Within the strategic management framework, an organization must define and continue to

improve its generic, business-level strategy. A generic, business-level strategy is also

called its generic competitive strategy, because it defines how a firm competes
head-to-head against similar products and services in the marketplace.

According to Michael Porter, a firm may pursue one of five generic/competitive

business-level strategies. These are broad cost leadership, broad differentiation, focused
cost leadership, focused differentiation, and best cost strategies

There are two primary decisions in a generic business strategy. Will the intent of the
strategy be on a broad or focused target audience, and simultaneously, does the firm
organize around a cost or differentiation approach? If selecting a broad cost leadership or
broad differentiation strategy, the target market for the product or service is broad,
meaning most people who buy within that industry. If the strategy is focused, that target
market is narrow, a niche market, and not meant for most people in the industry. A
strategy of broad cost leadership offers the lowest price in the market for that product or
service. It appeals particularly to price sensitive customers. Firms pursuing a broad
differentiation strategy offer something unique that differentiates their product or service
from others. Typically this uniqueness adds cost and value to the product or service,
allowing the company to charge more. If the strategy is focused cost leadership, then the
firm attempts to provide the lowest cost to a narrow, niche target market. Focused
differentiation provides unique or differentiated products or services to a narrow, niche
target market. The fifth generic business-level strategy is called best cost, where the firm
attempts to offer a hybrid of both lower cost and differentiated products or services,
combining the two basic strategies. A firm pursuing this strategy must be careful to
perform both strategies well, or risk not performing either well, and therefore becoming
“stuck in the middle,” and losing customers to the competition.

Once a firm establishes its overall generic business-level strategy, the strategic
management process helps the firm to continuously improve upon that strategy. The
organizational performance, external, and internal assessments, and the development of
the strategic issue(s) through the SWOT analysis are then used to plot strategies for the
firm to achieve its vision through its business-level strategy.
Business-level strategy addresses the question of how a firm will compete in a particular
industry

The solution is to think about business-level strategy in terms of generic strategies. A

generic business- level strategy is a general way of positioning a firm within an industry.
Focusing on generic strategies allows executives to concentrate on the core elements of
firms’ business-level strategies.

According to Porter, two competitive dimensions are the keys to business-level strategy.
The first dimension is a firm’s source of competitive advantage. This dimension involves
whether a firm tries to gain an edge on rivals by keeping costs down or by offering
something unique in the market. The second dimension is a firms’ scope of operations.
This dimension involves whether a firm tries to target customers in general or whether it
seeks to attract just a narrow segment of customers

Understanding the differences that underlie generic strategies is important because

different generic strategies offer different value propositions to customers. A firm
focusing on cost leadership will have a different value chain configuration than a firm
whose strategy focuses on differentiation. For example, marketing and sales for a
differentiation strategy often requires extensive effort while some firms that follow cost
leadership such as Waffle House are successful with limited marketing efforts.
Examining business-level strategy in terms of generic strategies has limitations. Firms
that follow a particular generic strategy tend to share certain features. (Example walmart
pays alot for advertising, Waffle house does not pay alot for advertising)

KEY TAKEAWAY
Business-level strategies examine how firms compete in a given industry. Firms derive
such strategies by executives making decisions about whether their source of competitive
advantage is based on price or differentiation and whether their scope of operations
targets a broad or narrow market.

Firms that compete based on price and target a broad target market are following a broad
cost leadership strategy.

Example: Despite its name, Dunkin’ Donuts makes more money selling inexpensive
coffee than it does from selling donuts. The coffee is often advertised as costing under a
dollar, making Dunkin’ Donuts a low-priced alternative to Starbucks.

A firm following a cost leadership strategy offers products or services with acceptable
quality and features to a broad set of customers at a low price. Super Shoes, for example,
sells name-brand shoes at inexpensive prices. Little Debbie snack cakes offer another
example.

Cost leaders tend to share some important characteristics. The ability to charge low prices
and still make a profit is challenging. Cost leaders manage to do so by emphasizing
efficiency.

Many cost leaders rely on economies of scale to achieve efficiency. Economies of scale
are created when the costs of offering goods and services decreases as a firm is able to
sell more items. This occurs because expenses are distributed across a greater number of
items.

