There has been a rich history of strategic management

Business-Level Strategy: research addressing this topic. One study analyzed 1,789
Creating and Sustaining strategic business units and found that businesses
combining multiple forms of competitive advantage
Competitive Advantages (differentiation and overall cost leadership) outperformed
businesses that used only a single form. The lowest
In order to create and sustain a competitive advantage, performers were those that did not identify with any type
companies need to analyze the needs and preferences of of advantage. They were classified as “stuck in the
their customers and work to reinforce the value of their middle.” Results of this study are presented below.
products for customers. They should not focus only on
their internal operations. By not listening to their
customers and responding to their evolving needs, many
firms have seen their performance drop and even their
existence challenged.

Business-level strategy
Business-level strategy is a strategy designed for a firm
or a division of a firm that competes within a single
business.
For an example of the dangers of being “stuck in the
Types of Competitive middle,” consider the traditional supermarket. The major
supermarket chains, such as Kroger, Ralphs, and
Advantage and Sustainability Albertsons, used to be the main source of groceries for
consumers. However, they find themselves in a situation
Michael Porter presented three generic strategies that a today where affluent customers are going upmarket to get
firm can use to overcome the five forces and achieve their organic and gourmet foods at retailers like Whole
competitive advantage. Each of Porter’s generic Foods Market and budget-conscious consumers are
strategies has the potential to allow a firm to outperform drifting to discount chains such as Walmart, Aldi, and
rivals in their industry. The first, overall cost leadership, is Dollar General.
based on creating a low-cost-position. Here, a firm must
manage the relationships throughout the value chain and
lower costs throughout the entire chain. Second, Overall Cost Leadership
differentiation requires a firm to create products and/or The first generic strategy is overall cost leadership.
services that are unique and valued. Here, the primary Overall cost leadership requires a tight set of interrelated
emphasis is on “nonprice” attributes for which customers tactics that include:
will gladly pay a premium. Third, a focus strategy directs
attention (or “focus”) toward narrow product lines, buyer  Aggressive construction of efficient-scale
segments, or targeted geographic markets and they must facilities.
attain advantages either through differentiation or cost  Vigorous pursuit of cost reductions from
leadership. Whereas the overall cost leadership and experience.
differentiation strategies strive to attain advantages  Tight cost and overhead control.
industrywide, focusers have a narrow target market in  Avoidance of marginal customer accounts.
mind. The figure below illustrates these three strategies  Cost minimization in all activities in the firm’s
on two dimensions: competitive advantage and strategic value chain, such as R&D, service, sales force, and
target. advertising.

One factor often central to an overall cost leadership

strategy is the experience curve , which refers to how
business “learns” to lower costs as it gains experience
with production processes. With experience, unit costs of
production decline as output increases in most industries.
The experience curve, developed by the Boston
Consulting Group in 1968, is a way of looking at efficiency
gains that come with experience. For a range of products,
as cumulative experience doubles, costs and labor hours
needed to produce a unit of product decline by 10 to 30
percent. There are a number of reasons why we find this
Both casual observation and research support the notion effect. Among the most common factors are workers
that firms that identify with one or more of the forms of getting better at what they do, product designs being
competitive advantage outperform those that do not. simplified as the product matures, and production
processes being automated and streamlined. drop by a third in the next 12 years, thanks to stringent
However, experience curve gains will only be the family-planning policies that have sharply reduced
foundation for a cost advantage if the firm knows the China’s population growth. This is leading to upward
source of the cost reduction and can keep these gains pressure on labor costs in Chinese factories, undercutting
proprietary. the cost advantage of firms producing there.

