The document discusses Porter's five generic competitive strategies: low-cost provider, differentiation, focused low-cost, focused differentiation, and best-cost provider. It explains the key factors that distinguish the strategies and when each strategy works best based on industry and market conditions. The major avenues for achieving a cost advantage as a low-cost provider include performing value chain activities efficiently and reconfiguring the value chain to reduce costs. Differentiation can be achieved by appealing product attributes that are valued by customers. Focused strategies target narrow market niches while best-cost providers offer quality products at lower prices than competitors.

1. CHAPTER 5
THE FIVE GENERIC
COMPETITIVE
STRATEGIES: WHICH ONE
TO EMPLOY?

2. 5–2
1. Understand what distinguishes each of the five
generic strategies and why some of these strategies
work better in certain kinds of industry and
competitive conditions than in others.
2. Understand the major avenues for achieving
a competitive advantage based on lower costs.
3. Learn the major avenues to a competitive advantage
based on differentiating a company’s product or
service offering from the offerings of rivals.
4. Understand the attributes of a focused strategy.
5. Recognize the attributes of a best-cost provider
strategy.

3. WHY DO STRATEGIES DIFFER?
Is the competitive advantage
pursued linked to low costs
or product differentiation?
Is the firm’s target market
broad or narrow?
Key factors that
distinguish one strategy
from another
5–3

4. THE FIVE GENERIC
COMPETITIVE STRATEGIES
Low-Cost
Provider
Striving to achieve lower overall costs than rivals on
products that attract a broad spectrum of buyers.
Broad
Differentiation
Differentiating the firm’s 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
5–4

5. FIGURE 5.1 The Five Generic Competitive Strategies
5–5

6. LOW-COST PROVIDER STRATEGIES
 Effective Low-Cost Approaches:
● Pursue cost-savings that are difficult to imitate.
● Avoid reducing product quality to unacceptable levels.
5–6

7. LOW-COST PROVIDER STRATEGIES
 A company has Two Options for Translating a
Low-Cost Advantage into Attractive Profit
Performance:
● Underpricing Competitors: Greater total profits and
increased market share gained from underpricing
competitors.
 Low pricing does not always attract enough new buyers.
 Rival’s retaliatory price cutting set off a price war.
● Maintaining the Present Price: Larger profit margins
when selling products at prices comparable to and
competitive with rivals.
5–7

8. CORE CONCEPT
♦ Successful low-cost leaders, who have the
lowest costs in the industry, 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 firm’s costs.
5–8

9. MAJOR AVENUES FOR ACHIEVING
A COST ADVANTAGE
 How to Gain a Low-cost Advantage:
Two Major Avenues:
1. Perform value chain activities more cost-
effectively than rivals.
2. Revamp the firm’s overall value chain to
eliminate or bypass cost-producing activities.
5–9

10. 1. PERFOMING VALUE CHAIN
ACTIVITIES EFFICIENTLY
 Managers must launch a concerted and
ongoing efforts to cut costs in every part
of the value chain.
 In particular, attention needs to be paid to
cost drivers which have a strong
influence on a firm’s costs.
5–10

11. FIGURE 5.2 Cost Drivers: The Keys to Driving Down Company Costs
5–11

12. COST-CUTTING METHODS
 Striving to capture economies of scale.
Economies of scale are unit cost reductions
associated with a large scale of output.
Diseconomies of scale refer to the increase
in unit cost due to an increase in
organizational size or in output.
Diseconomies of scale occur primarily
because of increased bureaucracy associated
with large-scale enterprises and the
managerial inefficiencies that can result.
5–12

13. COST-CUTTING METHODS
 Taking full advantage of learning and experience-curve
effects.
Learning effects are cost savings that come from
learning by doing. Labor, for example, learns by
repetition how to best carry out a task.
The experience curve is a concept that states that
there is a consistent inverse relationship between the
cumulative production quantity of a company and the
cost of production.
The concept implies that the more experienced a
company is in manufacturing a specific product, the
lower its cost of production. In other words, the
more a firm produces a particular good or service, the
more it gains efficiency. 5–13

14. Copyright © Houghton Mifflin Company. All rights reserved. 3 | 14
Efficiency and the
Experience Curve

15. COST-CUTTING METHODS
 Trying to operate facilities at full capacity.
● (Depreciation and other fixed costs can be spread over larger
number of units)
 Improving supply chain efficiency.
● (Partnering with suppliers, JIT to reduce carrying cost,
economizing shipping and materials handling)
 Using lower cost inputs wherever doing so will not entail
too great a sacrifice in quality.
● (Nonunionized labor, a location with lower rental fee)
5–15

16. COST-CUTTING METHODS
 Using the firm’s bargaining power vis-à-vis suppliers or
others in the value chain system to gain concessions.
● (Bargaining with suppliers to win price discount on large-volume
purchase)
5–16

