CH-5 Business-Level Strategy: Creating and Sustaining Competitive Advantages – Strategic Management: Creating Competitive Advantages : Book Guide

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. Learning from Mistakes The introductory case discusses the demise of Hostess as an ongoing company and how the new owners of its brands should proceed.  Discussion Question 1: How challenging is it to differentiate Hostess’ products in today’s health conscious marketplace? Response guidelines: This question is an opportunity to review the situation Hostess found itself in. We can assume that Hostess found it difficult to differentiate its products at least enough to give it the pricing flexibility needed to support its cost structure. Students should offer some ideas directly from the vignette. These ideas may include: • Competitors had imitated Hostess’ products • Hostess is constrained in what it can do by its union contracts • Hostess’ problems are primarily driven by changes in customer tastes to more healthy food choices. Hostess’ brand image is durable in consumers’ minds, and includes an association with sweet, rich, and tasty foods rather than healthy and nutritious foods. For the first point, instructors can apply the idea of “costly to imitate” that is a property of a firm’s strategic resource – from the resource based view of the firm (RBV) that was introduced in Chapter 3. Hostess’ brand has eroded value because it is not very costly to imitate. Instructors could also apply the property of “costly to substitute” from the RBV. Rivals in the industry have substituted Hostess’ products for those that are healthier or otherwise have more desirable characteristics. For the second point, instructors can link this idea to SWOT analysis that was covered in Chapter 2. The union contracts represent an internal weakness that prevents Hostess from adapting to its changing environment. For the third point, Hostess’ brand image has changed in consumers’ minds, which reflects a change in the sociocultural segment of the general environment. Overall, this discussion should increase students’ awareness and appreciation of Hostess’ situation and link it to material already covered in the text. This short vignette demonstrates how both external and internal factors can undercut the value of a firm’s strategic position. When students have shown their understanding of the situation, they are in a good position to move on to the second question. Answer: Differentiating Hostess’ products is challenging in a health-conscious marketplace due to increasing demand for healthier options and growing consumer awareness about nutrition. The brand must innovate to align with changing health trends while maintaining its classic appeal.  Discussion Question 2: Should the new owners of the Hostess brands strive to develop more health conscious snack goods or ignore the health trends and produce as tasty and rich a product as possible? Response guidelines: Instructors can pose this question to the class and ask students to take a position and defend it. Note that there is no right or wrong answer to this question. Hostess could decide to go in either direction. In the comments that follow, we suggest a few relevant points that can be made regarding each option. We are not claiming to cover all possible options, though we encourage students to consider all options. Also, this discussion can motivate students to learn the material in Chapter 5, especially generic strategies. The points below assume that an overall cost leadership strategy is not feasible. Since the new owners are taking on cost by procuring the Hostess Brands, these owners are unlikely to strive to stake out a low-cost position. Instead, they still value these established, recognizable brands as a source of differentiation. Option one – develop more health conscious snack goods. This option aims for a wide target market, as the health-conscious segment is growing and large. Hostess would offer a wide variety of totally new products that are healthy. It will have to modify its brand image, and perhaps change its brand name because consumers associate it with other types of products. Strengths: • Appeal to a larger and growing target market • Develop firm capabilities that will serve it well in the future Weaknesses: • It will be costly to develop a new brand image in consumers’ minds • Competitors will already be established in the industry segment Examples: • Kashi • Healthy Choice • Nature’s Path • Thomas’ Relevant generic strategy: • Differentiation Option two – produce as tasty and rich a product as possible. This option involves a conscious decision to ignore the sociocultural shift toward more health conscious foods and, instead, focusing on improving product quality and innovating new, unique flavors. This would likely necessitate price increases and would limit the target market. A smaller set of consumers are willing to consume high fat content, processed foods than had been in the past. Also, the higher price point would make the products more of an indulgent treat than a convenient, spur of the moment snack purchase. Strengths: • Possibility of building on current brand image; less expensive than developing a new brand. • If current product image is reinforced and strengthened, then product differentiation can be developed, which limits rivalry Weaknesses: • Smaller target market • Higher price point could limit volume • Examples: • Cadburys • Famous Amos • Entenmann’s Relevant generic strategy: • Focus on specialty baked goods target market Answer: The new owners should consider developing more health-conscious snack options to align with market trends and consumer preferences, while still maintaining some classic offerings. This balanced approach could attract a broader customer base and enhance long-term brand viability. 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 products and/or services that are unique and valued. Third, firms following a focus strategy must direct their attention (or “focus”) toward narrow product lines, buyer groups or geographical markets. Firms emphasizing a focus strategy must attain advantages either through differentiation or a cost leadership approach. EXHIBIT 5.1 illustrates these three strategies on two dimensions: competitive advantage and strategic target.  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)? Answer: 1. Cost Leadership: Walmart excels through low-cost strategies, leveraging economies of scale and efficient supply chain management to offer low prices and attract price-sensitive customers. 2. Differentiation: Apple differentiates itself with innovative design, premium quality, and a strong ecosystem, leading to high customer loyalty and willingness to pay premium prices. 3. Focused Cost Leadership: Ryanair focuses on cost leadership within the budget airline sector, minimizing expenses to offer low fares to cost-conscious travelers. 4. Focused Differentiation: Tesla targets a niche market with high-end electric vehicles that offer cutting-edge technology and sustainability, appealing to environmentally conscious consumers willing to pay more. Before moving on to the discussion of each of the generic strategies, it is useful to point out that there has been a variety of research that has supported the notion that firms that identify with one or more forms of competitive advantage typically outperform those who do not. EXHIBIT 5.2 provides evidence that businesses that combined multiple forms of competitive advantage were more successful than those that used only a single form. And, the lowest performers where those that were “stuck in the middle,” that is, they did not identify with a single type of strategy.  Discussion Question 4: What are some examples of firms that have successfully com-bined multiple strategies? Does this seem to help their performance? Why? Why not? Answer: 1. Amazon: Amazon combines cost leadership with differentiation by offering a vast selection of products at competitive prices and providing a highly convenient shopping experience through innovations like Prime and Alexa. 2. Starbucks: Starbucks blends differentiation with a focus strategy, offering a premium coffee experience and a unique store ambiance to attract specific customer segments while maintaining competitive pricing. 3. Nike: Nike integrates differentiation with a focus strategy, creating high-quality, innovative athletic wear and targeting both premium and niche market segments with specialized products. 4. Tesla: Tesla combines differentiation with a cost leadership approach in its long-term strategy, aiming to drive down costs through economies of scale while offering unique, high-performance electric vehicles. These companies often see improved performance due to their ability to appeal to a broader customer base, leverage multiple competitive advantages, and respond flexibly to market demands. At this point, it is useful to point out that deciding what types of competitive advantage to select requires the making of hard choices (a point driven home by Michael Porter in his 1996 Harvard Business Review article: What is strategy?) In effect, a firm cannot be “all things to all people.” 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 control, avoidance of managerial customer accounts, and cost minimization in all activities in a firm’s value chain. EXHIBIT 5.3 uses the value chain concept (from Chapter 3) to provide examples of how a firm can attain an overall cost leadership strategy in its primary and support activities.  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? Answer: 1. Apple: Differentiation – Apple exemplifies differentiation with its innovative product designs, user-friendly interfaces, and strong brand loyalty, leading to premium pricing and high margins. 2. Walmart: Cost Leadership – Walmart's focus on operational efficiency and supply chain management enables it to offer low prices, attracting price-sensitive customers and achieving high sales volume. 3. Netflix: Focus Strategy – Netflix uses a focus strategy by tailoring its content and recommendations to niche market segments, enhancing customer satisfaction and retention through personalized experiences. 4. Southwest Airlines: Cost Leadership with Differentiation – Southwest combines cost leadership with a unique service approach, such as free checked bags and no change fees, improving customer loyalty and profitability. These strategies improve firm performance by aligning their operations with customer needs, optimizing cost structures, and differentiating from competitors. The SUPPLEMENT below discusses how a firm (Spirit Airlines) has been able to compete successfully in an intensely competitive industry by means of an effective cost leadership strategy. It serves to show how actions involve many primary and support activities in the value chain.  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. While American Airlines lost nearly $2 billion in 2012, Spirit, an airline with one-twentieth of the sales of American, raked in $108 million in profit. It’s grown at a rate of 20% a year in recent years and saw its stock grow in value by 125% in the two years following its initial public offering in April 2011. 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. 