To generate above-average performance, a firm following The strategy is imitated too easily. One of the common
an overall cost leadership position must attain competitive pitfalls of a cost-leadership strategy is that a firm’s
parity on the basis of differentiation relative to strategy may consist of value-creating activities that
competitors. In other words, a firm achieving parity is are easy to imitate. Such has been the case with online
similar to its competitors, or “on par,” with respect to brokers in recent years. As of early 2013, there were over
differentiated products. Competitive parity on the basis of 200 online brokers listed on allstocks.com, hardly
differentiation permits a cost leader to translate cost symbolic of an industry where imitation is extremely
advantages directly into higher profits than competitors. difficult. And according to Henry McVey, financial services
Thus, the cost leader earns above-average returns. analyst at Morgan Stanley, “We think you need five to
ten” online brokers.
Overall Cost Leadership: Improving
A lack of parity on differentiation. As noted earlier,
Competitive Position vis-à-vis the Five firms striving to attain cost leadership advantages must
Forces obtain a level of parity on differentiation. Firms providing
online degree programs may offer low prices. However,
An overall low-cost position enables a firm to achieve they may not be successful unless they can offer
above-average returns despite strong competition. It instruction that is perceived as comparable to
protects a firm against rivalry from competitors, because traditional providers. For them, parity can be achieved
lower costs allow a firm to earn returns even if its on differentiation dimensions such as reputation and
competitors eroded their profits through intense quality and through signaling mechanisms such as
rivalry. A low-cost position also protects firms against accreditation agencies.
powerful buyers. Buyers can exert power to drive down
prices only to the level of the next most efficient producer. Reduced flexibility. Building up a low-cost advantage
Also, a low-cost position provides more flexibility to often requires significant investments in plant and
cope with demands from powerful suppliers for input equipment, distribution systems, and large, economically
cost increases. The factors that lead to a low-cost scaled operations. As a result, firms often find that these
position also provide substantial entry barriers investments limit their flexibility, leading to great difficulty
position with respect to substitute products introduced by responding to changes in the environment. For example,
new and existing competitors. Coors Brewing developed a highly efficient, large-
scale brewery in Golden, Colorado. Coors was one of
Potential Pitfalls of Overall Cost the most efficient brewers in the world, but their plant was
Leadership Strategies designed to mass produce one or two types of beer.
When the craft brewing craze started to grow, their
Potential pitfalls of overall cost leadership strategy plant was not well equipped to produce smaller
include: batches of craft beer, and they found it difficult to meet
this opportunity. Ultimately, they had to buy their way into
Too much focus on one or a few value-chain this movement by acquiring small craft breweries.
activities. Would you consider a person to be astute if he
cancelled his newspaper subscription and quit eating out Obsolescence of the basis of cost advantage. 
to save money, but then “maxed out” several credit cards, Ultimately, the foundation of a firm’s cost advantage may
requiring him to pay hundreds of dollars a month in become obsolete. In these circumstances, other firms
interest charges? Of course not. Similarly, firms need to develop new ways of cutting costs, leaving the old
pay attention to all activities in the value chain. Too often cost leaders at a significant disadvantage. The older
managers make big cuts in operating expenses, but cost leaders are often locked into their way of competing
don’t question year-to-year spending on capital projects. and are unable to respond to the newer, lower-cost
Or managers may decide to cut selling and marketing means of competing. This is what happened to the U.S.
expenses but ignore manufacturing expenses. auto industry in the 1970s. Ford, GM, and Chrysler had
Managers should explore all value-chain activities, built up efficient mass manufacturing auto plants.
including relationships among them, as candidates However, when Toyota and other Japanese
for cost reductions. manufacturers moved into the North American car market
using lean manufacturing, a new and more efficient
Increase in the cost of the inputs on which the means of production, the U.S. firms found themselves at
advantage is based. Firms can be vulnerable to price a significant cost disadvantage. It took the U.S. firms over
increases in the factors of production. For example, 30 years to redesign and retool their plants and
consider manufacturing firms based in China which rely restructure the responsibilities of line workers to get to
on low labor costs. Due to demographic factors, the where they were on cost parity with the Japanese firms.
supply of workers 16 to 24 years old has peaked and will
 with being the supplier to a producer of highly
Differentiation differentiated products and services. Last, differentiation
As the name implies, a differentiation strategy consists of enhances customer loyalty, thus reducing the threat from
creating differences in the firm’s product or service substitutes.
offering by creating something that is perceived
industrywide as unique and valued by customers. Potential Pitfalls of Differentiation
Differentiation can take many forms:
Strategies
 Prestige or brand image (Adam’s Mark hotels, Uniqueness that is not valuable. A differentiation
BMW automobiles). strategy must provide unique bundles of products
 Technology (Martin guitars, Marantz stereo and/or services that customers value highly. It’s not
components, North Face camping equipment). enough just to be “different.” An example is Gibson’s
 Innovation (Medtronic medical equipment, Dobro bass guitar. Gibson came up with a unique idea:
Apple’s iPhones and iPads). Design and build an acoustic bass guitar with sufficient
 Features (Cannondale mountain bikes, Honda sound volume so that amplification wasn’t necessary. The
Goldwing motorcycles). problem with other acoustic bass guitars was that they did
 Customer service (Nordstrom department not project enough volume because of the low-frequency
stores, Sears lawn equipment retailing). bass notes. By adding a resonator plate on the body of
 Dealer network (Lexus automobiles, Caterpillar the traditional acoustic bass, Gibson increased the sound
earthmoving equipment). volume. Gibson believed this product would serve a
particular niche market—bluegrass and folk artists who
played in small group “jams” with other acoustic
Firms may differentiate themselves along several different musicians. Unfortunately, Gibson soon discovered that its
dimensions at once. For example, the Cheesecake targeted market was content with their existing options:
Factory, an upscale casual restaurant, differentiates itself an upright bass amplified with a microphone or an
by offering high quality food, the widest and deepest acoustic electric guitar. Thus, Gibson developed a
menu in its class of restaurants, and premium locations. unique product, but it was not perceived as valuable
Firms achieve and sustain differentiation advantages and by its potential customers.
attain above-average performance when their price Too much differentiation. Firms may strive for quality
premiums exceed the extra costs incurred in being or service that is higher than customers desire. Thus,
unique. For example, the Cheesecake Factory must they become vulnerable to competitors who provide
