Chapter 4 - SHC Staff Web Index

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Feb 2, 2013 (3 years and 9 months ago)



Chapter 5

Level Strategy:

Creating and Sustaining Competitive Advantages


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 cha
pter, 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:


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 close the section with a discussion of how firms may combine generic


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 d
iscusses “turnaround
strategies” which enable a firm to reposition its competitive position in an industry.


The introductory case in the chapter is Food Lion, Inc. This is an example of a company that had
a very successfu
l cost leadership strategy

but took it too far. It is important to point out that it had an
“organizational strength” that did not lead to a sustainable competitive advantage

particularly when they
tried to apply this “strength” in a new marketplace. Nee
dless to say, its overemphasis on cost control did
not endear Food Lion to its employees or unions!

What were the underlying problem(s) at Food Lion?

How can such problems be avoided? (e.g., better integration among value creating
activities, more atten
tion paid to competitive conditions, greater diversity of perspectives
among managers/executives, a culture that encourages questioning of the status quo, etc.)

Are you familiar with other organizations that may have carried a competitive advantage
too fa
r? What were the consequences?

Transparency 41 (Learning Objectives)




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. Finally, firms following a focus strategy must
direct the
ir 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 strat
egies on two dimensions: competitive advantage and
strategic target.

What are some examples of businesses that follow each of the four strategies in Exhibit 5.1?
Why are they successful (or unsuccessful)?

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 provide
s 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 si
ngle type of strategy.

What are some examples of firms that have successfully combined multiple strategies?
Does this seem to help their performance? Why? Why not?

We now discuss each of the types of generic strategies.



Cost leadership requires a tight set of interrelated tactics such as: aggressive construction of
scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead
control, avoidance of managerial customer accounts, a
nd 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.

What are

some examples of firms that exemplify the items in Exhibit 5.3? How does it
improve the firm’s performance?

An important concept that is related to an overall cost leadership strategy is the experience curve.
This means that in many industries, unit co
sts decline as output increases. The experience curve concept
is discussed in STRATEGY SPOTLIGHT 5.1 and EXHIBIT 5.4

Transparency 42 (Ex. 5.1) Three Generic Strategies

Transparency 43 (Ex. 5.2) Competitive Advantage…

Transparency 44 (Ex. 5.3) Value Chain Activities…


Study the questions that are posed in STRATEGY SPOTLIGHT 5.1. What might be some
industries for which the experience curve is particu
larly relevant? Why?

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 differen
tiation means that the price discount needed to get an acceptable
market share does not offset a cost leader’s cost advantage.

Point out that the failure to attain parity on the basis of differentiation is a key lesson from the
opening Food Lion case. An
d, we discuss how Food Lion, Inc. has recently adapted their strategy in an
effort to attain parity on differentiation while emphasizing overall cost leadership.

The SUPPLEMENT below discusses Wal
Mart’s efforts to introduce its own house wine, to be

by E. & J. Gallo Winery.

Do you think these offerings will be successful? Why? Why not?

Will it be relatively easy to attain parity on the dimension of differentiation

given the
nature of this product? Why? Why not?



October 5, 2000, the world’s largest retailer introduced its house wine, and Chateau Bentonville didn’t just
sound right. The cabernet sauvignon, chardonnay, merlot, and white zinfandel wines on the shelves of about 1,000
U. S. and overseas stores will b
e dubbed Alcott Ridge Vineyards. Made by E. & J. Gallo Winery, the wines cost $6
to $7 a bottle.

And no, you wine snobs, Wal
Mart’s wine will not have a screw top or be sold with paper cups. Says a Wal
spokesman: “We found there was a need in our
stores for customers to have a quality wine at Wal
Mart’s everyday
low prices.”

Wine experts praise Wal
Mart’s move into the fast
growing, mid
priced wine segment. “Consumers are definitely
moving upscale. They want better quality, but many people don’t

want to pay $15 or $20 a bottle,” says wine
industry economist John Fredrikson. Okay, everyone. Bottoms up.

Source: Zellner, W. 2000. Bon Appetit.
Business Week
. October 9: 16.

We next address three examples of how overall cost leadership strategies

can help a firm to enjoy
advantages in their industry: IKEA, WellPoint (a managed
health care provider and General Mills.