Cost leaders are often large companies, which allows them to demand price concessions
from their suppliers

Cost leadership strategy helps create barriers to entry that protect the firm—and its
existing rivals—from new competition.
KEY TAKEAWAY
Cost leadership is an effective business-level strategy to the extent that a firm offers low
prices, provides satisfactory quality, and attracts enough customers to be profitable.

Firms that compete on uniqueness and target a broad market are following a
differentiation strategy

Example: FedEx’s former slogan “When it absolutely, positively has to be there

overnight” highlights the commitment to very speedy delivery that differentiates them
from competitors such as UPS and the US Postal Service.

A firm following a differentiation strategy attempts to convince customers to pay a

premium price for its goods or services by providing unique and desirable features. The
message that such a firm conveys to customers is that you will pay a little bit more for
our offerings, but you will receive a good value overall because our offerings provide
something special.

In terms of the two competitive dimensions described by Michael Porter, using a

differentiation strategy means that a firm is competing based on uniqueness rather than
price and is seeking to attract a broad market.

Successful use of a differentiation strategy depends on not only offering unique features
but also communicating the value of these features to potential customers. As a result,
advertising in general and brand building in particular are important to this strategy.

FedEx and Nike are two other companies that have done well at communicating to
customers that they provide differentiated offerings. FedEx’s former slogan “When it
absolutely, positively has to be there overnight” highlights the commitment to speedy
delivery that sets the firm apart from competitors such as UPS and the US Postal Service.
Nike differentiates its athletic shoes and apparel through its iconic “swoosh” logo as well
as an intense emphasis on product innovation through research and development.

A key advantage is that effective differentiation creates an ability to obtain premium

prices from customers. This enables a firm to enjoy strong profit margins. (Coca-Cola
33% profit margin)
Differentiation strategy also creates benefits relative to potential new entrants.
Specifically, the brand loyalty that customers feel to a differentiated product makes it
difficult for a new entrant to lure these customers to adopt its product.

The big risk when using a differentiation strategy is that customers will not be willing to
pay extra to obtain the unique features that a firm is trying to build its strategy around.

In some cases, customers may simply prefer a cheaper alternative. For example, products
that imitate the look and feel of offerings from Ray-Ban, Gucci, and Patagonia are
attractive to many value-conscious consumers. Firms such as these must work hard at
product development and marketing to ensure that enough customers are willing to pay a
premium for their goods rather than settling for knockoffs.

KEY TAKEAWAY
Differentiation can be an effective business-level strategy to the extent that a firm offers
unique features that convince customers to pay a premium for their goods and services.
As with other business-level strategies, there are advantages and disadvantages in
pursuing a differentiation strategy.

Companies that use a cost leadership strategy and those that use a differentiation strategy
share one important characteristic: both groups try to be attractive to customers in
general. These efforts to appeal to broad markets can be contrasted with strategies that
involve targeting a relatively narrow niche of potential customers. These latter strategies
are known as focus strategies

A focused cost leadership strategy requires competing based on price to target a narrow
market. A firm that follows this strategy does not necessarily charge the lowest prices in
the industry. Instead, it charges low prices relative to other firms that compete within the
target market. Redbox, for example, uses vending machines placed outside grocery stores
and other retail outlets to rent DVDs of movies for $1. There are ways to view movies
even cheaper, such as through the flat-fee streaming video subscriptions offered by
Netflix. But among firms that rent actual DVDs, Redbox offers unparalleled levels of low
price and high convenience.

Firms that compete based on price and target a narrow market are following a focused
cost leadership strategy.
Another important point is that the nature of the narrow target market varies across firms
that use a focused cost leadership strategy. In some cases, the target market is defined by
demographics. Claire’s, for example, seeks to appeal to young women by selling
inexpensive jewelry, accessories, and ear piercings. Claire’s use of a focused cost
leadership strategy has been very successful.

the target market is defined by the sales channel used to reach customers. Most pizza
shops offer sit-down service, delivery, or both. In contrast, Papa Murphy’s sells pizzas
that customers cook at home. Because these inexpensive pizzas are baked at home rather
than in the store, the law allows Papa Murphy’s to accept food stamps as payment. This
allows Papa Murphy’s to attract customers that might not otherwise be able to afford a
prepared pizza.

