McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Chapter 5: The Five Generic Competitive Strategies Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University * McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved “Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.” * McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved “Winners in business play rough and don’t apologize for it. The nicest part of playing hardball is watching your competitors squirm.” * 1-* Chapter Learning Objectives Gain command of how each of the five generic competitive strategies lead to competitive advantage and deliver superior value to customers. Learn why some of the five generic strategies work better in certain kinds of industry and competitive conditions than in others. Learn the major avenues for achieving a competitive advantage based on lower costs. 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. * 1-* Chapter RoadmapThe Five Competitive StrategiesLow-Cost Provider StrategiesBroad Differentiation StrategiesBest-Cost Provider StrategiesFocused (or Market Niche) StrategiesThe Contrasting Features of the Five Generic Competitive Strategies: A Summary * 1-* Strategy and Competitive AdvantageCompetitive advantage exists when a firm’s strategy gives it an edge inAttracting customers andDefending against competitive forces Convince customers firm’s product / service offers superior valueA good product at a low priceA superior product worth paying more forA best-value product Key to Gaining a Competitive Advantage 1-* What Is Competitive Strategy?Deals exclusively with a company’s business plans to compete successfullySpecific efforts to please customersOffensive and defensive moves to counter maneuvers of rivalsResponses to prevailing market conditionsInitiatives to strengthen its market positionNarrower in scope than business strategy 1-* Figure 5.1: The Five Generic Competitive Strategies * 1-* Low-Cost Provider StrategiesMake achievement of meaningful lower costs than rivals the theme of firm’s strategyInclude features and services in product offering that buyers consider essentialFind approaches to achieve a cost advantage in ways difficult for rivals to copy or match Keys to Success Low-cost leadership means low overall costs, not just low manufacturing or production costs! * 1-* Option 1: Use lower-cost edge to under-price competitors and attract price-sensitive buyers.

1. McGraw-Hill/Irwin ©2009 The
McGraw-Hill Companies, All Rights Reserved
Chapter 5: The Five Generic Competitive Strategies
Screen graphics created by:
Jana F. Kuzmicki, Ph.D.
Troy University
*
McGraw-Hill/Irwin ©2009 The
McGraw-Hill Companies, All Rights Reserved
“Competitive strategy is about being different. It means
deliberately choosing to perform activities differently or to
perform different activities than rivals to deliver a unique mix
of value.”
*
McGraw-Hill/Irwin ©2009 The
McGraw-Hill Companies, All Rights Reserved
“Winners in business play
rough and don’t apologize for

2. it. The nicest part of playing hardball is watching your
competitors squirm.”
*
1-*
Chapter Learning Objectives
Gain command of how each of the five generic competitive
strategies lead to competitive advantage and deliver superior
value to customers.
Learn why some of the five generic strategies work better in
certain kinds of industry and competitive conditions than in
others.
Learn the major avenues for achieving a competitive advantage
based on lower costs.
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.
*
1-*
Chapter RoadmapThe Five Competitive StrategiesLow-Cost
Provider StrategiesBroad Differentiation StrategiesBest-Cost
Provider StrategiesFocused (or Market Niche) StrategiesThe
Contrasting Features of the Five Generic Competitive
Strategies: A Summary

3. *
1-*
Strategy and Competitive AdvantageCompetitive advantage
exists when a firm’s strategy gives it an edge inAttracting
customers andDefending against competitive forces
Convince customers firm’s product / service offers superior
valueA good product at a low priceA superior product worth
paying more forA best-value product
Key to Gaining a Competitive Advantage
1-*
What Is Competitive Strategy?Deals exclusively with a
company’s business plans
to compete successfullySpecific efforts to please
customersOffensive and defensive moves
to counter maneuvers of rivalsResponses to prevailing market
conditionsInitiatives to strengthen its market positionNarrower
in scope than business strategy
1-*
Figure 5.1: The Five Generic Competitive Strategies

4. *
1-*
Low-Cost Provider StrategiesMake achievement of meaningful
lower costs than rivals the theme
of firm’s strategyInclude features and services in product
offering that buyers consider essentialFind approaches to
achieve a cost advantage in ways difficult for rivals to copy or
match
Keys to Success
Low-cost leadership means low overall costs, not just low
manufacturing or production costs!
*
1-*
Option 1: Use lower-cost edge to
under-price competitors and attract
price-sensitive buyers in enough
numbers to increase total profits

5. 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
*
1-*
Approaches to Securing
a Cost Advantage
Do a better job than rivals of
performing value chain activities
efficiently and cost effectively
Revamp value chain to bypass
cost-producing activities that add little value from the buyer’s
perspective
Approach 1
Approach 2