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 landing of one flight to the takeoff of the next. • It only stocks water and food onto its planes 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. Source: Nicas, J. 2012. A stingy Spirit lift’s airline’s profits. WSJ.com. May 11: 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 competitors. Proximity to differentiation means that the price discount needed to get an acceptable market share does not offset a cost leader’s cost advantage. We next address three examples of how overall cost leadership strategies can help a firm to enjoy advantages in their industry: Aldi (a hard discount supermarket chain), Tesco (a UK grocery retailer), and Harley Davidson. STRATEGY SPOTLIGHT 5.1 discusses Renault and its successful cost leadership strategy. It points out how the firm has learned from its experience in competing in developing markets to sell low-cost cars in the depressed European car market. Discussion Question 6: Do you think that Renault’s cost leadership model would work in the North American car market? Why or why not? Answer: Renault's cost leadership model could face challenges in the North American car market due to its high demand for premium features and brand reputation. North American consumers often prioritize advanced technology, safety features, and brand prestige, which can be at odds with a strict cost-cutting approach. Moreover, local competition from well-established manufacturers with strong brand loyalty and high-quality standards may limit Renault's ability to differentiate purely on cost. Adapting the model to include features appealing to North American tastes while maintaining cost efficiency might be crucial for success. 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 five forces, we reintroduce the earlier examples of Aldi, Renault, and Harley to illustrate the concepts. 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 their competitive position vis-à-vis the five forces? Answer: Spirit Airlines’ cost leadership strategy enhances its competitive position by lowering operational costs, allowing it to offer lower fares than many competitors. This reduces the threat of new entrants due to high cost barriers, diminishes the bargaining power of suppliers by focusing on operational efficiency, and mitigates buyer power through lower ticket prices. However, it may increase rivalry among existing low-cost carriers and could affect the airline's ability to differentiate. Discussion Question 8: Is Spirit able to achieve parity on differentiation? Answer: Spirit Airlines struggles with achieving parity on differentiation due to its focus on cost leadership. While it excels in providing low-cost travel, it often sacrifices amenities and service quality. This means Spirit may not fully meet customer expectations for comfort and service compared to higher-priced competitors, limiting its ability 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; • A lack of parity on differentiation; • Reduced flexibility; • Obsolescence of the basis of cost advantage. The SUPPLEMENT below describes how discounters are facing a sudden new threat: department stores are slashing their prices so deep that customers see no price difference between the two types of stores. The question is: Can they compete any longer on the basis of cost leadership if prices converge between discounters and department stores?  Extra Example: Potential Pitfalls of an Overall Cost Leadership Strategy JC Penney (JCP), a cost leader department store, has experienced the downsides of a cost leadership strategy in recent years. First, its position as a cost leader was undercut by imitation from discount retailers, such as Target and Walmart, and also by direct competitors, such as Kohls. The challenge for JCP existed at two levels. First, its position as a cost leader was not based on proprietary resources and was easily matched by other firms. Second, it relied heavily on sales and coupons to attract customers, and over time, this eroded the brand image of JCP and left it below parity on differentiation. To shake things up and improve JCP’s image, the firm brought in a new CEO, Ron Johnson. Mr. Johnson had been the head of Apple’s retail operations. He brought in a bold idea to remake JCP into a more exclusive retailer that would house boutique shops in its stores with merchandise from leading brands. However, he was unable to quickly change the image of JCP to attract new customers and also found that the changes he initiated drove away JCP’s core customers, resulting in a 30% decline in JCP’s sales. Mr. Johnson was fired in April 2013, after less than two years on the job. He was replaced by Mike Ullman, the same man who held the position as JCP’s CEO prior to Mr. Johnson. Still, JCP is struggling to find a viable position in the retail industry. Source: Reinbold, J. 2012. Retail’s new radical. Fortune. March 12: 125-131. Anonymous. 2012. JC Penney sales plunge overwhelms progress at new shops. Foxbusiness.com. November 9: np.  Discussion Question 9: Do you think JCP will recover from their current challenges? What type of strategic position offers them the greatest chance to succeed? Answer: JCPenney’s recovery hinges on its ability to adapt to the evolving retail landscape. A strategic position that offers the greatest chance for success would be a hybrid approach combining cost leadership with enhanced customer experience. By optimizing supply chain efficiency to reduce costs while investing in personalized customer service and a compelling in-store experience, JCPenney can differentiate itself from competitors and attract price-sensitive yet quality-seeking shoppers. Adapting to omnichannel retailing, integrating online and offline experiences, will also be crucial in their recovery. 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 customers. Differentiation can take many forms such as: prestige or brand image, technology, innovation, features, customer service, or dealer networks. The SUPPLEMENT below provides what many may consider an “extreme case” of differentiation — a razor that costs $100,000!  Extra Example: Would Your Shave be better with a $100,000 Razor? How much are you willing to pay for a stylish razor? More than a new car? As much as a college education? That’s what Oregon-based firm Zafirro is asking buyers of its new Zafirro Iridium to pay—$100,000 to be exact. The handle of the razor is hand crafted and made with iridium and platinum. The blade is made of solid white sapphire. Zafirro asserts that the edge is “5,000 times thinner than a human hair.” But for the $100K, you don’t just get the razor. It includes cleaning and servicing of the razor for ten years. Buyers better act fast. Zafirro plans to manufacture and sell only 99 of the Iridium razors. However, if the Iridium is a bit out of your price range, Zafirro also offers some more affordable razor options. The Zafirro Gold is only $18,000 while the Zafirro Platinum is a “very affordable” $2,000. Source: Tschorn, A. 2011. All the rage: Zafirro debuts a $100,000 Iridium Razor with sapphire blades. Latimesblogs.latimes.com: np; zafirro.com.  Discussion Question 10: Do you think these offerings will be successful? Why? Why not? Answer: Whether offerings will be successful depends on their alignment with consumer needs and market trends. Success is more likely if the offerings address gaps in the market, offer clear value, and are supported by effective marketing. If they fail to resonate with target customers or are poorly executed, they may not achieve success. 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? Answer: Marketing high-end luxury products can create a strong brand image and command premium prices. However, it also risks limiting market size and being vulnerable to economic downturns. Sustainability depends on maintaining exclusivity and quality while adapting to market changes. Discussion Question 12: What are some examples of other companies that have successfully implemented a strategy of extreme differentiation? Answer: Examples of companies with extreme differentiation include Tesla, which offers cutting-edge electric vehicles with unique features, and Apple, known for its innovative technology and design. These strategies succeed by creating distinct value propositions that stand out in their markets. Apple is a company admired by its customers and its rivals for its ability to come up an unending stream of highly innovative products which combine user friendliness, aesthetic design, and uncommon functionality. The SUPPLEMENT below provides comments by leaders of three different companies explaining why they admire Apple.  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 producets? Answer: While Steve Jobs' death and leadership changes at Apple undoubtedly impacted the company's dynamics, Apple's ability to lead markets and innovate remains strong. The company has continued to introduce successful products like the Apple Watch and advancements in technology, supported by a robust culture of innovation and a strong brand. However, maintaining the same level of market-changing innovation without Jobs' visionary leadership is a challenge that Apple continues to navigate. 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? Answer: Companies like Apple and Tesla have successfully incorporated elements from EXHIBIT 5.4 into their differentiation strategies. Apple uses cutting-edge technology, sleek design, and a seamless ecosystem to stand out, while Tesla integrates advanced technology, sustainability, and premium features to differentiate its electric vehicles. Discussion Question 15: What are some examples of companies that have been able to combine/integrate some of the items in EXHIBIT 5.4? Answer: Amazon and Nike are examples of firms that integrate elements from EXHIBIT 5.4. Amazon combines efficient logistics, vast selection, and personalized customer service, while Nike blends innovative product design, brand reputation, and customer engagement through its apps and customization options to strengthen its market position. As with overall cost leadership strategies, parity on the other dimension of strategy becomes very important. That is, firms following differentiation strategies must strive to attain a degree or level of parity on cost. In this section we provide many examples of firms that have successfully implemented a differentiation strategy. These include such firms as Adam’s Mark hotels and BMW automobiles (image and brand identification) and Nordstrom department stores (customer service). We also provide the example of Lexus (a division of Toyota) to illustrate the importance of achieving integration at multiple points on the value 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 speed and quick response to customers. (This may also provide another example of how a seemingly “commodity” service can be differentiated and premium prices may be charged to customers.) Ask students what other companies may use speed as a means of differentiation. STRATEGY SPOTLIGHT 5.2 discusses how Unilever, the global consumer products company, uses crowdsourcing to enhance its sustainability.  Discussion Question 16: 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 cost, free advertising in popular press articles, reputational benefits with sustainability advocates, etc.; potential risks: higher costs with sustainable sourcing, development of green products that may or may not be desired by customers, enhanced expectations for sustainability actions that they may be unable to follow through on, etc.) Answer: Crowdsourcing offers Unilever benefits such as innovative ideas for sustainable products, cost-effective process improvements, and positive media coverage that enhances its reputation among sustainability advocates. However, risks include potential increased costs for sustainable sourcing, the development of green products that may not meet customer demand, and heightened expectations for sustainability that could be challenging to fulfill. Balancing these benefits and risks is crucial for leveraging crowdsourcing effectively. 