the five generic competitive strategies:

The Five Generic Competitive The Five Generic Competitive Strategies: Which One to Employ?Strategies: Which One to Employ?

Chapter 5:Chapter 5:

Chapter Roadmap

• The Five Competitive Strategies

• Low-Cost Provider Strategies

• Broad Differentiation Strategies

• Best-Cost Provider Strategies

• Focused (or Market Niche) Strategies

• The Contrasting Features of the Five Generic Competitive Strategies: A Summary

Strategy and Competitive Advantage

Competitive advantage exists when a firm’s strategy gives it an edge in

Attracting customers and

Defending against competitive forces

Key to Gaining a Competitive AdvantageConvince customers firm’s product / service offers superior value

A good product at a low price

A superior product worth paying more for

A best-value product

What Is Competitive Strategy?

Deals exclusively with acompany’s business plansto compete successfully

Specific efforts to please customers

Offensive and defensive movesto counter maneuvers of rivals

Responses to prevailing market conditions

Initiatives to strengthen its market position

Narrower in scope than business strategy

Fig. 5.1: The Five Generic Competitive Strategies

Low-Cost Provider Strategies

• Make achievement of meaningful lower coststhan rivals the theme of firm’s strategy

• Include features and services in productoffering that buyers consider essential

• Find approaches to achieve a cost advantagein ways difficult for rivals to copy or match

Keys to SuccessKeys to Success

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

Translating a Low-Cost Advantage into Higher Profits: Two Options

Option 1: Use lower-cost edge to under-price competitors and attract price-sensitive buyers in enough numbers to increase total profits

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

Approaches to Securing a Cost Advantage

Approach 1

Do a better job than rivals ofperforming value chain activities

efficiently and cost effectively

Approach 2Revamp value chain to bypass

cost-producing activities that add little value from the buyer’s

perspective

Control costs!

By-pass costs!

Keys to Success in AchievingLow-Cost Leadership

Scrutinize each cost-creating activity, identifying cost drivers

Use knowledge about cost drivers to managecosts of each activity down year after year

Find ways to restructure value chain to eliminatenonessential work steps and low-value activities

Work diligently to create cost-conscious corporate culturesFeature 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

Approach 1: Controlling the Cost Drivers

Capture scale economies; avoid scale diseconomies Large plant is more economical to operate than small size plants Large distribution warehouse is more cost-efficient than a small

warehouse Manufacturing economies could be achieved by using common parts

and components different models Cutting back on the number of models In global industries, making separate products for each market

instead of selling standard worldwide tends to boost unit cost because of:- lost time in model changeover- production runs- inability to reach the most economic scale of production for ach country model


Capture learning and experience curve effects Learning/experience curve economies can result from:

- debugging and mastering newly introduced technologies- using the experiences and suggestions of workers to install more efficient plant layouts and procedures- the added speed and effectiveness that accrues from repeatedly picking sites for and building new plants, retail outlets, or distribution centers

Aggressively managed low cost providers pay diligent attention to capturing the benefits of learning/experience and keeping these benefits proprietary to what ever extent


Control percentage of capacity utilization Higher rates of capacity utilization allows

depreciation and other fixed costs to be spread over large unit volume, thereby lowering fixed cost per unit

The more the capital intensive the business, or higher the fixed costs as a percentage of total costs, the more important the full capacity operations

Pursue efforts to boost sales and spread costs such as R&D and advertising over more units


Improve supply chain efficiency partnering with suppliers, reduce inventory carrying costs via JIT inventory

systems Substitute use of low-cost for high-cost raw materials Use online systems and sophisticated software to achieve operating

efficiencies Enterprise resource planning (ERP), Manufacturing execution system (MES) Adopt labor-saving operating methods Applying labor saving technology Shifting production from geographic areas where labor costs

are high Avoiding use of union labor where possible Using incentive compensation systems that promote high

productivity


Use bargaining power to gain concessions from suppliers Compare vertical integration vs. outsourcing

Approach 2: Revamping the Value Chain

Use direct-to-end-user sales/marketing methods

Make greater use of online technology applications

Internet technology has revolutionized supply chain management

Procurement software packages Retailers can install on-line systems that relay data from

cash register at the check-out counter back to manufacturers and their suppliers

Manufacturers can use on-line systems to collaborate closely with parts and component suppliers in designing new products and shortening the time it takes to get them to reduction

Approach 2: Revamping the Value Chain

Streamline operations by eliminating low-value-added or unnecessary work steps

Computer assisted design techniques Standardizing parts and components across

models Relocate facilities closer to suppliers or

customers

Offer basic, no-frills product/service

Offer a limited product/service

Keys to Success in AchievingLow-Cost Leadership

Scrutinize each cost-creating activity,identifying cost drivers

Use knowledge about cost drivers to managecosts of each activity down year after year

Find ways to restructure value chain to eliminatenonessential 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

When Does a Low-CostStrategy Work Best?

Price competition is vigorous Product is standardized or readily available

from many suppliers There are few ways to achieve

differentiation that have value to buyers Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have

significant bargaining power Industry newcomers use

introductory low prices to attractbuyers and build customer base

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 ignoringBuyer interest in additional featuresDeclining buyer sensitivity to priceChanges in how the product is used

Technological breakthroughs open up cost reductions for rivals

Differentiation Strategies

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

Find ways to differentiate that createvalue for buyers and are not easilymatched or cheaply copied by rivals

Keeping the cost of achieving differentiation below the higher price that can be charged

Objective

Keys to Success

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

Build brand loyalty

= Competitive Advantage

Whichhat is

unique?

