5

The Five
Chapter
Title
Generic
Competitive
Strategies
15/e PPT
McGraw-Hill/Irwin

Strategic Management
2007 The McGraw-Hill Companies, Inc. All rights reserved.

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 that firms products offer

superior value i.e.

A good product at a low price

A superior product worth paying more for

A best-value product
5-2

Fig. 5.1: The Five Generic Competitive Strategies

5-3

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!
5-4

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

5-5

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

non-essential 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
5-6

Cost-Efficient Management of Value Chain

Activities

1.

Attempts to outmanage rivals on cost commonly involves such actions

as:
Striving to capture all available economies of scale
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 in different models
Cutting back on the number of models
In global industries, making separate products for each market instead
of selling standard products 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 each
countrys model
5-7

Cost-Efficient Management of Value Chain

Activities
2. Taking full advantage of learning/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 accrue 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
5-8

Cost-Efficient Management of Value Chain

Activities
3. Trying to operate at full capacity
Higher rates of capacity utilization allows
depreciation and other fixed costs to be spread over
large unit volume, thereby lowering fixed cost per nit
The more the capital intensive a business, or higher
the fixed costs as a percentage of total costs, the
more important the full capacity operations
4. Pursuing efforts to boost sales volumes and
thus spread out such costs as R&D, and selling
and administrative costs over more units
5-9

Cost-Efficient Management of Value Chain

Activities
5. Improving supply chain efficiency
partnering with suppliers,
reduce inventory carrying high costs via JIT
inventory systems
6. Substituting the use of low cost for high cost
raw materials or component parts
7. Using online systems and sophisticated
software to achieve operating efficiencies
Enterprise resource planning (ERP),
Manufacturing execution system (MES)
5-10

Cost-Efficient Management of Value Chain

Activities
8. Adapting labor-saving operating methods
Applying labor saving technology
Shifting production from geographic areas where labor costs
are high
Avoiding use of union labor wherever possible
Using incentive compensation systems that promote high
productivity
9. Using companys bargaining power vis--vis suppliers
to gain concessions
10. Being alert to the cost advantages of outsourcing and
vertical integration

5-11

Revamping the Value Chain to Curb or

Eliminate Unnecessary Activities
1.

i.
ii.
2.

Cutting out distributors and dealers by selling directly to

consumers
Having the companys own direct sales force (which adds the cost of
maintaining and supporting a sales force but may well be cheaper than
assessing customers through distributors)
Conducting sales operations at the companys web site
Replacing certain value chain activities with faster and cheaper
on line technology
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

5-12

Revamping the Value Chain to Curb or

Eliminate Unnecessary activities
3.

4.
5.
6.

Streamlining operations by eliminating lowvalue-added or unnecessary work steps and

activities
Computer assisted design techniques
Standardizing parts and components across
models
Relocating facilities so as to curb costs
associated with spatial differentiation
Offering a frills free product
Offering a limited product line as opposed to a
full product line
5-13

Characteristics of a Low-Cost Provider

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

Successful low-cost producers champion

frugality but wisely and aggressively
invest in cost-saving improvements !
5-14

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
5-15

Pitfalls of Low-Cost Strategies

Being
Low

overly aggressive in cutting price

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
5-16

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

Not

spending more to achieve differentiation

than the price premium that can be charged
5-17

Benefits of Successful Differentiation

A product with unique, appealing
attributes allows a firm to:

Command a premium price and/or

Increase unit sales and/or

Build brand loyalty

Which
hat is
unique?

= Competitive Advantage
5-18

Types of Differentiation Themes

Unique taste Dr. Pepper

Multiple features Microsoft Windows and Office
Wide selection and one-stop shopping ebay,
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, Honda
Technological leadership 3M Corporation
Top-of-line image Ralph Lauren, Starbucks, Chanel
5-19

Where to Find Differentiation

Opportunities in the Value Chain
Purchasing
Product

and procurement activities

R&D and product design activities

Production

process / technology-related activities

Manufacturing

/ production activities

Distribution-related
Marketing,
Activities,
Costs, &
Margins of
Suppliers

activities

sales, and customer service activities

Internally
Performed
Activities,
Costs, &
Margins

Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners

5-20

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
Reducing a buyers inventory requirements ( JIT
deliveries)
Increasing maintenance intervals and product
reliability to lower buyers procurement and order
processing cost
Providing free technical support
5-21

How to Achieve a
Differentiation-Based Advantage
Approach 2
Incorporate product features/attributes that raise
product performance
Attributes that provide buyer greater reliability,
ease of use, convenience or durability
Making the companys product cleaner, safer,
quicker, or more service maintenance free than
rival bands
5-22

How to Achieve a
Differentiation-Based Advantage
Approach 3
Incorporate features/attributes that enhance
buyer satisfaction in non-economic or
intangible ways
Goodyears Aquatread tire design appeals to
safety conscious motorists
Rolls Royce, Gucci, Rolex have
differentiation based competitive advantages
linked to buyer desires for status, image,
prestige, upscale fashion, etc.
5-23

How to Achieve a
Differentiation-Based Advantage
Approach 4
Compete on the basis of 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
5-24

The Importance of Perceived Value and

Signaling Value

The price premium commanded by a differentiation strategy

reflects the value actually delivered to the buyer and the
value perceived by the buyer
Actual and perceived value can differ whenever buyers
have trouble assessing what their experience with the
product will be
Incomplete knowledge on the part of buyer to judge value
based on such signals as:
Price ( where price connotes quality)
Attractive packaging
Extensive ad campaign
Ad content, and image
The firms market share
5-25

The Importance of Perceived Value and

Signaling Value

1.
2.
3.
4.

The sellers facilities

The sellers list of customers
Professionalism, appearance, and personality of
the sellers facilities
Such signals of value may be as important as
actual value when:
the nature of differentiation is subjective or hard to
quantify
buyers are making first-time purchase
repurchase is infrequent
buyers are unsophisticated
5-26

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
5-27

Pitfalls of Differentiation Strategies

Appealing

product features are easily copied by rivals

Often,

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 as too high

Not

striving to open up meaningful gaps in quality,

service, or performance features vis--vis rivals
products
5-28

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-toexcellent product attributes, then use cost
advantage to under-price comparable brands
5-29

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

5-30

Suzuki Liana

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
5-31

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
5-32

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 is the size
of the buyer group that a company is trying to
appeal to
5-33

Approaches to Defining a Market Niche

Geographic

uniqueness

Specialized

requirements in
using product

Special

product attributes
appealing only to niche buyers
5-34

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 the same niche

Focuser

can defend against challengers via

superior ability to serve niche members
5-35

Risks of a Focus Strategy

Competitors

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
5-36

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 out-compete 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 Selecting a stuck in the middle strategy!
This rarely produces a sustainable competitive
advantage or a distinctive competitive position!
5-37

5-38