The SUPPLEMENT discusses some of the ways in which Vanguard, the giant mutual fund
company, is able to enjoy a cost leadership pos
ition in their industry.

Transparency 45 (Ex. 5
.4) Comparing Experience Curve Effects




Vanguard helps to illustrate the importance of consistency between each activity (function) and its overall cost
leadership strategy. It minimizes portfolio expenses and does not need h
ighly compensated money managers. The
company distributes its funds directly, avoiding commissions to brokers. It also limits advertising, relying instead
on public relations and word
mouth recommendations. Vanguard ties its employees’ bonuses to cos
t savings.

Source: Porter, M. E. 1996. What is strategy?
Harvard Business Review
, 74(4): 71.

STRATEGY SPOTLIGHT 5.2 discusses IKEAS’s successful cost leadership strategy. It points
out how many of the firm’s value creating activities are closely inte
grated to drive down costs.



After discussing how an overall cost leadership position improves a firm’s position vis a vis the
five forces, we reintroduce the earlier
examples of IKEA, General Mills, and WellPoint to illustrate the

At this point, it might be helpful to reintroduce the example of Ikea, a global furniture retailer that
is based in Sweden. After reviewing this example, ask:

How does IKEA’s cos
t leadership strategy improve their competitive position vis a vis the
five forces?

Is IKEA able to achieve parity on differentiation? How?



This section addresses five pitfalls of following a
n overall cost leadership strategy:

Too much focus on one or a few value chain activities

All rivals share a common input or raw material

The strategy is imitated too easily

A lack of parity on differentiation

Erosion of cost advantages when pricing infor
mation available to customers increases

The SUPPLEMENT below, in a humorous way, addresses the need for firms following an overall
cost leadership strategy to attain some degree of parity on differentiation. (Most students will not, of
course, remember th
e Yugo

you may have to give a brief summary of this Yugoslavia
manufactured car
and its very poor reputation for quality.) This excerpt is drawn from a speech by J. W. Marriott, Jr.,
Chairman and CEO of Marriott International, Inc.:



“…money is a big thing. But it’s not the only thing.

“In the 1980s, a new automobile reached North America from behind the Iron Curtain. It was called the Yugo, and
ts main attraction was price. About $3,000 each.

“But the only way they caught on was as the butt of jokes. Remember the guy who told his mechanic, ‘I want a gas
cap for my Yugo’. ‘OK,’ the mechanic replied, ‘that sounds like a fair trade.’”

“Yugo was

offering a lousy value proposition. The cars literally fell apart before your eyes. And the lesson was
simple: price is just one component of value. No matter how good the price, the most cost
sensitive consumer
won’t buy a bad product.”

Source: Mar
riott, J. W. Jr. Our competitive strength: Human capital. A speech given to the Detroit Economic Club
on October 2, 2000.

The SUPPLEMENT below provides some additional information on how some firms and
industries have been affected by higher costs of e

a key input (the second pitfall above)




The impact of higher energy prices is particularly intense for energy dependent manufacturers. During 2000,
chemical giant DuPont had its raw material costs acce
lerate by $1.5 billion

primarily due to soaring fuel prices. In
response, the firm shifted its mix from commodity to more value added products “while aggressively raising prices
wherever we could”, says Chief Financial Officer Gary Pfeiffer. Similarly, N
ucor Corporation, which makes steel
by melting scrap in electric
arc furnaces, has seen its costs rise by $2 to $3 per ton. “In this business, you’re fighting
over nickels and dimes per ton,” says Nucor’s Daniel R. DiMicco.

Below are the percentage incre
ases in energy costs (from November, 1999 to November, 2000) for a few selected

Jet Fuel 59.6 %

Diesel Fuel 53.7%

Natural Gas for Utilities 51.0%

Grade Fuel Oil 42.3%

Source: Symonds, W. C. 2001. Trying to

break the choke hold.
Business Week
, January 22: 38.



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 uniq
ue 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

mobile phones that cost nearly $20,000!



If consumers are willing to spend $20,000 on a watch, why not also spend it on a mobile phone? Such is the idea
behind Vertu, which describes itself as
“the luxury communication company.” Its stylish handset

the company
prefers to call it an “instrument”, features a sapphire
crystal screen and ruby bearings, and is available in stainless
steel, gold and platinum finishes, with prices ranging from $4,990
to $19,450.