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 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. 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 • Differentiation that is easily imitated • Dilution of brand identification through product-line extensions • Perceptions of differentiation may vary between buyers and sellers  Discussion Question 17: 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? Answer: Firms like BlackBerry and Kodak achieved notable differentiation but saw it eroded due to several pitfalls. BlackBerry's focus on security and physical keyboards became less appealing as touchscreens and app ecosystems gained popularity. Kodak's pioneering in film technology failed to transition effectively to digital photography. Both companies underestimated evolving consumer preferences and technological advances, ultimately undermining their competitive edges. Teaching Tip: It is useful to point out that even if a firm has what may appear to 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 consumer electronics. While B&O has been a viable competitor in its markets, it has found it difficult to translate creative design and technologically capable products into strong market success. The firm has been marginally profitable over the last few years and experienced an 8% sales decline in 2012. 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 industry. The focuser attains competitive advantages by dedicating itself to a segment or group of segments and tailors its strategy to serving them.  Discussion Question 18: What are some companies that have successfully implemented a focus strategy? Answer: Companies like Rolex, Whole Foods Market, and Tesla have successfully implemented a focus strategy. Rolex targets high-end luxury consumers with premium watches, Whole Foods focuses on organic and health-conscious shoppers, and Tesla specializes in high-performance electric vehicles. Each company’s focused approach allows them to cater specifically to niche markets, differentiating themselves through specialized products and services that meet the unique needs of their target customers. The focus strategy, as indicated in EXHIBIT 5.1 has two variants. In a cost focus, a firm strives to create a cost advantage in its target segment. In a differentiation focus, a firm seeks to differentiate in its target market. We provide an example of a successful niche firm in both a service industry (LinkedIn) and a manufacturing industry (Marlin Steel Wire Products). STRATEGY SPOTLIGHT 5.3 examines Mini, a firm that has staked out an interesting differentiation niche in a segment of the car market that is typically very cost focused. 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 strategy. It operates in two dissimilar fields, is able to provide its customers with superior services, by customizing its offerings and by forecasting future industry trends.  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.  Discussion Question 19: Would customers be willing to pay higher prices for such customized services? Answer: Yes, customers often pay higher prices for customized services if they perceive added value, such as tailored solutions, enhanced quality, or exclusive features that meet their specific needs. Discussion Question 20: Do you believe that this approach might fit a majority or a minority of firms that seek consulting services? What type of firms (and what type of industries) may be more interested? Answer: This approach might fit a minority of firms seeking consulting services, especially those in specialized or high-stakes industries like finance, healthcare, or technology. These firms value customized, expert advice due to their complex needs and the potential for significant impact on their operations and profitability. 2. Potential Pitfalls of Focus Strategies The section closes by addressing some of the pitfalls of a focus strategy. These are: • Erosion of cost advantages within the narrow segment. • Even product and service offerings that are highly focused are subject to competition from new entrants and imitators • Focusers can become too focused to satisfy buyer needs. D. Combination Strategies: Integrating Overall Low Cost and Differentiation There has been a great deal of evidence — in both observation of business practice as well as in research studies — about the strategic benefits of competitive positioning and resultant performance implications that are inherent in combining generic strategies. In the beginning of this section, we provided some evidence from nearly 2000 strategic business units (EXHIBIT 5.2) to support this contention. In general, the key benefit to be enjoyed by firms that successfully integrate low cost and differentiation strategies is that it is generally harder for competitors to duplicate or imitate them. An integrated strategy enables a firm to provide two types of value to customers: differentiated attributes and lower prices. Furthermore, the benefits of combining advantages can be additive, instead of merely involving tradeoffs. We next address three approaches that combine overall cost leadership and differentiation. 1. Automated and Flexible Manufacturing Systems Given the advances in manufacturing technologies such as CAD/CAM as well as information technologies, many firms have been able to manufacture unique products in relatively small quantities at lower costs. This is a concept known as “mass customization”. We provide the example of Andersen Windows in Bayport, Minnesota — a $2 billion manufacturer of windows for the building industry. Among the benefits are that the system is virtually error free, the customers get exactly what they want, and the time to develop the design and price quotation are cut by 75 percent. EXHIBIT 5.6 discusses effective uses of flexible production systems. 2. Exploiting the Profit Pool Concept for Competitive Advantage A profit pool can be defined as 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. We provide the example of buyback insurance in the consumer electronics industry to illustrate the profit pool concept in STRATEGY SPOTLIGHT 5.4. Here, we present the idea that firms can generate and capture profits by offering services related to their core products. The key implication is that retailers often find much higher margins on their services than with their core retailing operations.  Discussion Question 21: What are some other examples of firms that generate higher returns by identifying and leveraging opportunities by expanding their scope of operations to capture more of the overall profit pool? Answer: Companies like Amazon and Apple have successfully expanded their scope to capture more of the overall profit pool. Amazon diversified from e-commerce into cloud computing with AWS, creating new revenue streams and capturing additional market share. Apple expanded beyond hardware into services like Apple Music and Apple TV+, enhancing its revenue and integrating its ecosystem. Both firms effectively leveraged their existing capabilities to enter new markets and generate higher returns. Our discussion of the profit pool concept can be illustrated more compellingly to the class by emphasizing that this applies to virtually every industry. The SUPPLEMENT below describes how Rolls Royce is placing more emphasis on downstream (i.e., marketing, sales, and service) profit opportunities.  Extra Example: Rolls Royce Sells Services Rolls-Royce has traditionally been a maker of airline jet engines. Given the growth in long-haul plane orders, which use the firm’s engines in Asia, as well as rebound in jet orders in the United States, the firm has seen improved sales and dramatic growth in earnings over the last few years. For example, its net income quadrupled between 2010 and 2012 to $3.6 billion. The company is in a strong competitive position, supplying engines to both the major jet manufacturers, Boeing and Airbus. For some of these firms’ models, they are the sole supplier of engines. But Rolls Royce is changing the way it does business to extract more of the potential profit from the aircraft engine business. Profits used to come primarily from selling engines and replacement parts. Now, they come from providing long-term repair and maintenance. Rolls is steadily signing up customers for this sort of service. Margins are typically higher for service than for hardware sales. Customers value these services since they offer peace of mind that Rolls will keep the engines running. However, if the economy declines again and airlines cut flights and aircraft orders, Rolls-Royce could be in a tough position since this will cut the need for both new hardware and services. Source: Anonymous. 2010. Rolls-Royce: The jet engine maker is soaring above its troubles. The Economist. February 5: 76; hoovers.com.  Discussion Question 22: Can you think of other industries where firms can benefit by applying the profit pool idea? Answer: Industries like healthcare and automotive repair could benefit from applying the profit pool idea. In healthcare, companies can capture profit pools by expanding into value-added services like telemedicine or specialized treatments. In automotive repair, firms could increase their share by offering comprehensive maintenance packages or advanced diagnostics, capturing more value across the service spectrum. Discussion Question 23: By exploiting the profit pool along the industry’s value chain, is Rolls-Royce taking too high a level of risk? Do they have more control over how their engines are maintained, therefore lowering their risk and increasing profits? Support your answer. Answer: Rolls-Royce’s approach to controlling engine maintenance through its Power-by-the-Hour model involves high risk but also offers significant rewards. By managing maintenance, Rolls-Royce can ensure higher reliability and extend engine life, which helps in controlling costs and enhancing profit margins. This strategy allows for greater control over service quality and can lead to long-term profitability, though it requires substantial investment and risk management. Teaching Tip: The profit pool concept and the example of the electronics retailing industry we provide are helpful in reinforcing to the students that the share of revenues within an industry will typically not be equivalent to the share of profits in an industry. You might ask the students if they can think of other industries in which there is no direct relationship between share of revenues and share of margins. (Example: Google is investing in building high speed fiber networks in cities to enhance internet capabilities. They are willing to lose money in providing internet services to make it up with advertising revenue due to increased clicks on Google searches and revenue from providing other services, such as a cable TV replacement service.) 3. Coordinating the ‘Extended’ Value Chain Via Information Technology Many firms have achieved success by integrating activities throughout the “extended value chain” by using information technology to link their own value chain with the value chains of their customers and suppliers. As noted in Chapter 3, this approach enables a firm not only to add value via its own value creating activities, but also for its customers and suppliers. We discuss Walmart and how it has been able to combine differentiation (e.g., quick response to customer demand) and overall cost leadership to become the dominant mass retailer in the world. Its emphasis on information technology and logistics are keys to their remarkable success. 