A focused differentiation strategy requires offering unique features that fulfill the
demands of a narrow market. As with a focused low-cost strategy, narrow markets are
defined in different ways in different settings. Some firms using a focused differentiation
strategy concentrate their efforts on a particular sales channel, such as selling over the
internet only. Others target particular demographic groups. One example is Breezes
Resorts, a company that caters to couples without children. The firm operates seven
tropical resorts where vacationers are guaranteed that they will not be annoyed by loud
and disruptive children.

Firms that compete based on uniqueness and target a narrow market are following a
focused differentiation strategy.

Example: The dedication of Mercedes-Benz to cutting-edge technology, styling, and

safety innovations has made the firm’s vehicles prized by those who are wealthy enough
to afford them.

While a differentiation strategy involves offering unique features that appeal to a variety
of customers, the need to satisfy the desires of a narrow market means that the pursuit of
uniqueness is often taken to the proverbial “next level” by firms using a focused
differentiation strategy. Thus the unique features provided by firms following a focused
differentiation strategy are often specialized.
In the case of focus differentiation, one advantage is that very high prices can be charged.
Indeed, these firms often price their wares far above what is charged by firms following a
differentiation strategy.

A second advantage of using a focus strategy is that firms often develop tremendous
expertise about the goods and services that they offer. In markets such as camping
equipment where product knowledge is important, rivals and new entrants may find it
difficult to compete with firms following a focus strategy.

In terms of disadvantages, the limited demand available within a niche can cause
problems. First, a firm could find its growth ambitions stymied. Once its target market is
being well served, expansion to other markets might be the only way to expand, and this
often requires developing a new set of skills. Also, the niche could disappear or be taken
over by larger competitors. Many gun stores have struggled and even gone out of
business since Walmart and sporting goods stores such as Academy Sports and Bass Pro
Shops have started carrying an impressive array of firearms.

damaging attacks may come not only from larger firms but also from smaller ones that
adopt an even narrower focus. A sporting goods store that sells camping, hiking,
kayaking, and skiing goods, for example, might lose business to a store that focuses
solely on ski apparel because the latter can provide more guidance about how skiers can
stay warm and avoid broken bones.

KEY TAKEAWAY
Focus strategies can be effective business-level strategies to the extent that a firm can
match their goods and services to specific niche markets. As with the other business-level
strategies, there are advantages and disadvantages to focus strategies.

Firms that charge relatively low prices and offer substantial differentiation are following
a best-cost strategy. This strategy is difficult to execute, but it is also potentially very
rewarding.

Example: Southwest Airlines provides low cost flights to vacation destinations such as
San Antonio, San Diego, and Orlando. While many airlines make passengers feel like
cattle loaded onto a truck, Southwest creates fun by, for example, getting children excited
about visiting Sea World when they see this custom Shamu plane design.
This strategy is difficult to execute in part because creating unique features and
communicating to customers why these features are useful generally raises a firm’s costs
of doing business. Product development and advertising can both be quite expensive.
However, firms that manage to implement an effective best-cost strategy are often very
successful.

Many firms would like to use a best cost strategy but struggle to meet the strategy’s dual
requirements of charging low prices and providing differentiation features. One way to
help make the best cost strategy a reality is to use a business model that slashes fixed
costs. [Link], for example, can charge low prices in part because it does not have
to absorb the overhead involved in operating stores. Similarly, some talented chefs are
pursuing a best cost strategy by operating food trucks and thereby avoiding the overhead
required to run a restaurant such as rent and utilities.

Example of Driving toward a Best-Cost Strategy by Reducing Overhead:

For about the same price as a Subway or Jimmy John’s sandwich, Counter Culture in
Austin, Texas, provides vegan offerings such as their Garbanzo “Tuna” sandwich.

Best cost advantage: Best cost can attract both the cost-conscientious buyer and one
looking for better quality than the low cost leader.

Best cost disadvantage: Neither achieving a low enough price nor sufficient
differentiation can result in accomplishing neither, and getting “stuck in the middle.”

KEY TAKEAWAY
A best-cost strategy can be an effective business-level strategy to the extent that a firm
offers differentiated goods and services at relatively low prices.

A firm is said to be stuck in the middle if it does not offer features that are unique
enough to convince customers to buy its offerings and its prices are too high to
effectively compete based on price. Firms that are stuck in the middle generally perform
poorly because they lack a clear market or competitive pricing.