increase consumer prices to offset the higher cost of an appropriate level of quality at a lower price. For
premium real estate and producing such a wide menu. example, consider the expensive Mercedes-Benz S-
Thus, a differentiator will always seek out ways of Class, which ranged in price between $93,650 and
distinguishing itself from similar competitors to justify $138,000 for the 2011 models. Consumer Reports
price premiums greater than the costs incurred by described it as “sumptuous,” “quiet and luxurious,” and a
differentiating. Clearly, a differentiator cannot ignore “delight to drive.” The magazine also considered it to be
costs. After all, its premium prices would be eroded by a the least reliable sedan available in the United States.
markedly inferior cost position. Therefore, it must attain a According to David Champion, who runs their testing
level of cost parity relative to competitors. Differentiators program, the problems are electronic. “The engineers
can do this by reducing costs in all areas that do not have gone a little wild,” he says. “They’ve put every bell
affect differentiation. Porsche, for example, invests and whistle that they think of, and sometimes they don’t
heavily in engine design—an area in which its customers have the attention to detail to make these systems work.”
demand excellence—but it is less concerned and spends Some features include: a computer-driven suspension
fewer resources in the design of the instrument panel or that reduces body roll as the vehicle whips around a
the arrangement of switches on the radio. corner; cruise control that automatically slows the car
down if it gets too close to another car; and seats that are
Differentiation: Improving Competitive adjustable 14 ways and that are ventilated by a system
Position vis-à-vis the Five Forces that uses eight fans.
Differentiation provides protection against rivalry since Too high a price premium. This pitfall is quite similar to
brand loyalty lowers customer sensitivity to price and too much differentiation. Customers may desire the
raises customer switching costs. By increasing a firm’s product, but they are repelled by the price premium. For
margins, differentiation also avoids the need for a low- example, Duracell (a division of Gillette) recently charged
cost position. Higher entry barriers result because of too much for batteries. The firm tried to sell consumers on
customer loyalty and the firm’s ability to provide its superior quality products, but the mass market wasn’t
uniqueness in its products or services. Differentiation also convinced. Why? The price differential was simply too
provides higher margins that enable a firm to deal with high. At a CVS drugstore just one block from Gillette’s
supplier power. And it reduces buyer power, because headquarters, a four-pack of Energizer AA batteries was
buyers lack comparable alternatives and are therefore on sale at $2.99 compared with a Duracell four-pack at
less price sensitive. Supplier power is also decreased $4.59. Duracell’s market share dropped 2 percent in a
because there is a certain amount of prestige associated recent two-year period, and its profits declined over 30
percent. Clearly, the price/performance proposition differentiate in its target market. Both variants of the
Duracell offered customers was not accepted. focus strategy rely on providing better service than
broad-based competitors who are trying to serve the
Differentiation that is easily imitated. Resources that focuser’s target segment. Cost focus exploits differences
are easily imitated cannot lead to sustainable in cost behavior in some segments, while differentiation
advantages. Similarly, firms may strive for, and even focus exploits the special needs of buyers in other
attain, a differentiation strategy that is successful for a segments.
time. However, the advantages are eroded through
imitation. Consider Cereality’s innovative differentiation Let’s look at examples of two firms that have successfully
strategy of stores which offer a wide variety of cereals implemented focus strategies. LinkedIn has staked out a
and toppings for around $4.00. As one would expect, position as the business social media site of choice.
once their idea proved successful, competitors entered Rather than compete with Facebook head on, LinkedIn
the market because much of the initial risk had already created a strategy that focuses on individuals who wish to
been taken. Rivals include an Iowa City restaurant named share their business experience and make connections
the Cereal Cabinet, the Cereal Bowl in Miami, and Bowls: with individuals with whom they share or could potentially
A Cereal Joint in Gainesville, Florida. Says David Roth, share business ties. In doing so, they have created an
one of Cereality’s founders: “With any good business extremely strong business model. LinkedIn monetizes
idea, you’re faced with people who see you’ve cracked their user information in three ways: subscription fees
the code and who try to cash in on it.” from some users, advertising fees, and recruiter fees. The
first two are fairly standard for social media sites, but the
Dilution of brand identification through product-line advertising fees are higher for LinkedIn since the ads can
extensions. Firms may erode their quality brand image be more effectively targeted as a result of LinkedIn’s
by adding products or services with lower prices and less focus. The third income source is fairly unique for
quality. Although this can increase short-term revenues, it LinkedIn. Headhunters and human resource departments
may be detrimental in the long run. Consider Gucci. In the pay significant user fees, up to $8,200 a year, to have
1980s Gucci wanted to capitalize on its prestigious brand access to LinkedIn’s recruiting search engine that can sift
name by launching an aggressive strategy of revenue through LinkedIn profiles to identify individuals with
growth. It added a set of lower-priced canvas goods to its desired skills and experiences. The power of this
product line. It also pushed goods heavily into department business model can be seen in the difference in user
stores and duty-free channels and allowed its name to value for LinkedIn when compared to Facebook. For
appear on a host of licensed items such as watches, every hour that a user spends on the site, LinkedIn
eyeglasses, and perfumes. In the short term, this strategy generates $1.30 in income. For Facebook, it is a paltry
worked. Sales soared. However, the strategy carried a 6.2 cents.
high price. Gucci’s indiscriminate approach to expanding
its products and channels tarnished its sterling brand. Marlin Steel Wire Products, a Baltimore-based
Sales of its high-end goods (with higher profit margins) manufacturing company, has also seen great benefit from
fell, causing profits to decline. developing a niche-differentiator strategy. Marlin, a
manufacturer of commodity wire products, faced stiff and
Perceptions of differentiation may vary between ever-increasing competition from rivals based in China
buyers and sellers. The issue here is that “beauty is in and other emerging markets. These rivals had labor-
the eye of the beholder.” Companies must realize that based cost advantages that Marlin found hard to counter.
although they may perceive their products and services Marlin responded by changing the game they played.
as differentiated, their customers may view them as Drew Greenblatt, Marlin’s president, decided to go
commodities. Indeed, in today’s marketplace, many upmarket, automating his production and specializing in
products and services have been reduced to high-end products. For example, Marlin produces
commodities. Thus, a firm could overprice its offerings antimicrobial baskets for restaurant kitchens and exports
and lose margins altogether if it has to lower prices to its products globally. Marlin saw its sales grow from
reflect market realities. $800,000 in 1998 to $3 million in 2007.