Since its launch, the “instrument”! has become a celebrity favorite. Gwyneth Paltrow, an American actress, was the
first customer. Madonna and Mariah Carey are said to be Vertu fans; another singer Jennifer Lopez, is reported to
own three. V
ertu is the brainchild of Frank Nuovo, a design guru at Nokia

the world’s largest handset
maker (of
which Vertu is a subsidiary).

Vertu may be on to something, says Sofia Ghachem, an analyst at Warburg. Siemens, another handset maker, has
just launche
d a new range of wearable “fashion accessory phones” under the name of Xelibri. It plans to produce
two “collections” of Xelibri phones a year. It hopes that marketing phones as fashion items will encourage people to
buy new handsets more often. With ma
rket penetration at around 80 percent in Western Europe, growth in handset
sales has stalled and Siemens believes its new approach could give the industry a much
needed boost.

Source: Anonymous. 2003. The origins of Vertu.
The Economist
. February 22: 62

What are some examples of companies that have successfully implemented a strategy of

EXHIBIT 5.5 applies the value chain concept to illustrate how companies may differentiate
themselves in primary and support activities.

What are

some examples of companies that have successfully incorporated some of the
elements in Exhibit 5.5 into their differentiation strategy?

What are some examples of companies that have been able to combine/integrate some of the
items in Exhibit 5.5?

The SU
PPLEMENT below “proves” that it is possible to differentiate virtually any product or
service. The example is a taxi service in Aspen, Colorado.


Jon Barnes, 41, doesn’t want to be just another commodity. So the Aspen, Co
based cabbie has come up with
a way to make his cab rides unique. For $100 a ride, customers can have what he calls the “Ultimate Taxi

one that actor Kevin Costner, former senator Bob Dole, and Disney CEO Michael Eisner have all
. What distinguishes the Ultimate Taxi from the standard fare? First, there’s the atmosphere. From the
front seat of his 1987 Checker Cab, Barnes orchestrates a sophisticated in
taxi light show, complete with 9 lasers, 14
miniature stage lights, a revol
ving disco ball, and a $2,000 haze machine that pumps smoke at his passengers’ feet.
Then there’s the personal touch. As he drives through the streets of Aspen, Barnes is happy to slow down for the
occasional magic trick or saxophone solo. “There’s no h
urry to get anywhere,” say Barnes. “It’s not where the
passengers are going that’s important

it’s where they are now.”

Source: Zack, L. 1999. Ultimate Taxi.
Fast Company
, November: 122.

Transparency 46 (Ex. 5.5) Value Chain Activities…


What might be some other examples of firms that have differentiate
d seemingly commodity
products or services? (e.g., Tyson

chickens; Dole

pineapples; Dell

computers, etc.)

As with overall cost leadership strategies, parity on the other dimension of strategy becomes very
important. That is, firms following di
fferentiation 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 Ferrari and Destiny Yachts (i
mage and brand
identification) and Siebel Systems (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.

Another important aspect of dif
ferentiation in today’s markets is speed, or alternatively, quick
response to changes in the marketplace/customer demands. STRATEGY SPOTLIGHT 5.4 provides the
example of how Roberts Express has increased its competitive position through speed and quick re
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.)

We discuss how a differentiation strategy helps a firm to improve its position vis a

vis Porter’s
five forces. We reintroduce the examples of Lexus, Destiny yachts, Ferrari automobiles, and FedEx to
illustrate our points.

Next, we address some of the pitfalls of a differentiation strategy:

Uniqueness that is not valuable

Too much diffe

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

We close the section with a brief discussion of

how additional products and services have become
further commoditized because of online auctions via such firms as FreeMarkets and Enron Online. This
serves to point out the increased difficulty in achieving differentiation advantages that are sustainabl
e for
a reasonable period of time.

EXHIBIT 5.6 contains a list of products which Geoffrey Colvin, a

editor, argues are
becoming more commodity
like (because they have become part of online auctions).

How difficult is it to differentiate the

products and services in Exhibit 5.6? Do you agree
that they are becoming more commodity
like? Why? Why not?