4. Integrated Overall Cost Leadership and Differentiation Strategies: Improving Competitive Position Vis-À-Vis the Five Forces We next address how an integrated overall cost leadership and differentiation strategy helps a firm to improve its position in regard to its industry’s five forces. We introduce the Walmart example to illustrate these points. We discuss why its strategy is highly sustainable. 5. Pitfalls of Integrated Overall Low Cost and Differentiation Strategies. Firms that attain both types of competitive advantage enjoy high returns. However, as with each generic strategy taken individually, there are some pitfalls to avoid: • Firms that fail to attain both strategies may end up with neither and become “stuck in the middle.” • Underestimating the challenges associated with coordinating value creating activities in the extended value chain. • Miscalculating sources of revenue and profit pools in your industry. II. Can Competitive Strategies Be Sustained? Integrating and Applying Strategic Management Concepts We have added this section in the Sixth Edition of Strategic Management to integrate many of the key concepts in the first five chapters: stakeholder analysis, external environmental analysis, five-forces analysis, value chain analysis, resource-base view of the firm (including the issue of sustainability). We provide the example of a manufacturing firm (Atlas Door—a “real” company) which entered an industry and developed a strategy that earned them very high returns and a very favorable competitive position. The Atlas Door example provides an opportunity for students to get a more thorough understanding of the aforementioned key concepts as well as provide some insights on whether or not a firm’s advantage is sustainable over a long period of time (rather strong arguments are provided for both the “pro” and “con” positions) as well as potential sources of value appropriation. You might find it interesting to pose some very general questions to the class such as whether or not they felt that Atlas Door’s advantages were sustainable as well as any other sources of value appropriation. III. How the Internet and Digital Technologies Are Affecting the Competitive Strategies To stay competitive, firms must update their strategies to reflect the new possibilities and constraints that the Internet and digital technologies represent. In this section, we review the impact of the Internet on overall cost leadership, differentiation, and focus strategy formulation. We also address Internet-related value chain activities that firms can implement to enhance their strategic success. A. Overall Cost Leadership An overall low cost leadership strategy involves managing costs in every activity of a firm’s value chain and offering no-frills products that are an exceptional value at the best possible price. Internet technologies now provide more opportunities to manage costs and achieve greater efficiencies. But these capabilities are available to many firms and may provide only short-lived advantage. Most analysts agree that the Internet’s ability to lower transaction costs has transformed business. Transaction costs refer to various expenses associated with conducting business. It applies not just to buy-sell transactions but to the costs of interacting with every part of a firm’s value chain, both within and outside the firm. The process of disintermediation lowers costs. Each time intermediaries are used in a transaction, additional costs are added. Removing those intermediaries lowers transaction costs. The Internet may also reduce the costs of traveling, and the cost of maintaining a physical address.  Discussion Question 24: What are some examples of companies that have used the Internet and e-business practices to achieve low cost advantages? Answer: Companies like Amazon and Walmart have leveraged the Internet and e-business practices to achieve low cost advantages. Amazon’s vast online marketplace and efficient supply chain management reduce operational costs and offer lower prices. Walmart uses its online platform for streamlined inventory management and reduced overhead costs, enabling competitive pricing. Both firms utilize advanced data analytics and digital tools to enhance efficiency and drive down costs. 1. Potential Internet-Related Pitfalls for Low Cost Leaders Internet-related pitfalls include the threat of imitation by competitors who can quickly duplicate capabilities without threat of infringement on proprietary information. Other pitfalls include the availability of information online that increases buyer power, excessive cost cutting, and offering too many free or low cost products or services.  Discussion Question 25: What are some examples of Internet companies that once offered free products or services but have had to abandon that practice in order to survive? Answer: Companies like LinkedIn and Dropbox initially offered free tiers of their services but later transitioned to paid models for sustainability. LinkedIn introduced premium subscriptions for advanced features, while Dropbox expanded its paid plans to support increased storage and collaboration tools. Both faced the challenge of balancing user acquisition with revenue needs, leading to the shift from free offerings to monetized services to ensure long-term viability. B. Differentiation A differentiation strategy involves providing unique, high-quality products and services that promote a favorable reputation and strong brand identity and usually command a premium price. Internet technologies are being used to threaten the position of companies that have traditionally maintained the best reputations. Other technologies are being employed by industry leaders to make their position stronger. One way the Internet is creating differentiation advantages is by enabling mass customization. Mass customization is not new, but the Internet has generated a giant leap forward in the amount of control customers can have in influencing the process. Many consumers now judge the quality and uniqueness of a product or service by their ability to be involved in planning and design, combined with factors such as speed of delivery and reliability of results. Such capabilities are changing the way companies develop unique products and services, make their reputation, preserve their brand image, and achieve superior service.  Discussion Question 26: Research some other ways that Internet technologies are enabling mass customization. Answer: Internet technologies enable mass customization through platforms like NikeID, which allows customers to design their own sneakers with personalized colors and features. Similarly, Dell’s online PC builder lets users configure computers to their specifications. These platforms use digital tools and data analytics to manage production and inventory, offering tailored products at scale. Discussion Question 27: What are some examples of companies that have used the Internet and e-business practices to achieve differentiating advantages? Answer: Amazon uses advanced e-business practices like personalized recommendations and a vast product selection to differentiate itself. Etsy leverages its online marketplace to offer unique, handmade items that appeal to niche markets. Both companies use the Internet to create a distinctive shopping experience that sets them apart from competitors. 1. Potential Internet-Related Pitfalls for Differentiators Internet-related pitfalls include overspending differentiating features that customers don’t want or creating a sense of uniqueness that customers don’t value. This happened with some personalization and customization software that early dot-com companies added at great expense. Other problems can result from overpricing products and services or developing brand extensions that dilute a company’s image or reputation. The SUPPLEMENT below describes a differentiation strategy aimed at customers who value mobile and electronic communications and storage.  Extra Example: Outbox Turns Snail Mail into Electronic Communications For many Americans, the daily trip to the mailbox to pick up the daily mail is a traditional ritual. Outbox, a startup firm in Austin, Texas, aims to change that. For $4.99 a month, Outbox will send one of its employees, dubbed an “unpostman”, out to a subscriber’s home to collect all of his or her mail three times a week. Outbox then opens and photographs the mail and creates digital files of the mail. The encrypted, digital mail files are accessible to subscribers at Outbox’s website or on tablets and smartphones using Outbox’s app. Subscribers can then organize mail into digital folders, forward the files as email, or ask for certain mail to be re-delivered to their homes. Outbox then shreds and recycles unwanted paper mail. The company is focusing on tech-savvy markets where customers are more comfortable going to a digital mail format. They have over 600 customers in Austin, Texas and, in early 2013, started recruiting customers in San Francisco, CA. Source: Kelly, H. 2013. Startup finds niche in digitizing physical mail. Cnn.com. February 26: np.  Discussion Question 28: How much potential is there with Outbox’s business? What other services could they provide to enhance the value potential of the business? Answer: Outbox, which digitizes physical mail, has significant potential in reducing clutter and increasing convenience. To enhance value, Outbox could integrate features like advanced mail sorting, spam filtering, or document archiving. Offering services like secure digital storage or integrations with financial management tools could further increase its value proposition. Discussion Question 29: What are some examples of other companies that are providing differentiated advantages by using the Internet? Are these advantages sustainable? Answer: Netflix provides differentiated advantages through its vast content library and personalized recommendations. Spotify offers curated playlists and music discovery features tailored to user preferences. These advantages are sustainable if companies continue innovating and leveraging data analytics to enhance user experience and stay ahead of competitors. C. Focus A focus strategy involves targeting a narrow market segment with customized products and/or specialized services. The Internet has opened up new opportunities for niche players who seek to access small markets in a highly specialized fashion. Focusers face many of the same problems as low cost leaders and differentiators. To create focus strategies that work, firms must use the kind of singlemindedness that is characteristic of a focus strategy throughout every value-creating activity. Focusers can use Internet technologies to achieve cost savings and unique advantages – such as specialized knowledge, rapid response, and strong customer service – in niche markets.  Discussion Question 30: What are some examples of companies that have used the Internet and digital technologies to enhance their focus strategy or build advantages in a niche market? Answer: Etsy enhances its focus strategy by offering a platform for unique, handmade, and vintage items, catering to niche markets of artisans and collectors. Warby Parker leverages digital technologies for a direct-to-consumer model in eyewear, including virtual try-ons and home try-on kits, targeting fashion-conscious consumers seeking affordable, stylish glasses. Both companies successfully use the Internet to cater to specific niches, building strong brand loyalty and competitive advantages in their respective markets. 