Focus Focus: Improving Competitive Position

A focus strategy is based on the choice of a narrow vis-à-vis the Five Forces
competitive scope within an industry. A firm following Focus requires that a firm either have a low-cost position
this strategy selects a segment or group of segments with its strategic target, high differentiation, or both. As we
and tailors its strategy to serve them. The essence of discussed with regard to cost and differentiation
focus is the exploitation of a particular market niche. strategies, these positions provide defenses against each
As you might expect, narrow focus itself (like merely competitive force. Focus is also used to select niches that
“being different” as a differentiator) is simply not sufficient are least vulnerable to substitutes or where
for above-average performance. competitors are weakest. Let’s look at our examples to
illustrate some of these points. First, by providing a
The focus strategy has two variants. In a cost focus, a platform for a targeted customer group, business people,
firm strives to create a cost advantage in its target to share key work information, LinkedIn insulated itself
segment. In a differentiation focus, a firm seeks to from rivalrous pressure from existing social networks,
such as Facebook. It also felt little threat from new superior quality can lead to lower costs because of less
generalist social networks, such as Google+. Similarly, need for rework in manufacturing, fewer warranty claims,
the new focus of Marlin Steel lessened the power of a reduced need for customer service personnel to resolve
buyers since they provide specialized products. Also, they customer complaints, and so forth. Thus, the benefits of
are insulated from competitors, who manufacture the combining advantages can be additive, instead of merely
commodity products Marlin used to produce. involving tradeoffs. Next, we consider three approaches
to combining overall low cost and differentiation.
Potential Pitfalls of Focus Strategies
Potential pitfalls of focus strategies include:
Automated and Flexible Manufacturing
Systems
Erosion of cost advantages within the narrow
segment. The advantages of a cost focus strategy may Given the advances in manufacturing technologies such
be fleeting if the cost advantages are eroded over time. as CAD/CAM (computer aided design and computer
For example, Dell’s pioneering direct-selling model in the aided manufacturing) as well as information technologies,
personal computer industry has been eroded by rivals many firms have been able to manufacture unique
such as Hewlett-Packard as they gain experience with products in relatively small quantities at lower costs
Dell’s distribution method. Similarly, other firms have —a concept known as mass customization.
seen their profit margins drop as competitors enter their Let’s consider Andersen Windows of Bayport,
product segment. Minnesota—a $3 billion manufacturer of windows for the
Even product and service offerings that are highly building industry. Until about 20 years ago, Andersen was
focused are subject to competition from new entrants a mass producer, in small batches, of a variety of
and from imitation. Some firms adopting a focus standard windows. However, to meet changing customer
strategy may enjoy temporary advantages because they needs, Andersen kept adding to its product line. The
select a small niche with few rivals. However, their result was catalogs of ever-increasing size and a
advantages may be short-lived. A notable example is the bewildering set of choices for both homeowners and
multitude of dot-com firms that specialize in very narrow contractors. Over a 6-year period, the number of products
segments such as pet supplies, ethnic foods, and vintage tripled, price quotes took several hours, and the error rate
automobile accessories. The entry barriers tend to be increased. This not only damaged the company’s
low, there is little buyer loyalty, and competition becomes reputation, but also added to its manufacturing expenses.
intense. And since the marketing strategies and To bring about a major change, Andersen developed an
technologies employed by most rivals are largely interactive computer version of its paper catalogs that it
nonproprietary, imitation is easy. Over time, revenues fall, sold to distributors and retailers. Salespersons can now
profits margins are squeezed, and only the strongest customize each window to meet the customer’s needs,
players survive the shakeout. check the design for structural soundness, and provide a
Focusers can become too focused to satisfy buyer price quote. The system is virtually error free, customers
needs. Some firms attempting to attain advantages get exactly what they want, and the time to develop the
through a focus strategy may have too narrow a product design and furnish a quotation has been cut by 75
or service. Consider many retail firms. Hardware chains percent. Each showroom computer is connected to the
such as Ace and True Value are losing market share to factory, and customers are assigned a code number that
rivals such as Lowe’s and Home Depot that offer a full permits them to track the order. The manufacturing
line of home and garden equipment and accessories. And system has been developed to use some common
given the enormous purchasing power of the national finished parts, but it also allows considerable variation in
chains, it would be difficult for such specialty retailers to the final products. Despite its huge investment, Andersen
attain parity on costs. has been able to lower costs, enhance quality and
variety, and improve its response time to customers.