Example: Sears and their famous catalog once dominated US retailing, but the failure to
cultivate customers among newer generations and prices that are higher than those of
rivals have severely wounded the company. Sears filed for bankruptcy in 2018.
Some firms fail to effectively pursue one of the generic strategies. A firm is said to be
stuck in the middle if it does not offer features that are unique enough to convince
customers to buy its offerings, and its prices are too high to compete effectively based on
price. Arby’s appears to be a good example. Arby’s signature roast beef sandwiches are
neither cheaper than other fast-food sandwiches nor standouts in taste. Firms that are
stuck in the middle generally perform poorly because they lack a clear market or
competitive pricing.

A firm’s business-level strategy should not involve trying to serve the varied needs of
different segments of customers in an industry. No firm could possibly pull this off.

In many cases, firms become stuck in the middle not because executives fail to arrive at a
well-defined strategy but because firms are simply outmaneuvered by their rivals. (circuit
city vs best buy. Best buy had better deals and customer service than circuit city)

KEY TAKEAWAY
When executing a business-level strategy, a firm must not become stuck in the middle
between viable generic business-level strategies by neither offering unique features nor
competitive pricing.

Conclusion
This chapter explains generic business-level strategies that executives select to keep their
firms competitive. Executives must select their firm’s source of competitive advantage by
choosing to compete based on low-cost versus more expensive features that differentiate
their firm from competitors. In addition, targeting either a narrow or broad market helps
firms further understand their customer base. Based on these choices, firms will follow
broad cost leadership, broad differentiation, focused cost leadership, or focused
differentiation strategies. Another potentially viable business strategy, best cost, exists
when firms offer relatively low prices while still managing to differentiate their goods or
services on some important value-added aspects. All firms pursuing a best cost strategy
can fall victim to being “stuck in the middle” by not offering unique features or
competitive prices.
Chapter 7

A firm’s philosophy toward innovation greatly impacts the business-level/competitive

strategies that it pursues. Having an entrepreneurial orientation stimulates a firm toward
innovation, improving its products and services and launching new product lines.

A famous Nike slogan encourages people to “just do it!” For people and organizations
that have developed an entrepreneurial orientation (EO), “just do it!” is a way of life.
While often associated with starting new ventures, an EO can be very valuable to
established organizations as well.

Entrepreneurship within an organization is called intrapreneurship. Companies often

grow by offering new services or launching new products. Rather than acquire another
company that provides that product or service, they develop it themselves. This is a
method of strategy implementation called internal development. To maximize
opportunities for intrapreneurship, companies need employees with a high entrepreneurial
orientation.

Entrepreneurial orientation (EO) is a key concept when executives are crafting

strategies in the hopes of doing something new and exploiting opportunities that other
organizations cannot exploit. EO refers to the processes, practices, and decision-making
styles of organizations that act entrepreneurially. Any organization’s level of EO can be
understood by examining how it stacks up relative to three dimensions: (1)
innovativeness, (2) proactiveness, (3) and risk taking. These dimensions are also relevant
to individuals.

Entrepreneurial orientation (EO) is measured at both the organizational and the individual
levels. It is important to note that EO is not only related to high tech start-ups. Starting a
lawn care business or a beauty shop are very valid and necessary entrepreneurial
ventures, and will have a better chance of success if an entrepreneur possesses a higher
EO.

Innovativeness - is the tendency to pursue creativity and experimentation. Some

innovations build on existing skills to create incremental improvements, while more
radical innovations require brand-new skills and may make existing skills obsolete. Either
way, innovativeness is aimed at developing new products, services, and processes. Those
organizations that are successful in their innovation efforts tend to enjoy stronger
performance than those that do not.

FedEx has introduced its Smart Package, which allows both shippers and recipients to
monitor package location, temperature, and humidity.

Proactiveness - is the tendency to anticipate and act on future needs rather than reacting
to events after they unfold. A proactive organization is one that adopts an
opportunity-seeking perspective. Such organizations act in advance of shifting market
demand and are often either the first to enter new markets or “fast followers” that
improve on the initial efforts of first movers.

Risk taking - refers to the tendency to engage in bold rather than cautious actions.
Starbucks, for example, made a risky move when it introduced a new instant coffee called
VIA Ready Brew. Instant coffee has long been viewed by many coffee drinkers as a bland
drink, but Starbucks decided that the opportunity to distribute its product in a different
format was worth the risk of associating its brand name with instant coffee.

