The Five Generic Competitive Strategies

Part 3 Chapter 5 TSG in Primus

What Is Competitive Strategy?

The companys overall business plan The firm has a competitive advantage when its strategy gives it an edge in Attracting customers and Defending against competitive forces The firm must convince their customers that their product / service offers superior value A good product at a low price A superior product worth paying more for A best-value product

The Five Competitive Strategies

There are countless variations of competitive strategies that companies employ, because each has a different internal and industry environment The biggest differences can be summarized as:

Is the companys target market broad or narrow?

Is the company trying to be a low cost provider, or is it competing by product differentiation?

The Five Generic Competitive Strategies

Low-Cost Provider Strategies

The theme of the firms strategy is to achieve lower costs than rivals
The firms products should have the features and services that buyers consider essential This approach will be most successful if the firm can achieve a cost advantage that is 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 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 Benchmarking and valuechain analysis

Approach 2
Revamp value chain to bypass cost-producing activities that add little value from the buyers perspective Change distribution Reduce frills Streamline

Wal-Marts Approach to Managing Its Value Chain

Institute extensive information sharing with vendors via online systems Pursue global procurement of some items and centralize most purchasing activities Invest in state-of-the-art automation at its distribution centers 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 Manage and compensate its workforce to yield lower labor costs

When Does a Low-Cost Strategy Work Best?

Price competition is vigorous Product is standardized and there are lots of sellers There are not many ways to differentiate that have value to buyers Buyers find it easy to switch to other sellers. Buyers are large and therefore have significant bargaining power

Differentiation Strategies
Objective

Incorporate differentiating features that cause buyers to prefer firms product or service over brands of rivals

Keys to that create value for Find ways to differentiate Success buyers and are not easily matched or cheaply copied by rivals
Do not spend more on differentiation than the price premium 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

Increase unit sales and/or Build brand loyalty = Competitive Advantage

Types of Differentiation

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 Michelin, Toyota Technological leadership 3M Corporation Top-of-line image Ralph Lauren, Starbucks, Grey Poupon

Importance of Perceived Value

Buyers seldom pay for value that is not perceived

Price premium of a differentiation strategy reflects

Value actually delivered to the buyer

and
Value perceived by the buyer

Signals of value may be as important as actual value.

Signaling Value

Lack of knowledge of buyers causes them to judge value based on such signals as Price Attractive packaging Extensive ad campaigns Ad content and image Seller facilities or professionalism and personality of employees Having a list of prestigious customers Signals of value may be as important as actual value when Buyers are making first-time purchases Repurchase is infrequent Buyers are unsophisticated

When Does a Differentiation Strategy Work Best?

There are many ways to differentiate a product that customers find valuable
Buyer needs and uses are diverse Few rivals are following a similar differentiation approach The costs of differentiation are lower than the benefits

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

Be the low-cost provider of a product with good-toexcellent product attributes, then use cost advantage to underprice comparable brands

When Does a Best-Cost Provider Strategy Work Best?

Where buyer diversity makes product differentiation the norm and

Where many buyers are also sensitive to price and value

Focus / Niche Strategies

Concentrate 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

Approaches to Defining a Market Niche

Geographic uniqueness
Specialized requirements in using product/service Special product attributes appealing only to niche buyers

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

Examples of Focus Strategies

Animal Planet and History Channel Cable TV Porsche Sports cars Cannondale Top-of-the line mountain bikes Enterprise Rent-a-Car Provides rental cars to repair garage customers

Summary
The companys choice of generic strategy is not trivial

Each positions a company differently in its market and competitive environment Each establishes a central theme for how a company will endeavor to out-compete rivals

Strategic alliance

Art of creating value partnering 2 or more cos join forces to achieve mutually beneficial str outcomes. Computers apple-sony-motorola, HP & Disney-GSK & Dr.Reddy, Wipro& GE, Microsoft &TCS, HP & Oracle Technology, new product, expertise, new competencies, supply chain

Advantages

Entry into critical markets and speeden the process Gain inside knowledge Access valuable skills Strong technology Consumer needs and preference Reduce fixed costs ROI & ROS

Examples of strategic alliances in india Tata Motors and Fiat are close to signing a worldwide agreementjoint R& Dfor cars for overseas markets and the use of Fiat's retail presence abroad for marketing Tata cars. Blue star has entered into a strategic alliance with italian co.,ISA, for providing a range ofsupermarkets and food refrigeration solutions

Weaknesses

Not stable Lack of pulling for long term No self development Small units Technology adaptation Over exloitation of markets

Mergers & acquisitions

Absorption /amalgamation Reconstruction-internal or external Merger through Absorption:- An absorption is a combination of two /more companies into an 'existing company'. absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL). TCL, an acquiring company , survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

Merger through Consolidation:- A consolidation is a combination of two or more companies into a 'new company'. In this form of merger, all companies are legally dissolved and a new entity is created. Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares.