1. Potential Internet-Related Pitfalls for Focusers Internet-related pitfalls include focusing on segments that are too narrow to be profitable or trying to appeal to niches that are overly broad. When focus strategies become too narrow, they may have trouble generating enough activity to justify the expense of operating. Focusers that try to extend to a broader audience — by offering additional inventory, content, or services — can lose the cost advantages associated with a narrow focus and become vulnerable to imitators or new entrants.  Discussion Question 31: What are some examples of Internet companies that attempted to appeal to a niche that was defined too broadly? Did they survive or abandon that practice in order to survive? Answer: MySpace initially targeted a broad audience with its social networking platform but struggled with user retention as Facebook’s more focused approach gained popularity. MySpace eventually pivoted away from broad social networking to focus on music and entertainment. Quibi, aimed at short-form video content for mobile users, defined its niche too broadly without clear differentiation, leading to its failure and subsequent shutdown. Both examples highlight the risks of targeting overly broad niches and the need for clear market positioning. D. Are Combination Strategies the Key to E-Business Success? Many experts agree that the net effect of the Internet is fewer rather than more opportunities for sustainable advantages. Therefore, new strategic combinations that make the best use of the competitive strategies may hold the greatest promise for future success. The Internet has provided all companies with greater tools for managing costs. This may be good in general for the efficiency of the economy. But for individual companies, it may shave profit margins and make creating a sustainable advantage more difficult. Many differentiation advantages are diminished by the Internet. The ability to comparatively shop, for example, is depriving some companies of unique advantages. In the Internet age, the best approach may be to combine differentiation with other competitive strategies. The greatest benefit may be in using the Internet to focus on a niche. However, an incumbent firm that previously thought a given niche market was not worth the effort may use Internet technologies to enter the segment for a lower cost than it could in the past. STRATEGY SPOTLIGHT 5.5 describes how the legal services business is changing as firms use digital technologies to achieve both differentiation and cost advantages.  Discussion Question 32: What are some examples of companies that are benefiting from combination strategies? Are those benefits sustainable? Answer: Apple benefits from combining differentiation and cost leadership through premium products with efficient production. Amazon combines broad differentiation with cost leadership via extensive product selection and low prices. Both strategies offer sustainable competitive advantages due to strong brand loyalty and operational efficiency. Teaching Tip: Internet and digital technologies have created many new opportunities for creating advantages using combination strategies, many of which are technology-based. Ask students to reflect on other ways that Internet and digital technologies may make it possible for firms to develop combination strategies. Possible answers may include the ability to cut costs and still offer premium services, new methods of differentiating such as monitoring the status of work-in-progress or streamlining the delivery process, and the ability to offer specialized products to small niches because the Internet makes it easier to reach very narrow segments that are geographically widespread. A benefit of this exercise is to give students the opportunity to see how sources of competitive advantage often change when new technologies create new capabilities, as well as how technologies often combine with other strategic factors such as changes in the business environment, demographic shifts, or new sociocultural trends. IV. Industry Life Cycle Stages: Strategic Implications The life cycle of an industry refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry. In considering the industry life cycle, it’s useful to think in terms of broad product lines such as personal computers, photocopiers, or long-distance telephone service. Why is it important to consider industry life cycles? The emphasis on various generic strategies, functional areas, value creating activities, and overall objectives vary over the course of the industry life cycle. Managers must become even more aware of their firm’s strengths and weaknesses in many areas to attain competitive advantages. EXHIBIT 5.7 depicts the four stages of the industry life cycle and how factors such as generic strategies, market growth rate, intensity of competition, and overall objectives change over time. Be sure to point out an important caveat regarding the key limitation of the industry life cycle concept. That is, products and services go through many cycles of innovation and renewal. And, for the most part, only fad products have a single life cycle. We provide the example of how the cereal industry got a boost in sales when medical research indicated that oat consumption reduced a person’s cholesterol. Teaching Tip: In the textbook, we discuss what may be considered as the “generic” industry life cycle. Ask students for examples of how technological or product market innovations have abruptly truncated or extended an industry’s life cycle. (Examples would include how the technological innovation of digital downloading music, such as iTunes, truncated the life cycle of the CD, and how Nike’s product innovation enhanced the life cycle of the athletic shoe industry.) Next, we address each of the four stages of the industry life cycle. A. Strategies in the Introduction Stage 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. There’s an advantage to being a “first mover” in the market. We address the examples of Coca Cola’s global brand, Caterpillar’s ability to get a lock on overseas sales channels and service capabilities, and Matsushita’s establishment of VHS as a global standard for videocassettes.  Discussion Question 33: What are some other firms that benefited from being a “first mover” in their industry? Answer: Amazon gained early dominance in e-commerce, shaping online retail standards. Google leveraged its first-mover advantage in search engines to become a leading tech giant. Both companies benefited from establishing strong brand recognition and capturing significant market share early on. However, there are also benefits to being a “late mover.” We address how Target benefited from its delayed Internet strategy. The SUPPLEMENT below addresses some of the advantages to being a late mover in the context of international business.  Extra Example: The Advantages of Being a Late Mover Emerging multinationals often exploit late-mover advantages in one of two ways. Some start by benchmarking the established global players and then maneuvering around them, often by exploiting niches that the larger companies had overlooked. Other companies adopt an alternative, though riskier strategy. They use their newcomer status to challenge the rules of the game, capitalizing on the inflexibilities in the existing players’ business models. Source: Bartlett, C. A. & Ghoshal, S. 2000. Going global: Lessons from late movers. Harvard Business Review, 78(2): 138. B. Strategies in the Growth Stage The second stage of the industry life cycle, growth, is characterized by strong increases in sales. The potential for strong sales (and profits) attracts other rivals who also want to benefit. 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 with those of its rivals. Revenues in the growth stage increase at an accelerating rate because (1) new consumers are trying the product, and (2) a growing proportion of satisfied consumers are making repeat purchases. In general, new products and services often fail if there are relatively few repeat purchases. (We provide the example of Alberto-Culver’s introduction of Mr. Sparklers, which were sold as solid air fresheners that looked like stained glass.)  Discussion Question 34: What are some examples of products/industries in the growth stage of their life cycle? How long do you think the growth stage will last? Answer: Electric vehicles (EVs) and renewable energy technologies like solar panels are in the growth stage of their life cycles. The EV market is expanding rapidly due to increased environmental awareness and government incentives, while renewable energy is growing as costs decline and adoption increases. The growth stage for these industries may last another 5-10 years, driven by technological advancements and evolving consumer preferences. C. Strategies in the Maturity Stage In the third stage, maturity, aggregate industry demand begins to slow. Since markets are becoming saturated, there are few opportunities to attract new adopters. Since it is no longer possible to “grow around” competition, direct competition becomes more predominant — and competition intensifies (often on the basis of price). We address the example of the intense competition between Unilever and Procter and Gamble in the laundry soap business. This slow growth business in the maturity stage puts enormous pressure on both players to make even small gains in market share. Also, given the slow growth, all gains are essentially at the rival’s expense, since there are few unexplored niches to exploit. The SUPPLEMENT below provides examples of how General Mills continues to renew a very established brand with new versions of its flagship cereal, Cheerios..  Extra Example: Cheerios New Flavors General Mills introduced the Cheerios brand of cereal in 1941 and has seen it take on a central position in the breakfast food market. The Cheerios brand accounts for 13% of all cold cereal sold in the United States, over twice the share of its nearest competitor. Although the brand is over 70 years old, General Mills has not accepted that growth potential for the mature brand is over and continues to spin out new variants of the venerable cereal to stoke up new demand. There are now 13 different varieties of Cheerios, with five new types of Cheerios introduced after 2007. The latest to arrive are Dulce de Leche and Multi Grain Peanut Butter Cheerios. By extending the brand with new flavors, General Mills has found a way to generate modest growth in a very mature market. For example, Chocolate Cheerios, introduced in 2010, has been a very successful launch and added to sales by adding a chocolate flavor to the family-cereal market. Prior to this launch, chocolate-flavored cereals were largely limited to the kids’ cereal market. There is one additional benefit to launching new versions of established brands. Every new version of Cheerios on the shelf represents an inch of territory extracted from some other brand. Shelf space is so tight in retail stores these days that each Cheerios product has the potential to take the shelf space of competing cereal brands. Source: Hughlett, M. 2012. General Mills makes Cheerios a serial business. Startribune.com. March 3: np.  