Chapter 5 - Business Level Strategy - Competitive Advantage

Question 1

• 3 standards for competitive advantage:

Answer 1

o How much economic value does the firm generate?
o What is the firm’s accounting profitability?
o How much shareholder value does the firm create?

Question 2

• Business level strategy:

Answer 2

a strategy designed for a firm or a division of a firm that competes within a single business. Detailed actions managers take to pursue competitive advantage with a single product or group of products

Question 3

What are the three generic competitive strategies?

Answer 3

• overall cost leadership
• differentiation
• focus strategy (cost leadership focus or differentiation strategy)

Question 4

o Overall cost leadership

Answer 4

a firm’s generic strategy based on appeal to the industrywide market using a competitive advantage based on low cost.

Question 5

What are some details of cost leadership strategy?

Answer 5

 Manage relationships throughout the entire value chain
 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.
 *Price is just one component of value. No matter how good the price, the most cost-sensitive consumer won’t buy a bad product.
- Helps control the five forces with protecting firm against rivals, protects against powerful buyers, more flexibility to cope with demands from suppliers, substantial barriers to entry due to economies of scale, favorable position in regard to substitutes

Downsides:

• too much focus on one or a few value chain activities
• all rivals share common inputs or raw materials
• strategy is imitated too easily
• lack of parity on differentiation
• erosion of cost advantages when customers have too much access to pricing information

Question 6

Differentiation

Answer 6

a firm’s generic strategy based on creating differences in the firm’s product or service offering by creating something that is perceived industrywide as unique and valued by customers.

Question 7

What are some details of differentiation strategy?

Answer 7

 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).

• Creates high barrier to entry
• higher margin that help deal with supplier power
• customer loyalty helps with threat from substitutes

Downsides:
- uniqueness is not valuable
- too much differentiation or price premium
- differentiation easily imitated
-

Question 8

Focus strategy

Answer 8

a firm’s generic strategy based on appeal to a narrow market segment within an industry based on product lines, buyer segments, targeted geographic markets

• creates barriers of either cost or differentiation
• select niches that aren’t vulnerable to substitues

downside:

• erosion of cost advantage with narrow segment
• focused products still have threat of new entrants
• can be too focused and not satisfying customer needs

Question 9

What is the cost focus strategy?

Answer 9

 In a cost focus, a firm strives to create a cost advantage in its target segment.

Question 10

What is differentiation focus strategy?

Answer 10

 In a differentiation focus, a firm seeks to differentiate in its target market.

Question 11

What is combination/integration strategy?

Answer 11

• cost leadership and differentiation strategies combined
  • Economies of scope: starbucks adding hot tea to its menu
  • Innovation: IKEA – stylish furniture in flat pack deliver
  • Structure, culture, and routines

downsides:

• firms may get stuck in the middle with strategy
• underestimating challenges and costs associated with extended value chain
• miscalculating sources of revenue and profit pools in the industry

Question 12

What are the three combination approach strategies?

Answer 12

• mass customization
• profit pool
• coordinating the extended value chain by way of information technology

Question 13

Profit Pool

Answer 13

the total profits in an industry at all points along the industry’s value chain. 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.

Question 14

Mass customization

Answer 14

a firm’s ability to manufacture unique products in small quantities at low cost. Use automated and flexible manufacturing systems.

Question 15

What are the industry life-cycle stages?

Answer 15

• introduction stage
• growth stage
• maturity stage
• decline stage

Question 16

What is an industry life cycle?

Answer 16

the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry.

Question 17

Introduction stage

Answer 17

the first stage of the industry life cycle, characterized by (1) new products that are not known to customers, (2) poorly defined market segments, (3) unspecified product features, (4) low sales growth, (5) rapid technological change, (6) operating losses, and (7) a need for financial support.

Question 18

Growth stage

Answer 18

the second stage of the product life cycle, characterized by (1) strong increases in sales; (2) growing competition; (3) developing brand recognition; and (4) a need for financing complementary value-chain activities such as marketing, sales, customer service, and research and development.

Question 19

Maturity Stage

Answer 19

the third stage of the product life cycle, characterized by (1) slowing demand growth, (2) saturated markets, (3) direct competition, (4) price competition, and (5) strategic emphasis on efficient operations.

Question 20

What are two strategies in the maturity stage?

