Click to edit Master title styleCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5: The Five Generic Competitive Strategies: Which One to Employ?
Screen graphics created by:
Jana F. Kuzmicki, Ph.D.
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
“Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.”
Michael Porter
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
“Winners in business play
rough and don’t apologize for
it. The nicest part of playing hardball is watching your competitors squirm.”
George Stalk Jr. and Rob Lachenauer
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Chapter Learning Objectives
Gain command of how each of the five generic competitive strategies lead to competitive advantage and deliver superior value to customers.
Learn why some of the five generic strategies work better in certain kinds of industry and competitive conditions than in others.
Learn the major avenues for achieving a competitive advantage based on lower costs.
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Focused (or Market Niche) Strategies
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Strategy and Competitive Advantage
Competitive advantage exists when a firm’s strategy gives it an edge in
Attracting customers and
A good product at a low price
A superior product worth paying more for
A best-value product
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Offensive and defensive moves
Initiatives to strengthen its market position
Narrower in scope than business strategy
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A low- cost provider strategy – appealing to a broad spectrum of customers by being the overall low – cost provider of product or services.
A broad Differentiation strategy – seeking to differentiate the company’s product/services offering from rivals’ in ways that will appeal to a broad spectrum of buyers.
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Best-cost provider strategy – giving customers more value for the money by in corpora ting good to excellent product attributes at lower cost than rivals; the target is to have the lowest (best) costs and prices compared to rivals offering products with comparable attributes.
A focused ( or market niche) strategy based on lower cost – concentrating on narrower buyer segment and outcompeting rivals by serving niche members at lower cost than rivals.
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A focused ( or market niche) strategy based on Differentiation – concentrating on narrower buyer segment and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals products.
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of firm’s strategy
offering that buyers consider essential
Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match
Keys to Success
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under-price competitors and attract
price-sensitive buyers in enough
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,
thereby increasing total profits
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performing value chain activities
efficiently and cost effectively
Revamp value chain to bypass
cost-producing activities that add little value from the buyer’s perspective
Approach 1
Approach 2
Control costs!
Control percentage of capacity utilization
Pursue efforts to boost sales and spread costs such as R&D and advertising over more units
Improve supply chain efficiency
high-cost raw materials
Adopt labor-saving operating methods
Compare vertical integration vs. outsourcing
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technology applications
Relocate facilities closer to suppliers or customers
Offer basic, no-frills product/service
Offer a limited product/service
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Pursue global procurement of some items and centralize most purchasing activities
Invest in state-of-the-art automation at its distribution centers
Strive to optimize the product mix and achieve greater sales turnover
Install security systems and store operating procedures that lower shrinkage rates
Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites
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Use of electric arc furnace technology allows for
lower investment costs for facilities and equipment and eliminates many expensive steps in making steel products from scratch
Use incentive compensation to achieve high productivity and low labor costs per ton produced
Locate plants close to customers to keep shipping costs down
Cost advantages and bottom-line results
Lower capital investment and operating costs
Ability to charge lower prices than traditional steel companies using make-it-from scratch technology
Earned attractive profits for shareholders since 1966
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Key Characteristics of Southwest Airlines’ Low-Cost Provider Strategy
Mastery of fast turnarounds at gates (25 minutes vs. 45 minutes for rivals) allows
Planes to fly more hours per day
More flights to be scheduled per day with fewer aircraft
More revenue generated per plane on average than rivals
Elimination of several services
results in cost savings
First-class seating and service
Facilitates e-ticketing
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Low-Cost Leadership
costs of each activity down year after year
Find ways to restructure value chain to eliminate
nonessential work steps and low-value activities
Work diligently to create cost-conscious corporate cultures
Feature broad employee participation in continuous cost-improvement efforts and limited perks for executives
Strive to operate with exceptionally small corporate staffs
Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business
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Strong commitment to continuous
Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !
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from many suppliers
Most buyers use product in same ways
Buyers incur low switching costs
Buyers are large and have
significant bargaining power
Industry newcomers use
When Does a Low-Cost
Low cost methods are easily
imitated by rivals
Changes in how the product is used
Technological breakthroughs open up cost reductions for rivals
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Test Your Knowledge
Striving to be the industry’s low-cost provider and achieving lower costs than rivals entails
A. doing a better job than rivals of performing value chain activities more cost-effectively.
B. having a smaller labor force than rivals, paying lower wages than rivals, locating all facilities in countries where labor costs are low, and outsourcing many value chain activities to suppliers with world-class technological capabilities.
C. revamping the firm’s overall value chain to eliminate or bypass cost-producing activities that produce little value added insofar as customers are concerned.
D. adopting activity-based costing, utilizing more best practices than rivals, and having a narrower product line than rivals.