6. 1-*
Approach 1: Controlling the Cost DriversCapture scale
economies; avoid scale diseconomiesCapture learning and
experience curve effectsControl percentage of capacity
utilizationPursue efforts to boost sales and spread costs such as
R&D and advertising over more unitsImprove supply chain
efficiencySubstitute use of low-cost for
high-cost raw materialsUse online systems and sophisticated
software to achieve operating efficienciesAdopt labor-saving
operating methodsUse bargaining power to gain concessions
from suppliersCompare vertical integration vs. outsourcing
1-*
Use direct-to-end-user
sales/marketing methodsMake greater use of online
technology applicationsStreamline operations by eliminating
low-value-added or unnecessary work stepsRelocate facilities
closer to suppliers or customersOffer basic, no-frills
product/serviceOffer a limited product/service
Approach 2: Revamping the Value Chain
1-*

7. Wal-Mart’s Approach to
Managing Its Value Chain
*
1-*
Nucor Corporation’s
Low-Cost Provider Strategy Key elements of Nucor’s
strategyUse 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 producedLocate plants close to
customers to keep shipping costs downCost advantages and
bottom-line resultsLower capital investment and operating
costsAbility to charge lower prices than traditional steel
companies using make-it-from scratch technologyEarned
attractive profits for shareholders since 1966
*
1-*
Key Characteristics of Southwest Airlines’ Low-Cost
Provider Strategy Mastery of fast turnarounds at gates (25
minutes vs. 45 minutes for rivals) allowsPlanes to fly more

8. hours per dayMore flights to be scheduled per day with fewer
aircraftMore revenue generated per plane on average than
rivalsElimination of several services
results in cost savingsIn-flight mealsAssigned seatingBaggage
transfer to connecting airlinesFirst-class seating and
serviceFast, user-friendly online reservation systemFacilitates
e-ticketingReduces staffing requirements at telephone
reservation centers and airport counters
*
1-*
Keys to Success in Achieving
Low-Cost LeadershipScrutinize each cost-creating activity,
identifying cost driversUse knowledge about cost drivers to
manage
costs of each activity down year after yearFind ways to
restructure value chain to eliminate
nonessential work steps and low-value activitiesWork diligently
to create cost-conscious corporate culturesFeature broad
employee participation in continuous cost-improvement efforts
and limited perks for executivesStrive to operate with
exceptionally small corporate staffs Aggressively pursue
investments in resources and capabilities that promise to drive
costs out of the business

9. 1-*
Cost conscious corporate cultureEmployee participation in cost-
control effortsOngoing efforts to benchmark costsIntensive
scrutiny of budget requestsStrong 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 !
1-*
Price competition is vigorousProduct is standardized or readily
available
from many suppliersThere are few ways to achieve
differentiation that have value to buyersMost buyers use
product in same waysBuyers incur low switching costs Buyers
are large and have
significant bargaining powerIndustry newcomers use
introductory low prices to attract
buyers and build customer base
When Does a Low-Cost
Strategy Work Best?

10. 1-*
Pitfalls of Low-Cost StrategiesBeing overly aggressive in
cutting priceLow cost methods are easily
imitated by rivalsBecoming too fixated on
reducing costs and ignoringBuyer interest in additional
featuresDeclining buyer sensitivity to priceChanges in how the
product is usedTechnological breakthroughs open up cost
reductions for rivals
1-*
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.
Answer: E

11. 1-*
Differentiation Strategies
Incorporate differentiating features that cause buyers to prefer
firm’s product or service over brands of rivals
Find ways to differentiate that create
value for buyers and are not easily
matched or cheaply copied by rivalsKeeping the cost of
achieving differentiation below the higher price that can be
charged
Objective
Keys to Success
*
1-*
Benefits of Successful Differentiation
A product / service with unique, appealing attributes allows a
firm toCommand a premium price and/orIncrease unit sales
and/orBuild brand loyalty
= Competitive Advantage
*
1-*

12. Unique taste – Dr. PepperMultiple features – Microsoft Vista
and Office, iPhoneWide selection and one-stop shopping –
Home Depot, Amazon.comSuperior service – FedExSpare parts
availability – CaterpillarEngineering design and performance –
Mercedes, BMWPrestige and distinctiveness – RolexProduct
reliability – Johnson & JohnsonQuality manufacture – Karastan,
Michelin, ToyotaTechnological leadership – 3M
CorporationTop-of-line image – Ralph Lauren and Starbucks
Types of Differentiation Themes
1-*
Sustaining Differentiation:
Keys to Competitive AdvantageMost appealing approaches to
differentiation are thoseHardest for rivals to match or
imitateBuyers will find most appealingBest choices to gain a
longer-lasting, more profitable competitive edge New product
innovationTechnical superiorityProduct quality and
reliabilityComprehensive customer serviceUnique competitive
capabilities
1-*
Where to Find Differentiation
Opportunities in the Value ChainPurchasing and procurement
activitiesProduct R&D and product design activitiesProduction
process / technology-related activitiesManufacturing /
production activitiesDistribution-related activitiesMarketing,

