CHAPTER 7 Strategies for Competing in International Markets.docx

CHAPTER 7 Strategies for Competing in International Markets
LEARNING OBJECTIVES
THIS CHAPTER WILL HELP YOU UNDERSTAND:
The primary reasons companies choose to compete in
international markets
How and why differing market conditions across countries
influence a company’s strategy choices in international markets
The five major strategic options for entering foreign markets
The three main strategic approaches for competing
internationally
How companies are able to use international operations to
improve overall competitiveness
The unique characteristics of competing in developing-country
markets
© McGraw-Hill Education.
Why companies decide to enter foreign markets
To further exploit core competencies
To gain access to lower-cost inputs of production
To gain access to new customers and meet current customer
needs
To achieve lower costs through economies of scale, experience,
and increased purchasing power
To gain access to resources and capabilities located in foreign
markets
WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS

Jump to Appendix 1 long image description
WHY COMPETING ACROSS NATIONAL BORDERS MAKES
STRATEGY-MAKING MORE COMPLEX1.Different countries
with different home-country advantages in different
industries2.Location-based value chain advantages
for certain countries3.Differences in government policies, tax
rates, and economic conditions4.Currency exchange rate
risks5.Differences in buyer tastes and preferences for products
and services
FIGURE 7.1 The Diamond of National Advantage
THE DIAMOND FRAMEWORK
Answers important questions about competing on an
international basis by:
Predicting where new foreign entrants are likely to come from
and their strengths
Highlighting foreign market opportunities where rivals are
weakest
Identifying the location-based advantages of conducting certain
value chain activities of the firm in a particular country

REASONS FOR LOCATING VALUE CHAIN ACTIVITIES
ADVANTAGEOUSLY
Lower wage rates
Higher worker productivity
Lower energy costs
Fewer environmental regulations
Lower tax rates
Lower inflation rates
Proximity to suppliers and technologically related industries
Proximity to customers
Lower distribution costs
Available or unique natural resources
THE IMPACT OF GOVERNMENT POLICIES AND
ECONOMIC CONDITIONS IN HOST COUNTRIES
Positives
Tax incentives
Low tax rates
Low-cost loans
Site location and development
Worker training
Negatives
Environmental regulations
Subsidies and loans to domestic competitors
Import restrictions
Tariffs and quotas
Local-content requirements

Regulatory approvals
Profit repatriation limits
Minority ownership limits
Core Concepts (1 of 6)
Political risks stem from instability or weaknesses in national
governments and hostility to foreign business.
Economic risks stem from the stability of a country’s monetary
system, economic and regulatory policies, the lack of property
rights protections.
THE RISKS OF ADVERSE EXCHANGE RATE SHIFTS
Effects of exchange rate shifts
Exporters experience a rising demand for their goods whenever
their currency grows weaker relative to the importing country’s
currency.
Exporters experience a falling demand for their goods whenever
their currency grows stronger relative to the importing
country’s currency.
STRATEGIC MANAGEMENT PRINCIPLE (1 of 6)
Fluctuating exchange rates pose significant economic risks to a
firm’s competitiveness in foreign markets.
Exporters are disadvantaged when the currency of the country
where goods are being manufactured grows stronger relative to
the currency of the importing country.

Domestic companies facing competitive pressure from lower-
cost imports benefit when their government’s currency grows
weaker in relation to the currencies of the countries where the
lower-cost imports are being made.
Thinking Strategically
What effects has the adoption of the euro had on the ability of
European Union (EU) countries and firms to respond to changes
in intra-national economic conditions given that they now share
a common currency?
What should a EU firm do to respond to a adverse currency
exchange rate shift in a non-EU country?
How will exiting the EU affect the United Kingdom’s ability to
compete in world markets?
CROSS-COUNTRY DIFFERENCES IN DEMOGRAPHIC,
CULTURAL, AND MARKET CONDITIONS
Whether to pursue a strategy of offering a mostly standardized
product worldwide
Whether to customize offerings in each country market to match
the tastes and the preferences of local buyers
Key Strategic
Considerations

STRATEGIC OPTIONS FOR ENTERING AND COMPETING
IN INTERNATIONAL MARKETS
Maintain a home country production base and export goods to
foreign markets.
License foreign firms to produce and distribute the firm’s
products abroad.
Employ a franchising strategy in foreign markets.
Establish a subsidiary in a foreign market via acquisition or
internal development.
Rely on strategic alliances or joint ventures with foreign
companies.
EXPORT STRATEGIES
Advantages
Low capital requirements
Economies of scale in utilizing existing production capacity
No distribution risk
No direct investment risk
Disadvantages
Maintaining relative cost advantage of home-based production
Transportation and shipping costs
Exchange rates risks
Tariffs and import duties
Loss of channel control