Answer 20

• reverse positioning

- breakaway positioning

Question 21

Reverse positioning

Answer 21

a break in the industry tendency to continuously augment products, characteristic of the product life cycle, by offering products with fewer product attributes and lower prices. This strategy assumes that although customers may desire more than the baseline product, they don’t necessarily want an endless list of features.

Question 22

Breakaway positioning

Answer 22

a break in the industry tendency to incrementally improve products along specific dimensions, characteristic of the product life cycle, by offering products that are still in the industry but are perceived by customers as being different.

Question 23

Decline stage

Answer 23

the fourth stage of the product life cycle, characterized by (1) falling sales and profits, (2) increasing price competition, and (3) industry consolidation.

Question 24

What are four strategies in the decline stage?

Answer 24

• Harvesting strategy
• Consolidation strategy
• Exiting the market
• Maintaining

Question 25

Harvesting strategy

Answer 25

a strategy of wringing as much profit as possible out of a business in the short to medium term by reducing costs.

Question 26

Consolidation strategy

Answer 26

a firm’s acquiring or merging with other firms in an industry in order to enhance market power and gain valuable assets.

Question 27

Turnaround strategy

Answer 27

- a strategy that reverses a firm’s decline in performance and returns it to growth and profitability.  Asset and cost surgery.  Selective product and market pruning  Piecemeal productivity improvement

Question 28

1. Explain why the concept of competitive advantage is central to the study of strategic management.

Answer 28

a. Strategic Management creates competitive advantage. This is important due to the PORTERS 5 FORCES. companies want to be able to beat the porters 5 forces to have the highest returns and to beat their competitors. b. The concept of competitive advantage is central to the study of strategic management because a firm’s strategy consists of particular actions to improve the way they perform as a whole. It is vital to not only improve, but to exceed your competition to gain a competitive advantage. According to Dess, Lumpkin, & Eisner (2008), there are “three generic strategies that a firm can use to overcome the five forces and achieve competitive advantage” (p. 158). The three generic strategies are overall cost leadership, differentiation, and focus.

Question 29

2. Briefly describe the three generic strategies—overall cost leadership, differentiation, and focus.

Answer 29

a. *The overall cost leadership generic strategy involves developing a competitive advantage based on low cost position while appealing to an industry wide market. * The differentiation generic strategy involves developing a competitive advantage based on uniqueness perceived by the customer while appealing to industry wide market. * The focus generic strategy involves focus on a narrow market segment while developing a competitive advantage of either uniqueness perceived by the customer or low cost position.

Question 30

5. Describe some of the pitfalls associated with each of the three generic strategies.

Answer 30

a. 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 neglect on specific value chain activities such that competitive parity is not reached, vulnerability to an increase in price on inputs, imitation by competitors, insufficient differentiation such that buyers do not get acceptable quality even at the low price, and customer demands for the low prices, based on the ready availability of information on cost. 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 difference that is not perceived to be valuable by customers, differentiating more than customers desire, charging too high a price, imitation by rivals, dilution of brand image, and difference in quality perception between the firm and its buyers. 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, imitation of product and service offerings, and loss of focus advantage as less focused competitors offer products and services at prices that the niche customers prefer.

Question 31

6. Can firms combine the generic strategies of overall cost leadership and differentiation? Why or why not?

Answer 31

a. Yes, combination or integration strategy (like IKEA) b. Yes, there are examples of firms that serve the industry wide target market by providing products that are differentiated by, say, high quality or brand equity. Firms can do this by providing unique value to customers efficiently. Methods included use of manufacturing systems that are flexible and automated, exploiting profit pools, seamlessly integrating operation with suppliers and customers, and exploiting profit pools.

Question 32

7. Explain why the industry life-cycle concept is an important factor in determining a firm’s business-level strategy.

Answer 32

a. The industry life cycle explains patterns of critical aspects of the industry and external environment, including market size, growth potential, characteristics of customers, establishment and volatility of the technology, and amount of competition. For each stage of the industry life cycle, there are associated strategies that have been shown to be effective.

Question 33

Introduction stage strategies

Answer 33

- Develop product and get users to try it | - Generate exposure so product becomes “standard”

Question 34

Growth stage strategies

Answer 34

- Brand recognition - differentiated products - Financial resources to support value-chain activities