The Five Generic Competitive Strategies

CHAPTER 5
THE FIVE GENERIC

COMPETITIVE STRATEGIES
(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
THIS CHAPTER WILL HELP YOU UNDERSTAND:

LO 1 What distinguishes each of the five generic
strategies and why some of these strategies
work better in certain kinds of competitive
conditions than in others.
LO 2 The major avenues for achieving a competitive advantage
based on lower costs.
LO 3 The major avenues to a competitive advantage based on
differentiating a companys product or service offering from
the offerings of rivals.
LO 4 The attributes of a best-cost provider strategya hybrid of
low-cost provider and differentiation strategies.
52
WHY DO STRATEGIES DIFFER?
A firms competitive strategy deals exclusively with the

specifics of its efforts to position itself in the marketplace, please customers, ward off competitive threats,
and achieve a particular kind of competitive advantage.
Is the firms market target
broad or narrow?
Key factors that

distinguish one strategy
from another
Is the competitive advantage

pursued linked to low costs
or product differentiation?
53
THE FIVE GENERIC COMPETITIVE STRATEGIES

Low-Cost
Provider
Broad
Differentiation
Striving to achieve lower overall costs than rivals on

products that attract a broad spectrum of buyers.
Differentiating the firms product offering from rivals with
attributes that appeal to a broad spectrum of buyers.
Focused
Low-Cost
Concentrating on a narrow price-sensitive buyer

segment and on costs to offer a lower-priced product.
Focused
Differentiation
Concentrating on a narrow buyer segment by meeting

specific tastes and requirements of niche members
Best-Cost
Provider
Giving customers more value for the money by offering

upscale product attributes at a lower cost than rivals
54
FIGURE 5.1
The Five Generic Competitive Strategies
55
LOW-COST PROVIDER STRATEGIES
Effective Low-Cost Approaches:
Pursue cost-savings that are difficult imitate.
Avoid reducing product quality to unacceptable levels.
Competitive Advantages and Risks:
Greater total profits and increased market share

gained from underpricing competitors.
Larger profit margins when selling products at prices

comparable to and competitive with rivals.
Low pricing does not attract enough new buyers.
Rivals retaliatory price cutting set off a price war.
56
CORE CONCEPT
A low-cost providers basis for competitive
advantage is lower overall costs than
competitors. Successful low-cost leaders, who
have the lowest industry costs, are exceptionally
good at finding ways to drive costs out of their
businesses and still provide a product or service
that buyers find acceptable.
A cost driver is a factor that has
a strong influence on a firms costs.
57
STRATEGIC MANAGEMENT PRINCIPLE

A low-cost advantage over rivals can translate
into better profitability than rivals attain.
58
MAJOR AVENUES FOR ACHIEVING

A COST ADVANTAGE
Low-Cost Advantage
A firms cumulative costs across its overall value

chain must be lower than competitors cumulative
costs.
How to Gain a Low-cost Advantage:

1. Perform value chain activities more cost-effectively
than rivals.
2. Revamp the firms overall value chain to eliminate or
bypass cost-producing activities.
59
CORE CONCEPT
A cost driver is a factor that has a strong
influence on a companys costs.
510
COST-EFFICIENT MANAGEMENT
OF VALUE CHAIN ACTIVITIES
Cost Driver
Is a factor with a strong influence on a firms costs.
Can be asset- or activity-based.
Securing a Cost Advantage:
Use lower-cost inputs and hold minimal assets
Offer only essential product features or services
Offer only limited product lines
Use low-cost distribution channels
Use the most economical delivery methods
511
FIGURE 5.2
Cost Drivers: The Keys to Driving Down Company Costs
512
COST-CUTTING METHODS
1. Striving to capture all available economies of scale.
2. Taking full advantage of experience and learning-curve
effects.
3. Operating facilities at full or near-full capacity.
4. Improving supply chain efficiency.
5. Substituting lower-cost inputs wherever there is little or
no sacrifice in product quality or performance..
6. Using the firms bargaining power vis--vis suppliers or
others in the value chain system to gain concessions.
7. Using online systems and sophisticated software to
achieve operating efficiencies..
513
COST-CUTTING METHODS (contd)

8. Improving process design and employing advanced
production technology..
9. Being alert to the cost advantages of outsourcing or
vertical integration.
10. Motivating employees through incentives and company
culture.
514
REVAMPING THE VALUE CHAIN SYSTEM

TO LOWER COSTS
Selling direct to consumers and bypassing the activities

and costs of distributors and dealers by using a direct
sales force and a company website.
Streamline operations by eliminating low value-added or

unnecessary work steps and activities.
Reduce materials handling and shipping costs by

having suppliers locate their plants or warehouses close
to the firms own facilities.
515
How Walmart Managed Its Value