17. COST-CUTTING METHODS
Using communication systems and information technology
to achieve operating efficiencies.
● Aid in organizing resources, communicating information swiftly,
doing things efficiently and accurately.
● Use of software, such as enterprise resource planning (ERP),
manufacturing execution system (MES) software
● ERP is a software used to plan and manage day-to-day
business activities, such as accounting, human resources,
supply chain management, procurement, etc.
● MES is a software used to monitor and control complex
manufacturing systems.
● Example: Otis Elevator’s electronic Monitoring System can
detect 325 types of problems in their installed elevators.
5–17

18. COST-CUTTING METHODS (cont’d)
 Employing advanced production technology and
process design to improve overall efficiency.
● (Lean production system, flexible manufacturing system,
automated manufacturing, robotic production technology, CAD,
TQM, business process reengineering, six sigma methodology)
 Being alert to the cost advantages of outsourcing or
vertical integration.
 Motivating employees through incentives and company
culture.
● (Rewarding greater worker productivity and cost-saving
innovations)
5–18

19. Six Sigma and Normal Distribution

20. 2. REVAMPING THE VALUE CHAIN
SYSTEM TO LOWER COSTS
 Use a direct sales force and a company website
to bypass the activities and costs of distributors
and dealers.
● (Sometimes, use of intermediaries represents 35 to 50% of the
price paid by final consumers)
 Eliminate low value-added or unnecessary work
steps and activities.
● (At Walmart, some items supplied by manufacturers are
delivered directly to retail stores rather than being routed
through Walmart’s distribution centers and delivered by their
trucks)
5–20

21. REVAMPING THE VALUE CHAIN
SYSTEM TO LOWER COSTS
 Reduce materials handling and shipping costs
by having suppliers locate their plants or
warehouses close to the firm’s own facilities.
5–21

22. STRATEGIC MANAGEMENT PRINCIPLE
♦ Success in achieving a low-cost edge over
rivals comes from finding ways to perform
value chain activities faster, more accurately,
and more cost-effectively.
5–22

23. WHEN A LOW-COST PROVIDER
STRATEGY WORKS BEST
1. Price competition among rival sellers is vigorous.
(Competitors are in a price war; customers are price sensitive; the
appeal of lower prices should be used to grab sales)
2. Identical products are available from many sellers.
3. There are a 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.
6. The majority of industry sales are made to a few, large-
volume buyers.
7. New entrants can use low introductory prices to attract
buyers and build a customer base.
5–23

24. PITFALLS TO AVOID IN PURSUING
A LOW-COST PROVIDER STRATEGY
 Engaging in 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.
 Extreme focus on cost reduction such that the firm’s
offering is too features-poor to gain the interest of
buyers.
 Having a rival discovers a new lower-cost value
chain approach or develop a cost-saving
technological breakthrough.
5–24

25. 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 firm’s products
● Increased unit sales due to attractive differentiation
● Brand loyalty that bonds buyers to the firm’s products
5–25

26. 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 influence on differentiation.
5–26

27. FIGURE 5.3 Uniqueness Drivers: The Keys to Creating a Differentiation Advantage
5–27

28. ENHANCING DIFFERENTIATION BASED
ON UNIQUENESS DRIVERS
 Creating superior product features, design, and performance.
(aesthetic features, superior performance, enhanced quality, added
customer safety, eco-friendly features, greater recycling capacity, energy-
saving features)
 Improving customer service or adding additional services.
(Superior technical assistance to buyers, higher-quality maintenance
services, fast customer response time, order accuracy, better credit terms,
quick order processing, or greater customer convenience)
 Pursuing production R&D activities.
(flexible manufacturing system, custom-made manufacturing, manufacturing
system for producing a wider range of products, designing luxury and eco-
friendly products, safer production system, eco-friendly manufacturing
system)
5–28

29. ENHANCING DIFFERENTIATION BASED
ON UNIQUENESS DRIVERS
 Striving for innovation and technological advances.
(Innovation proves hard to replicate due to patent protection,
provides first mover advantage)
 Pursuing continuous quality improvement.
(TQM, Quality Control Processes for reducing product defects,
preventing premature product failure, and extending product life)
 Increasing emphasis on marketing and brand-building activities.
 Seeking out high-quality inputs.
● For example, Starbucks has very strict specifications on the
coffee beans purchased from suppliers.
5–29

30. ENHANCING DIFFERENTIATION BASED
ON UNIQUENESS DRIVERS
 Emphasizing human resource management activities that improve
the skills, expertise, and knowledge of company personnel.
● A high-caliber intellectual capital has the capacity to generate
ideas that drive innovation, technological advances, improved
production techniques, better product design and product
performance.
5–30

