The Five Generic Competitive Strategies: Which One to Employ?

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 firms

strategy gives it an edge in

Attracting customers and Defending against competitive forces

Key to Gaining a Competitive Advantage

Convince customers firms 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 a

companys business plans to compete successfully

Specific efforts to please customers

Offensive and defensive moves

to 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

Keys to Success

Make achievement of meaningful lower costs than rivals the theme of firms strategy Include features and services in product offering that buyers consider essential Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match
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 of performing value chain activities efficiently and cost effectively

Approach 2
Revamp value chain to bypass cost-producing activities that add little value from the buyers perspective
Control costs! By-pass costs!

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-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

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

Approach 1: Controlling the Cost Drivers

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

Approach 1: Controlling the Cost Drivers

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

Approach 1: Controlling the Cost Drivers

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

Approach 1: Controlling the Cost Drivers

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 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-value activities

Work diligently to create cost-conscious corporate cultures
Feature broad employee participation in continuous costimprovement 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-Cost Strategy 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 attract buyers 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 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

Differentiation Strategies
Objective
Incorporate differentiating features that cause

buyers to prefer firms product or service over brands of rivals

Keys to Success
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

Benefits of Successful Differentiation

A product / service with unique, appealing attributes allows a firm to
Command a premium price and/or
Which hat is unique?

Increase unit sales and/or

Build brand loyalty

= Competitive Advantage

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 Differentiation Opportunities 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 of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies Buyer/User Value Chains

How to Achieve a Differentiation-Based Advantage

Approach 1 Incorporate product features/attributes that lower buyers overall costs of using product
Making a companys product more economical to use by reducing buyers raw material waste( providing cut to seize components Reducing a buyers 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

How to Achieve a Differentiation-Based Advantage

Approach 2
Incorporate features that raise performance a buyer gets out of the product Attributes that provide buyer greater reliability, ease of use, convenience or durability Making the companys product cleaner, safer, quitter, or more service maintenance free than rival bands

How to Achieve a Differentiation-Based Advantage

Approach 3 Incorporate features that enhance buyer satisfaction in non-economic or intangible ways Goodyears 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.

How to Achieve a Differentiation-Based Advantage

Approach 4 Outcompete rivals via superior capabilities
CNN for breaking news Microsoft 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 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

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 performance features vis--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

Objectives
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

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 to
Incorporate attractive features
at a lower cost than rivals 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 Provide attractive customer service at a lower cost than rivals

When Is a Best-Cost Provider 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 siphon
customers away with a lower price

High-end differentiators may

be able to steal customers away with better product attributes

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

Focus / Niche Strategies and Competitive Advantage

Approach 1
Achieve lower costs than rivals in serving a well-defined buyer segment Focused low-cost strategy

Approach 2
Offer a product appealing to unique preferences 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 Niche Attractive 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

Risks of a Focus Strategy

Competitors with broad product lines having wide

appeal find effective ways to match a 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

Deciding Which Generic 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 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