Chain to Achieve a Huge Low-Cost
Advantage over Rival Supermarket
Chains
Which Walmart value chain activity would be most
easily overcome by rival supermarket chains?
Which Walmart value chain activities would be the
most difficult to overcome by rival supermarket
chains?
Assume you have been tasked to revamp a rival
supermarkets value chain activities to better
compete with Walmart. In what order of expected
payoff should you attempt to revamp its value
chain activities?
ILLUSTRATION
CAPSULE 5.1
516
THE KEYS TO BEING A SUCCESSFUL

LOW-COST PROVIDER
Success in achieving a low-cost edge over rivals comes

from out-managing rivals in finding ways to perform
value chain activities faster, more accurately, and more
cost-effectively by:
Spending aggressively on resources and capabilities

that promise to drive costs out of the business.
Carefully estimating the cost savings of new

technologies before investing in them.
Constantly reviewing cost-saving resources to ensure

they remain competitively superior.
517

Success in achieving a low-cost edge over
rivals comes from out-managing rivals in
finding ways to perform value chain activities
faster, more accurately, and more costeffectively.
518
WHEN A LOW-COST PROVIDER STRATEGY

WORKS BEST
1. Price competition among rival sellers is
vigorous.
2. Identical products are available from many
sellers.
3. There are few ways to differentiate industry
products.
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching among
sellers.
519
PITFALLS TO AVOID IN PURSUING

A LOW-COST PROVIDER STRATEGY
Engaging in overly aggressive price cutting does not

result in unit sales gains large enough to recoup forgone
profits.
Relying on a cost advantage that is not sustainable

because rival firms can easily copy or overcome it.
Becoming too fixated on cost reduction such that the

firms offering is too features-poor to gain the interest of
buyers.
Having a rival discover a new lower-cost value chain

approach or develop a cost-saving technological
breakthrough.
520

A low-cost provider is in the best position to win
the business of price-sensitive buyers, set the
floor on market price, and still earn a profit.
521

Reducing price does not lead to higher total
profits unless the added gains in unit sales are
large enough to bring in a bigger total profit
despite lower margins per unit sold.
522

A low-cost providers product offering must
always contain enough attributes to be
attractive to prospective buyerslow price, by
itself, is not always appealing to buyers.
523
BROAD DIFFERENTIATION STRATEGIES
Effective Differentiation Approaches:
Carefully study buyer needs and behaviors, values

and willingness to pay for a unique product or service.
Incorporate features that both appeal to buyers and

create a sustainably distinctive product offering.
Use higher prices to recoup differentiation costs.
Advantages of Differentiation:
Command premium prices for the firms products
Increased unit sales due to attractive differentiation
Brand loyalty that bonds buyers to the firms products
524
CORE CONCEPT
Differentiation enhances profitability
whenever a companys product can
command a sufficiently higher price or
produce sufficiently greater unit sales to
more than cover the added costs of
achieving the differentiation
525
CORE CONCEPTS
The essence of a broad differentiation
strategy is to offer unique product
attributes that a wide range of buyers
find appealing and worth paying for.
A uniqueness driver is a factor that can
have a strong differentiating effect.
526
COST-EFFICIENT MANAGEMENT
OF VALUE CHAIN ACTIVITIES
A Uniqueness Driver Can:
Have a strong differentiating effect.
Be based on physical as well as functional attributes

of a firms products.
Be the result of superior performance capabilities of

the firms human capital.
Have an effect on more than one of the firms value

chain activities.
Create a perception of value (brand loyalty) in buyers

where there is little reason for it to exist.
527
FIGURE 5.3
Value Drivers: The Keys to Creating a Differentiation Advantage
528
MANAGING THE VALUE CHAIN TO CREATE

THE DIFFERENTIATING ATTRIBUTES
1. Create product features and performance attributes that appeal to
a wide range of buyers.
2. Improve customer service or add extra services.
3. Invest in production-related R&D activities.
4. Strive for innovation and technological advances.
5. Pursue continuous quality improvement.
6. Increase marketing and brand-building activities.
7. Seek out high-quality inputs.
8. Emphasize human resource management activities that improve
the skills, expertise, and knowledge of company personnel.
529
REVAMPING THE VALUE CHAIN SYSTEM