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 be unable t
o be successful in the market place. All students have, for
example, heard of Rolls Royce. Given their very high prices, students think Rolls Royce must be very
profitable. It may be interesting to point out to them that the firm has consistently lost mone
y and ask
them why. Rolls Royce may have a highly differentiated position and high prices, but its very high cost
Transparency 47 (Ex. 5.6) The Erosion of Product And…


of production, technological backwardness, lack of volume to spread out fixed costs, etc. have caused
their decline. This will lead to greater

appreciation on their part of the need to manage different
aspects of organizational success. (Rolls Royce has been acquired by BMW.)



The third generic strategy is based on the choice of a narrow competitive scope within an
industry. The focus
er attains competitive advantages by dedicating itself to a segment or group of
segments and tailors its strategy to serving them.

What are some companies that have successfully implemented a focus strategy?

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 examples of both a cost focus strategy (Network Appliance)

and a differentiation
focus strategy (Juniper Networks) in technology
based industries. We also discuss Bessemer Trust, a
differentiation focuser in the private banking industry.

STRATEGY SPOTLIGHT 5.4 addresses a very well known differentiation focuser
, Porsche.
Clearly, here’s a very successful company that makes products that nobody needs

but everybody wants!
What is particularly interesting to most people is that it has been able to reduce its breakeven point to only
12,000 to 14,000 units. There
are not too many companies that can remain profitable if their sales
dropped nearly 70 percent!

We next discuss how an effective focus strategy can improve a firm’s position vis a vis the
industry’s five forces. We draw on the previous examples of Bes
semer Trust, Porsche, and Network

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 subje
ct to competition
from new entrants and imitators

Focusers can become too focused to satisfy buyer needs.



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 nea
rly 2000 strategic business units (EXHIBIT 5.2) to support this

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.


next address three approaches that combine overall cost leadership and differentiation.



Given the advances in manufacturing technologies such as CAD/CAM as well as information
technologies, many firms hav
e 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 $1 billion
manufacturer of windows for the build
ing 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.

The SUPPLEMENT below discusses another example of mass c
ustomization in a different
industry: Paris Miki, a Japanese eyewear retailer.



An approach often associated with the term mass customization, “collaborative customization” is appropriate for
ses whose customers cannot easily articulate what they want and grow frustrated when forced to select from
a plethora of options.

Paris Miki, a Japanese eyewear retailer that has the largest number of eyewear stores in the world, is the
quintessential col
laborative customizer. The company spent five years developing the Mikissimes Design System
(to be called the Eye Tailor in the United States), which eliminates the customer’s need to review myriad choices
when selecting a pair of rimless glasses. The sy
stem first takes a digital picture of the consumer’s face, analyzes its
attributes as well as a set of statements submitted by the customer about the kind of look he or she desires,
recommends a distinctive lens size and shape, and displays the lenses on a

digital image of the customer’s face. The
customer and optician next collaborate to adjust the shape and size of the lenses until both are satisfied with the
look. Similarly, consumers select from a number of options for the nose bridge, hinges, and arm
s in order to
complete the design. Then they receive a photo
quality picture of themselves with the suggested glasses. And,
finally, a technician grinds the lenses and assembles the eyeglasses in the store in as little as an hour.

Source: Gilmore, J. H
. & Pine, B. J. II. 1997. The four faces of mass customization.
Harvard Business Review
75(1): 91

Would it be hard for a competitor to imitate Paris Miki’s strategy? Why? Why not?



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 individua
l segment.

We provide the example of the automobile industry profit pool in EXHIBIT 5.7. Here, we
present the relationship between the generation of revenues and capturing of profits. The key implication
is that a carmaker would be ill advised to focus
solely on manufacturing and leaving downstream
operations to others through outsourcing.

Transparency 48 (Ex. 5.7) The U.S. Auto Industry's Profit Pool


What are the implications for competitors in this industry? What are some of the challenges
in actually implementing your proposed ideas? (e.g., the manufacturer m
ay have limited
knowledge of downstream operations such as financing)

We then discuss another example, U
Haul, a competitor in the truck
rental industry. The key
here was to tightly manage costs and prices to consumers in the low
profit truck rental part

of the
industry, but make the majority of their profits on the sale (and rental) of high margin accessories.

The SUPPLEMENT below addresses how the profit
pool concepts provides a different
perspective for managers, especially for those in companies that

are used to thinking in terms of revenues.




