The document discusses various strategic management concepts including Porter's views on strategy, the three generic strategies of overall cost leadership, differentiation, and focus. It explains how each strategy can provide competitive advantage and improve competitive position against the five forces. The document also discusses combination strategies that integrate cost leadership and differentiation, as well as how strategies should be tailored based on the industry life cycle stage.

1. McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT
Creating and
Sustaining
Competitive
Advantages
Strategic
Management
(BA 491)
Strategic Formulation

2. 2
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Porter’s “What Is Strategy?”
• Operational effectiveness is not strategy:
• Operational effectiveness means performing similar
activities better than rivals. It is necessary, but not
sufficient, for competitive advantage.
• Strategic positioning means performing different
activities from rivals’ or performing similar activities in
different ways:
 Variety-based positioning (producing a subset of
products/services)
 Needs-based positioning (serving needs of particular group of
customers)
 Access-based positioning (using different ways to reach
customers)
• Strategy involves trade-offs, choosing what not to do.

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Types of Competitive Advantage and
Sustainability
• Three generic strategies to overcome the five
forces and achieve competitive advantage
• Overall cost leadership
 Low-cost-position relative to a firm’s peers
 Manage relationships throughout the entire value chain
• Differentiation
 Create products and/or services that are unique and valued
 Non-price attributes for which customers will pay a premium
• Focus strategy
 Narrow product lines, buyer segments, or targeted
geographic markets
 Attain advantages either through differentiation or cost
leadership

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Three Generic Strategies
Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter.
Copyright © 1980, 1998 by The Free Press.
Competitive Advantage
Uniqueness Perceived
by the Customer
Low Cost Position
Strategic
Target
Particular
Segment Only
Industrywide

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Creating Value Through Human Capital,
Social Capital, and Technology
Performance
Competitive Advantage
Source: Adapted from G. G. Dess and J. C. Picken, Beyond Productivity (New York:
AMACON, 1999), pp. 63-64.
Return on
investment (%) 35.5 32.9 30.2 17.0 23.7 17.8
Sales Growth (%)15.1 13.5 13.5 16.4 17.5 12.2
Gain in Market
Share (%) 5.3 5.3 5.5 6.1 6.3 4.4
Sample Size 123 160 100 141 86 105
Differentiation
and Cost Differentiation Cost
Differentiation
Focus
Cost
Focus
Stuck in
the Middle

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

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Value-Chain
Activities
Source: Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter.
Copyright © 1985 by Michael E. Porter.
Shared purchasing operations
with other business units
Effective policy guidelines
to ensure low cost raw
materials (with acceptable
quality levels)
Expertise in process
engineering to reduce
manufacturing costs
Effective use of automated
technology to reduce
scrappage rates
Effective orientation and
training programs to maxi-
mize employee productivity
Minimize costs associated
with employee turnover
through effective policies
Standardized account-
ing practices to minimize
personnel required
Few management layers
to reduce overhead
costs
Effective
layout of
receiving
dock
operation
Effective
use of
quality
control
inspectors
to
minimize
rework on
the final
product
Effective
utilization
of
delivery
fleets
Purchase of
media in
large blocks
Sales force
utilization is
maximized
by territory
management
Thorough service
repair guidelines to
minimize repeat
maintenance calls
Use of single type
of repair vehicle
to minimize
costs
Firm
infrastructure
Human resource
management
Technology
development
Procurement
Inbound
logistics
Operations Outbound
logistics
Marketing
and sales
Service

8. 8
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Overall Cost Leadership (Cont.)
• A firm following an overall cost leadership
position
• Must attain parity on the basis of
differentiation relative to competitors
• Parity on the basis of differentiation
 Permits a cost leader to translate cost
advantages directly into higher profits than
competitors
 Allows firm to earn above-average profits

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Comparing Experience Curve Effects