Steps can be taken by executives to develop a stronger entrepreneurial orientation

throughout an organization and by individuals to become more entrepreneurial
themselves.

For executives, it is important to design organizational systems and policies to reflect the
three dimensions of EO. As an example, how an organization’s compensation systems
encourage or discourage these dimensions should be considered. Is taking sensible risks
rewarded through raises and bonuses, regardless of whether the risks pay off, for
example, or does the compensation system penalize risk taking?

Examination of some performance measures can assist executives in assessing EO within

their organizations. To understand how the organization develops and reinforces
autonomy, for example, top executives can administer employee satisfaction surveys and
monitor employee turnover rates.

Individuals should consider whether their attitudes and behaviors are consistent with the
three dimensions of EO. Is an employee making decisions that focus on competitors?
Does the employee provide executives with new ideas for products or processes that
might create value for the organization? Is the employee making proactive as opposed to
reactive decisions? Each of these questions will aid employees in understanding how they
can help to support EO within their organizations.

KEY TAKEAWAY
Building an entrepreneurial orientation can be valuable to organizations and individuals
alike in identifying and seizing new opportunities. Entrepreneurial orientation consists of
three dimensions: (1) innovativeness, (2) proactiveness, and (3) risk taking.

Innovation can be a key strategy to stay ahead of the competition. Firms who sit still,
perhaps satisfied with their success, will find themselves outsmarted and left behind, with
the competition winning over their customers. An innovation strategy coupled with an
entrepreneurial orientation will help keep customers buying.

It is the innovation strategy that propels the organization forward.

It is best to win without fighting. – Sun-Tzu, The Art of War

Blue ocean strategy - involves creating a new, untapped market rather than competing
with rivals in an existing market. This strategy follows the approach recommended by the
ancient master of strategy Sun-Tzu in the quote above. Instead of trying to outmaneuver
its competition, a firm using a blue ocean strategy tries to make the competition
irrelevant.

Firms that create blue oceans experience a temporary competitive advantage. How long
“temporary competitive advantage lasts” in a blue ocean strategy depends on the
particular combination of internal and external factors that create the opportunity in the
first place. Needless to say, the more successful a company is with a blue ocean strategy,
the more attention they will receive from potential competitors who want to get into a
position to benefit from those same advantages.

It’s a big ocean out there! When pursuing a blue ocean strategy, executives try to create
and exploit vast untapped markets rather than competing directly with rivals.

Example of blue ocean strategy:

At a time when cars were only for the wealthy, Henry Ford envisioned cars that were
affordable to the typical American. Ford priced his vehicles so that his assembly line
workers could afford them.
KEY TAKEAWAY
Firms must continually innovate to stay ahead of the competition. Blue ocean strategy is
one way that innovation can capture new markets.

The idea of first mover advantage borrows from military strategy. For example,
Confederate general Nathan Beford Forrest’s attack plan was simply stated as “git thar
fustest with the mostest.”

When confronted by a poisonous snake, should you strike first or wait for the serpent to
make a move? Each option has advantages and disadvantages. In business, being a first
mover might allow a firm to “rattle its rivals, but a first move might also attract the
“venom” of skeptical customers

First Move Successes: At a time when using most personal computers required
memorizing obscure commands, Apple pioneered a user-friendly interface. The firm
gained a reputation as an innovator that persists today.

First Move Failures: Not all of Apple’s first moves were triumphs. The firm’s disastrous
attempt to pioneer the personal digital assistant market through its “Newton” created a
loss of around one-hundred million dollars.

Certain benefits are available to a first mover into a market that will not be available to
later entrants. A first-mover advantage exists when making the initial move into a market
allows a firm to establish a dominant position that other firms struggle to overcome.

On the other hand, a first mover cannot be sure that customers will embrace its offering,
making a first move inherently risky. Apple’s attempt to pioneer the personal digital
assistant market, through its Newton, was a financial disaster. The first mover also bears
the costs of developing the product and educating customers. Others may learn from the
first mover’s successes and failures, allowing them to cheaply copy or improve the
product. Sony, Samsung, and others have built on Apple’s knowledge and creation of
Airpods to offer competing products. In many industries, knowledge diffusion and
public-information requirements make such imitation increasingly easy.