E. Both A and C.
Answer: D
Differentiation Strategies
Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals
Find ways to differentiate that create
value for buyers and are not easily
matched or cheaply copied by rivals
Keeping the cost of achieving differentiation below the higher price that can be charged
Objective
Benefits of Successful Differentiation
A product / service with unique, appealing attributes allows a firm to
Command a premium price and/or
Increase unit sales and/or
Wide selection and one-stop shopping – Home Depot, Amazon.com
Superior service – FedEx
Prestige and distinctiveness – Rolex
Product reliability – Johnson & Johnson
Technological leadership – 3M Corporation
Types of Differentiation Themes
Buyers will find most appealing
Best choices to gain a longer-lasting, more profitable competitive edge
New product innovation
Purchasing and procurement activities
Production process / technology-related activities
Activities,
Costs, &
Incorporate features that enhance buyer satisfaction in non-economic or intangible ways
Outcompete rivals via superior capabilities
Incorporate product features/attributes that
Approach 1
Approach 2
Approach 3
Approach 4
Test Your Knowledge
Which of the following is not one of the four basic routes to achieving a differentiation-based competitive advantage?
A. Appealing to high-income buyers who are willing and able to pay a premium price for a high-performing, multi-featured product
B. Incorporating features that raise product performance
C. Incorporating product attributes and user features that lower the buyer’s overall costs of using the company’s product
D. Delivering value to customers via competencies and competitive capabilities that rivals don’t have or can’t afford to match
E. Incorporating features that enhance buyer satisfaction in intangible or non-economic ways
Answer: A
Price premium of a
and
Value perceived by the buyer
Actual and perceived value can differ when buyers are unable to assess their experience with a product
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Price
personality of employees
Signals of value may be as important as
actual value when
Buyers are making first-time purchases
Repurchase is infrequent
Buyers are unsophisticated
Strategy Work Best?
There are many ways to differentiate a product that have value and please customers
Buyer needs and uses are diverse
Few rivals are following a similar
differentiation approach
Buyers see little value in unique attributes of product
Overspending on efforts to differentiate the product offering, thus eroding profitability
Over-differentiating such that product features exceed buyers’ needs
Charging a price premium
Not striving to open up meaningful
gaps in quality, service, or performance
features vis-à-vis rivals’ products
For Discussion: Your Opinion
A low-cost provider strategy can defeat a differentiation strategy when buyers are satisfied with a basic product and don’t think “extra” attributes are worth a higher price. True or false? Explain.
True. A company employing a differentiation strategy may differentiate on the basis of some attribute that does not deliver adequate value to buyers, i.e. such as lowering a buyer’s cost to use the product or enhancing a buyer’s well being. If potential buyers look at a differentiated product offering and conclude “so what?”, buyers are indicating they are satisfied with a basic product.
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Best-Cost Provider Strategies
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
Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands
Objectives
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Best-Cost Provider Strategy
Competitive advantage is based on the capability to include upscale attributes at a lower cost than rivals’ comparable products
To achieve competitive advantage,
Incorporate attractive features
Manufacture a good-to-excellent quality
product at a lower cost than rivals
Develop a product that delivers good-to-excellent performance at a lower cost than rivals
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When many buyers are also sensitive to price and value
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Best-Cost Provider Strategy for the Lexus
Design an array of high-performance characteristics and upscale features into Lexus models to make them comparable in performance/luxury to other high-end models, i.e. Mercedes, BMW
Transfer its capabilities in making high-quality Toyota models at low cost to making premium-quality Lexus models at costs below other luxury-car makers
Use its relatively lower manufacturing costs to
underprice comparable Mercedes and BMW models
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Risk of a Best-Cost Provider Strategy
A best-cost 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
with better product attributes
Test Your Knowledge
Which of the following are distinguishing features of a best-cost provider strategy (based on the comparisons of the five generic competitive strategies shown in Figure 5.1)?
A. The strategic target is price-conscious buyers
B. A marketing emphasis on charging a slightly higher price than rival brands having comparable features and attributes
C. A product line that stresses wide selection, many product variations, and emphasis on differentiating features
D. A competitive advantage based on more value for the money
E. Using constant product innovation, excellent R&D skills, and periodic technological breakthroughs to sustain the strategy
Answer: D
Focus / Niche Strategies
Involve concentrated attention on a narrow piece of the total market
Serve niche buyers better than rivals
Choose a market niche where buyers
have distinctive preferences, special
requirements, or unique needs
Develop unique capabilities to
Objective
Approaches to Defining a Market Niche
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Porsche
CGA Inc.
serving a well-defined buyer segment
Focused low-cost strategy
Focused differentiation strategy
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
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 with broad product lines having wide appeal 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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For Discussion: Your Opinion
Which of the five generic competitive strategies do you think the following companies are employing:
The Saturn division of General Motors
Abercrombie & Fitch
Abercrombie & Fitch – Focused differentiation strategy
Amazon.com – Broad differentiation strategy
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Competitive Strategy to Use
Each positions a company differently in its market and competitive environment
Each establishes a central theme for how a company will endeavor to outcompete rivals
Each creates some boundaries for maneuvering as market circumstances unfold
Each points to different ways of experimenting with the basics of the strategy
Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy
The big risk – Mixing and matching pieces of the generic strategies to create a mixed bag or “stuck in the middle”
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Table 5.1: Distinguishing Features of the Five Generic Competitive Strategies
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