13. sales, and customer service activities
1-*
How to Achieve a
Differentiation-Based Advantage
Incorporate features that raise
performance 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 that
lower buyer’s overall costs of using product
Approach 1
Approach 2
Approach 3
Approach 4
1-*
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

14. 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
Answer: A
1-*
Importance of Perceived ValueBuyers seldom pay for
value that is not perceivedPrice premium of a
differentiation strategy reflectsValue actually delivered to the
buyer
andValue perceived by the buyerActual and perceived value
can differ when buyers are unable to assess their experience
with a product
1-*
1-*
Signaling Value as

15. Well as Delivering ValueIncomplete knowledge of buyers
causes them to
judge value based on such signals asPriceAttractive
packagingExtensive ad campaignsAd content and imageSeller
facilities or professionalism and
personality of employeesHaving a list of prestigious
customersSignals 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
1-*
When Does a Differentiation
Strategy Work Best?There are many ways to differentiate a
product that have value and please customersBuyer needs and
uses are diverseFew rivals are following a similar
differentiation approachTechnological change and
product innovation are fast-paced
1-*
Pitfalls of Differentiation StrategiesAppealing product
features are easily copied by rivalsBuyers see little value in

16. unique attributes of productOverspending on efforts to
differentiate the product offering, thus eroding
profitabilityOver-differentiating such that product features
exceed buyers’ needsCharging a price premium
buyers perceive is too highNot striving to open up meaningful
gaps in quality, service, or performance
features vis-à-vis rivals’ products
1-*
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.
True. A company employing a differentiation strategy may
differentiate on the basis of some attribute that does not deliver
adequate value to buyers, i.e. such as lowering a buyer’s cost to
use the product or enhancing a buyer’s well being. If potential
buyers look at a differentiated product offering and conclude
“so what?”, buyers are indicating they are satisfied with a basic
product.
1-*
Best-Cost Provider StrategiesCombine a strategic emphasis on
low-cost with a strategic emphasis on differentiationMake an
upscale product at a lower costGive customers more value for

17. the money
Deliver superior value by meeting or exceeding buyer
expectations on product attributes and beating their price
expectationsBe the low-cost provider of a product with good-to-
excellent product attributes, then use cost advantage to
underprice comparable brands
Objectives
1-*
Competitive Strength of a
Best-Cost Provider StrategyCompetitive advantage is based
on the capability to include upscale attributes at a lower cost
than rivals’ comparable productsTo 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
*
1-*

18. When Is a Best-Cost
Provider Strategy Appealing?When buyer diversity makes
product differentiation the norm When many buyers are also
sensitive to price and value
1-*
Key Characteristics of Toyota’s
Best-Cost Provider Strategy for the Lexus
*
1-*
Risk of a Best-Cost Provider StrategyA best-cost provider
may get squeezed between strategies of firms using low-cost
and differentiation strategiesLow-cost leaders may be able to
siphon
customers away with a lower priceHigh-end differentiators may
be able to steal customers away
with better product attributes
*

19. 1-*
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
Answer: D
1-*
Focus / Niche StrategiesInvolve concentrated attention on a
narrow piece of the total market
Serve niche buyers better than rivals
Choose a market niche where buyers
have distinctive preferences, special
requirements, or unique needsDevelop unique capabilities to
serve needs of target buyer segment
Objective
Keys to Success

20. 1-*
Geographic uniquenessSpecialized requirements in
using product/serviceSpecial product attributes
appealing only to niche buyers
Approaches to Defining a Market Niche
*
1-*
Examples of Focus StrategiesCommunity CoffeeSpecialty
coffee retailerAnimal Planet and History Channel Special
interest Cable TV programsPorsche Sports carsBandag
Specialist in truck tire recappingCGA Inc. Specialty insurance
providerMatch.comOnline dating service
1-*
Focus / Niche Strategies
and Competitive Advantage
Achieve lower costs than rivals in
serving a well-defined buyer segment
Focused low-cost strategy

21. Offer a product appealing to unique
preferences of a well-defined buyer segment
Focused differentiation strategy
Approach 1
Approach 2
1-*
What Makes a Niche
Attractive for Focusing?Big enough to be profitable and offers
good growth potentialNot crucial to success of industry
leadersCostly or difficult for multi-segment
competitors to meet specialized
needs of niche membersFocuser has resources and capabilities
to effectively serve an attractive nicheFew other rivals are
specializing in same nicheFocuser can defend against
challengers via superior ability to serve niche members
1-*
Risks of a Focus StrategyCompetitors with broad product
lines having wide appeal find effective ways to match
a focuser’s capabilities in serving nicheNiche buyers’

