Overview
This lecture introduces the concept of competitive strategy (business-level strategy), focusing on the three generic strategies—cost leadership, differentiation, and focus—and their application across industry life cycle stages.
Components of Strategy
- Strategy has three parts: analysis, decisions (formulation), and actions (implementation).
- Competitive strategy is also known as business-level strategy and occurs at the business unit level.
Three Generic Competitive Strategies
- Firms can adopt overall cost leadership, differentiation, or focus strategies.
- Cost leadership aims for the lowest cost position through value chain management.
- Differentiation creates unique products/services perceived as valuable by customers, allowing premium pricing.
- Focus targets a specific segment or niche, with either a cost or differentiation angle.
Examples and ROI Comparisons
- Toyota and Walmart are examples of cost leaders; Nordstrom and Starbucks are differentiators.
- Lamborghini (luxury cars) and Patel Brothers (ethnic groceries) exemplify focus strategy.
- ROI for cost leadership and differentiation are similar; combining both successfully yields slightly higher ROI, but failure (“stuck in the middle”) results in poor performance.
Cost Leadership Strategy Details
- Involves strict cost and overhead control, experience curve effects, and economies of scale.
- Competitive parity: Must not lose comparability in differentiation aspects when pursuing cost leadership.
- Pitfalls: Over-focusing on few areas, easy imitation by rivals, and information-driven erosion of cost advantage.
Differentiation Strategy Details
- Achieved through unique features, brand, technology, customer service, or convenience.
- Benefits: Higher entry barriers, less threat from substitutes, customer loyalty.
- Pitfalls: Unvalued uniqueness, excessive differentiation or premiums, easy imitation, diluted brand, perception mismatches.
Focus Strategy Details
- Targets a narrow market (niche), tailoring strategy to specific segments.
- Can use cost leadership or differentiation within the chosen segment.
- Pitfalls: Erosion of niche advantages, competition from larger rivals, becoming overly specialized.
Combination Strategies
- Firms can combine cost leadership and differentiation via flexible manufacturing, profit pool exploitation, or IT coordination.
- Risks: Failing at both leads to mediocre performance; underestimating coordination and revenue sources is costly.
Industry Life Cycle & Strategy Fit
- Industry stages: Introduction, Growth, Maturity, Decline.
- Differentiation dominates in early stages; cost leadership and focus become more relevant in maturity and decline.
- Strategic objectives shift according to industry life cycle phase.
Key Terms & Definitions
- Competitive Parity — Maintaining comparability in key areas not targeted by primary strategy.
- Experience Curve — Costs decrease as cumulative production experience increases.
- Focus Strategy — Targeting a narrow industry segment with tailored offerings.
- Industry Life Cycle — Introduction, growth, maturity, and decline phases of an industry.
- Turnaround Strategy — Corporate-level actions to reverse firm decline, not a competitive (business-level) strategy.
Action Items / Next Steps
- Review examples of strategies and pitfalls discussed in the textbook.
- Read about internet applications for cost leadership, differentiation, and focus strategies.
- Prepare for the next lecture on corporate strategy.