Discussion Question 35: What are some industries in the maturity phase of the life cycle? How intense is the competition? How difficult is it to differentiate products and services? Answer: The automotive and telecommunications industries are in the maturity phase of their life cycles. Competition is intense due to numerous established players and saturated markets. Differentiating products and services can be challenging as innovations become incremental, and firms often rely on brand loyalty and service quality to stand out. Companies focus on efficiency, cost management, and enhancing customer experience to maintain market share. Two positioning strategies that managers can use in the maturity stage include: a) Reverse positioning – a change in industry tendencies to continuously improve products by offering products with fewer product attributes and lower prices. b) Breakaway positioning – a break in industry tendencies to incrementally improve by offering products that are still in the industry but are perceived by customers as being different. STRATEGY SPOTLIGHT 5.6 provides two examples of firms that made such changes during the maturity stage of the life cycle. Commerce Bank used reverse positioning to set itself apart from other banks; Swatch used breakaway positioning to introduce a whole new watch concept into the industry.  Discussion Question 36: What are some examples of other companies that used breakaway or reverse positioning strategies to distinguish themselves from other companies in their industry? Answer: Apple and Tesla are notable examples of companies that have used breakaway or reverse positioning strategies to distinguish themselves. Apple achieved this with its focus on design, user experience, and ecosystem integration, which set it apart from traditional tech products. Tesla employed reverse positioning by introducing high-performance electric vehicles that defied the conventional limitations of electric cars, such as range and speed, thus redefining the industry’s expectations. Discussion Question 37: What are some of the risks associated with breaking away from other similar companies in an industry? What are the benefits? Answer: Breaking away from other similar companies can lead to several risks, including diminished market recognition and increased competition. There’s also a potential for higher costs as new strategies or processes are developed. However, the benefits include the opportunity to differentiate oneself, potentially capturing a niche market or innovating without being constrained by industry norms. Ultimately, this can lead to unique brand identity and potentially higher long-term rewards. D. Strategies in the Decline Stage Decisions in the decline phase of the industry life cycle become particularly important. Hard choices must be made and firms must face up to the fundamental strategic choices of either exiting or staying and attempting to consolidate the industry. There are four basic strategies available in the decline phase: maintaining, harvesting, exiting, or consolidating. Maintaining refers to keeping a product going without significantly reducing marketing support, technological development, or other investments in the hope that competitors will eventually leave the market. Harvesting involves obtaining as much profit as possible and requires that costs in the decline stage be decreased quickly. Exiting the market involves dropping the product from a firm’s portfolio. Consolidating involves one firm acquiring the best of the surviving firms in an industry at a reasonable price. (We provide the example of Lockheed Martin, the giant in the defense industry.)  Discussion Question 38: What are some examples of industries in the decline stage? What strategies are the incumbent firms following? Answer: Industries in the decline stage include traditional print media, coal mining, and landline telecommunications. Incumbent firms in these sectors often pursue strategies such as diversifying into more profitable areas, cutting costs, and focusing on niche markets. They may also invest in technology to modernize their offerings or seek mergers and acquisitions to consolidate resources and reduce competition. We also address three ways in which old technologies can enjoy a “last gasp” in the marketplace. These are: retreating to a more defensible ground, using the old to replace the new, and, improving the price-performance tradeoff. E. Turnaround Strategies We discuss three turnaround strategies: • Asset and cost surgery; • Selective product and market pruning; • Piecemeal productivity improvements. We also address software maker Intuit’s effective turnaround strategy. The new CEO, Stephen Bennett, quickly sold several money-losing operations and focused on software for small businesses.  Discussion Question 39: Can you think of other successful (or unsuccessful) turnarounds? (Note: It might be interesting to get their perspectives on General Motors and Chrysler as they have rebounded from bankruptcy.) Answer: Beyond General Motors and Chrysler, notable turnarounds include Apple in the late 1990s, which revitalized its brand through innovative products and design, and IBM's shift from hardware to services and software in the early 2000s. Conversely, Yahoo's turnaround efforts largely failed, as it struggled to compete with emerging tech giants and ultimately was acquired by Verizon. These cases highlight how strategic innovation and adaptation are crucial for successful turnarounds. STRATEGY SPOTLIGHT 5.7 addresses CEO Alan Mulally’s recent remarkable turnaround at Ford Motor Company.  Discussion Question 40: What do you think was the most important element of his turnaround plan? Why? Any other suggestions for Ford’s turnaround? Answer: For Ford's turnaround, the most crucial element was its focus on restructuring operations and streamlining its product line to emphasize quality and efficiency. This included significant cost-cutting measures and a renewed emphasis on core vehicle segments. To further strengthen its position, Ford could explore increased investment in electric and autonomous vehicle technology, enhance its digital and connectivity offerings, and continue improving customer experience and sustainability initiatives. These steps would help Ford adapt to evolving market demands and stay competitive. I V. Issue for Debate The case points out that finding the right balance in strategic positioning is challenging. While firms have to ultimately choose if they are striving to differentiate or be a cost-leader as well as whether they aim to serve a broad range vs. a narrow segment of customers, these firms can’t choose one at the complete expense of the other. Porsche is a firm that is struggling with finding the right balance. Historically, Porsche positioned itself as a clear niche differentiator. For decades, the firm has been an iconic sports car brand. It has won both the 24 Hours of Le Mans and the 24 Hours at Daytona sports car races more times than any other car brand. Today, it sells some the highest priced sports cars available. By focusing on the sports car niche, Porsche was able to develop a narrow set of competencies around the design and manufacturing of high end sports cars. It also developed an extremely strong reputation that allowed it to charge premium prices for its cars. In recent years, Porsche has expanded its product line to include the Cayenne SUV (introduced in 2002) and the Panamera sports sedan (2009). They will launch a compact SUV, the Macan, in 2013. While each of these vehicles retain aspects of the sports car heritage of Porsche, they are also positioned as luxury vehicles. The introduction of these cars have allowed Porsche to grow dramatically, with sales growing from 54 thousand vehicles in 2002 to 118 thousand in 2012. Matthias Mueller, Porsche’s CEO, even has loftier goals with sales targets of 150 thousand units in 2015 and 200 thousand vehicles in 2018. However, this sales growth and the desired these sales goals don’t come without risks. The primary risk is the potential weakening of the Porsche brand name. While it is not clear this has happened (yet), it is interesting to note that in constant euro terms, the average price of Porsche vehicles declined by 13% between 2002 and 2012.  Discussion Question 41: Is it wise for Porsche to continue to expand its product portfolio out of the sports care market into more practical models? Answer: Expanding Porsche's product portfolio into more practical models can be wise, as it allows the brand to tap into broader market segments and stabilize revenue streams. However, Porsche must ensure that these new models align with its brand identity of high performance and luxury. Success depends on maintaining the brand’s premium image while delivering quality and innovation in these new offerings. Balancing tradition with diversification could strengthen Porsche's market position and long-term growth. You are likely to get two reactions from the class with this question. On the one side, you will have Porsche enthusiasts. They are likely to have an emotional reaction and will see a real loss of the core identity of the firm. If you have these types in your class, you will need to push them to relate this issue back to strategic implications of Porsche’s actions. It is the potential for long term erosion of the brand that will reduce Porsche’s ability to retain high premium pricing. Their very focused strategy and the perceived exclusivity of their products have allowed them to have one of the highest average price point of any manufacturer in the car business. The proliferation of Porsche luxury models that are not true sports cars and are aimed at buyers who are not sports car enthusiasts could weaken this exclusivity and Porsche’s premium pricing. On the other side of the argument, students will note that Porsche was boxed into a very small niche. In order for the firm to grow, it had to expand out of the true sports car market. Students with this view may note that other manufacturers, such as Mercedes and Audi, have straddled this line, producing both high end sports cars and luxury sedans. Supporters of the strategy may note that if Porsche can triple or quadruple their sales, it will generate much higher returns even if it suffers some erosion in its price premiums. You can push the students to quantify what the consequences could be. If one of these two perspectives is missing in your class, you can push the students toward one view or the other with suggestions and leading questions. In the end, the key is to see that there is no definitively correct answer here. Firms, such as Porsche, need to consider the potential benefits and risks of strategic repositioning.  Discussion Question 42: How should Porsche balance the need to maintain its image with the desire to expand sales? Answer: Porsche should balance maintaining its image with expanding sales by carefully integrating new models that align with its luxury and performance brand ethos. Introducing practical models should emphasize innovation and quality to uphold the brand’s reputation. Strategic marketing can highlight these new offerings as extensions of Porsche's core values, rather than departures from them. Ensuring high performance and premium features in every product will help preserve Porsche's image while attracting a broader customer base. As they are expanding their portfolio of luxury vehicles, it is important for Porsche to balance this with other efforts that reinforce their reputation as one of the leading manufacturers of true sports cars. They can do this with the development of new, high end sports cars as they are doing with the 918 Spyder. They also need to burnish their reputation on the sports car track. While Porsche has one more of the major “24 hour” endurance races than any other manufacturer, they have only one victory in the 26 races since 2000. Porsche could reinforce its reputation by additional investments in its sports car efforts and reclaiming its position as the manufacturer of choice in sports car racing.  