TO INCREASE DIFFERENTIATION
Approaches
to enhancing
differentiation
through changes
in the value chain
system
Coordinating with channel

allies to enhance customer
perceptions of value
Coordinating with suppliers

to better address customer
needs
530
DELIVERING SUPERIOR VALUE VIA

A BROAD DIFFERENTIATION STRATEGY
Broad Differentiation:
Offering Customers Something That Rivals Cannot
1.
Incorporate product attributes and user features that lower

the buyers overall costs of using the firms product.
2.
Incorporate tangible features (e.g., styling) that increase

customer satisfaction with the product.
3.
Incorporate intangible features (e.g., buyer image) that

enhance buyer satisfaction in noneconomic ways.
4.
Signal the value of the firms product (e.g., price, packaging,

placement, advertising) offering to buyers.
531
DIFFERENTIATION: SIGNALING VALUE
Signaling Value Is Important When:
The nature of differentiation is based on intangible

features and is therefore subjective or hard to
quantify by the buyer.
Buyers are making a first-time purchase and are

unsure what their experience will be with the product
Product or service repurchase by buyers is

infrequent.
Buyers are unsophisticated.
(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
532

Differentiation can be based on tangible or
intangible attributes.
Easy-to-copy differentiating features cannot
produce a sustainable competitive advantage.
Any differentiating feature that works well is a
magnet for imitators.
Overdifferentiating and overcharging are fatal
strategy mistakes.
533
SUCCESSFUL APPROACHES
TO SUSTAINABLE DIFFERENTIATION
Differentiation that is difficult for rivals to duplicate or

imitate:
Company reputation
Long-standing relationships with buyers
A unique product or service image
Differentiation that creates substantial switching costs

that lock in buyers
Patent-protected product innovation
Relationship-based customer service
534
WHEN A DIFFERENTIATION STRATEGY

WORKS BEST
Market Circumstances
Favoring Differentiation
Diversity of
buyer needs
and uses for
the product
Many ways that

differentiation
can have value
to buyers
Few rival firms

follow a similar
differentiation
approach
Rapid change
in technology
and product
features
535
PITFALLS TO AVOID IN PURSUING

A DIFFERENTIATION STRATEGY
Relying on product attributes easily copied by rivals.
Introducing product attributes that do not evoke an

enthusiastic buyer response.
Eroding profitability by overspending on efforts to

differentiate the firms product offering.
Offering only trivial improvements in quality, service, or

performance features vis--vis the products of rivals.
Over-differentiating the product quality, features, or

service levels exceed the needs of most buyers..
Charging too high a price premium.
536
FOCUSED (OR MARKET NICHE) STRATEGIES
Focused Strategy
Approaches
Focused
Focused
Low-Cost
Low-Cost
Strategy
Strategy
Focused
Focused
Market
Market Niche
Niche
Strategy
Strategy
537
ILLUSTRATION
CAPSULE 5.2
Aravind Eye Care Systems

Focused Low-Cost Strategy
Which uniqueness drivers are responsible

for the success of the Aravind Eye Care
System?
Which competitive conditions would
mitigate against successful entry of the
Aravind Eye Care System into U.S. eye
care market?
What part do customer expectations about
patient-doctor relationships play in the
delivery of health care in the U.S.?
538
WHEN A FOCUSED LOW-COST OR FOCUSED

DIFFERENTIATION STRATEGY IS ATTRACTIVE
The target market niche is big enough to be profitable

and offers good growth potential.
Industry leaders chose not to compete in the niche

focusers avoid competing against strong competitors
It is costly or difficult for multi-segment competitors to

meet the specialized needs of niche buyers.
The industry has many different niches and segments.
Rivals have little or no entry interest in the target

segment.
539
THE RISKS OF A FOCUSED LOW-COST OR

FOCUSED DIFFERENTIATION STRATEGY
1. Competitors will find ways to match the focused firms
capabilities in serving the target niche.
2. The specialized preferences and needs of niche
members to shift over time toward the product
attributes desired by the majority of buyers.
3. As attractiveness of the segment increases, it draws in
more competitors, intensifying rivalry and splintering
segment profits.
540
ILLUSTRATION
CAPSULE 5.3
Popchips Focused
Differentiation Strategy
How did the backgrounds of the founders

of Popchips aid in the success of their
firm?
Which uniqueness drivers are responsible
for the success of Popchips?
Which of Popchips uniqueness drivers are
competitors likely to attempt to copy first?
541
BEST-COST PROVIDER STRATEGIES
Differentiation:
Providing desired quality/
features/performance/
service attributes
Low Cost Provider:

Charging a lower price
than rivals with similar
caliber product offerings
Best-Cost Provider
Hybrid Approach
Value-Conscious Buyer
542
CORE CONCEPT
Best-cost provider strategies are a
hybrid of low-cost provider and
differentiation strategies that aim at
providing desirable attributes (quality,
features, performance, service) while
beating rivals on price.
543
WHEN A BEST-COST PROVIDER STRATEGY