Combination Strategies : Exploiting the Profit Pool Concept for

Integrating Overall Low Cost Competitive Advantage
and Differentiation A profit pool is defined as the total profits in an industry
at all points along the industry’s value chain. Although the
Perhaps the primary benefit to firms that integrate low- concept is relatively straightforward, the structure of the
cost and differentiation strategies is the difficulty for profit pool can be complex. The potential pool of profits
rivals to duplicate or imitate. This strategy enables a will be deeper in some segments of the value chain than
firm to provide two types of value to customers: in others, and the depths will vary within an individual
differentiated attributes (e.g., high quality, brand segment. Segment profitability may vary widely by
identification, reputation) and lower prices (because of the customer group, product category, geographic market, or
firm’s lower costs in value-creating activities). The goal is distribution channel. Additionally, the pattern of profit
thus to provide unique value to customers in an concentration in an industry is very often different from
efficient manner. Some firms are able to attain both the pattern of revenue generation.
types of advantages simultaneously. For example,
Coordinating the “Extended” Value Chain mainline supermarket chains find themselves stuck in the
middle as their cost structure is higher than discount
by Way of Information Technology retailers offering groceries, and their products and
Many firms have achieved success by integrating services are not seen by consumers as being as valuable
activities throughout the “extended value chain” by as those of high-end grocery chains, such as Whole
using information technology to link their own value Foods.
chain with the value chains of their customers and
suppliers. This approach enables a firm to add value not Underestimating the challenges and expenses
only through its own value-creating activities, but also for associated with coordinating value-creating activities
its customers and suppliers. in the extended value chain. Integrating activities
across a firm’s value chain with the value chain of
Such a strategy often necessitates redefining the suppliers and customers involves a significant investment
industry’s value chain. A number of years ago, Walmart in financial and human resources. Firms must consider
took a close look at its industry’s value chain and decided the expenses linked to technology investment,
to reframe the competitive challenge. Although its managerial time and commitment, and the involvement
competitors were primarily focused on retailing— and investment required by the firm’s customers and
merchandising and promotion—Walmart determined that suppliers. The firm must be confident that it can generate
it was not so much in the retailing industry as in the a sufficient scale of operations and revenues to justify all
transportation logistics and communications industries. associated expenses.
Here, linkages in the extended value chain became
central. That became Walmart’s chosen battleground. By Miscalculating sources of revenue and profit pools in
redefining the rules of competition that played to its the firm’s industry. Firms may fail to accurately assess
strengths, Walmart has attained competitive advantages sources of revenue and profits in their value chain. This
and dominates its industry. can occur for several reasons. For example, a manager
may be biased due to his or her functional area
background, work experiences, and educational
Integrated Overall Low-Cost and background. If the manager’s background is in
Differentiation Strategies: Improving engineering, he or she might perceive that proportionately
Competitive Position vis-à-vis the Five greater revenue and margins were being created in
manufacturing, product, and process design than a
Forces person whose background is in a “downstream” value-
Firms that successfully integrate both differentiation and chain activity such as marketing and sales. Or politics
cost advantages create an enviable position. For could make managers “fudge” the numbers to favor their
example, Walmart’s integration of information systems, area of operations. This would make them responsible for
logistics, and transportation helps it to drive down costs a greater proportion of the firm’s profits, thus improving
and provide outstanding product selection. This dominant their bargaining position.
competitive position, serves to erect high entry barriers to
potential competitors that have neither the financial nor A related problem is directing an overwhelming
physical resources to compete head-to-head. Walmart’s amount of managerial time, attention, and resources
size—with nearly $450 billion in sales in 2012— provides to value-creating activities that produce the greatest
the chain with enormous bargaining power over suppliers. margins—to the detriment of other important, albeit
Its low pricing and wide selection reduce the power of less profitable, activities. For example, a car
buyers (its customers), because there are relatively few manufacturer may focus too much on downstream
competitors that can provide a comparable cost/value activities, such as warranty fulfillment and financing
proposition. This reduces the possibility of intense head- operations, to the detriment of differentiation and cost of
to-head rivalry, such as protracted price wars. Finally, the cars themselves.
Walmart’s overall value proposition makes potential
substitute products (e.g., Internet competitors) a less How the Internet and Digital
viable threat.
Technologies Affect the
Pitfalls of Integrated Overall Cost Competitive Strategies
Leadership and Differentiation Strategies
The pitfalls of integrated overall cost leadership and Internet and digital technologies have swept across the
differentiation include: economy and now have an impact on how nearly every
company conducts its business. These changes have
Firms that fail to attain both strategies may end up created new cost efficiencies and avenues for
with neither and become “stuck in the middle.” A key differentiation. However, the presence of these
issue in strategic management is the creation of technologies is so widespread that it is questionable
competitive advantages that enable a firm to enjoy above- how any one firm can use them effectively in ways
average returns. Some firms may become “stuck in the that genuinely set them apart from rivals. Thus, to stay
middle” if they try to attain both cost and differentiation competitive, firms must update their strategies to reflect
advantages. As mentioned earlier in this chapter, the new possibilities and constraints that these
phenomena represent. In this section, we address both trends are new ways to interact with consumers. In
the opportunities and the pitfalls that Internet and particular, the Internet has created new ways of
digital technologies offer to companies using overall differentiating by enabling mass customization, which
cost leadership, differentiation, and focus strategies. We improves the response to customer wishes.
also briefly consider two major impacts that the
Internet is having on business: lowering transaction costs Mass customization has changed how companies go to
and enabling mass customization. market and has challenged some of the tried-and-true
techniques of differentiation. Traditionally, companies
reached customers using high-end catalogs, the
Overall Cost Leadership showroom floor, personal sales calls and products using
The Internet and digital technologies create new prestige packaging, celebrity endorsements, and charity
opportunities for firms to achieve low-cost advantages by sponsorships. All of these avenues are still available and
enabling them to manage costs and achieve greater may still be effective, depending on a firm’s competitive
efficiencies. Managing costs, and even changing the environment. But many customers now judge the quality
cost structures of certain industries, is a key feature of the and uniqueness of a product or service by their ability to
digital economy. Most analysts agree that the Internet’s be involved in its planning and design, combined with
ability to lower transaction costs has transformed speed of delivery and reliable results. Internet and
business. Broadly speaking, transaction costs refer to all digitally based capabilities are thus changing the way
the various expenses associated with conducting differentiators make exceptional products and achieve
business. It applies not just to buy/sell transactions but to superior service. Such improvements are being made at a
the costs of interacting with every part of a firm’s value reasonable cost, allowing firms to achieve parity on the
chain, within and outside the firm. Think about it. Hiring basis of overall cost leadership.
new employees, meeting with customers, ordering
supplies, addressing government regulations—all of Potential Internet-Related Pitfalls for
these exchanges have some costs associated with them. Differentiators
Because business can be conducted differently on the
Internet, new ways of saving money are changing the Traditional differentiation strategies such as building
competitive landscape. strong brand identity and prestige pricing have been
undermined by Internet-enabled capabilities such as the
Other factors also help to lower transaction costs. The ability to compare product features side-by-side or bid
process of disintermediation has a similar effect. Each online for competing services. The sustainability of
time intermediaries are used in a transaction, additional Internet-based gains from differentiation will deteriorate
costs are added. Removing intermediaries lowers if companies offer differentiating features that
transaction costs. The Internet reduces the costs to customers don’t want or create a sense of uniqueness
search for a product or service, whether it is a retail outlet that customers don’t value. The result can be a failed
(as in the case of consumers) or a trade show (as in the value proposition—the value companies thought they
case of business-to-business shoppers). Not only is the were offering, does not translate into sales.
need for travel eliminated but so is the need to maintain a
physical address, whether it’s a permanent retail location
or a temporary presence at a trade show.
Focus
A focus strategy targets a narrow market segment with
Potential Internet-Related Pitfalls for customized products and/or services. With focus
strategies, the Internet offers new avenues in which to
Low-Cost Leaders compete because they can access markets less
One of the biggest threats to low-cost leaders is expensively (low cost) and provide more services and
imitation. This problem is intensified for business done features (differentiation). Some claim that the Internet has
on the Internet. Most of the advantages associated with opened up a new world of opportunities for niche players
contacting customers directly, and even capabilities that who seek to access small markets in a highly specialized
are software driven (e.g., customized ordering systems or fashion. Niche businesses are among the most active
real-time access to the status of work in progress), can be users of digital technologies and e-business solutions,
duplicated quickly and without threat of infringement on using the Internet and digital technologies to create more
proprietary information. Another pitfall relates to viable focus strategies.
companies that become overly enamored with using the
Internet for cost-cutting and thus jeopardize customer Many aspects of the Internet economy favor focus
relations or neglect other cost centers. strategies because niche players and small firms have
been able to extend their reach and effectively compete
with larger competitors. For example, niche firms can
Differentiation more easily employ Twitter and other social media to
For many companies, Internet and digital technologies connect in personalized ways with their focused customer
have enhanced their ability to build brand, offer groups. With these social media tools, they can solicit
quality products and services, and achieve other input, respond quickly to customer feedback, and provide
differentiation advantages. Among the most striking overall improvements in customer service. Thus, the
Internet has provided many firms that pursue focus
strategies with new tools for creating competitive for a lower cost than in the past. The larger firm can then
advantages. bring its market power and resources to bear in a way
that a smaller competitor cannot match.
Potential Internet-Related Pitfalls for
A combination strategy challenges a company to
Focusers carefully blend alternative strategic approaches and
A key danger for focusers using the Internet relates to remain mindful of the impact of different decisions on the
correctly assessing the size of the online marketplace. firm’s value-creating processes and its extended value-
Focusers can misread the scope and interests of their chain activities. Strong leadership is needed to
target markets. This can cause them to focus on maintain a bird’s-eye perspective on a company’s
segments that are too narrow to be profitable or to lose overall approach and to coordinate the multiple
their uniqueness in overly broad niches, making them dimensions of a combination strategy.
vulnerable to imitators or new entrants.