Sustaining Differentiation:Keys to Competitive Advantage

• Most appealing approaches to differentiation are those– Hardest for rivals to match or imitate– Buyers will find most appealing

• Best choices to gain a longer-lasting, more profitable competitive edge – New product innovation– Technical superiority– Product quality and reliability– Comprehensive customer service– Unique competitive capabilities

Types of Differentiation Themes• Unique taste – Dr. Pepper• Multiple features – Microsoft Windows and Office• Wide selection and one-stop shopping – Home Depot,

Amazon.com• Superior service -- FedEx, Ritz-Carlton• Spare parts availability – Caterpillar• Engineering design and performance – Mercedes, BMW• Prestige – Rolex• Product reliability – Johnson & Johnson• Quality manufacture – Karastan, Michelin, Toyota• Technological leadership – 3M Corporation• Top-of-line image – Ralph Lauren, Starbucks, Chanel

Where to Find DifferentiationOpportunities in the Value Chain

Purchasing and procurement activities Product R&D and product design activities Production process / technology-related

activities Manufacturing / production activities Distribution-related activities Marketing, sales, and customer service activities

Activities, Costs, &

Margins ofForward

Channel Allies

InternallyPerformedActivities,

Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValueChains

How to Achieve aDifferentiation-Based Advantage

Approach 1Approach 1

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

Making a company’s product more economical to use by reducing buyer’s raw material waste( providing cut to seize components Reducing a buyer’s inventory requirements ( JIT deliveries)Increasing maintenance intervals and product reliability to lower buyers procurement and order processing cost( using online systems)Providing free technical support


Incorporate features that raiseperformance a buyer gets out of the productAttributes that provide buyer greater reliability, ease of use, convenience or durability

Making the company’s product cleaner, safer, quitter, or more service maintenance free than rival bands




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

waysGoodyear’s Aquatread tire design appeals to safety conscious motorist Rolls Royce, Gucci, Rolex have differentiation based competitive advantage linked to buyer desires for status, image, prestige, upscale fashion, etc.



Outcompete rivals via superior capabilitiesCNN for breaking newsMicrosoft has stronger capabilities to design, create, distribute, and advertise an array of software products for PC Avon and Mary Kay cosmetics have differentiated themselves from other cosmetics and personal care products by having direct sales capability through its sales force

When Does a DifferentiationStrategy 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 similardifferentiation approach

Technological change andproduct innovation are fast-paced

Pitfalls of Differentiation Strategies

Appealing product features are easily copied by rivals 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

buyers perceive is too high Not striving to open up meaningful

gaps in quality, service, or performancefeatures vis-à-vis rivals’ products

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 underpriced comparable brands

Objectives

Competitive Strength of a 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,a company must be able toIncorporate attractive features

at a lower cost than rivalsManufacture a good-to-excellent quality

product at a lower cost than rivalsDevelop a product that delivers good-to-excellent

performance at a lower cost than rivalsProvide attractive customer service at a lower cost than

rivals

When Is a Best-CostProvider Strategy Appealing?

• When buyer diversity makes product differentiation the norm

• When many buyers are also sensitive to price and value

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 siphoncustomers away with a lower price

High-end differentiators maybe able to steal customers awaywith better product attributes

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 buyershave distinctive preferences, specialrequirements, or unique needs

Develop unique capabilities toserve needs of target buyer segment

Objective

Keys to Success

Focus / Niche Strategiesand Competitive Advantage

Approach 1

Achieve lower costs than rivals inserving a well-defined buyer segmentFocused low-cost strategy

Approach 2

Offer a product appealing to uniquepreferences of a well-defined buyer segment Focused differentiation strategy

Which hat is unique?

A Focused Low- Cost strategy

Aims at securing a competitive advantage by serving buyers in the target market at a lower cost and lower price than rivals

It has considerable attraction when a firm can lower cost significantly by limiting its customer base to a well defined buyer segment

The only real difference between low-cost provider strategy and a focused low cost strategy the size of the buyer group that a company is trying to appeal to

A Focused Differentiation Strategy

• Aims at securing a competitive advantage with a product offering carefully designed to appeal to the unique preferences and needs of a well defined group of buyers ( as opposed to a broad differentiation strategy aimed at many buyer groups and segments)

• Success depends on the existence of a buyer segment that is looking for special product attributes or seller capabilities and on firms ability to stand apart from rivals competing in the same target market niche

• Market contain a buyer segment willing to pay a big premium for the very finest items available

• Examples : Godiva chocolates, Chanel, Gucci, Rolls Royce. Hagen-Dazs

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-segmentcompetitors to meet specializedneeds of niche members

Focuser has resources and capabilitiesto 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

Risks of a Focus Strategy

Competitors with broad product lines having wide appeal find effective ways to matcha focuser’s capabilities in serving niche

Niche buyers’ preferences shifttowards product attributes desiredby majority of buyers – nichebecomes part of overall market

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

Deciding Which GenericCompetitive 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”

strategy! This rarely produces a sustainable competitive advantage or a distinctive competitive position !

Cooperative Strategies and Competitive advantages

• Strategic Alliances

Mergers and Acquisitions

• Why are they important and how can they bring competitive advantage?

Vertical Integration

• Advantages & disadvantages

Outsourcing

• When to consider outsourcing and what are its pros and cons ?

Using offensive strategies to secure competitive advantage

• Initiatives to match or exceed competitors strength• Exploiting weakness of competitor• Opening multiple battle fronts• Guerrilla offensives• Blue Ocean / Less contested area – New offering / Market /

Technology / Segment / geography• Preemptive strikes• Choosing whom to attach ?

– Market leader ? Runner up ? Vulnerable firm ? Local / regional firm?

1st Mover Advantage / Disadvantage

• Pros– Pioneering Image– Capture early ground– Set Rules / Bars

• Cons– However, not very sustainable – High cost to pioneer– Can be imitated – Rapidly changing technology

the five generic competitive strategies:

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