all decisions in the phases of an industry life cycle are important, they become particularly difficult in the decline stage. Firms must face up to the fundamental strategic choices of either exiting or staying and attempting to consolidate their position in the industry.

The decline stage occurs when industry sales and profits begin to fall. Typically, changes in the business environment are at the root of an industry or product group entering this stage”

“In the decline stage, a firm’s strategic options become dependent on the actions of rivals. If many competitors leave the market, sales and profit opportunities increase. On the other hand, prospects are limited if all competitors remain.69 If some competitors merge, their increased market power may erode the opportunities for the remaining players. Managers must carefully monitor the actions and intentions of competitors before deciding on a course of action

Question 51

Four basic strategies are available in the decline phase

Answer 51

• maintaining
• harvesting
• exiting
• consolidating

Question 52

Four basic strategies are available in the decline phase - maintaining

Answer 52

Maintaining refers to keeping a product going without significantly reducing marketing support, technological development, or other investments, in the hope that competitors will eventually exit the market.

For example, even though most documents are sent digitally, there is still a significant market for fax machines since many legal and investment documents must still be signed and sent using a fax. This mode of transmission is still seen as more secure than other means of transmission. Thus, there may still be the potential for revenues and profits.

Question 53

Four basic strategies are available in the decline phase - harvesting

Answer 53

Harvesting involves obtaining as much profit as possible and requires that costs be reduced quickly. Managers should consider the firm’s value-creating activities and cut associated budgets.

Value-chain activities to consider are primary (e.g., operations, sales and marketing) and support (e.g., procurement, technology development). The objective is to wring out as much profit as possible.

Question 54

Four basic strategies are available in the decline phase - exiting the market

Answer 54

Exiting the market involves dropping the product from a firm’s portfolio. Since a residual core of consumers exist, eliminating it should be carefully considered. If the firm’s exit involves product markets that affect important relationships with other product markets in the corporation’s overall portfolio, an exit could have repercussions for the whole corporation.

For example, it may involve the loss of valuable brand names or human capital with a broad variety of expertise in many value-creating activities such as marketing, technology, and operations.

Question 55

Four basic strategies are available in the decline phase - consolidation

Answer 55

Consolidation involves one firm acquiring at a reasonable price the best of the surviving firms in an industry. This enables firms to enhance market power and acquire valuable assets.

One example of a consolidation strategy has been taking place in the newspaper industry. Newspaper circulation in the United States dropped by 59 dropped from 1990 to 2020

Question 56

decline - In each case, the advent of new technology prompted predictions of the demise of the older technology, but each of these has proved to be a resilient survivor.

Answer 56

Retreating to more defensible ground
- is one strategy that firms specializing in technologies threatened with rapid obsolescence have followed. For example, while angioplasty may be appropriate for relatively healthier patients with blocked arteries, sicker, higher-risk patients seem to benefit more from coronary artery bypass graft surgery. “

“Using the new to improve the old is a second approach.
- Train service providers in Europe have incorporated elements of the business model of discount airlines to win business back from them.

Improving the price-performance trade-off is a third approach.
- IBM continues to make money selling mainframes long after their obituary was written. It retooled the technology using low-cost microprocessors and cut their prices drastically.

Question 57

retrenchment strategy

Answer 57

A retrenchment strategy involves selectively cutting unprofitable market segments and asset investments to reverse performance decline and improve a firm’s profitability. A need for retrenchment may occur at any stage in the life cycle but is more likely to occur during maturity or decline

Most retrenchments require a firm to carefully analyze the external and internal environments.
The external analysis leads to identification of market segments or customer groups that may still find the product attractive.
Internal analysis results in actions aimed at reduced costs and higher efficiency.

Question 58

the need for retrenchment strategies that enable a firm to reposition its competitive position in an industry

Answer 58

1. Asset and cost surgery.
   » Frequently, mature firms tend to have assets that do not produce any returns. These include real estate, buildings, and so on. Outright sales or sale and leaseback free up considerable cash and improve returns. Investment in new plants and equipment can be deferred.
2. Selective product and market pruning.
   » Most mature or declining firms have many product lines that are losing money or are only marginally profitable. One strategy is to discontinue such product lines and focus all resources on a few core profitable areas.
3. Piecemeal productivity improvements.
   » There are many ways in which a firm can eliminate costs and improve productivity. Although individually these are small gains, they cumulate over a period of time to substantial gains.