C5.ppt

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5: The Five Generic Chapter 5: The Five Generic

Competitive Strategies: Which Competitive Strategies: Which

One to Employ? One to Employ?

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University

““Competitive strategy is about being Competitive strategy is about being different. It means deliberately choosing to different. It means deliberately choosing to perform activities differently or to perform perform activities differently or to perform different activities than rivals to deliver a different activities than rivals to deliver a

unique mix of value.”unique mix of value.”

Michael PorterMichael Porter

““Winners in business playWinners in business playrough and don’t apologize forrough and don’t apologize forit. The nicest part of playing it. The nicest part of playing

hardball is watching your hardball is watching your competitors squirm.”competitors squirm.”

George Stalk Jr. and Rob LachenauerGeorge Stalk Jr. and Rob Lachenauer

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Chapter Learning Objectives

1. Gain command of how each of the five generic competitive strategies lead to competitive advantage and deliver superior value to customers.

2. Learn why some of the five generic strategies work better in certain kinds of industry and competitive conditions than in others.

3. Learn the major avenues for achieving a competitive advantage based on lower costs.

4. Learn the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals in ways that better satisfy buyer needs and preferences.

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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

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Strategy and Competitive Advantage

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

Attracting customers and

Defending against competitive forces

Convince 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

Key to Gaining a Competitive Advantage

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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

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Figure 5.1: The Five Generic Competitive Strategies

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Low-Cost Provider Strategies

Make achievement of meaningfullower costs than rivals the themeof firm’s strategy

Include features and services in productoffering that buyers consider essential

Find approaches to achieve a cost advantage in 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!

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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

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

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Approaches to Securing a Cost Advantage

Do a better job than rivals ofperforming value chain activities

efficiently and cost effectively

Revamp value chain to bypasscost-producing activities that add

little value from the buyer’s perspective

Control costs!

By-pass costs!

Approach 1

Approach 2

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Approach 1: Controlling the Cost Drivers

Capture scale economies; avoid scale diseconomies Capture learning and experience curve effects Control percentage of capacity utilization Pursue efforts to boost sales and spread costs such

as R&D and advertising over more units Improve supply chain efficiency Substitute use of low-cost for

high-cost raw materials Use online systems and sophisticated

software to achieve operating efficiencies Adopt labor-saving operating methods Use bargaining power to gain concessions from

suppliers Compare vertical integration vs. outsourcing

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Use direct-to-end-usersales/marketing methods

Make greater use of onlinetechnology applications

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

Relocate facilities closer to suppliers or customers

Offer basic, no-frills product/service

Offer a limited product/service

Approach 2: Revamping the Value Chain

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Wal-Mart’s Approach toManaging Its Value Chain

Institute extensive information sharing with vendors via online systems

Institute extensive information sharing with vendors via online systems

Pursue global procurement of some items and centralize most purchasing activities

Pursue global procurement of some items and centralize most purchasing activities

Invest in state-of-the-art automation at its distribution centers

Invest in state-of-the-art automation at its distribution centers

Strive to optimize the product mix and achieve greater sales turnover

Strive to optimize the product mix and achieve greater sales turnover

Install security systems and store operating procedures that lower shrinkage rates

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

Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites

Manage and compensate its workforce in a manner to yield lower labor costs

Manage and compensate its workforce in a manner to yield lower labor costs

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Nucor Corporation’sLow-Cost Provider Strategy

Key elements of Nucor’s strategy Use of electric arc furnace technology allows for

lower investment costs for facilities and equipment and eliminates many expensive steps in making steel products from scratch

Use incentive compensation to achieve high productivity and low labor costs per ton produced

Locate plants close to customers to keep shipping costs down

Cost advantages and bottom-line results Lower capital investment and operating costs Ability to charge lower prices than traditional steel

companies using make-it-from scratch technology Earned attractive profits for shareholders since 1966

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Key Characteristics of Southwest Airlines’ Low-Cost Provider Strategy

Mastery of fast turnarounds at gates (25 minutes vs. 45 minutes for rivals) allows

Planes to fly more hours per day More flights to be scheduled per day with fewer aircraft More revenue generated per plane on average than rivals

Elimination of several servicesresults in cost savings

In-flight meals Assigned seating Baggage transfer to connecting airlines First-class seating and service

Fast, user-friendly online reservation system Facilitates e-ticketing Reduces staffing requirements at telephone

reservation centers and airport counters

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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

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Cost conscious corporate culture

Employee participation in cost-control efforts

Ongoing efforts to benchmark costs

Intensive scrutiny of budget requests

Strong commitment to continuous cost improvement

Characteristics of a Low-Cost Provider

Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !

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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

When Does a Low-CostStrategy Work Best?

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Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price

Low cost methods are easilyimitated by rivals

Becoming too fixated onreducing 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

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Test Your Knowledge

Striving to be the industry’s low-cost provider and achieving lower costs than rivals entails

A. doing a better job than rivals of performing value chain activities more cost-effectively.

B. having a smaller labor force than rivals, paying lower wages than rivals, locating all facilities in countries where labor costs are low, and outsourcing many value chain activities to suppliers with world-class technological capabilities.

C. revamping the firm’s overall value chain to eliminate or bypass cost-producing activities that produce little value added insofar as customers are concerned.