22. preferences shift
towards product attributes desired
by majority of buyers – niche
becomes part of overall marketSegment becomes so attractive it
becomes crowded with rivals, causing segment profits to be
splintered
1-*
For Discussion: Your Opinion
Which of the five generic competitive strategies do you think
the following companies are employing:The Saturn division of
General MotorsAbercrombie & FitchAmazon.comAvon Products
Saturn division of General Motors – Focused low-cost strategy
Abercrombie & Fitch – Focused differentiation strategy
Amazon.com – Broad differentiation strategy
Avon Products – Broad low-cost strategy
1-*
Deciding Which Generic
Competitive Strategy to UseEach positions a company
differently in its market and competitive environmentEach
establishes a central theme for how a company will endeavor to
outcompete rivalsEach creates some boundaries for
maneuvering as market circumstances unfoldEach points to
different ways of experimenting with the basics of the

23. strategyEach entails differences in product line, production
emphasis, marketing emphasis, and means to sustain the
strategy
The 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 !
*
1-*
Table 5.1: Distinguishing Features of the Five Generic
Competitive Strategies
*
*
*
*
*
*
*

24. *
*
*
*
*
Answer: E
*
*
Answer: A
True. A company employing a differentiation strategy may
differentiate on the basis of some attribute that does not deliver
adequate value to buyers, i.e. such as lowering a buyer’s cost to
use the product or enhancing a buyer’s well being. If potential
buyers look at a differentiated product offering and conclude

25. “so what?”, buyers are indicating they are satisfied with a basic
product.
*
*
*
Answer: D
*
Saturn division of General Motors – Focused low-cost strategy
Abercrombie & Fitch – Focused differentiation strategy
Amazon.com – Broad differentiation strategy
Avon Products – Broad low-cost strategy
*
*
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies,
Inc. All rights reserved.
Chapter 4: Evaluating a Company’s Resources and
Competitive Position

26. Screen graphics created by:
Jana F. Kuzmicki, Ph.D.
Troy University
*
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies,
Inc. All rights reserved.
“Before executives can
chart a new strategy, they must reach common understanding of
the company’s current position.”
*
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies,
Inc. All rights reserved.
“Organizations succeed in a competitive marketplace over the
long run because they can do certain things their customers
value better than can their competitors.”
*
4-*
Chapter Learning Objectives

27. Understand how to evaluate a company’s internal situation and
capabilities and identify the resource strengths capable of
becoming the cornerstone of the company’s strategic approach.
Grasp how and why activities performed internally by a
company and those performed externally by its suppliers and
forward channel allies determine a company’s cost structure and
ability to compete successfully.
Learn how to evaluate a company’s competitive strength
relative to key rivals.
Understand the role and importance of industry and competitive
analysis and internal situation analysis in identifying strategic
issues company managers must address.
*
4-*
Chapter RoadmapQuestion 1: How Well Is the Company’s
Present Strategy Working?Question 2: What Are the
Company’s Resource Strengths and Weaknesses and Its External
Opportunities and Threats?Question 3: Are the Company’s
Prices and Costs Competitive?Question 4: Is the Company
Competitively Stronger or Weaker than Key Rivals?Question 5:
What Strategic Issues and Problems Merit Front-Burner
Managerial Attention?
*
4-*
Company Situation Analysis:

28. The Key Questions
1. How well is the company’s
present strategy working?
2. What are the company’s resource
strengths and weaknesses and its
external opportunities and threats?
3. Are the company’s prices and
costs competitive?
4. Is the company competitively
stronger or weaker than key rivals?
5. What strategic issues merit
front-burner managerial attention?
4-*
Figure 4.1: Identifying Components of a Single-Business
Company’s Strategy
4-*
*
4-*
Question 1: How Well Is the Company’s

29. Present Strategy Working?Must begin by understanding what
the strategy isIdentify competitive approachLow-cost
leadership?Differentiation?Best-cost provider?Focus on a
particular market niche?Determine competitive scopeBroad or
narrow geographic market coverage?In how many stages of
industry’s production/distribution chain does the company
operate?Examine recent strategic movesIdentify functional
strategies
Key Considerations
*
4-*
Approaches to Assessing How Well
the Present Strategy Is Working
Qualitative assessment –
Is the strategy well-conceived?Covers all the bases?Internally
consistent?Makes sense?Timely and in step with
marketplace?Quantitative assessment – What are the results?Is
company achieving its financial and strategic objectives?Is
company an above-average industry performer?
4-*
*
4-*
Trend in sales and market shareAcquiring and/or retaining

30. customersTrend in profit marginsTrend in net profits, EPS, and
ROEOverall financial strength and credit ratingEfforts at
continuous improvement activitiesTrend in stock priceImage
and reputation with customersLeadership role(s) – Technology,
product quality, innovation, etc.
Key Indicators of How Well
the Strategy Is Working
4-*
Table 4.1: Key Financial Ratios: How to
Calculate Them and What They Mean
4-*
*
4-*
Table 4.1: Key Financial Ratios: How to
Calculate Them and What They Mean (con’t)
4-*
*