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Overall Cost Leadership: Improving
Competitive Position vis-à-vis the Five Forces
• An overall low-cost position
• Protects a firm against rivalry from competitors
• Protects a firm against powerful buyers
• Provides more flexibility to cope with demands from
powerful suppliers for input cost increases
• Provides substantial entry barriers from economies
of scale and cost advantages
• Puts the firm in a favorable position with respect to
substitute products

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Pitfalls of Overall Cost Leadership Strategies
• Too much focus on one or a few value-chain
activities
• All rivals share a common input or raw material
• The strategy is initiated too easily
• A lack of parity on differentiation
• Erosion of cost advantages when the pricing
information available to customers increases

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Differentiation
• Differentiation can take many forms
• Prestige or brand image
• Technology
• Innovation
• Features
• Customer service
• Dealer network

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Value-Chain
Activities:
Examples of
Differentiation
Source: Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter.
Copyright © 1985 by Michael E. Porter.
Facilities that
promote firm
image
Superior MIS—To integrate
value-creating activities to
improve quality
Widely respected
CEO enhances
firm reputation
Provide training and
incentives to ensure a strong
customer service orientation
Programs to attract talented
engineers and scientists
Excellent applications
engineering support
Superior material handling
and sorting technology
Use of most prestigious outlets
Purchase of high-quality
components to enhance
product image
Superior
material
handling
operations
to minimize
damage
Quick
transfer of
inputs to
manufactur-
ing process
Flexibility
and speed in
responding
to changes
in manu-
facturing
specs
Low defect
rates to
improve
quality
Accurate and
responsive
order
processing
Effective
product
replenish-
ment to
reduce
customer’s
inventory
Creative
and
innovative
advertising
programs
Fostering
of personal
relation-
ship with
key
customers
Rapid response
to customer
service
requests
Complete
inventory of
replacement
parts and
supplies
Firm
infrastructure
Human resource
management
Technology
development
Procurement
Inbound
logistics
Operations Outbound
logistics
Marketing
and sales
Service

14. 14
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Differentiation
• Firms may differentiate along several
dimensions at once
• Firms achieve and sustain differentiation and
above-average profits when price premiums
exceed extra costs of being unique
• Successful differentiation requires integration
with all parts of a firm’s value chain
• An important aspect of differentiation is speed
or quick response

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Differentiation: Improving Competitive
Position vis-à-vis the Five Forces
• Differentiation
• Creates higher entry barriers due to customer loyalty
• Provides higher margins that enable the firm to deal
with supplier power
• Reduces buyer power because buyers lack suitable
alternative
• Reduces supplier power due to prestige associated
with supplying to highly differentiated products
• Establishes customer loyalty and hence less threat
from substitutes

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Potential Pitfalls of Differentiation
Strategies
• 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

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Focus
• Focus is based on the choice of a narrow
competitive scope within an industry
• Firm selects a segment or group of segments
(niche) and tailors its strategy to serve them
• Firm achieves competitive advantages by dedicating
itself to these segments exclusively
• Two variants
• Cost focus
• Differentiation focus

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Focus: Improving Competitive Position
vis-à-vis the Five Forces
• Focus
• Creates barriers of either cost leadership or
differentiation, or both
• Also focus is used to select niches that are
least vulnerable to substitutes or where
competitors are weakest

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Pitfalls of Focus Strategies
• Erosion of cost advantages within the
narrow segment
• Focused products and services still
subject to competition from new entrants
and from imitation
• Focusers can become too focused to
satisfy buyer needs

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Combination Strategies: Integrating
Overall Low Cost and Differentiation
• Primary benefit of successful integration
of low-cost and differentiation strategies
is difficulty it poses for competitors to
duplicate or imitate strategy
• Goal of combination strategy is to provide
unique value in an efficient manner

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Combination Approaches
• Automated and flexible manufacturing systems
(e.g., “mass customization”)
• Exploiting the profit pool concept for
competitive advantage
• Coordinating the “extended” value chain by way
of information technology
• Best-cost provider strategies – incorporating
attractive attributes at a lower cost than rivals

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The U.S. Auto Industry’s Profit Pool
Source: Adapted from “A Fresh Look at Strategy” by O. Gadiesh and J. L. Gilbert, Harvard Business Review 76, no. 3
(1998), pp. 139-48. Copyright © 1998 by the Harvard Business School Publishing Corporation, all rights reserved.