WORKS BEST
Product differentiation is the market norm.
There are a large number of value-conscious buyers

who prefer midrange products.
There is competitive space near the middle of the

market for a competitor with either a medium-quality
product at a below-average price or a high-quality
product at an average or slightly higher price.
Economic conditions have caused more buyers to

become value-conscious.
544
THE BIG RISK OF A BEST-COST PROVIDER STRATEGY

GETTING SQUEEZED ON BOTH SIDES
Low-Cost
Providers
Best-Cost
Provider
Strategy
High-End
Differentiators
545
ILLUSTRATION
CAPSULE 5.4
American Giants Best-Cost

Provider Strategy
How can product quality lower product

costs?
In which stages of an industry life cycle are
low-cost leadership, differentiation, focused
niche, and best-cost provider strategies
most appropriate?
Could the higher selling prices of American
Giants clothing verses its competitors be
used as a proxy for measuring the strength
of its best-cost strategy?
546
THE CONTRASTING FEATURES OF THE FIVE

GENERIC COMPETITIVE STRATEGIES:
A SUMMARY
Each Generic Strategy:
Positions the firm differently in its market.
Establishes a central theme for how the firm

intends to outcompete rivals.
Creates boundaries or guidelines for strategic

change as market circumstances unfold.
Entails different ways and means of

maintaining the basic strategy.
547
TABLE 5.1
Distinguishing Features of the Five Generic Competitive Strategies
548
TABLE 5.1 Distinguishing Features of the Five Generic Competitive Strategies (contd)
549
SUCCESSFUL COMPETITIVE STRATEGIES ARE

RESOURCE-BASED
A firms competitive strategy is most likely to succeed if

it is predicated on leveraging a competitively valuable
collection of resources and capabilities that match the
strategy.
Sustaining a firms competitive advantage depends on

its resources, capabilities, and competences that are
difficult for rivals to duplicate and have no good
substitutes.
550

A companys competitive strategy should
be well-matched to its internal situation
and predicated on leveraging its
collection of competitively valuable
resources and capabilities.
551

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CHAPTER 5

THE FIVE GENERIC

THIS CHAPTER WILL HELP YOU UNDERSTAND:

WHY DO STRATEGIES DIFFER?

A firms competitive strategy deals exclusively with the

Key factors that

Is the competitive advantage

THE FIVE GENERIC COMPETITIVE STRATEGIES

Striving to achieve lower overall costs than rivals on

Concentrating on a narrow price-sensitive buyer

Concentrating on a narrow buyer segment by meeting

Giving customers more value for the money by offering

The Five Generic Competitive Strategies

LOW-COST PROVIDER STRATEGIES

Effective Low-Cost Approaches:

Pursue cost-savings that are difficult imitate.

Avoid reducing product quality to unacceptable levels.

Competitive Advantages and Risks:

Greater total profits and increased market share

Larger profit margins when selling products at prices

Low pricing does not attract enough new buyers.

Rivals retaliatory price cutting set off a price war.

STRATEGIC MANAGEMENT PRINCIPLE

MAJOR AVENUES FOR ACHIEVING

A firms cumulative costs across its overall value

How to Gain a Low-cost Advantage:

Is a factor with a strong influence on a firms costs.

Can be asset- or activity-based.

Securing a Cost Advantage:

Use lower-cost inputs and hold minimal assets

Offer only essential product features or services

Offer only limited product lines

Use low-cost distribution channels

Use the most economical delivery methods

Cost Drivers: The Keys to Driving Down Company Costs

COST-CUTTING METHODS (contd)

REVAMPING THE VALUE CHAIN SYSTEM

Selling direct to consumers and bypassing the activities

Streamline operations by eliminating low value-added or

Reduce materials handling and shipping costs by

How Walmart Managed Its Value

THE KEYS TO BEING A SUCCESSFUL

Success in achieving a low-cost edge over rivals comes

Spending aggressively on resources and capabilities

Carefully estimating the cost savings of new

Constantly reviewing cost-saving resources to ensure

STRATEGIC MANAGEMENT PRINCIPLE

WHEN A LOW-COST PROVIDER STRATEGY

PITFALLS TO AVOID IN PURSUING

Engaging in overly aggressive price cutting does not

Relying on a cost advantage that is not sustainable

Becoming too fixated on cost reduction such that the

Having a rival discover a new lower-cost value chain

STRATEGIC MANAGEMENT PRINCIPLE

STRATEGIC MANAGEMENT PRINCIPLE

STRATEGIC MANAGEMENT PRINCIPLE

BROAD DIFFERENTIATION STRATEGIES

Effective Differentiation Approaches: