SM5.pptx

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 company’s product or service offering from the
offerings of rivals.
LO 4 The attributes of a best-cost provider strategy—a hybrid of
low-cost provider and differentiation strategies.
CHAPTER 5 OBJECTIVES

TYPES OF GENERIC COMPETITIVE STRATEGIES

1. A low-cost provider strategy—striving to achieve lower overall
costs than rivals on comparable products that attract a broad
spectrum of buyers, usually by underpricing rivals.
2. A broad differentiation strategy—seeking to differentiate the
company’s product offering from rivals’ products by offering
superior attributes that will appeal to a broad spectrum of
buyers.

3. A focused low-cost strategy—concentrating on a narrow buyer
segment (or market niche) and outcompeting rivals on costs, thus
being able to serve niche members at a lower price.
4. A focused differentiation strategy—concentrating on a narrow
buyer segment (or market niche) and outcompeting rivals by
offering niche members customized attributes that meet their
tastes and requirements better than rivals’ products.

5. A best-cost provider strategy—giving customers more value for
their money by satisfying buyers’ expectations on key quality,
features, performance, and/or service attributes while beating
their price expectations. This option is a hybrid strategy that blends
elements of low-cost provider and differentiation strategies; the
aim is to have the lowest (best) costs and prices among sellers
offering products with comparable differentiating attributes.

LOW-COST PROVIDER STRATEGIES
• A company achieves low-cost
leadership when it becomes the industry’s
lowest-cost provider rather than just being
one of perhaps several competitors with
comparatively low costs

Option 1 is to use the lower-cost edge to
underprice competitors and attract price-
sensitive buyers in great enough numbers to
increase total profits.
Option 2 is to maintain the present price, be
content with the present market share, and use
the lower-cost edge to earn a higher profit
margin on each unit sold, thereby raising the
firm’s total profits and overall return on
investment

1. Cost-Efficient Management of Value Chain Activities

2. Revamping the Value Chain System to Lower Costs
Redesigning the company’s value chain system in ways that eliminate
costly work steps and entirely bypass certain cost-producing value
chain activities.
2A. Selling direct to consumers and bypassing the activities and costs of
distributors and dealers: (1) create its own direct sales (2) Using
website

2B. Streamlining operations by eliminating low-value-added or
unnecessary work steps and activities.
Example: Walmart unloads incoming shipments from manufacturers’
trucks arriving at its distribution centers and loads them directly onto
outgoing Walmart trucks headed to particular stores
without ever moving the goods into the distribution center.

2C. Reducing materials handling and shipping costs by having suppliers
locate their plants or warehouses close to the company’s own facilities

The Keys to Being a Successful Low-Cost Provider
Low-cost providers seldom hesitate to spend aggressively on
resources and capabilities that promise to drive costs out of the
business.
Example: Walmart has been an early adopter of state-of-the-
art technology throughout its operations.
By continuously investing in complex, cost-saving technologies
that are hard for rivals to match, Walmart has sustained its
low-cost advantage for over 30 years.

When a Low-Cost Provider Strategy Works Best
1. Price competition among rival sellers is vigorous.
2. The products of rival sellers are essentially identical and
readily available from many eager sellers
3. It is difficult to achieve product differentiation in ways that
have value to buyers
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching their purchases from one
seller to another

Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy
1. Higher unit sales and market shares do not
automatically translate into higher profits.
2. relying on an approach to reduce costs that can be easily
copied by rivals
3. becoming too fixated on cost reduction

BROAD DIFFERENTIATION STRATEGIES
Successful differentiation allows a firm:
• Command a premium price for its
product.
• Increase unit sales (because
additional buyers are won over by the
differentiating features).
• Gain buyer loyalty to its brand
(because some buyers are strongly
attracted to the differentiating
features and bond with the company
and its products)

 Differentiation enhances profitability whenever a
company’s product can command a sufficiently higher price
or produce sufficiently bigger unit sales to more than cover
the added costs of achieving the differentiation.
 Company differentiation strategies fail when buyers don’t
value the brand’s uniqueness sufficiently and/or when a
company’s approach to differentiation is easily matched by
its rivals.

Companies can pursue differentiation from many angles:
 a unique taste (Red Bull, Listerine);
 multiple features (Microsoft Office, Apple iPad);
 engineering design and performance (Mercedes, BMW)

Managing the Value Chain to Create the Differentiating Attributes

Managing the Value Chain to Create the Differentiating Attributes
Revamping the Value Chain System to Increase Differentiation
 Coordinating with channel allies to enhance customer value
 Coordinating with suppliers to better address customer needs.

Delivering Superior Value via a Broad Differentiation Strategy
The first route is to incorporate product attributes and user features
that lower the buyer’s overall costs of using the company’s product.
Producers of materials and components often win orders for their
products by reducing a buyer’s inventory requirements (providing just-
in-time deliveries), using online systems to reduce a buyer’s
procurement and order processing costs, and providing free
technical support.

A second route is to incorporate tangible features that increase
customer satisfaction with the product, such as product specifications,
functions, and styling.