VI. Reflecting on Career Implications Below, we provide some suggestions on how you can lead the discussion on the career implications for the material in Chapter 5.  Types of Competitive Advantage: Are you aware of your organization’s business-level strategy? What do you do to help your firm either increase differentiation or lower costs? Can you demonstrate to your superiors how you have contributed to the firm’s chosen business-level strategy? This would be an opportunity for the student to see if his or her own actions at work are leading to competitive advantage for the firm. Although, at first sight, this might be appear to be difficult for the student to figure out, we find it to be quite easy to walk the student through his/her activities at work even if they are only entry level employees. For example, you may have a student who is a waiter/waitress at an upscale restaurant and someone who has worked in a fast food restaurant during their high school years. The instructor can then help the class understand that their activities were very dissimilar because their organizations were attempting very different kinds of competitive advantage.  Types of Competitive Advantage: What is your own competitive advantage? What opportunities does your current job provide to enhance your competitive advantage? Are you making best use of your competitive advantage? If not, what organizations might provide you with better opportunities for doing so? Does your resume clearly reflect your competitive advantage? Or are you “stuck in the middle?” Since students are unlikely to stay with the same company or in the same position for your entire career, it is important for students to think about how they are positioning themselves. Specifically, push students to consider how their training and experiences can help them differentiate themselves from their peers or others with whom they will compete for positions. Students can also think about whether they are striving to focus their skill set on specific industries or types of positions or if they are striving to build a broader set of skills that will allow them to be a generalist employee, capable of handling a wider range of responsibilities or varying types of work and industry environments.  Understanding your Differentiation: When looking for a new job or for advancement in your current firm, be conscious of being able to identify what differentiates you from other applicants. Consider the items in Exhibit 5.4 as you work to identify what distinguishes you from others. Once you have walked the student through Question 2, this question would become more relevant. Students often assert they are differentiated from competing applicants and co-workers, but it is important that they can clearly articulate how they are different.  Industry Life Cycle: Before you go for a job interview, identify the life cycle stage of the industry within which your firm is located. You are more likely to have greater opportunities for career advancement in an industry in the growth stage than in the decline stage. This point is part of a larger issue of having students examine and assess firms with which they are interviewing. They should think of how the firm and its position provide opportunities for them. Also, they can determine if there is a good fit between them and the firms to which they are applying.  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 that (a) even if an industry is declining, many of their skills can be transferred to other industries (with some “switching costs” of course!), and (b) that there many avenues available to them to develop new skill sets.  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 strategies. Successful generic strategies invariably enhance a firm’s position vis-à-vis the five forces of that industry — a point that we stressed and illustrated with examples. However, as we pointed out, there are pitfalls to each of the generic strategies. Thus, the sustainability of a firm’s advantage is always challenged because of imitation or substitution by new or existing rivals. Such competitor moves erode a firm’s advantage over time. 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 performance and improve its competitive position. However, this is challenging and managers must be aware of the potential downside risks associated with such an initiative. We also discussed the issue of the sustainability of a firm’s competitive advantage. We used the example of a manufacturing firm—Atlas Door—to illustrate our key concepts in the first five chapters in the book. The way companies formulate and deploy strategies is also changing because of the impact of the Internet and digital technologies on many industries. Overall low cost strategies may be more important as some firms use Internet technologies to lower transaction costs and increase the efficiency of their operations. Differentiation strategies may be harder to achieve for many firms because the Internet is eroding some of their most unique features. Further, Internet technologies are enabling the mass customization capabilities of greater numbers of competitors. Focus strategies are likely to increase in importance because the Internet provides highly targeted and lower-cost access to narrow or specialized markets. These strategies are not without their pitfalls, however, and firms need to understand the dangers as well as the potential benefits of Internet-based approaches. 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 the industry life cycle — introduction, growth, maturity, and decline — and suggested how these stages can play a role in decisions that managers must make at the business level. These include overall strategies as well as the relative emphasis on functional areas and value creating activities. When a firm’s performance severely erodes, turnaround strategies are needed to reverse its situation and enhance its competitive position. We have discussed three approaches — asset cost surgery, selective product and market pruning, and piecemeal productivity improvements. 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 question for stimulating discussion on the merits, demerits and the organizational implications of overall cost leadership and differentiation strategies. 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 to look at how firms can achieve low cost in their value-chain activities). This strategy helps in improving the competitive position vis-à-vis the five-forces in the industry in the following manner: *Protects against rivalry from existing competitors because lower costs allow a firm to earn profits even when its competitors are losing money. *Protects against powerful buyers because buyers can exert their power to drive down prices only to the level of the next most efficient producer and here there is none. *Protects against powerful suppliers by providing greater flexibility to cope with their demands for input cost increases. *Serves as a substantial barrier to entry and thus lowers the threat of new entrants. *Puts the firm in a favorable position with respect to substitute products. 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 help much. Managers need to explore all value-chain activities and the relationships between them for cost reduction. * The firm becomes vulnerable to price increases in the factors of production. The firm may not always be able to pass the price increases to the customers and could face serious problems. An example is the challenge experienced by manufacturing firms based in China. These firms rely on a common input—low labor costs. Given demographic factors (causing labor shortages) firms have been forced to raise wages. *The strategy can be imitated too easily if the activities contributing to cost reduction are easily imitable. You might want to emphasize the importance of exploiting the linkages between various activities of the value chain so that the advantage cannot be easily imitated. *When you lack parity on differentiation, buyers may be willing to pay more for the differentiated product and thus cost leadership may not create a competitive advantage. 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 customers (You might want to refer to Exhibit 5.4 in this section of the text to see how firms can achieve differentiation in their value-chain activities). Differentiation creates the following advantages: *Provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs. *Customer loyalty and the firm’s ability to provide uniqueness in its products or services create higher entry barriers. *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 sensitive to price. *Lessens the threat from substitutes and in some cases the product or service may be so unique that there are no substitutes at all. 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 *Dilution of brand identification through product-line extension *The seller may consider it as differentiation whereas buyers do not perceive it the same way. You might want to ask the students whether the firm pursuing differentiation is facing any or all of these problems and if so, how to address them. 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 the earnest 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 competitive scope within an industry. *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 might also discuss the concept of the “profit pool” – and our example of the automobile industry to demonstrate that there usually not a one-to-one relationship between revenues and profits along the value chain in an industry.) Highlight the danger of getting ‘stuck in the middle’ if the firm cannot achieve both. On the other hand, if the firm is successful, it may be creating competitive advantages that cannot be easily imitated. 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 forces. Only through overcoming competitive forces can firms achieve above-average returns. So, it’s all about making the organization perform successfully. Answer: Competitive advantage is central to strategic management because it drives superior performance and helps firms achieve market leadership by leveraging unique strengths or resources. 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 developing a competitive advantage based on low cost position while appealing to an industrywide market. The differentiation generic strategy involves developing a competitive advantage based on uniqueness perceived by the customer while appealing to industrywide 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. Answer: The three generic strategies are: overall cost leadership, which aims to be the lowest-cost producer; differentiation, which focuses on offering unique products or services; and focus, which targets a specific market niche with tailored offerings. 