31. 4-*
S W O T represents the first letter inS trengthsW eaknessesO
pportunitiesT hreatsFor a company’s strategy to be well-
conceived, it must beMatched to its resource strengths and
weaknessesAimed at capturing its best market opportunities and
erecting defenses against external threats to its well-being
Question 2: What Are the Company’s Strengths,
Weaknesses, Opportunities and Threats ?
4-*
A strength is something a firm does well or an attribute that
enhances its competitivenessValuable skills, competencies, or
capabilitiesValuable physical assetsValuable human
assetsValuable organizational assetsValuable intangible
assetsImportant competitive capabilitiesAn attribute placing a
company in a position of market advantageAlliances or
cooperative ventures with partners
Identifying Resource Strengths
and Competitive Capabilities
Resource strengths and competitive
capabilities are competitive assets!
4-*
Competencies vs. Core Competencies vs. Distinctive
CompetenciesA competence is the product of organizational

32. learning and experience and represents real proficiency in
performing an internal activityA core competence is a well-
performed
internal activity central (not peripheral or incidental) to a
company’s competitiveness
and profitabilityA distinctive competence is a competitively
valuable activity a
company performs better than its rivals
4-*
Stem from skills, expertise, and
experience usually representing anAccumulation of learning
over time andGradual buildup of real proficiency in
performing an activityInvolve deliberate efforts to develop the
ability to do something, often entailingSelecting people with
requisite knowledge and skillsUpgrading or expanding
individual abilities Molding work products of individuals into a
cooperative effort to create organizational abilityA conscious
effort to create intellectual capital
Company Competencies and Capabilities
*
4-*
Core Competencies –

33. A Valuable Company ResourceA competence becomes a core
competence when the well-performed activity is central to a
company’s competitiveness and profitabilityOften, a core
competence is
knowledge-based, residing in people,
not in assets on a balance sheetA core competence is typically
the result of cross-department collaborationA core competence
gives a company a
potentially valuable competitive capability
and represents a definite competitive asset
4-*
Examples: Core CompetenciesExpertise in integrating multiple
technologies to create families
of new productsKnow-how in cost efficient supply chain
managementSpeeding new/next-generation products to
marketBetter after-sale service capabilitySkills in
manufacturing a high quality productCapability to fill customer
orders accurately and swiftly
4-*
A distinctive competence is a competitively valuable activity

34. that a company performs better than its competitorsA distinctive
competence is a competitively potent resource
source because it Gives a company a competitively valuable
capability unmatched by rivalsCan underpin and add real punch
to a company’s strategyIs a basis for sustainable competitive
advantage
Distinctive Competence –
A Competitively Superior Resource
4-*
Examples: Distinctive Competencies
Toyota
Low-cost, high-quality manufacturing of motor vehicles
Starbucks
Innovative coffee drinks and store ambience
4-*
*
4-*
Determining the Competitive
Power of a Company ResourceTo qualify as competitively

35. valuable or to be the basis for sustainable competitive
advantage, a “resource” must pass 4 tests:
1. Is the resource really competitively superior?
2. Is the resource rare – is it something rivals lack?
3. Is the resource hard to copy?
4. Can the resource be trumped by
the different capabilities of rivals?
4-*
What Is a Resource-Based Strategy?Companies with
competitively valuable resource strengths and competencies
often deploy these capabilities toBoost the competitive power
of their overall strategyBolster their position in the
marketplaceResource-based strategiesAttempt to exploit
company resources to offer value to customers in ways rival
cannot matchCan focus on eroding the competitive potency of a
rival by developing different resources that effectively
substitute for the strengths of the rival
*
4-*
Test Your Knowledge
A distinctive competence
A. is a more important competitive asset than a core
competence.

36. B. represents uniquely strong capability relative to rival
companies—it qualifies as a competitively superior resource
strength with competitive advantage potential.
C. is a competitively important value chain activity that a
company performs better than its rivals.
D. can underpin and add real punch to a company's strategy.
E. All of the above.
Answer: E
4-*
Identifying Resource Weaknesses
and Competitive DeficienciesA weakness is something a firm
lacks, does poorly, or a condition placing it at a
disadvantageResource weaknesses relate toInferior or unproven
skills,
expertise, or intellectual capitalLack of important physical,
organizational, or intangible assetsMissing capabilities in key
areas
Resource weaknesses and deficiencies
are competitive liabilities!
4-*
Table 4.2: What to Look for in Identifying a
Company’s Strengths, Weaknesses, Opportunities, and

37. Threats
4-*
*
4-*
Identifying a Company’s
Market OpportunitiesOpportunities most relevant to a
company are those offeringGood match with its financial and
organizational resource capabilitiesBest prospects for profitable
long-term growthPotential for competitive advantage
4-*
Identifying External Threats
Some possibilities: Emergence of cheaper/better
technologiesIntroduction of better products by rivalsEntry of
lower-cost foreign competitorsOnerous regulationsRise in
interest ratesPotential of a hostile takeoverUnfavorable
demographic shiftsAdverse shifts in foreign exchange
ratesPolitical upheaval and/or burdensome government policies