1. Horizontal Mergers :

* Lipton India & Brooke bond * Bank of Mathura with ICICI Bank * BSES Ltd. with Orissa Power Supply co. 2. Vertical Merger : Reliance and FLAG Telecom group 3. Reverse Mergers : * Godrej Soaps Ltd. with Gujrat Godrej Innovative Chemicals Ltd. 4. Conglomerate merger : L&T and Voltas Ltd. 5. Negotiated merger : ITC Classic Ltd. with ICICI Ltd. 6. Downstream merger : ICICI Ltd. a parent co. merged with it's subsidiary co. ICICI bank.

Upstream Merger : Bhadrachalam paper Board with the parent ITC Ltd. For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.

Horizontal merger:- is a combination of two or more firms in the same area of business. For example, combining of two book publishers or two luggage manufacturing companies to gain dominant market share.

Conglomerate merger:- is a combination of firms engaged in unrelated lines of business activity. For example, merging of different businesses like manufacturing of cement products, fertilizer products, electronic products, insurance investment and advertising agencies. L&T and Voltas Ltd are examples of such mergers.

Vertical merger:- is a combination of two or more firms involved in different stages of production or distribution of the same product. joining of a TV manufacturing (assembling) co and a TV marketing co or joining of a spinning company and a weaving company. Vertical merger may take the form of forward or backward merger.

Reasons

Easy and quick entry Reduced competition Faster rate of growth Diversification Tax concessions Synergy Future growth prospects Balanced growth

Why fail

No systematic assessments Lack of matching managerial skill Financial stake Diversity

joint ventures in india

Sony-Ericsson is a jv japanese company Sony Corp and the Swedish telecommunications co Ericsson to make mobile phones. combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Bothcompanies have stopped making their own mobile phones.

Technology transfer agreements Joint product development Purchasing agreements Distribution agreements Marketing and promotional collaboration Intellectual advice Engineering, Procurement and Construction (EPC) arrangements

Example of joint ventures in India Virgin Mobile India Limited is a cellular telephone service provider company which is a joint venture between Tata Tele service and Richard Branson's Service Group. Currently, the company uses Tata's CDMA network to offer its services under the brand name Virgin Mobile.

Virgin Mobile India Limited is a cellular telephone service provider company which is a joint venture between Tata Tele service and Richard Branson's Service Group. Currently, the company uses Tata's CDMA network to offer its services under the brand name Virgin Mobile, and it has also started GSM services in some states.

Tata Motors & Fiat: The JV will manufacture cars from Tata & Fiat stables. Tata Motors will also buy diesel engines for it cars from Fiat, while Fiat will distribute Tata cars in Europe.

Mahindra & Renault: This JV is the market entry strategy for Renault. The JV will manufacture Renaults Logan cars in India. Renault will gain market knowledge - while Mahindras will learn how to make good cars, and leverage its dealership network to additional profits.

Tata-AIG: the new government regulations on private insurance companies. Private insurance companies need foreign collaboration for technical know how. While the current regulations prevent foreign insurance companies setting up a green field venture in India. Similarly other JV in this field are: ICICI Lombard, ICICI Prudential, Bajaj-

Bharthi-Walmart: JV was primarily created by Wal-Marts desire to enter India and the government regulations regarding large foreign retail firms operating in India. This 50:50 venture with Bharti will give Wal-Mart an entry into India ( a long awaited one at that)

advantages

Technology sophistication Brand image implication Improvement of competitive ability Economies of scale share the risks Knowledge acquisition Foreign market

demerits

Risk of loss of control Strategy implementation problems Coordination Lack of pre planning

effective

Identification Strenghts and weaknesses Portfolio investment Quick n smart learning Perfect integration

Outsourcing

VALUE CHAIN Cheaper Core businesses Nike athletic shoes China and Gap jeans Toll free

Benefits

Cost structure- IBM- 2002-comp mfg-sanmina-SCI- low cost Enhanced differentiation- reliability & quality-Dell Focus on core business Sustainable competitive advantage Reduces the risk of change in techLCD

Demerits

Depending on others Hold up Loss of info

International business level strat

New customers Lower costs Firms competiveness Spread the business risk

Issues

Customise Competitive strategy Locational advantages Cultural issues Social issues

entering

Exporting- Direct and Indirect Licensing-mfg Franchising-service use brand names- KFC Joint ventures Wholly owned subsidiaries- coca cola india, PG