31. Dr. Ugur Sahin and Dr. Özlem Türeci

32. REVAMPING THE VALUE CHAIN
SYSTEM TO INCREASE
DIFFERENTIATION
Coordinating with suppliers
to better address customer
needs
Coordinating with channel
allies to enhance customer
perceptions of value
Approaches
to enhancing
differentiation
through changes
in the value chain
system
5–32

33. Delivering Superior Value via a
Broad Differentiation Strategy
1.
Incorporate product attributes and user features that lower
the buyer’s overall costs of using the firm’s product.
2.
Incorporate tangible features (e.g., styling) that increase
customer satisfaction with the product.
3.
Incorporate intangible features (e.g., buyer’s image) that
enhance buyer satisfaction in noneconomic ways.
4.
Signal the value of the firm’s product (e.g., price, packaging,
placement, advertising) offering to buyers.
Broad Differentiation:
Offering Customers Something That Rivals Cannot
5–33

34. SUCCESSFUL APPROACHES
TO SUSTAINABLE DIFFERENTIATION
 Differentiation that is difficult for rivals to duplicate
or imitate:
● Company's long reputation for producing quality
products and services
● Patent-protected product innovation
● Well-established brand image
● Technological superiority
● Differentiation that creates switching costs high for
buyers
● A high caliber intellectual capital
● Long-standing relationships with buyers
5–34

35. WHEN A DIFFERENTIATION
STRATEGY WORKS BEST
Buyers have
demand for
differentiated
products
Many ways that
differentiation
can have value
to buyers
Rival firms follow
differentiation
approach
Rapid change
in technology
and product
features
Market Circumstances
Favoring Differentiation
5–35

36. PITFALLS TO AVOID IN PURSUING
A DIFFERENTIATION STRATEGY
 Relying on product attributes easily copied by rivals.
 Introducing product attributes that do not attract
customers.
 Eroding profitability by overspending on efforts to
differentiate the firm’s product offering.
 Offering only trivial improvements in quality, service, or
performance features vis-à-vis the products of rivals.
 Adding frills and features such that the product exceeds
the needs and use patterns of most buyers.
 Charging too high price.
5–36

37. FOCUSED (OR MARKET NICHE)
STRATEGIES
Focused
Differentiation
Strategy
Focused
Low-Cost
Strategy
Focused Strategy
Approaches
5–37

38. Focused Low-Cost Strategy
♦ A focused low-cost strategy aims at securing a
competitive advantage by serving buyers in the target
market niche at a lower cost (and usually lower price)
than those of rival competitor.
♦ The avenues for achieving a cost advantage in
Focused Low-Cost Strategy are the same as those for
Broad Low-Cost Leadership—
● use the cost drivers to perform value chain activities more
efficiently than rivals, and
● bypass nonessential value chain activities.

39. Focused Differentiation Strategy
♦ Differentiation strategies involve offering superior
products or services tailored to the unique preferences
and needs of a narrow, well-defined group of buyers.
♦ Successful use of a focused differentiation strategy
depends on
1. the existence of a buyer segment that is looking for
special product or service attributes and
2. a firm’s ability to create a product or service offering
that stands apart from that of rivals competing in the
same target market niche.

40. 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 have chosen 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.
 New entrants have little or no interest in the target
segment.
5–40

41. THE RISKS OF A FOCUSED LOW-COST OR
FOCUSED DIFFERENTIATION STRATEGY
1. As the attractiveness of the segment increases,
it draws in more competitors, intensifying rivalry
and splintering segment profits.
2. Competitors can copy the focused firm’s
capabilities in serving the target niche.
3. The specialized preferences and needs of
niche members shift over time toward the
product attributes desired by the majority of
buyers.
5–41

42. Value-Conscious Buyer
BEST-COST PROVIDER
STRATEGIES
Best-Cost Provider
Hybrid Approach
Differentiation:
Providing desired quality/
features/performance/
service attributes
Low Cost Provider:
Charging a lower price
than rivals with similar
caliber product offerings
5–42

43. CORE CONCEPT
♦ Best-cost provider strategies are a hybrid of
low-cost provider and differentiation strategies
that aim at providing desired quality/features/
performance/service attributes while beating
rivals on price.
5–43

44. 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 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.
5–44

45. THE BIG RISK OF A BEST-COST
PROVIDER STRATEGY—GETTING
SQUEEZED ON BOTH SIDES
High-End
Differentiators
Low-Cost
Providers
Best-Cost
Provider
Strategy
5–45

46. TABLE 5.1 Distinguishing Features of the Five Generic Competitive Strategies
5–46

47. TABLE 5.1 Distinguishing Features of the Five Generic Competitive Strategies (cont’d)
5–47

48. SUCCESSFUL COMPETITIVE
STRATEGIES ARE RESOURCE-BASED
 Sustaining a firm’s competitive advantage
depends on its resources, capabilities, and
competences that are difficult for rivals to
duplicate and have no good substitutes.
5–48

49. THANK YOU….