38. 4-*
S W O T analysis involves more than
just developing the 4 lists of strengths, weaknesses,
opportunities, and threatsThe most important part of S W O T
analysis isUsing the 4 lists to draw conclusions
about a company’s overall situationActing on the conclusions
toBetter match a company’s strategy to its
resource strengths and market opportunitiesCorrect the
important weaknessesDefend against external threats
Role of SWOT Analysis in
Crafting a Better Strategy
4-*
Figure 4.2: The Three Steps of SWOT Analysis
4-*
*
4-*
For Discussion: Your Opinion
In doing SWOT analysis, why is it not sufficient just to compile
4 lists (one each for resource strengths, resource weaknesses,
market opportunities, and external threats) and then move on?

39. The most important part of SWOT analysis is using the 4 lists
to draw conclusions about a company’s overall situation and
then acting on the conclusions in these lists to better match a
company’s strategy to its resource strengths and market
opportunities, correct the important weaknesses, and defend
against external threats.
4-*
Assessing whether a firm’s costs are competitive with those of
rivals is a crucial part of company situation analysisKey
analytical toolsValue chain analysisBenchmarking
Question 3: Are the Company’s
Prices and Costs Competitive?
4-*
A company’s business consists of all activities undertaken in
designing, producing, marketing, delivering, and supporting its
product or service All these activities a company performs
internally combine to form a value chain — so-called because
the underlying intent of a company’s activities is to do things
that ultimately create value for buyers The value chain contains
two types of activitiesPrimary activities – Where most of
the value for customers is createdSupport activities – Facilitate
performance of primary activities
Concept: Company Value Chain

40. 4-*
Figure 4.3: A Representative Company Value Chain
4-*
*
4-*
Example: Value Chain Activities
for a Bakery Goods Maker
Primary ActivitiesSupply chain managementRecipe
development and testingMixing and bakingPackagingSales and
marketingDistribution
Support ActivitiesQuality controlHuman resource
managementAdministration
4-*
*
4-*
Example: Value Chain Activities
for a Department Store Retailer

41. Primary ActivitiesMerchandise selection and purchasingStore
layout and product displayAdvertisingCustomer service
Support ActivitiesSite selectionHiring and trainingStore
maintenanceAdministrative activities
4-*
*
4-*
Example: Value Chain
Activities for a Hotel Chain
Primary ActivitiesSite selection and
constructionReservationsOperation of hotel propertiesManaging
lineup
of hotel locations
Support ActivitiesAccountingHiring and
trainingAdvertisingBuilding a brand and reputationGeneral
administration
4-*
*
4-*
Combined costs of all activities in a company’s value chain
define a company’s internal cost structureCompares a firm’s
costs activity

42. by activity against costs of key rivalsFrom raw materials
purchase toPrice paid by ultimate customerPinpoints which
internal activities are a
source of cost advantage or disadvantage
Characteristics of Value Chain Analysis
4-*
Several factors give rise to differences
in value chains of rival companiesDifferent strategies Different
operating practicesDifferent technologiesDifferent degrees of
vertical integration Some companies may perform particular
activities internally while others outsource themDifferences
among the value chains of competing companies complicate task
of assessing rivals’ relative cost positions
Why Do Value Chains of Rivals Differ?
*
4-*
Assessing a company’s cost competitiveness involves
comparing costs all along an industry’s value chain Suppliers’
value chains are relevant becauseCosts, performance features,
and quality of inputs provided by suppliers influence a firm’s
own costs and product performanceValue chains of distributors
and retailers are relevant because Their costs and profit margins
represent “value added” and are part

43. of the price paid by ultimate end-userActivities they perform
affect
end-user satisfaction
The Value Chain System
for an Entire Industry
4-*
Figure 4.4: Representative Value Chain for an Entire
Industry
4-*
*
4-*
Example: Value Chain Activities
Pulp & Paper Industry
Timber farming
Logging
Pulp mills
Papermaking
Distribution
4-*

44. *
4-*
Example: Value Chain Activities
Parts and components manufacture
Assembly
Wholesale distribution
Retail sales
Home Appliance Industry
4-*
*
4-*
Example: Value Chain Activities
Processing of basic ingredients
Syrup manufacture
Bottling and can filling
Wholesale distribution
Advertising
Retailing
Soft Drink Industry
Publix
4-*