A third route to a differentiation-based competitive advantage is to
incorporate intangible features that enhance buyer satisfaction in
noneconomic ways.
Bentley, Ralph Lauren, Louis Vuitton, Burberry, Cartier, and Coach have
differentiation-based competitive advantages linked to buyer desires for
status, image, prestige, upscale fashion, superior craftsmanship, and
the finer things in life. Intangibles that contribute to differentiation can
extend beyond product attributes to the reputation of the company and
to customer relations or trust

The fourth route is to signal the value of the company’s product offering to buyers.
Typical signals of value include a high price (in instances where high price implies
high quality and performance), more appealing or fancier packaging than competing
products, ad content that emphasizes a product’s standout attributes, the quality of
brochures and sales presentations, and the luxuriousness and ambience of a seller’s
facilities (important for high-end retailers and for offices or other facilities frequented
by customers).

When a Differentiation Strategy Works Best
1. Buyer needs and uses of the product are diverse
2. There are many ways to differentiate the product or service that
have value to buyers.
3. Few rival firms are following a similar differentiation approach
4. Technological change is fast-paced and competition revolves
around rapidly evolving product features

Pitfalls to Avoid in Pursuing a Differentiation Strategy
 A differentiation strategy keyed to product or service attributes that are
easily and quickly copied is always suspect.

Differentiation strategies can also falter when buyers see little value in the
unique attributes of a company’s product

The third big pitfall is overspending on efforts to differentiate the
company’s product offering, thus eroding profitability.

Pitfalls to Avoid in Pursuing a Differentiation Strategy
Others:
 Offering only trivial improvements in quality, service, or performance features vis-
à-vis rivals’ products
 Over-differentiating so that product quality, features, or service levels exceed the
needs of most buyers.
 Charging too high a price premium.
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

FOCUSED (OR MARKET NICHE) STRATEGIES
Attention is on a narrow piece of the total market.
The target segment, or niche, can be in the form of:
- A geographic segment (such as New England), or
- A customer segment (such as urban hipsters), or
- A product segment (such as a class of models or some version of the
overall product type)

A Focused Low-Cost Strategy
A focused strategy based on low cost aims at securing a competitive
advantage by serving buyers in the target market niche at a lower cost
and lower price than those of rival competitors
The avenues to achieving a cost advantage over rivals also serving the
target market niche are the same as those for low-cost leadership
—use the cost drivers to keep the costs of value chain activities to a
bare minimum and search for innovative ways to bypass nonessential
activities

A Focused Low-Cost Strategy
Example: The Perrigo Company has become a leading manufacturer of
over-the-counter health care products, with 2013 sales of more than
$3.5 billion, by focusing on producing private label brands for retailers
such as Walmart, CVS, Walgreens, Rite-Aid, and Safeway

A Focused Differentiation Strategy
Focused differentiation strategies involve offering superior
products or services designed to appeal 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 attributes or seller capabilities and
(2) a firm’s ability to stand apart from rivals competing in the
same target market niche.

A Focused Differentiation Strategy
Companies like L. A. Burdick’s (gourmet chocolates), Rolls-Royce, and
Four Seasons Hotels and Resorts employ successful differentiation-
based focused strategies targeted at upscale buyers wanting products
and services with world-class attributes.

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—in which
case focusers can avoid battling head to head against the industry’s
biggest and strongest competitors.
 It is costly or difficult for multisegment competitors to meet the
specialized needs of niche buyers and at the same time satisfy the
expectations of their mainstream customers

When a Focused Low-Cost or Focused Differentiation Strategy Is
Attractive
 The industry has many different niches and segments, thereby
allowing a focuser to pick the niche best suited to its resources and
capabilities. Also, with more niches there is more room for focusers
to avoid competing for the same customers.
 Few if any rivals are attempting to specialize in the same target
segment—a condition that reduces the risk of segment
overcrowding.

The Risks of a Focused Low-Cost or Focused Differentiation Strategy
 One is the chance that competitors will find effective
ways to match the focused firm’s capabilities in serving the target
niche
 A second risk of employing a focused strategy is the potential for the
preferences and needs of niche members to shift over time toward
the product attributes desired by the majority of buyers

BEST-COST PROVIDER STRATEGIES
To profitably employ a best-
cost provider strategy, a
company must have the
capability to incorporate
upscale attributes into its
product offering at a lower
cost than rivals.

When a Best-Cost Provider Strategy Works Best
 A best-cost provider strategy works best in markets where
product differentiation is the norm and an attractively
large number of value-conscious buyers can be induced to
purchase midrange products rather than cheap, basic
products or expensive, top-of-the-line products
 Best-cost provider needs to position itself near the middle
of the market with either a medium-quality product at a
below-average price or a high-quality product at an
average or slightly higher price.

When a Best-Cost Provider Strategy Works Best
 Best-cost provider strategies also work well in
recessionary times, when masses of buyers become value-
conscious and are attracted to economically priced
products and services with more appealing attributes.
 But unless a company has the resources, know-how, and
capabilities to incorporate upscale product or service
attributes at a lower cost than rivals, adopting a best-cost
strategy is ill-advised

The Risk of a Best-Cost Provider Strategy
A company’s biggest vulnerability in employing a best-cost
provider strategy is getting squeezed between the strategies
of firms using low-cost and high-end differentiation
strategies.

THE CONTRASTING FEATURES OF THE FIVE
GENERIC COMPETITIVE STRATEGIES: A SUMMARY
Successful Competitive Strategies
Are Resource-Based

References
Thompson, A. A., Strickland III, A. J. and Gamble,
J. E. (2010). Crafting & Executing Strategy: The
Quest for Competitive Advantage, Concepts and
Cases (17th ed.). NY: McGraw-Hill Irwin.

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