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5Strategic Management

Competitive Strategies

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Learning Outline

What is competitive advantage and how do we get it? Explain the importance of competitive advantage. Describe how an organization’s competitors can be

determined. Discuss how resources, capabilities, and core

competencies lead to competitive advantage. Explain the relationship between competitive advantage

and competitive strategies.

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Learning Outline (contd.)

What are the competitive strategies? Describe Miles and Snow’s adaptive strategies. Describe Porter’s generic competitive

strategies. Explain low-cost and differentiation Explain what is meant by “stuck in the

middle.” Describe an integrated low-cost differentiation

strategy. Explain Mintzberg’s generic competitive

strategies.

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Learning Outline (contd.)

Implementing, evaluating, and changing competitive strategy Describe how an organization’s competitive strategies are

implemented, evaluated, and changed. Explain what role functional strategies play in an

organization’s competitive strategies. Discuss the various competitive postures and actions an

organization can take.

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Competitive Advantage

Competitive advantage exists when a firm’s strategy gives it an edge in Defending against competitive forces and Securing customers

Convince customers firm’s product / service offers superior value Offer buyers a good product at a lower price Use differentiation to provide a better product buyers

think is worth a premium price

Can be eroded easily and quickly by competitors

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Understanding the Competitive Environment

What is competition? When organizations battle for some desired

object or outcome

Who are our competitors? Industry perspective Market perspective Strategic groups perspective

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Industry and Market Approaches to Defining Competitors

Industry

Same Product-Service

Number of Sellers Degree of Differentiation

One LowPure Monopoly

Few LowPure Oligopoly

Few MediumDifferentiated Oligopoly

Many HighMonopolistic Competition

Many NonePure Competition

Market

Customer Needs

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Identifying Strategic Groups Possible Strategic Dimensions for Identifying Strategic Groups

• Price• Quality• Level of vertical integration• Geographic scope• Product line breadth-depth• Level of diversification• R&D expenditures• Market share• Profits• Product characteristics• Any other relevant strategic factor

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Strategic Groups: Vehicles Industry

Dis

trib

utio

nS

trat

egy

Selective

DepartmentStore

Mass-Discount

PriceStrategy

Low Medium High

Group AHayondaiDayooKIA

Group BToyotaHondaGMRenaultVolvo

Group CMercedesBMWAudiInfinityLexus

Group DRolsRoisKontenental

Group ENissanMazdaDayhatsu

Group FPorcheFerrari

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The Role of Resources and Distinctive Capabilities in Gaining Competitive Advantage

Every organization has resources and

capabilities to do whatever it’s in business to do

Some organizations “can do,” others “can’t do” Competitive advantage implies gaining the edge on

others Organizations strive for sustainable competitive

advantage and set the stage for competition – intense, moderate, or mild.

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Competitive Strategy

Exploits competitive advantage

By finding ways to use resources and distinctive capabilities

Which sets the organization apart from its competitors

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What are the Competitive Strategies?

Contrary to expectations, the number of ways to define competitive strategy are limited

Traditional approaches

New perspectives

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Characteristics of Miles and Snow’s Adaptive (Competitive) Strategies

StrategyStrategy CharacteristicsCharacteristics Prospector •

•

•

•

Defender ••

••

•

Organization seeks innovationDemonstrated ability to survey dynamic environment and develop new products-services to fit the changing environmentFrequently and continually innovating, developing, and testing new products-servicesCompetitors are uncertain about prospector’s future strategic decisions and actions

Searches for market stabilityProduces only a limited product line for a narrow segment of total potential marketSeeks to protect (defend) its well-established businessDoes whatever is necessary to aggressively prevent competitors from entering their turfCan carve out and maintain niches within its industry that competitors find difficult to penetrate

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Characteristics of Miles and Snow’s Adaptive (Competitive) Strategies

StrategyStrategy CharacteristicsCharacteristics Analyzer •

•

•

Reactor ••••

Strategy of analysis and imitationThoroughly analyzes new business ideas (products, services, markets) before deciding to jump inWatches for and copies the promising and successful ideas of prospectors

Lacks coherent strategic planSimply reacts to environmental changesMakes strategic adjustments only when finally forced to do soUnable to respond quickly to environmental changes because resources-capabilities are lacking or are not developed or exploited properly

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Porter’s Generic Competitive Strategies

Competitive advantage comes from only 1 of 2 sources Having the lowest costs in the industry Possessing significant and desirable differences from

competitors

The second factor is the scope of product-market Mix of these factors provide the basis for:

Cost leadership strategy (or low-cost strategy) Differentiation strategy Focus strategy

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Porter’s Generic Competitive Strategies

CompetitiveMarket Scope

Broad

Narrow

CompetitiveAdvantage

Low Costs Product-ServiceDifferences

Cost Leadership Differentiation

Focus(Cost)

Focus(Differentiation)

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Contemporary Perspectives on Competitive Strategy

Newer perspectives provide an expanded, and perhaps more realistic, description of what competitive strategies organizations are using

Integrated low-cost differentiation strategy

Mintzberg’s generic competitive strategies

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Low-Cost Leadership

Make achievement of low-cost relative to rivals the theme of firm’s business strategy

Find ways to drive costs out of business year-after-year

Low-cost leadership means low Overall costs, not just low manufacturing or production costs!