What happens when an e-business focuser tries to

Industry Life-Cycle Stages:
overextend its niche? Efforts to appeal to a broader
audience by carrying additional inventory, developing
Strategic Implications
additional content, or offering additional services can The industry life cycle refers to the stages of
cause it to lose the cost advantages associated with a introduction, growth, maturity, and decline that occur
limited product or service offering. over the life of an industry. In considering the industry life
cycle, it is useful to think in terms of broad product lines
Are Combination Strategies the such as personal computers, photocopiers, or long-
distance telephone service. Yet the industry life cycle
Key to E-Business Success? concept can be explored from several levels, from the life
Because of the changing dynamics presented by digital cycle of an entire industry to the life cycle of a single
and Internet-based technologies, new strategic variation or model of a specific product or service.
combinations that make the best use of the Why are industry life cycles important? The emphasis on
competitive strategies may hold the greatest promise. various generic strategies, functional areas, value-
Many experts agree that the net effect of the digital creating activities, and overall objectives varies over the
economy is fewer rather than more opportunities for course of an industry life cycle. Managers must
sustainable advantages. This means strategic thinking become even more aware of their firm’s strengths and
becomes more important. weaknesses in many areas to attain competitive
More specifically, the Internet has provided all advantages. For example, firms depend on their research
companies with greater tools for managing costs. So and development (R&D) activities in the introductory
it may be that cost management and control will become stage. R&D is the source of new products and features
more important management tools. In general, this may that everyone hopes will appeal to customers. Firms
be good if it leads to an economy that makes more develop products and services to stimulate consumer
efficient use of its scarce resources. However, for demand. Later, during the maturity phase, the functions of
individual companies, it may shave critical percentage the product have been defined, more competitors have
points off profit margins and create a climate that makes it entered the market, and competition is intense. Managers
impossible to survive, much less achieve sustainable then place greater emphasis on production efficiencies
above-average profits. and process (as opposed to the product) engineering in
order to lower manufacturing costs. This helps to protect
Many differentiation advantages are also diminished the firm’s market position and to extend the product life
by the Internet. The ability to comparison shop—to cycle because the firm’s lower costs can be passed on to
check product reviews and inspect different choices with consumers in the form of lower prices, and price-sensitive
a few clicks of the mouse—is depriving some companies, customers will find the product more appealing.
such as auto dealers, of the unique advantages that were
the hallmark of their prior success. Differentiating is still The figure below illustrates the four stages of the industry
an important strategy, of course. But how firms achieve it life cycle and how factors such as generic strategies,
may change, and the best approach may be to combine market growth rate, intensity of competition, and
differentiation with other competitive strategies. overall objectives change over time. Managers must
strive to emphasize the key functional areas during each
Perhaps the greatest beneficiaries are the focusers who of the four stages and to attain a level of parity in all
can use the Internet to capture a niche that previously functional areas and value-creating activities. For
may have been inaccessible. However, because the example, although controlling production costs may be a
same factors that make it possible for a small niche primary concern during the maturity stage, managers
player to be a contender may make that same niche should not totally ignore other functions such as
attractive to a big company. That is, an incumbent firm marketing and R&D. If they do, they can become so
that previously thought a niche market was not worth the focused on lowering costs that they miss market trends or
effort may use Internet technologies to enter that segment fail to incorporate important product or process designs.
Thus, the firm may attain low-cost products that have There’s an advantage to being the “first mover” in a
limited market appeal. market. It led to Coca-Cola’s success in becoming the
first soft-drink company to build a recognizable global
brand and enabled Caterpillar to get a lock on overseas
sales channels and service capabilities. However, there
can also be a benefit to being a “late mover.”