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Combination Strategies: Improving
Competitive Position vis-à-vis the Five Forces
• Firms that successfully integrate differentiation
and cost strategies obtain advantages of
competition from both approaches
• High entry barriers
• Bargaining power over suppliers
• Reduces power of buyers (fewer competitors)
• Value position reduces threat from substitute
products
• Reduces the possibility of head-to-head rivalry

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Pitfalls of Combination Strategies
• Firms that fail to attain both strategies
may end up with neither and become
“stuck in the middle”
• Underestimating the challenges and
expenses associated with coordinating
value-creating activities in the extended
value chain
• Miscalculating sources of revenue and
profit pools in the firm’s industry

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Industry Life-Cycle States: Strategic
Implications
• Life cycle of an industry
• Introduction
• Growth
• Maturity
• Decline
• Emphasis on strategies, functional areas,
value-creating activities, and overall objectives
varies over the course of an industry life cycle

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Stages of the Industry Life Cycle

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Stages of the Industry Life Cycle
Generic
strategies
Differentiation Differentiation Differentiation Overall cost
Overall cost leadership
leadership Focus
Market
growth rate
Low Very large Low to Negative
moderate
Number of
segments
Very few Some Many Few
Intensity of
competition
Low Increasing Very intense Changing
Emphasis
on product
design
Very high High Low to Low
moderate
Stage
Introduction Growth Maturity Decline
Factor

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Stages of the Industry Life Cycle
Emphasis
on process
design
Low Low to High Low
moderate
Major
functional
area(s) of
concern
Research and Sales and Production General
Development marketing management
and finance
Overall
objective
Increase Create Defend Consolidate,
market share consumer market share maintain,
awareness demand and extend harvest, or
product life exit
cycles
Stage
Factor
Introduction Growth Maturity Decline

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Strategies in the Introduction Stage
• Products are unfamiliar to consumers
• Market segments not well defined
• Product features not clearly specified
• Competition tends to be limited
Strategies
• Develop product and get users to try it
• Generate exposure so product becomes
“standard

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Strategies in the Growth Stage
• Characterized by strong increases in sales
• Attractive to potential competitors
• Primary key to success is to build consumer
preferences for specific brands
Strategies
• Brand recognition
• Differentiated products
• Financial resources to support value-chain
activities

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Strategies in the Maturity Stage
• Aggregate industry demand slows
• Market becomes saturated, few new adopters
• Direct competition becomes predominant
• Marginal competitors begin to exit
Strategies
• Efficient manufacturing operations and process
engineering
• Low costs (customers become price sensitive)

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Strategies in the Decline Stage
• Industry sales and profits begin to fall
• Strategic options become dependent on the
actions of rivals
Strategies
• Maintaining
• Exiting the market
• Harvesting
• Consolidation

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Turnaround Strategies in the Life Cycle
• Asset and cost surgery
• Selective product and market pruning
• Piecemeal productivity improvements

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Grand Strategies
• Concentrated Growth
• Market Development
• Product Development
• Innovation
• Cooperative Strategies
• Joint Ventures
• Strategic Alliances
• Merger and Acquisition Strategies
• Horizontal Integration
• Vertical Integration (forward and backward)
• Related Diversification
• Unrelated Diversification

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Grand Strategies (cont.)
• Unbundling and Outsourcing Strategies
• Offensive Strategies
• Defensive Strategies
• First-Mover, Rapid-Follower, and Late-Mover
Strategies
• Strategies for Industry Leaders
• Strategies for Runner-Up Firms
• Turnaround