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C. Value Chain Using Online Sales and Internet Delivery - Lowest Cost

Software development

activities

Online marketing and promotion

activities

Systems to accept credit card

payment and allow immediate

download

Technical support and customer

service activities

Software development

activities

production and packaging activities

Marketing and promotion of

software

Warehousing and shipping of

wholesaler-retailer orders

Technical support

activities

Activities of software retailers

Activities of wholesale

distributors of software products

A. Value Chain Using Traditional Channels - Highest Cost

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When Does it work?

It works when Price competition is vigorous Product is standardized Buyers incur low switching costs Industry newcomers use introductory low prices to

attract buyers and build customer base Pitfalls with this strategy

Being overly aggressive in cutting price Low cost methods are easily imitated by rivals Differentiation matters

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Differentiation Strategies

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

Keys to success Find ways to differentiate that create value for

buyers and that are not easily matched or cheaply copied by rivals

Not spending more to achieve differentiation than the price premium that can be charged

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Types of Differentiation Unique taste -- Dr. Pepper Wide selection and one-stop shopping --

Home Depot and Amazon.com Superior service -- FedEx, Ritz-Carlton Spare parts availability -- Caterpillar More for your money -- McDonald’s, Wal-Mart Prestige -- Rolex Quality manufacture -- Honda, Toyota Top-of-the-line image -- Ralph Lauren, Chanel

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Signaling Value as Well as Delivering Value

Buyers seldom pay for value that is not perceived

Signals of value may be as important as actual value when Nature of differentiation is hard to quantify Buyers are making first-time purchases Repurchase is infrequent Buyers are unsophisticated

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When does it work?

It works when There are many ways to differentiate a product that

have value and please customers Buyer needs and uses are diverse Technological change and product innovation are fast-

paced

Pitfalls Charging too high a price or over differentiating Failing to signal value Not understanding what buyers want or prefer and

differentiating on the “wrong” things

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Competitive Strategy Principle

A low-cost producer strategy can

defeat a differentiation strategy

when buyers are satisfied with a

standard product and do not see

extra attributes as worth paying

additional money to obtain!

A low-cost provider strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not

see extra differentiating attributes worth paying for!

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Integrated low-cost / differentiated

Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation Make an upscale product at a lower cost Give customers more value for the money

Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations

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Integrated Low Cost/Differentiation Strategy

DifferentiationLow Cost

Use a single aircraft model(Boeing 737)

Use secondary airports

15 minute turnaround time

No meals

No reserved seats

Focus on customer satisfaction

High level of employee dedication

Southwest Airlines

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Risk of an integrated Provider Strategy

Risk – An integrated provider may get squeezed between strategies of firms using low-cost and differentiation strategies

Low-cost leaders may be able to siphon customers away with a lower price

High-end differentiators may be able to steal customers away with better product attributes

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Focus / Niche Strategies

Involve concentrated attention on a narrow piece of the total market

Objective Serve niche buyers better than rivals

Keys to success Choose a market niche where buyers have

distinctive preferences, special requirements, or unique needs

Develop unique capabilities to serve needs of target buyer segment

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Examples of Focus Strategies

eBay Online auctions

Jiffy Lube International Maintenance for

motor vehicles

Bandag Specialist in truck

tire recapping

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What Makes a NicheAttractive for Focusing?

Big enough to be profitable and offers good growth potential

Not crucial to success of industry leaders Costly or difficult for multi-segment competitors to

meet specialized needs of niche members Focuser has resources and capabilities to

effectively serve an attractive niche Few other rivals are specializing in same niche Focuser can defend against challengers via

superior ability to serve niche members

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Risks of a Focus Strategy

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

Niche buyers’ preferences shift towards product attributes desired by majority of buyers - niche becomes part of overall market

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

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First-Mover Advantages

When to make a strategic move is often as crucial as what move to make

First-mover advantages arise when Pioneering helps build firm’s image and reputation Early commitments to new technologies, new-style

components, and distribution channels can produce cost advantage

Loyalty of first time buyers is high Moving first can be a preemptive strike

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First-Mover Disadvantages

Moving early can be a disadvantage (or fail to produce an advantage) when

Costs of pioneering are sizable and loyalty of first time buyers is weak

Innovator’s products are primitive, not living up to buyer expectations

Rapid technological change allows followers to leapfrog pioneers

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Timing and Competitive Advantage

Being a first-mover holds potential for competitive advantage in some cases but not in others

Principle 1

Being a fast follower can sometimes yield as good a result as being a first mover

Principle 2

Being a late-mover may or may not be fatal -- it varies with the situation

Principle 3

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Mintzberg’s Generic Competitive Strategies

Differentiation

Undifferentiated

By Price

By Marketing Image

By Product Design

By Product Quality

By Product Support

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Implementing Competitive Strategy

Without implementation a strategy is nothing more than an idea

Implementing competitive strategies The role of functional strategies

What strategy is most appropriate? How is that strategy implemented?

Competitive postures and actions Offensive moves Defensive moves

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Evaluating and Changing Competitive Strategy

Responsibility of managing strategically doesn’t stop after implementation

Evaluation of competitive strategy assesses: Various functional areas Activities performed in those areas

Change when evaluation shows the strategy Doesn’t have the intended impact Hasn’t resulted in desired levels of performance