D. adopting activity-based costing, utilizing more best practices than rivals, and having a narrower product line than rivals.

E. Both A and C.

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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

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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?

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Unique taste – Dr. Pepper Multiple features – Microsoft Vista and Office, iPhone Wide selection and one-stop shopping – Home Depot,

Amazon.com Superior service – FedEx Spare parts availability – Caterpillar Engineering design and performance – Mercedes,

BMW Prestige and distinctiveness – Rolex Product reliability – Johnson & Johnson Quality manufacture – Karastan, Michelin, Toyota Technological leadership – 3M Corporation Top-of-line image – Ralph Lauren and Starbucks

Types of Differentiation Themes

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Sustaining Differentiation:Keys to Competitive Advantage

Most appealing approaches to differentiation are thoseHardest 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

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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

activitiesActivities, Costs, &

Margins ofForward

Channel Allies

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

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How to Achieve aDifferentiation-Based Advantage

Incorporate features that raiseperformance a buyer gets out of the product

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

Outcompete rivals via superior capabilities

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

Approach 1Approach 1

Approach 2Approach 2

Approach 3Approach 3

Approach 4Approach 4

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Test Your Knowledge

Which of the following is not one of the four basic routes to achieving a differentiation-based competitive advantage?

A. Appealing to high-income buyers who are willing and able to pay a premium price for a high-performing, multi-featured product

B. Incorporating features that raise product performance

C. Incorporating product attributes and user features that lower the buyer’s overall costs of using the company’s product

D. Delivering value to customers via competencies and competitive capabilities that rivals don’t have or can’t afford to match

E. Incorporating features that enhance buyer satisfaction in intangible or non-economic ways

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Importance of Perceived Value

Buyers seldom pay forvalue that is not perceived

Price premium of adifferentiation strategy reflects

Value actually delivered to the buyer

and

Value perceived by the buyer

Actual and perceived value can differ when buyers are unable to assess their experience with a product

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Signaling Value asWell as Delivering Value

Incomplete knowledge of buyers causes them tojudge value based on such signals asPriceAttractive packagingExtensive ad campaignsAd content and imageSeller facilities or professionalism and

personality of employeesHaving a list of prestigious customers

Signals of value may be as important as actual value whenNature of differentiation is hard to quantifyBuyers are making first-time purchasesRepurchase is infrequentBuyers are unsophisticated

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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

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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 premiumbuyers perceive is too high

Not striving to open up meaningfulgaps in quality, service, or performancefeatures vis-à-vis rivals’ products

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For Discussion: Your Opinion

A low-cost provider strategy can defeat a

differentiation strategy when buyers are

satisfied with a basic product and don’t think

“extra” attributes are worth a higher price.

True or false? Explain.

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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 underprice comparable brands

Objectives

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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

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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

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Key Characteristics of Toyota’sBest-Cost Provider Strategy for the Lexus

Design an array of high-performance characteristics and upscale features into Lexus models to make them comparable in performance/luxury to other high-end models, i.e. Mercedes, BMW

Design an array of high-performance characteristics and upscale features into Lexus models to make them comparable in performance/luxury to other high-end models, i.e. Mercedes, BMW

Transfer its capabilities in making high-quality Toyota models at low cost to making premium-quality Lexus models at costs below other luxury-car makers

Transfer its capabilities in making high-quality Toyota models at low cost to making premium-quality Lexus models at costs below other luxury-car makers

Use its relatively lower manufacturing costs tounderprice comparable Mercedes and BMW models

Use its relatively lower manufacturing costs tounderprice comparable Mercedes and BMW models

Establish a new network of Lexus dealers, separate from Toyota dealers, dedicated to providing a level of personalized customer service unmatched in the industry

Establish a new network of Lexus dealers, separate from Toyota dealers, dedicated to providing a level of personalized customer service unmatched in the industry

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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

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Test Your Knowledge

Which of the following are distinguishing features of a best-cost provider strategy (based on the comparisons of the five generic competitive strategies shown in Figure 5.1)?

A. The strategic target is price-conscious buyers

B. A marketing emphasis on charging a slightly higher price than rival brands having comparable features and attributes

C. A product line that stresses wide selection, many product variations, and emphasis on differentiating features

D. A competitive advantage based on more value for the money

E. Using constant product innovation, excellent R&D skills, and periodic technological breakthroughs to

sustain the strategy

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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

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Geographic uniqueness

Specialized requirements inusing product/service

Special product attributesappealing only to niche buyers

Approaches to Defining a Market Niche

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Examples of Focus Strategies

Community Coffee Specialty coffee retailer

Animal Planet and History Channel Special interest Cable TV programs

Porsche Sports cars

Bandag Specialist in truck tire recapping

CGA Inc. Specialty insurance provider

Match.com Online dating service

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Focus / Niche Strategiesand Competitive Advantage

Achieve lower costs than rivals inserving a well-defined buyer segment

Focused low-cost strategy

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

Focused differentiation strategy

Which hat is unique?

Approach 1

Approach 2

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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

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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

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For Discussion: Your Opinion

Which of the five generic competitive strategies do you think the following companies are employing:

The Saturn division of General Motors

Abercrombie & Fitch

Amazon.com

Avon Products

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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 strategyThe 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 !

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Table 5.1: Distinguishing Features of the Five Generic Competitive Strategies

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