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, or are stuck in the middle. Further, business units that identify with multiple generic strategies will have higher performance than those that identify with just one generic strategy. The highest performing business units identified with differentiation and overall cost leadership generic advantages. Answer: The three generic strategies help firms address the five forces—competitive rivalry, threat of new entrants, threat of substitutes, bargaining power of buyers, and bargaining power of suppliers—by positioning themselves to reduce competitive pressures, improve profitability, and enhance market power. For instance, cost leadership can mitigate buyer power and new entrants, while differentiation can reduce rivalry and substitute threats. 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 asset and cost surgery, where firms sell off unproductive assets and outsource any activities in which they are not competitive. Second is product and market pruning, which is the reverse of diversification. Firms will sell off products and businesses in which it is not competitive and focus on select products and markets. Third is productivity improvements, which may involve examination of many businesses processes. But small productivity improvements in many processes can add up to substantial improvement overall. Answer: A firm can attain a successful turnaround strategy by implementing cost reduction measures, restructuring operations for efficiency, and refocusing on core competencies. Additionally, fostering innovation, improving customer satisfaction, and exploring strategic partnerships or acquisitions can revitalize growth. Effective leadership and a clear vision are crucial to guide and execute these changes. 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 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, reduced strategic flexibility, and obsolescence of the basis of a cost advantage. 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. Answer: Overall Cost Leadership can lead to reduced quality perception or vulnerability to price wars. Differentiation risks becoming irrelevant if competitors mimic unique features or if customer preferences shift. Focus may limit growth opportunities and make a firm overly dependent on a niche market. 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 value to customers efficiently. Methods include use of manufacturing systems that are flexible and automated, exploiting profit pools, seamlessly integrating operations with suppliers and customers, and exploiting profit pools. Answer: Firms can combine overall cost leadership and differentiation, but it’s challenging because it requires balancing low costs with unique value propositions. Successfully integrating both strategies demands efficient operations and innovation, avoiding the pitfalls of becoming stuck in the middle where neither cost leadership nor differentiation is fully achieved. 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 patters 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. Answer: The industry life cycle concept is important because it influences the competitive dynamics and market conditions a firm faces, which in turn affects the appropriateness of its business-level strategy. For example, firms may need to adopt cost leadership during decline or differentiation during growth to align with industry trends and maintain competitive advantage. 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 inbound logistics to taking in recycled steel, which is very different from taking in iron ore and other inputs associated with traditional steel manufacturers. Production operations focus on processing, or reprocessing, refined steel. It requires less energy to reprocess refined steel than to make steel out of iron ore, and the savings are passed on to customers. For technology development, Nucor focuses on steel refining technologies that are efficient and adapted to refining steel. (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 chain. For each student example, we suggest that the student first explain exactly what it is, where he or she found out about the example, and then in what activity of the value chain the example belongs. 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 other refuse made of steel. Operations Yes Focus operations on efficiently reprocessing steel, which requires specially adapted furnaces and other associated processes. Outbound logistics Yes Outbound logistics are adapted to efficient delivery of specialty steel products rather than less refined steel. Marketing and sales Yes Marketing focused on appeals to customers who require specialty steel products. Service No Support: Procurement Yes Efficient procurement of scrap iron required developing relationships with various suppliers of recycled steel, specialized transportation equipment, and the like. Also, procurement of capital goods such as specialized furnaces contribute to Nucor’s competitive advantage. Technology development Yes Nucor has developed specialized and unique steel processing technologies that enable it to refine steel efficiently. Human resource management Yes Talent is needed for Nucor to develop and sustain its advantages in all activities. General administration Yes All activities listed above need to be organized, supported, and sustained through strategic investments and support systems. Answer: Primary Activities: • Inbound Logistics: Efficient supply chain management and bulk purchasing of raw materials. • Operations: Use of mini-mills and electric arc furnaces to reduce production costs. Support Activities: • Technology Development: Investment in advanced steelmaking technologies and automation. • Human Resources Management: Emphasis on a performance-based culture and employee involvement in decision-making. Application Questions 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 it to achieve scale economies in operations. Walmart uses its large size to develop other advantages related to buying power. It offers its suppliers large volume purchases but demands low prices. Walmart also has developed a series of brand-name products in its store offerings and numerous services such as pharmacies, photography studios, and credit cards. (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-name products that Walmart offers, and product variety. Product quality at Walmart is adequate and consistent. Brand equity is also a strong asset for Walmart. Ask students what the brand means to them. It is probably not just cheap goods. Commercials include appeals to cost savings, stretching household budgets, fun shopping experience, and Answer: Walmart combines overall cost leadership by leveraging its massive scale for low prices and efficient supply chain management, while differentiating through a broad product selection and convenient one-stop shopping experience. 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 associated with the development of intellectual capital and the potential pitfalls of each of the generic strategies. Answer: For example, a local coffee shop might successfully follow a differentiation strategy by offering unique blends and a distinctive ambiance. However, challenges include maintaining quality consistency and managing costs to sustain its competitive edge amidst growing competition. 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 students to articulate these sources, with emphasis on the cost to imitate and cost to substitute. Second is to consider the firms associated with each of Porter’s five forces, including suppliers, buyers, potential entrants, substitutes, and rivals, especially rivals that follow other generic strategies. And third is to assess the potential of each of these other firms for imitating or substituting the firm’s product or service. Note that in a dynamic context, these other firms are constantly striving to imitate or substitute the advantages of any successful firm, so the challenge is making the right investments to maintain the advantages. It is therefore useful to ask students what kind of investments firms can make to leverage, extend or otherwise maintain their advantages. Answer: A firm like Dollar General, with a cost focus strategy, enjoys sustainable advantages through low prices and niche market targeting. However, these advantages may be challenged by rising operational costs and increasing competition from other low-cost retailers. 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 test 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 question, ask students to assess the ability of suppliers, buyers, potential entrants, substitutes, and rivals to imitate or substitute for this unique capability. Then ask them to assess the possibility for acquisition. Another line of questioning is to ask about other strategic capabilities the firm could be developing to sustain its competitive advantage. And ask students if the firm is maintaining equally its cost leadership and differentiation strategies. If one is weaker, then discuss how the firm can avoid becoming stuck in the middle. There are no right answers to these questions! The end result should be to raise students’ awareness of the vulnerabilities and strengths of this combination strategy. Answer: Apple is a prime example of successfully combining overall cost leadership and differentiation strategies. It achieves differentiation through innovative design and features while maintaining cost efficiency through streamlined production. This combination is sustainable due to Apple's strong brand loyalty and technological leadership, though it faces challenges from rising competition and market saturation that may pressure margins. 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 scale efficient facilities, and the lag between investment and product delivery gives competitors an opportunity to enter the market with better products or services. Making such large-scale investments may involve substantial borrowing. The financial implications would be that cash flow is not sufficient to cover the interest and principle payments. Perhaps excessive borrowing to cover these financial costs would dig the firm into an unsustainable debt burden. The nonfinancial implications may involve stress on top management. 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. Financiers could be promised payment or collateral fraudulently. And employees may be squeezed. Answer: One example is Nike, which faced ethical consequences due to cost-cutting measures that led to exploitative labor practices in overseas factories. Financial implications included damage to its brand reputation and consumer backlash, which affected sales and profitability. Nonfinancial implications involved significant reputational harm, decreased employee morale, and increased scrutiny from activists and media, prompting costly reforms and efforts to improve labor practices. 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 product. The technology is not developed. Costs are not established. And product capabilities are not established. 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 fraud, loss of reputation and brand equity, and loss of sales. All these can threaten the life of the firm and, by extension, the industry. Answer: In the introductory stage, managers might engage in unethical practices like false advertising or misleading claims to boost market position. Long-term implications include damaged credibility, legal consequences, and loss of consumer trust, which can undermine future growth and profitability. Solution Manual for Strategic Management: Creating Competitive Advantages Gregory G. Dess, Alan Eisner, G.T. (Tom) Lumpkin, Gerry McNamara 9780077636081, 9781259245558