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Chapter 3Chapter 3

Competitive Strategy Competitive Strategy and Advantage in and Advantage in the Marketplacethe Marketplace

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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Competitive StrategyCompetitive Strategy

Deals exclusively with a company’sbusiness plans for securing a competitive advantage in the marketplace

Specific efforts to give customers superior value

– A good product at a lower price– A superior product worth paying more for– An attractive mix of price, features,

quality, service, and other appealing attributes

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Competitive Strategies and Industry Competitive Strategies and Industry PositioningPositioning

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Competitive Advantages of a Low Competitive Advantages of a Low Cost StrategyCost Strategy

Advantage Option 1: Use lower-cost edge to under-price competitors and increase market share

Advantage Option 2: Maintain present price, be content with present market share, and use lower-cost edge to earn a higher profit margin on each unit sold

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Approaches to Achieving Low CostsApproaches to Achieving Low Costs

1. Do a better job than rivals of controlling the costs of performing critical activities

2. Eliminate cost-producing activities that add little value from the buyer’s perspective

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When a Low Cost Strategy Works When a Low Cost Strategy Works BestBest

Price competition is vigorous Product is standardized There are few ways to achieve

differentiation Buyers incur low switching costs Buyers are large and have significant

bargaining power Industry newcomers use introductory

low prices to attract buyers and build customer base

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Hazards of a Low-Cost StrategyHazards of a Low-Cost Strategy

Cutting price by an amount greater than size of cost advantage

Low cost methods are easily imitated Becoming too fixated on reducing costs

and ignoringBuyer interest in additional featuresDeclining buyer sensitivity to price

Technological breakthroughs open up cost reductions for rivals

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Differentiation StrategiesDifferentiation Strategies

Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals

Not spending more to achieve differentiation than the price premium that customers are willing to pay for all the differentiating extras

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Types of Differentiation ThemesTypes of Differentiation Themes

Unique taste – Dr. Pepper Multiple features – Microsoft Windows and

Office Wide selection – Amazon.com Superior service – Ritz-Carlton Spare parts availability – Caterpillar Engineering design and performance – BMW Prestige – Rolex Product reliability – Johnson & Johnson Quality manufacture – Toyota Top-of-line image – Ralph Lauren, Starbucks,

Chanel

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Benefits of Successful Benefits of Successful DifferentiationDifferentiation

Successfully executed differentiation strategiesallow a company to:

Command a premium price, and/or

Increase unit sales, and/or

Gain buyer loyalty to its brand

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Creating Value for Customers Creating Value for Customers through Differentiationthrough Differentiation

Incorporate product features/attributes that lower buyer’s overall costs of using product

Incorporate features/attributes that raise the performance a buyer gets out of the product

Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways

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Where to Find Opportunities to Where to Find Opportunities to DifferentiateDifferentiate

Supply chain activities Product R&D and product

design activities Production R&D and

technology-related activities Manufacturing activities Distribution-related activities Marketing, sales, and customer service

activities

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Market Conditions Favoring a Market Conditions Favoring a Differentiation StrategyDifferentiation Strategy

There are many ways to differentiate aproduct that have value and please customers

Buyer needs and uses are diverse

Few rivals are following a similardifferentiation approach

Technological change andproduct innovation are fast-paced

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Perceived Value and SignalingPerceived Value and Signaling

The price premium commanded by a differentiation strategy reflects actual value delivered and value perceived by the buyer.

Buyers seldom pay for value that is not perceived

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Perceived Value and SignalingPerceived Value and Signaling

Important to signal value when:Nature of differentiation is

subjective

When buyers are making first-time purchases

When repurchase is infrequent

When buyers are unsophisticated

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Hazards of a Differentiation StrategyHazards of a Differentiation Strategy

Buyers see little value in a product’s unique attributes

Appealing product features are easily copied by rivals

Overspending on efforts to differentiate

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Hazards of a Differentiation StrategyHazards of a Differentiation Strategy

Over differentiating such that productfeatures exceed buyers’ needs

Charging a price premiumbuyers perceive is too high

Failing to open up meaningful gaps in product or service attributes

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When is a Niche an Attractive MarketWhen is a Niche an Attractive Market

It is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers

The industry has many different niches and segments

Few other rivals are specializing in same niche

Big enough to be profitable and offers good growth potential Not crucial to success of industry leaders

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Hazards of a Focused StrategyHazards of a Focused Strategy

Competitors find effective ways to matcha focuser’s capabilities in serving niche

Niche buyers’ preferences shift towards product attributes desired by majority of buyers

Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

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Resource- and Competence-Resource- and Competence-Based Approaches to Based Approaches to Competitive AdvantageCompetitive Advantage

Competitive strategy elements used to supplement strategies keyed to unique industry positioning.

Utilizes a company’s resources and competitive capabilities to achieve a cost-based advantage or differentiation.

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Resources, Capabilities, and Resources, Capabilities, and Competencies as the Basis for Competencies as the Basis for Competitive AdvantageCompetitive Advantage

A competence represents real proficiency in performing an internal activity

A core competence is a well-performedinternal activity central to a company’s competitivenessand profitability

A distinctive competence is a competitively valuable activity a company performs better than its rivals

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Determining the Competitive Determining the Competitive Value of a Resource StrengthValue of a Resource Strength

Is the resource strength really competitively valuable?

Is the resource strength rare and something rivals lack?

Is the resource hard to copy?

Can the resource strength be trumped by the substitute resource strengths and competitive capabilities of rivals?

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Strategies for Addressing Resource Strategies for Addressing Resource Deficiencies Deficiencies

Companies lacking stand-alone resource strengths may develop a distinctive competence through bundled resource strengths.

Companies may be able to develop substitute resources to offset resource weaknesses or deficiencies in performing competitively critical activities.

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Supplementing Resources and Supplementing Resources and Competencies through Strategic Competencies through Strategic AlliancesAlliances

Strategic alliances involve formal agreements between two or more companies engage in strategically-relevant collaboration.

Allows partners to add to their collections of resources and competencies.

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Factors Making Collaborative Factors Making Collaborative Partnerships “Strategic”Partnerships “Strategic”

It is critical to a company’s achievement of an important objective

It helps build, sustain, or enhance a core competence or competitive advantage

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Factors Making Collaborative Factors Making Collaborative Partnerships “Strategic”Partnerships “Strategic”

It helps block a competitive threat

It helps open up importantmarket opportunities

It mitigates a significant riskto a company’s business

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How Collaborative Partnerships How Collaborative Partnerships Build Resource Strengths and Core Build Resource Strengths and Core CompetenciesCompetencies

Expedite the development of new technologies or products

Overcome deficits in technical or manufacturing expertise

To create new skill sets and capabilities by bringing together personnel of each partner

To improve supply chain efficiency

To gain economies of scale inproduction and/or marketing

To acquire or improve market accessvia joint marketing agreements

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Why Strategic Alliances and Why Strategic Alliances and Collaborative Partnerships FailCollaborative Partnerships Fail

Diverging objectives and priorities of partners

Inability of partners to work well together

Changing conditions rendering purpose of alliance obsolete

Emergence of more attractive technological paths

Marketplace rivalry between one or more allies