45. *
4-*
Example: Value Chain Activities
Computer Software Industry
Programming
Disk loading
Marketing
Distribution
4-*
*
4-*
Determining whether a company’s costs are in line with those of
rivals requiresMeasuring how a company’s costs compare with
those of rivals activity-by-activityRequires having accounting
data to measure cost of each
value chain activityActivity-based costing entailsDefining
expense categories according
to specific activities performed andAssigning costs to the
activity
responsible for creating the cost
Activity-Based Costing: A Key
Tool in Analyzing Costs

46. 4-*
Developing Data to Measure a Company’s Cost
CompetitivenessAfter identifying key value chain activities, the
next step involves determining costs of performing specific
value chain activities using activity-based costingAppropriate
degree of disaggregation depends onEconomics of
activitiesValue of comparing narrowly defined
versus broadly defined activitiesGuideline – Develop separate
cost
estimates for activitiesHaving different economicsRepresenting
a significant or growing proportion of costs
*
4-*
Table 4.3: The Difference between Traditional Cost
Accounting and Activity-Based Cost Accounting: An
Example from Air Conditioner Manufacturing
4-*
*
4-*

47. Focuses on cross-company comparisons of how certain
activities are performed and costs associated with these
activitiesPurchase of materialsPayment of suppliersManagement
of inventoriesGetting new products to marketPerformance of
quality controlFilling and shipping of customer orders Training
of employeesProcessing of payrolls
Benchmarking Costs of
Key Value Chain Activities
4-*
Identify best and most efficient means of performing various
value chain activitiesLearn what is the “best” way to perform a
particular activity from those companies who have demonstrated
that they are “best-in-industry” or “best-in-world” at performing
the activityLearn what other firms do to
perform an activity at lower costFigure out what actions to take
to improve a company’s own cost competitiveness
Objectives of Benchmarking
4-*
Ethical Principles in BenchmarkingAvoid actions implying
an interest inRestraint of tradeMarket and/or customer
allocation schemesPrice fixingBriberyRefrain from acquiring
trade secrets by any means viewed as improperBe willing to
provide same type of information to a benchmarking
partnerCommunicate early to clarify expectations and avoid

48. misunderstandingsBe honest and completeObtain prior
permission of benchmarking partner to use partner’s name with
dataHonor wishes of partners regarding use of
informationEstablish specific ground rules up front with
partnersCheck with legal counsel if any information gathering
procedure is in doubtDo not ask partners for sensitive dataUse
an ethical third party to assemble competitive dataTreat
benchmarking interchange as confidential
4-*
Cost competitiveness depends on how well a company manages
its value chain relative to how well competitors manage their
value chainsWhen a company’s costs are out-of-line, the
activities responsible for the higher costs may be due to any of
three parts of industry value chain
1. Activities performed by suppliers
2. A company’s own internal activities
3. Activities performed by forward channel allies
What Determines If a
Company Is Cost Competitive?
4-*
Implement use of best practices throughout companyEliminate
some cost-producing activities
altogether by revamping value chain systemRelocate high-cost
activities to
lower-cost geographic areasSee if high-cost activities can be

49. performed
cheaper by outside vendors/suppliersInvest in cost-saving
technologyInnovate around troublesome cost
componentsSimplify product designMake up difference by
achieving savings in backward or forward portions of value
chain system
Options to Correct
Internal Cost Disadvantages
4-*
Pressure suppliers for lower pricesSwitch to lower-priced
substitutesCollaborate closely with suppliers to identify mutual
cost-saving opportunitiesArrange for just-in-time deliveries
from suppliers to lower inventory and internal logistics
costsIntegrate backward into business
of high-cost suppliers
Options to Correct a
Supplier-Related Cost Disadvantage
4-*
Pressure dealer-distributors and other forward channel allies to
reduce their costs to make the final price to buyers more
competitive with prices of rivalsWork closely with forward
channel allies to identify win-win opportunities to reduce
costsChange to a more economical distribution strategySwitch

50. to cheaper distribution channelsIntegrate forward into company-
owned retail outlets
Options to Correct a Cost Disadvantage Associated With
Activities of Forward Channel Allies
4-*
Test Your Knowledge
For a company to translate performance of value chain activities
into competitive advantage, it
A. must (1) develop core competencies and maybe a distinctive
competence that rivals don’t have or can’t quite match and that
are instrumental in helping it deliver attractive value to
customers or (2) be more cost efficient in how it performs value
chain activities such that it has a low-cost advantage.
B. has to develop more core competencies than rivals.
C. must be more adept than rivals in using benchmarking and
activity-based costing.
D. has to position itself in the strategic group where profit
margins are highest.
E. must adopt more best practices than rival firms.
Answer: A
4-*
A company can create competitive advantage by out-managing
rivals in performing value chain activities
in either/both of two ways
Option 1: Develop competencies and capabilities
that rivals don’t have or can’t match and thereby create a

51. resource or capability-based competitive advantage
Option 2: Perform value chain activities at a lower overall cost
than rivals and thereby create a cost-based competitive
advantage
Translating Performance of Value Chain Activities into
Competitive Advantage
4-*
Figure 4.5: Translating Company Performance of
Value Chain Activities into Competitive Advantage
4-*
*
4-*
Whether a company is competitively stronger or weaker than
key rivals hinges on the answers to two questionsHow does the
company rank
relative to competitors on each
important factor that determines
market success?Does the company have a net
competitive advantage or disadvantage
vis-à-vis major competitors?