One caution is that first movers must be willing to commit sufficient resources to follow
through on their pioneering efforts.
Perhaps the best question that executives can ask themselves when deciding whether to
be a first mover is, how will this move provide my firm with a sustainable competitive
advantage? First moves that build on strategic resources such as patented technology are
difficult for rivals to imitate and thus are likely to succeed (Pzifzer with viagra)

Innovation can be classified into four types:

1. Incremental Innovation
2. Disruptive Innovation
3. Architectural Innovation
4. Radical Innovation

The type of innovation is dependent on two factors:

1. Market – does the innovation create a new market, or address the existing market?
2. Technology – does the innovation use a new technology or an existing technology?

Incremental innovation can be described as making improvements on an existing

product or service. The improvements are based on using existing technology and are
directed at the existing market. In the automobile industry, the improvements made each
year to the newest model of car are incremental innovations. No new markets are formed,
and existing technology is used to make the car better.

Incremental innovation occurs when the innovation uses existing technology to improve a
product or service that addresses the existing market.

Some firms have the opportunity to shake up their industry by introducing a disruptive
innovation—an innovation that conflicts with, and threatens to replace, traditional
approaches to competing within an industry. Disruptive innovation occurs when a new
product or service engages the existing market with a new technology. The iPad has
proved to be a disruptive innovation since its introduction by Apple in 2010. Many
individuals quickly abandoned clunky laptop computers in favor of the sleek tablet
format offered by the iPad. And as a first mover, Apple was able to claim a large share of
the market.

Disruptive innovations occur when firms introduce offerings that are so unique and
superior that they threaten to replace traditional approaches. Existing markets are
disrupted by new technology. Sometimes a disruption is so significant that it may create a
“blue ocean” by finding a new market while disrupting an existing one, but this is not
typically the case.

Architectural innovation - occurs when new products or services use existing

technology to create new markets and/or new consumers that did not purchase that item
before. For example, the smart watch used existing cell phone technology and was
repackaged into a watch. This opened up a new market of purchasers by repackaging an
existing technology. Typically, firms alter the architecture of the product to create a new
product that opens up sales to new markets.

Firms can innovate by using and adapting existing technology to create new products or
services that address new markets and consumers. This type of innovation is called
Architectural Innovation, since the architecture of a product is changed to create a new
product to reach new markets.

Example: Peloton, maker of home exercise bicycles, packages the already existent
bicycle, internet, and communications technologies to create new consumers who
otherwise would not buy an exercise bike.

When new products or services are developed using new technology that open up new
markets, the result is called radical innovation. The airplane is a good example of a
radical innovation. It used an entirely new aeronautical technology to open up a whole
new market for people traveling. Traveling across the country was unthinkable for most
people, when it would take weeks to go from New York to San Francisco by car or train.

Innovation that uses new technology to reach new consumers is radical innovation. Firms
who are successful with a new product of service using radical innovation may then
employ a strategy of incremental innovation to continually improve the product or service
and generate more sales.

Footholds - are useful for rock climbers looking for sure footing to ascend a difficult
mountain, as well as firms hoping to gain positions in new markets. In business, a
foothold is a small position that a firm intentionally establishes within a market in which
it does not yet compete.

Foothold - is a small position that a firm intentionally establishes within a market in

which it does not yet compete. Swedish furniture seller IKEA is a firm that relies on
footholds. When IKEA enters a new country, it opens just one store. This store is then
used as a showcase to establish IKEA’s brand. Once IKEA gains brand recognition in a
country, more stores are established.

KEY TAKEAWAY
•Being the first mover can provide a firm a competitive advantage, but competitors who
wait may be the ultimate winners.
• There are four types of innovation that firms employ to increase their strength in the
marketplace.

When innovation creates a new product, it typically goes through four stages within the
marketplace. This is true whether it is a high-tech product like a new video game system
or a more mundane product like a laundry detergent. The four stages are:

1. Introduction: The product is launched, with the hopes that it catches on. Sales are low.

2. Growth: The product catches on, and sales increase with time. Competitors jump in,
but the rivalry among competitors is not really strong yet, and there are plenty of sales for
all.

3. Maturity: Sales begin to level out, growth slows, and competition increases. Shake-out
occurs, with some competitors leaving the market or being acquired by others.