Strategies in the Growth Stage

The growth stage is characterized by strong increases in
sales. Such potential attracts other rivals. In the growth
It is important to point out a caveat. While the life cycle stage, the primary key to success is to build consumer
idea is analogous to a living organism (i.e., birth, growth, preferences for specific brands. This requires strong
maturity, and death), the comparison has limitations. brand recognition, differentiated products, and the
Products and services go through many cycles of financial resources to support a variety of value-chain
innovation and renewal. Typically, only fad products have activities such as marketing and sales, and research and
a single life cycle. Maturity stages of an industry can be development. Whereas marketing and sales initiatives
“transformed” or followed by a stage of rapid growth if were mainly directed at spurring aggregate demand—that
consumer tastes change, technological innovations take is, demand for all such products in the introduction stage
place, or new developments occur. The cereal industry is —efforts in the growth stage are directed toward
a good example. When medical research indicated that stimulating selective demand, in which a firm’s product
oat consumption reduced a person’s cholesterol, sales of offerings are chosen instead of a rival’s.
Quaker Oats increased dramatically.
Revenues increase at an accelerating rate because (1)
new consumers are trying the product and (2) a growing
proportion of satisfied consumers are making repeat
purchases. In general, as a product moves through its life
cycle, the proportion of repeat buyers to new
purchasers increases. Conversely, new products and
services often fail if there are relatively few repeat
purchases. For example, Alberto-Culver introduced Mr.
Culver’s Sparklers, which were solid air fresheners that
looked like stained glass. Although the product quickly
went from the introductory to the growth stage, sales
collapsed. Why? Unfortunately, there were few repeat
purchasers because buyers treated them as inexpensive
window decorations, left them there, and felt little need to
purchase new ones.

Strategies in the Maturity Stage

In the maturity stage aggregate industry demand softens.
Strategies in the Introduction As markets become saturated, there are few new
adopters. It’s no longer possible to “grow around” the
Stage competition, so direct competition becomes predominant.
In the introduction stage , products are unfamiliar to With few attractive prospects, marginal competitors exit
consumers. Market segments are not well defined, and the market. At the same time, rivalry among existing rivals
product features are not clearly specified. The early intensifies because of fierce price competition at the
development of an industry typically involves low sales same time that expenses associated with attracting new
growth, rapid technological change, operating buyers are rising. Advantages based on efficient
losses, and the need for strong sources of cash to manufacturing operations and process engineering
finance operations. Since there are few players and not become more important for keeping costs low as
much growth, competition tends to be limited. customers become more price sensitive. It also becomes
more difficult for firms to differentiate their offerings,
Success requires an emphasis on research and because users have a greater understanding of products
development and marketing activities to enhance and services.
awareness. The challenge becomes one of (1)
developing the product and finding a way to get users to An article in Fortune magazine that addressed the
try it, and (2) generating enough exposure so the product intensity of rivalry in mature markets was aptly titled “A
emerges as the “standard” by which all other rivals’ Game of Inches.” It stated, “Battling for market share in a
products are evaluated. slowing industry can be a mighty dirty business. Just ask
laundry soap archrivals Unilever and Procter & Gamble.”
These two firms have been locked in a battle for market
share since 1965. Why is the competition so intense? When a breakaway product is successful in leaving its
There is not much territory to gain and industry sales category and joining a new one, it is able to redefine its
were flat. An analyst noted, “People aren’t getting any competition. Similar to reverse positioning, this strategy
dirtier.” Thus, the only way to win is to take market share permits the product to shift backward on the life-cycle
from the competition. To increase its share, Procter & curve, moving from the rather dismal maturity phase
Gamble (P&G) spends $100 million a year promoting its to a thriving growth opportunity.
Tide brand on television, billboards, buses, magazines,
and the Internet. But Unilever isn’t standing still. Armed
with an $80 million budget, it launched a soap tablet
Strategies in the Decline Stage
product named Wisk Dual Action Tablets. For example, it Although all decisions in the phases of an industry life
delivered samples of this product to 24 million U.S. cycle are important, they become particularly difficult in
homes in Sunday newspapers, followed by a series of TV the decline stage. Firms must face up to the fundamental
ads. P&G launched a counteroffensive with Tide Rapid strategic choices of either exiting or staying and
Action Tablets ads showed in side-by-side comparisons attempting to consolidate their position in the
of the two products dropped into beakers of water. In the industry.
promotion, P&G claimed that its product is superior
because it dissolves faster than Unilever’s product. The decline stage occurs when industry sales and
profits begin to fall. Typically, changes in the business
Although this is only one example, many product classes environment are at the root of an industry or product
and industries, including consumer products such as group entering this stage. Changes in consumer tastes or
beer, automobiles, and athletic shoes, are in maturity. a technological innovation can push a product into
decline. Compact disks forced cassette tapes into decline
Firms do not need to be “held hostage” to the life-cycle in the prerecorded music industry in the 1980s, and now
curve. By positioning or repositioning their products digital devices have pushed CDs into decline.
in unexpected ways, firms can change how
customers mentally categorize them. Thus, firms are Products in the decline stage often consume a large
able to rescue products floundering in the maturity phase share of management time and financial resources
of their life cycles and return them to the growth phase. relative to their potential worth. Sales and profits decline.
Also, competitors may start drastically cutting their prices
Two positioning strategies that managers can use to to raise cash and remain solvent. The situation is further
affect consumers’ mental shifts are reverse positioning, aggravated by the liquidation of assets, including
which strips away “sacred” product attributes while adding inventory, of some of the competitors that have failed.
new ones, and breakaway positioning, which associates This further intensifies price competition.
the product with a radically different category.
In the decline stage, a firm’s strategic options become
Reverse Positioning dependent on the actions of rivals. If many competitors
leave the market, sales and profit opportunities increase.
This assumes that although customers may desire more On the other hand, prospects are limited if all competitors
than the baseline product, they don’t necessarily want an remain. If some competitors merge, their increased
endless list of features. Such companies make the market power may erode the opportunities for the
creative decision to step off the augmentation remaining players. Managers must carefully monitor the
treadmill and shed product attributes that the rest of actions and intentions of competitors before deciding on a
the industry considers sacred. Then, once a product is course of action.
returned to its baseline state, the stripped-down
product adds one or more carefully selected Four basic strategies are available in the decline phase:
attributes that would usually be found only in a highly maintaining, harvesting, exiting, or consolidating.
augmented product. Such an unconventional
combination of attributes allows the product to assume a Maintaining refers to keeping a product going without
new competitive position within the category and significantly reducing marketing support, technological
move backward from maturity into a growth position development, or other investments, in the hope that
on the life-cycle curve. competitors will eventually exit the market. Many offices,
for example, still use typewriters for filling out forms and
Breakaway Positioning other purposes that cannot be completed on a PC. In
some rural areas, rotary (or dial) telephones persist
As noted above, with reverse positioning, a product because of the older technology used in central switching
establishes a unique position in its category but offices. Thus, there may still be the potential for revenues
retains a clear category membership. However, with and profits.
breakaway positioning, a product escapes its category by
deliberately associating with a different one. Thus, Harvesting involves obtaining as much profit as possible
managers leverage the new category’s conventions to and requires that costs be reduced quickly. Managers
change both how products are consumed and with whom should consider the firm’s value-creating activities
they compete. Instead of merely seeing the breakaway and cut associated budgets. Value-chain activities to
product as simply an alternative to others in its category, consider are primary (e.g., operations, sales and
consumers perceive it as altogether different.
marketing) and support (e.g., procurement, technology A study of 260 mature businesses in need of a
development). The objective is to wring out as much profit turnaround identified three strategies used by successful
as possible. companies.