Using the profit pool lens to formulate strategy requires the overturning of old assumptions, the rethinking of old
decisions, and the pursuit of co
unterintuitive initiatives. A company may, for example, hold off on pursuing obvious
growth opportunities in favor of concentrating first on seemingly less exciting business segments with richer profit
pools. It may also shed traditional customer groups,

product lines, and even entire businesses in order to focus on
the best profit sources. It may deliberately reduce its profits in one area of the business to maximize them in
another. Even the way a company views its competitors may change. It may, for

example, decide to cooperate with
its rivals in order to block or take advantage of value
chain shifts that threaten an existing profit pool.

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

Teaching Tip: The profit pool concept and the example of the auto 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 indust
ry. 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. (In the
locomotive manufacturing industry GE enjoys much greater profitability going downstream by

providing long
term maintenance agreements than by manufacturing the locomotives themselves.)



Many firms have achieved success by integrating activities throughout the “extended val
ue 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 i
ts customers and suppliers.

STRATEGY SPOTLIGHT 5.5 addresses how Wal
Mart was able to combine differentiation and
overall cost leadership to become the dominant mass retailer in the world. We also discuss why its
strategy is high sustainable. Competitor
s would have a very difficult time trying to imitate it or find

The SUPPLEMENT below provides some data on the enormous size of Wal
Mart and how
important it is to many of its well
known suppliers. It should be interesting to students as we
ll, and
provides some additional evidence of why the firm has such enormous power over its suppliers.



At Sam Walton’s death in 1992, Wal
Mart was one
fifth of its present size. The firm, in essence, has created
entire new meaning of size. If conventional metrics, such as its $240 billion
plus in revenues plus its 1.3 million
“associates” doesn’t do the trick, consider the following:

Mart’s sales on one day last fall

$1.42 billion

were larger than the G
DP of 36 countries.

It is the biggest employer in 21 states, with more people in uniform than the U. S. Army.

It plans to grow this year by the equivalent of

take your pick

one Dow Chemical, one Pepsi
Cola, one
Microsoft, or one Lockheed Martin.

If t
he estimated $2 billion it loses through theft each year were incorporated as a business, it would rank
No. 694 on the Fortune 1,000.

CEO Lee Scott runs, arguably, the world’s most powerful company. What it means for corporate America is a bit
more braci
ng. It means, for example, that Wal
Mart is not just Disney’s biggest customer, but also Procter &
Gamble’s, Kraft’s, and Revlon’s, and Gillette’s, and Campbell Soup’s and RJR’s, and so on. Further, it means that
it is the U. S.’ biggest seller of DVDs a
s well as groceries, toys, guns, diamonds, CDs, apparel, dog food

as well as
being the largest film developer, optician, private truck
fleet operation, energy consumer, and real estate developer!

Source: Useem, J. 2003. One nation under Wal
, March 3: 65



We next address how an integrated overall cost leadership and differentiation strategy helps a
firm to impr
ove its position vis a vis its industry’s five forces. We reintroduce the Wal
Mart example to
illustrate these points.



Firms that attain both types of competitive advantage enj
oy 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

Underestimating the challenges associated wi
th coordinating value creating activities in
the extended value chain.

Miscalculating sources of revenue and profit pools in your industry.



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 importan
t 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 stre
ngths and weaknesses in many areas
to attain competitive advantages.


EXHIBIT 5.8 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 ove
r 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 sing
le 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 technological innovation, i.e.,
DVDs, truncated the life cycle of VC
Rs, 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.



In the introduction stage, products are unfamilia
r 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
f cash to finance operations. Since there are few players and not much growth, competition tends to be

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 ge
t a lock on overseas sales channels and service capabilities,
and Matsushita’s establishment of VHS as a global standard for videocassettes.

What are some other firms that benefited from being a “first mover” in their industry?

However, there are also be
nefits to being a “late mover”. STRATEGY SPOTLIGHT 5.6
addresses 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.


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 o
verlooked. 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.

Transparency 49 (Ex. 5.8) Stages of th
e Industry Life Cycle




The second stage of the industry life cycle, growth, is characterized by strong increases in sales.
The potential for strong sale
s (and profits) attracts other rivals who also want to benefit. Whereas
marketing and sales initiatives were mainly directed at spurring

demand, that is, demand for all
such products in the introduction stage, efforts in the growth stage are dir
ected toward stimulating

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 proportio
n 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 f
resheners that
looked like stained glass.)