4. Decline: Sales start declining. More consolidation occurs, with firms looking for exit
strategies. A few firms remain.

Figure 7.5 illustrates these four stages over time. To prevent the decline of their product
after the maturity stage, firms will often “relaunch” their product with a new and
improved model. Innovation again plays a role, making improvements to the product, so
that consumers will purchase the latest model. Prime examples of incremental innovation
strategy are Apple’s iPhone and car manufacturers, such as Ford and Toyota. In essence,
the new model starts the product life cycle all over again.

Profits generated during the product life cycle also usually follow a traditional pattern.
During the research and development phase of the product, the firm is investing funds
into the product, generating a negative profit. Losses continue during the introduction
phase, when sales are low and marketing expenses are high. Firms tend to recoup their
investment in R&D and marketing during the growth phase, with maximum profits at the
beginning of the maturity phase. Once competition heats up in the maturity phase, price
competition kicks in, and lower prices mean lower profits.

Another phenomenon that occurs in the innovation process with new technology is called
“crossing the chasm.” When a new technology is launched, often there are technology
innovators/enthusiasts who will purchase the new technology to check it out. A few
more, called early adopters, will also want to try out the new product. But how does the
firm get the product into the mainstream market? How do they get it to catch on? This
can often be challenging. Can the product make the leap to the mainstream? This is called
“crossing the chasm,” and often requires a different marketing approach.

Figure 7.6 illustrates this concept, breaking down the market into customer segments.
Innovators and early adopters make up about 15% of the market. Firms must determine a
business strategy for each segment of the market. If they cannot convince the early
majority to buy their product, the product fails.

Where is the electric car in this technology adoption life cycle? The purchase of electric
cars has certainly been growing. Have they crossed the chasm? In 2019, approximately
2.2% of all car sales were electric plug-in vehicles. Electric vehicles still need to cross the
chasm. The lack of charging stations across the nation and concern for running out of
battery are limiting factors preventing the electric vehicle from selling to the early
majority.

Franklin Roosevelt once quipped, “Competition has been shown to be useful up to a

certain point and no further, but cooperation, which is the thing we must strive for today,
begins where competition leaves off.

In addition to competitive moves, firms can benefit from cooperating with one another.
Cooperative moves such as forming joint ventures and strategic alliances may allow firms
to enjoy successes that might not otherwise be reached. This is because cooperation
enables firms to share rather than duplicate resources and to learn from one another’s
strengths. Firms that enter cooperative relationships take on risks, however, including the
loss of control over operations, possible transfer of valuable secrets to other firms, and
possibly being taken advantage of by partners.
Joint venture - is a cooperative arrangement that involves two or more organizations
with each contributing to the creation of a new entity. The partners in a joint venture
share decision-making authority, control of the operation, and any profits that the joint
venture earns.

Sometimes two firms create a joint venture to deal with a shared opportunity

In other cases, a joint venture is designed to counter a shared threat.

Strategic alliance - is a cooperative arrangement between two or more organizations that

does not involve the creation of a new entity. For example, Twitter formed a strategic
alliance with Yahoo! Japan. The alliance involved relevant Tweets appearing within
various functions offered by Yahoo! Japan. The alliance simply involves the two firms
collaborating through a contractual relationship as opposed to creating a new entity
together.

Mergers - Two firms decide to combine into one entity, often gaining strength in the
market. The merger of T-Mobile and Sprint is a prime example. As the number three and
four players in the wireless communications industry, combining forces makes the new
firm a much stronger competitor against AT&T and Verizon. Sometimes both firms’
identities remain in the name of the new company, such as with the merger of Exxon and
Mobil oil companies to ExxonMobil. At other times, only one of the firm’s names
remains, or a new name is selected for the merged companies.

Acquisitions - are usually done by the larger firm acquiring the smaller firm. The end
result is basically the same, with two companies combining into one. Sometimes the
acquired firm is absorbed into the acquiring company, but sometime it retains its identity.
Besides combining the strengths of both organizations with the intent of having a stronger
performing company, mergers and acquisitions reduce the number of competitors in the
industry.

Another method to expand a firm is through internal development. If a firm wants to

add a new product or service line, rather than acquire that expertise by buying a company,
the firm can develop that capability themselves. Although this is more of a competitive
rather than a cooperative move, this is where a firm’s strength of entrepreneurial
orientation (EO) comes into play, and when intrapreneurship is important. Instead of
acquiring Fitbit, Google could have developed this wearable technology internally by
hiring those with the expertise and paying for the research and development for product
development to enter this market.

