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The Five GenericCompetitive Strategies

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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 E. Porter

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Product / Service offers superior value:

A

good productat a low price Abetter productat the same price

Asuperior value productat a reasonable

price

Abest-value productat apremium price

Key to Gaining a Competitive Advantage

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Concept of Value Creation :GeneratingConsumer surplus by

providing Utility Value in excess of the price paid

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Competitive Strategies

Low-Cost Strategies

Differentiation Strategies

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The Five Generic

Competitive Strategies

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Low-cost leadership means low

overall costs, not just low

manufacturing or production costs!

Low-Cost Provider Strategies

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Compare and Benchmark cost componentswith those of Rivals

Identify areas forsubstantial reduction in costs

Include essential features and services inproduct

from buyers point of view Find approaches to achieve a cost advantage

such that it becomes difficultfor rivalsto copy or match

Keys Steps

Low-Cost Provider Strategies

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Option 1: Use lower-cost edge to

Under-price and increase market share by

attracting price-sensitive buyers, thereby

increase profits

Option 2: Use lower-cost edge to

- Maintain present price and existing market share,

- Earn higher profit margin on sales, thereby

increase profits

Two options in achieving

Low-Cost Advantage

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Re-EngineerActivities to enhance Value Additions

by performing value chain activities more efficiently

and cost effectively

Revamp activities adding little value or eliminate

those activities adding No-Value in the value

chain

Approach 1

Approach 2

Approaches to Securing

a Cost Advantage

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Approach 1: Controlling

the Cost Drivers

Capture scale economies; avoid scale

diseconomies

Capture learning and experience curve

effects

Manage costs of key resource inputs

Consider linkages with other activities in

value chain

Find sharing opportunities with other

business units

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Approach 1: Controlling

the Cost Drivers

Compare vertical integration vs. outsourcing

Assess first-mover advantages vs.

disadvantages

Control percentage of capacity utilization

Make prudent strategic choices related to

operations

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Approach 2: Revamping

the Value Chain

Make greater use of Internet technology

applications

Use direct-to-end-user sales/marketing

methods

Simplify product design

Offer basic, no-frills product/service

Shift to a simpler, less capital-intensive, ormore flexible technological process

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Approach 2: Revamping

the Value Chain

Find ways to bypass use of high-cost raw

materials

Relocate facilities closer to suppliers or

customers

Drop something for everyone approach

and focus on a limited product/service

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Keys to Success in Achieving

Low-Cost Leadership

Scrutinize each cost-creating activity,

identifying cost drivers

Use knowledge about cost drivers to manage

costs of each activity down year after year

Find ways to restructure value chain to

eliminate

nonessential work steps and low-valueactivities

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Keys to Success in Achieving

Low-Cost Leadership

Work diligently to create cost-consciouscorporate cultures

Feature broad employee participation in

continuous cost-improvement efforts andlimited perks for executives

Strive to operate with exceptionally smallcorporate staffs

Aggressively pursue investments inresources and capabilities that promise todrive costs out of the business

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Characteristics of

Cost conscious corporate culture

Employee participation in cost-control efforts

Ongoing efforts to benchmark costs

Intensive scrutiny of budget requests

Programs promoting continuous cost

improvement

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Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price

Low cost methods are easily imitated by rivals

Becoming too fixated on reducing costs

and ignoring

Buyer interest in additional features

Declining buyer sensitivity to price

Changes in how the product is used

Technological breakthroughs open up cost

reductions for rivals

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Nucor Corporations

Low-Cost Provider StrategyEliminate some production processes from value chain used by traditionalintegrated steel mills; cut investment in facilities and equipment

Strive hard for continuous improvement in the efficiency of its plants andfrequently invest in state-of-the art equipment to reduce unit costs

Carefully select plan sites to minimize inbound and outbound shippingcosts and to take advantage of low rates for electricity

Hire a nonunion workforce that uses team-based incentive compensationsystems

Heavily emphasize consistent product quality and maintain rigorousquality systems

Minimize general and administrative expenses by maintaining a lean staffat corporate headquarters and allowing only 4 levels of management

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Differentiation Strategies

Incorporate differentiatingfeatures that

cause buyers topreferfirmsproduct orservice over brands of rivals

Objective

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Differentiation Strategies

Find ways to differentiate that create valuefor buyers and are not easily matchedor

cheaply copiedby rivals

Not spendingmore to achieve differentiationthan theprice premium that can be charged

Keys to Success

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Sustaining Differentiation: Keys to

Competitive Advantage

Most appealingapproaches to differentiation

Those hardest for rivals to match or imitate

Those buyers will find most appealing

Best choices to gain a longer-lasting, more profitablecompetitive edge

New product innovation

Technical superiority

Product quality and reliability

Comprehensive customer service

Unique competitive capabilities

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Differentiation Opportunities in the

Value Chain

Value Chain

Internally

Performed

Activities,

Costs, &

Margins

Activities,

Costs, &Margins of

Suppliers

Buyer/User

Value

Chains

Margins of

Forward

ChannelAllies &

Strategic

Partners

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Where to Find Differentiation

Opportunities in the Value Chain

Purchasing and procurement activities

Product R&D and product design activities

Production process / technology-relatedactivities

Manufacturing / production activities

Distribution-related activities

Marketing, sales, and customer service

activities

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How to Achieve a

Differentiation-Based Advantage

Approach 1

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

Approach 2

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

Approach 3

Compete on the basis ofsuperior capabilities

Approach 4

Incorporate product features/attributes thatlower buyers overall costs of using product

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When Does a Differentiation

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

Technological change and

product innovation are fast-paced

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Pitfalls of

Differentiation Strategies

Buyers see little value in unique attributes of product

Appealing product features are easily copied by

rivals

Differentiating on a feature buyers do not perceiveas lowering their cost or enhancing their well-being

Over-differentiating such that product

features exceed buyers needs

Charging a price premiumbuyers perceive is too high

Not striving to open up meaningful gaps in quality,

service, or performance features vis--vis rivals

products

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Best-Cost Provider Strategies

Combine a strategic emphasis on low-costwith astrategic 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 under-price comparable brands

Objectives

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A best-cost providers competitive advantage

comes from matchingclose rivals on key

product attributes and beatingthem on price Success depends on having the skills and

capabilities toprovide attractive performance

and features at a lower cost than rivals

Competitive Strength of a

Best-Cost Provider Strategy

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Focus / Niche Strategies

Involve concentrated attention on a narrow piece ofthe 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 serve needs of target

buyer segment

Objective

Keys to Success

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Geographic uniqueness

Specialized requirements in

using product/service

Special product attributes

appealing only to niche buyers

Approaches to Defining

a Market Niche

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Focus / Niche Strategies

and Competitive Advantage

Achieve lower costs than

rivals in serving the segment --A focused low-cost strategy

Offer niche buyers something

different from rivals --

A focused differentiation strategy

Approach 1

Approach 2

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Examples of Focus Strategies

eBay

Online auctions

Porsche

Sports cars

Jiffy Lube International

Maintenance for motor vehicles

Pottery Barn Kids

Childrens furniture and accessories Bandag

Specialist in truck tire recapping

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Pitfalls of Focus Strategy

Competitors find effective ways to matcha focusers 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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