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?



In the third stage, maturity, aggr
egate 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 inte
(often on the basis of price).

We address the example of the intense competition between Unilever and Proctor 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 Proctor & Gamble continues to develop an
dance of “new and improved” Tide products in an effort to further gain incremental market share


The real genius of Tide’s strategy is its relentless stream of new and improved products. Each year P & G spends
ut $2 billion on research and development, a large portion of which goes toward developing new formulations of
Tide. There’s Tide With Bleach, Tide Free (which has no fragrance), Tide WearCare (which purports to keep
fabrics vibrant longer), and Tide Kick

(whose package includes a nozzle to rub detergent directly into fabrics).

In all, Tide has spawned more than 60 varieties of itself. Individually, each new mutation doesn’t add up to much:
Tide Kick has just 0.005% of the market; Tide With Bleach Powd
er, 0.009%. But together they drive the business.
Every new Tide on the shelf represents an inch of territory extracted from some other brand. Shelf space is so tight
in stores these days, says Susan Chachil, a category manager at Kmart, “when something

new comes in, something
else has got to go out.”

Source: Brooker, K. 2001. A game of inches.
, February 5: 100.

What are some industries in the maturity phase of the life cycle? How intense is the
competition? How difficult is it to differenti
ate products and services?




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 exitin
g or
staying and attempting to consolidate the industry.

There are four basic strategies available in the decline phase: maintaining, harvesting, exiting, or


refers to keeping a product going without significantly reducing mar
keting support,
technological development, or other investments in the hope that competitors will eventually leave the


involves obtaining as much profit as possible and requires that costs in the decline
stage be decreased quickly.


the market involves dropping the product from a firm’s portfolio.


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 in

What are some examples of industries in the decline stage? What strategies are the
incumbent firms following?



We close the chapter wit
h the example of the personal computer industry and how generic
strategies have changed over time. This is an industry with which students should be most familiar.

How strong a competitive threat do you feel that web appliances are to personal computers?

How intense will price competition become?

Do you think some personal computer companies will try to develop niche strategies if
demand continues to stagnate or decline? What other strategies are available to rivals in
this industry?



We discuss three turnaround strategies:

Asset and cost surgery

Selective product and market pruning

Piecemeal productivity improvements

The example of Caswell
Massey (a “negative example”) in STRATEGY SPOTLIGHT 5.7,
serves to illustrate the con
cepts and point out the difficulties in attaining a successful turnaround.

The SUPPLEMENT below is an excerpt from one of the executives who was brought in to serve
on a four
person team to turnaround Rite Aid. It points out some of the challenges execu
tive faces when
a major turnaround is required.



Mary Sammons, now President and COO of Rite Aid Corporation (Camp Hill, Pennsylvania) was one of a four
person team to try to turn around Rite Aid. At the time, the
company had $7 billion in debt and was on the verge of

as well as being in the middle of an accounting scandal. It also turned out there was virtually no cash
flow and almost no cash,
. Needless to say, it was a period of high

According to Ms. Sammons:

“I was in charge of the stores. My first move was to go to the front lines and tackle the fixable problems. They
weren’t hard to find. Our stores were is disarray, and our ads were a joke. There was a whole division on the We
Coast that was rumored to be for sale. When in fact, we had no plans to sell it. So that became my first big project.
I remodeled and remerchandised four of the larger stores and used them as examples. Within 90 days, we had
repriced about 1,500 key

items in stores.

“People on the front lines can either be your biggest allies or your worst enemies. In our case, they needed to see
and feel that we were serious about change. But one thing I didn’t do

even though it’s the one thing everyone


is make promises. I told people that there wasn’t any structural reason why we couldn’t be successful.
But at the beginning of a turnaround, you’re not in a position to be certain about anything. I gave perspective
without making promises.”


Mary Sammons, January 2003,
Fast Company
: 61.



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
vantages 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 t
he 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 a vis the five forces of that

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 also discussed the viability of combining (or integrating) overall cost leadership and
differentiation generic strate
gies. 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.

The c
oncept 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 se
verely 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.