KEY TAKEAWAY
• New products and services typically follow a predictable product life cycle, and must be
able to “cross the chasm” to attract buyers beyond the early adopters.
• Sometimes it is advantageous for a firm to make a cooperative move with a competitor,
with strategies such as a joint venture, strategic alliance, merger, or acquisition. Internal
development is also a method to add innovative capability.

Executives in many markets must cope with a rapid-fire barrage of attacks from rivals,
such as head-to-head advertising campaigns, price cuts, and attempts to grab key
customers. If a firm is going to respond to a competitor’s move, doing so quickly is
important. If there is a long delay between an attack and a response, this generally
provides the attacker with an edge. For example, PepsiCo made the mistake of waiting
fifteen months to copy Coca-Cola’s introduction of Vanilla Coke. In the interim, Vanilla
Coke carved out a significant market niche.

In contrast, fast responses tend to prevent such an edge.

Multi-point competition adds complexity to decisions about whether to respond to a

rival’s moves. With multi- point competition, a firm faces the same rival in more than one
market.

If rivals are able to establish mutual forbearance, then multi-point competition can help
them be successful. Mutual forbearance occurs when rivals do not act aggressively
because each recognizes that the other can retaliate in multiple markets. (United Airlines
wanted to enter into southwest market, but southwest threatened to perform in their
market and United Airlines called it off)

Fighting brand - is a lower-end brand that a firm introduces to try to protect the firm’s
market share without damaging the firm’s existing brands. In the late 1980s, General
Motors (GM) was troubled by the extent to which the sales of small, inexpensive
Japanese cars were growing in the United States. GM wanted to recapture lost sales, but
it did not want to harm its existing brands, such as Chevrolet, Buick, and Cadillac, by
putting their names on low-end cars. GM’s solution was to sell small, inexpensive cars
under a new brand: Geo.
Despite these missteps, the use of fighting brands is a time-tested competitive move.

Co-location occurs when goods and services offered under different brands are located
close to one another. In many cities, for example, theaters and art galleries are clustered
together in one neighborhood. Auto malls that contain several different car dealerships
are found in many areas. Restaurants and hotels are often located near one another as
well. “Big Box Stores” like Target. Staples, Best Buy, Lowes, etc., are almost always
found clustered together with other retailers. By providing customers with a variety of
choices, a set of co-located firms can attract a bigger set of customers collectively than
the sum that could be attracted to individual locations. If a desired play is sold out, a
restaurant overcrowded, or a hotel overbooked, many customers simply patronize another
firm in the area.

Co-opetition - competition and cooperation are usually viewed as separate processes, the
concept of co-opetition highlights a complex interaction that is becoming increasingly
popular in many industries.

In their book titled, not surprisingly, Co-opetition, A. M. Brandenberger and B. J.

Nalebuff suggest that cooperation is generally best suited for “creating a pie,” while
competition is best suited for “dividing it up”. In other words, firms tend to cooperate in
activities located far in the value chain from customers, while competition generally
occurs close to customers.

KEY TAKEAWAY - Cooperating with other firms is sometimes a more lucrative and
beneficial approach than directly attacking competing firms.

CONCLUSION
This chapter explains how innovation impacts strategy development. An entrepreneurial
orientation helps a firm develop and implement new innovations. Being the first mover
can present advantages, but is not without the risk of competitors learning from the first
mover and eventually beating them. Executives may also choose a more conservative
route by establishing a foothold within an area that can serve as a launching point or by
avoiding existing competitors overall by using a blue ocean strategy. There are four types
of innovation: incremental, disruptive, architectural, and radical. New products typically
follow a predictable product life cycle with four stages: introduction, growth, maturity,
and decline. Firms often use incremental innovation to re- launch products with improved
features, starting the product life cycle over again. New products and services must
“cross the chasm” to get them into the mainstream. Firms may cooperate with
competitors through joint ventures, strategic alliances, mergers, and acquisitions, or
through co-location and co-opetition. Executives may also react to competitive attacks by
using fighting brands. All of these efforts by firms are part of the strategic management
process that executives must respond to if they want their companies to be successful.