A successful blue ocean strategy requires

Learning Objectives

After reading this chapter, you should have a good understanding of:

5-1 The central role of competitive advantage in the study of strategic management and the three generic strategies: overall cost leadership, differentiation, and focus.

5-2 How the successful attainment of generic strategies can improve the firm’s relative power vis-à-vis the five forces that determine an industry’s average profitability.

5-3 The pitfalls managers must avoid in striving to attain generic strategies.

5-4 How firms can effectively combine the generic strategies of overall cost leadership and differentiation.

5-5 What factors determine the sustainability of a firm’s competitive advantage.

5-6 The importance of considering the industry life cycle to determine a firm’s business-level strategy and its relative emphasis on functional area strategies and value-creating activities.

5-7 The need for turnaround strategies that enable a firm to reposition its competitive position in an industry.

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The Central Role of Competitive Advantage

Consider . . .

In order to create and sustain a competitive advantage, companies need to stay focused on their customers’ evolving wants and needs and not sacrifice their strategic position as they mature and the market around them evolves.

They also have to have a strategy…

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Discussion Question 1: What decisions did A&P make when it was successful that led to its later failure?

A&P failed to reinvest in its business to sustain either its differentiation or its cost leadership.

Instead of reinvesting to continue to refresh the interior of its stores, expand its stores to carry more products, or enhance the service level it offered, A&P paid out large dividends to its shareholders.

In short, A&P fell prey to a common attitude of a market leader. It got complacent. This left an opportunity for aggressive competitors to come in and take A&P’s business.

As a result, A&P lost its differentiation advantage.

As other competitors grew larger and larger, A&P also lost its scale-based cost advantage.

By the time the company realized its mistakes, it no longer generated sufficient profits to invest enough to engineer a turnaround.

Discussion Question 3: What firms do you see today that face similar challenges? How should these firms respond to and act to reinforce their strategic positions?

Mainline supermarkets - face the challenge of Aldi, Walmart, and Amazon—with its Whole Foods subsidiary.

Clothing retailers – Abercrombie &Fitch, department stores, JCPenney.

Auto manufacturers - upstart competitors, such as Tesla, and the looming threat of a shift from car ownership to auto sharing and autonomous car services.

Challenge students to consider how the market is changing, what the capabilities of competitors are, and a clear understanding of what is the distinct strategic position of the focal firm. They should show they understand the specific form of differentiation the firm is pursuing or the foundation of its cost leadership and evaluate whether this is the correct path for the firm to continue to pursue, what the alternative path might be, and the actions to take to develop or reinforce this strategic position.

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Question

The primary aim of strategic management at the business level is:

A – maximizing risk to return trade-offs through diversification

B – maximizing differentiation of products and/or services

C – achieving competitive advantage

D – achieving a low-cost position

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3

Sustaining a Competitive Advantage

Business-level strategies require a choice.

How to overcome the five forces and achieve competitive advantage?

Suggestion – Use Porter’s three generic strategies.

Overall cost leadership

Differentiation

Focus

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Business-level strategy is a strategy designed for a firm or a division of the firm that competes within a single business. Generic strategies = basic types of business level strategies based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness).

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Three Generic Strategies

Exhibit 5.1 Three Generic Strategies

Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors. Michael E Porter, 1980, 1998, Free Press.

Jump to Appendix 1 for long image description.

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The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Generic strategies are plotted on two dimensions: competitive advantage and market served.