52. Question 4: Is the Company Stronger
or Weaker than Key Rivals?
4-*
1. List industry key success factors and other relevant measures
of competitive strength
2. Rate firm and key rivals on each factor using rating scale of
1 to 10 (1 = very weak; 5 = average; 10 = very strong)
3. Decide whether to use a weighted or unweighted rating
system (a weighted system is superior because chosen strength
measures are unlikely to be equally important)
4. Sum individual ratings to get an overall measure of
competitive strength for each rival
5. Based on overall strength ratings, determine overall
competitive strength of firm
Assessing a Company’s
Competitive Strength vs. Key Rivals
4-*
Table 4.4: Illustrations of Unweighted
and Weighted Strength Assessments
4-*

53. *
4-*
Reveals strength of firm’s competitive position vis-à-vis key
rivalsShows how firm stacks up against rivals, measure-by-
measure – pinpoints firm’s competitive strengths and
competitive weaknessesIndicates whether firm is at a
competitive advantage / disadvantage against each
rivalIdentifies possible offensive attacks (pit company strengths
against rivals’ weaknesses) Identifies possible defensive actions
(a need to correct competitive weaknesses)
Why Do a Competitive
Strength Assessment ?
4-*
Test Your Knowledge
Which of the following statements is false?
A. The higher a company’s costs are above those of close
rivals, the more competitively vulnerable it becomes.
B. Because the value chains of rival companies tend to be quite
similar, costs outside a company’s own value chain do not
affect whether it is at a cost advantage or disadvantage vis-à-vis
key rivals.
C. A company’s cost competitiveness depends not only on the
costs of internally performed value chain activities but also on
the costs of activities performed by its suppliers and forward
channel allies.
D. The stronger a company’s financial performance and market
position, the more likely it has a well-conceived, well-executed
strategy.

54. E. A competence is something a company is good at doing
whereas a core competence is a proficiently performed internal
activity that is central to a company’s strategy and
competitiveness.
Answer: B
4-*
Based on results of both industry and competitive analysis and
an evaluation
of a company’s competitiveness,
what items should be on
a company’s “worry list”?Requires thinking strategically
aboutPluses and minuses in the industry
and competitive situationCompany’s resource strengths and
weaknesses and attractiveness of its competitive position
Question 5: What Strategic Issues
Merit Managerial Attention?
A “good” strategy must address “what to do” about each and
every strategic issue!
4-*
A Clear Grasp of the Issues Is a Prerequisite to Effective
ActionIssues are best couched in such phrases as“How to . . .
?”“Whether to . . . ?”“What should be done about . . . ?”Issues
need to be precisely stated

55. and “cut straight to the chase”The issues on management’s
“worry list” represent an agenda
for action
Sharp, clear understanding of the issues is a big assist in
figuring out what to do to address and resolve them !
4-*
How to stave off market challenges from new foreign
competitors?How to combat price discounting of rivals?How to
reduce a company’s high costs?How to sustain a company’s
present growth
in light of slowing buyer demand?Whether to expand a
company’s product line?Whether to acquire a rival
firm?Whether to expand into foreign
markets rapidly or cautiously?What to do about aging
demographics
of a company’s customer base?
Identifying the Strategic Issues:
Some Possibilities
4-*

56. For Discussion: Your Opinion
Why is it important for company managers to develop a “worry
list” of strategic issues and problems that they need to address
and to resolve?
Why can’t managers just skip this step and go directly to the
task of choosing what strategy to employ?
The purpose of the “worry list” is to identify the specific
issues/problems that management needs to address, not to figure
out what specific actions to take. Deciding what to do – which
strategic actions to take and which strategic moves to make –
comes later, i.e. when it is time to craft a company’s strategy
and choose from among the various strategic alternatives.
*
*
*
*
*
*
*
*
*

57. *
*
*
*
Answer: E
*
*
The most important part of SWOT analysis is using the 4 lists
to draw conclusions about a company’s overall situation and
then acting on the conclusions in these lists to better match a
company’s strategy to its resource strengths and market
opportunities, correct the important weaknesses, and defend
against external threats.
*
*

58. *
*
*
*
*
*
*
*
*
*
Answer: A
*

59. *
Answer: B
The purpose of the “worry list” is to identify the specific
issues/problems that management needs to address, not to figure
out what specific actions to take. Deciding what to do – which
strategic actions to take and which strategic moves to make –
comes later, i.e. when it is time to craft a company’s strategy
and choose from among the various strategic alternatives.