Exiting the market involves dropping the product from Asset and cost surgery. Very often, mature firms tend to
a firm’s portfolio. Since a residual core of consumers have assets that do not produce any returns. These
exist, eliminating it should be carefully considered. If the include real estate, buildings, etc. Outright sales or sale
firm’s exit involves product markets that affect important and leaseback free up considerable cash and improve
relationships with other product markets in the returns. Investment in new plants and equipment can be
corporation’s overall portfolio, an exit could have deferred. Firms in turnaround situations try to
repercussions for the whole corporation. For example, it aggressively cut administrative expenses and
may involve the loss of valuable brand names or human inventories and speed up collection of receivables.
capital with a broad variety of expertise in many value- Costs also can be reduced by outsourcing production of
creating activities such as marketing, technology, and various inputs for which market prices may be cheaper
operations. than in-house production costs.

Consolidation involves one firm acquiring at a Selective product and market pruning. Most mature or
reasonable price the best of the surviving firms in an declining firms have many product lines that are losing
industry. This enables firms to enhance market power money or are only marginally profitable. One strategy
and acquire valuable assets. One example of a is to discontinue such product lines and focus all
consolidation strategy took place in the defense industry resources on a few core profitable areas. For example,
in the early 1990s. As the cliché suggests, “peace broke in the early 1980s, faced with possible bankruptcy,
out” at the end of the Cold War and overall U.S. defense Chrysler Corporation sold off all its nonautomotive
spending levels plummeted. Many companies that make businesses as well as all its production facilities abroad.
up the defense industry saw more than 50 percent of their Focus on the North American market and identification of
market disappear. Only one-quarter of the 120,000 a profitable niche—namely, minivans—were keys to their
companies that once supplied the Department of Defense eventual successful turnaround.
still serve in that capacity; the others have shut down their
defense business or dissolved altogether. But one key Piecemeal productivity improvements. There are many
player, Lockheed Martin, became a dominant rival by ways in which a firm can eliminate costs and improve
pursuing an aggressive strategy of consolidation. During productivity. Although individually these are small gains,
the 1990s, it purchased 17 independent entities, including they cumulate over a period of time to substantial gains.
General Dynamics’ tactical aircraft and space systems Improving business processes by reengineering
divisions, GE Aerospace, Goodyear Aerospace, and them, benchmarking specific activities against
Honeywell ElectroOptics. These combinations enabled industry leaders, encouraging employee input to identify
Lockheed Martin to emerge as the top provider to three excess costs, increasing capacity utilization, and
governmental customers: the Department of Defense, the improving employee productivity lead to a significant
Department of Energy, and NASA. overall gain.

The introduction of new technologies and associated Software maker Intuit is a case of a quick but well-implemented
turnaround strategy. After stagnating and stumbling during the
products does not always mean that old technologies
dot-com boom, Intuit, which is known for its QuickBook and
quickly fade away. Research shows that in a number of TurboTax software, hired Stephen M. Bennett, a 22-year GE
cases, old technologies actually enjoy a very profitable veteran, in 1999. He immediately discontinued Intuit’s online
“last gasp.” Clearly, “last gasps” may not necessarily finance, insurance, and bill-paying operations that were losing
translate into longer term gains. money. Instead, he focused on software for small businesses
that employ less than 250 people. He also instituted a
Turnaround Strategies performance-based reward system that greatly improved
employee productivity. Within a few years, Intuit was once again
A turnaround strategy involves reversing performance making substantial profits and its stock was up 42 percent.
decline and reinvigorating growth toward profitability. Even when an industry is in overall decline, pockets of
A need for turnaround may occur at any stage in the life profitability remain. These are segments with customers who
cycle but is more likely to occur during maturity or decline. are relatively price insensitive. For example, the replacement
demand for vacuum tubes affords its manufacturers an
Most turnarounds require a firm to carefully analyze the opportunity to earn above normal returns although the product
external and internal environments. The external itself is technologically obsolete. Surprisingly, within declining
analysis leads to identification of market segments or industries, there may still be segments that are either stable or
customer groups that may still find the product growing. Although fountain pens ceased to be the writing
attractive. Internal analysis results in actions aimed at instrument of choice a long time ago, the fountain pen industry
reduced costs and higher efficiency. A firm needs to has successfully reconceptualized the product as a high margin
undertake a mix of both internally and externally oriented luxury item that signals accomplishment and success. In the
final analysis, every business has the potential for
actions to effect a turnaround. In effect, the cliché “you rejuvenation. But it takes creativity, persistence, and most
can’t shrink yourself to greatness” applies. of all a clear strategy to translate that potential into reality.