LICENSING AND FRANCHISING STRATEGIES
Advantages
Low resource requirements
Income from royalties and franchising fees
Rapid expansion into many markets
Disadvantages
Maintaining control of proprietary know-how
Loss of operational and quality control
Adapting to local market tastes and expectations
FOREIGN SUBSIDIARY STRATEGIES
Advantages
High level of control
Quick large-scale market entry
Avoids entry barriers
Access to acquired firm’s skills
Disadvantages
Costs of acquisition
Complexity of acquisition process
Integration of the firms’ structures, cultures, operations, and
personnel
Core Concept (2 of 6)
A greenfield venture is a subsidiary business that is established
by setting up the entire operation from the ground up.

USING A GREENFIELD STATEGY FOR DEVELOPING A
FOREIGN SUBSIDIARY
A greenfield strategy is appealing when:
Creating an internal startup is cheaper than making
an acquisition
Adding new production capacity will not adversely impact the
supply-demand balance in the local market
A startup subsidiary has the ability to gain good distribution
access
A startup subsidiary will have the size, cost structure, and
resource strengths to compete head-to-head against local rivals
PURSUING A GREENFIELD STRATEGY
Advantages
High level of control over venture
“Learning by doing”
in the local market
Direct transfer of the firm’s technology, skills, business
practices, and culture
Disadvantages
Capital costs of initial development
Risks of loss due to political instability or lack of legal
protection of ownership
Slowest form of entry due to extended time required to
construct facility
BENEFITS OF ALLIANCE AND JOINT VENTURE
STRATEGIES
Gaining partner’s knowledge of local market conditions
Achieving economies of scale through joint operations

Gaining technical expertise and local market knowledge
Sharing distribution facilities and dealer networks, and mutually
strengthening each partner’s access to buyers
Directing competitive energies more toward mutual rivals and
less toward one another
Establishing working relationships with key officials in the
host-country government
Strategic Management Principle (3 of 6)
Collaborative strategies involving alliances or joint ventures
with foreign partners are a popular way for companies to edge
their way into the markets of foreign countries.
Cross-border alliances enable a growth-minded firm to widen its
geographic coverage and strengthen its competitiveness in
foreign markets; at the same time, they offer flexibility and
allow a firm to retain some degree of autonomy and operating
control.
Walgreens Boots Alliance, Inc.: Entering Foreign Markets via
Alliance Followed by Merger
Did industry consolidation provoke Walgreens to make its
strategic international acquisition?
What strategic advantages does the alliance between Walgreens
and Alliance Boots bring to both partners?
What internal problems could the merger create for Walgreens
as it strives to integrate and adjust to the risks of entry into

international markets?
THE RISKS OF STRATEGIC ALLIANCES WITH FOREIGN
PARTNERS
Outdated knowledge and expertise of local partners
Cultural and language barriers
Costs of establishing the working arrangement
Conflicting objectives and strategies or deep differences of
opinion about joint control
Differences in corporate values and ethical standards
Loss of legal protection of proprietary technology or
competitive advantage
Overdependence on foreign partners for essential expertise and
competitive capabilities
INTERNATIONAL STRATEGY: THE THREE MAIN
APPROACHES
Multidomestic Strategy
Global
Strategy
Transnational
Strategy
Competing
Internationally

An international strategy is a strategy for competing in two or
more countries simultaneously.
A multidomestic strategy is one in which a firm varies its
product offering and competitive approach from country to
country in an effort to be responsive to differing buyer
preferences and market conditions. It is a think-local, act-local
type of international strategy, facilitated by decision making
decentralized to the local level.
A global strategy is one in which a firm employs the same basic
competitive approach in all countries where it operates, sells
much the same products everywhere, strives to build global
brands, and coordinates its actions worldwide with strong
headquarters control. It represents a think-global, act-global
approach.
A transnational strategy is a think-global,
act-local approach that incorporates elements of both
multidomestic and global strategies.
FIGURE 7.2 Three Approaches for Competing
Internationally
INTERNATIONAL OPERATIONS AND THE QUEST FOR
COMPETITIVE ADVANTAGE
Use international location to lower

cost or differentiate
product
Share resources
and capabilities
Gain cross-border coordination
benefits
Build Competitive Advantage
in International Markets
TABLE 7.1 Advantages and Disadvantages of a
Multidomestic StrategyMultidomestic (think local, act
local)AdvantagesDisadvantagesCan meet the specific needs of
each market more preciselyHinders resource and capability
sharing or cross-market transfersCan respond more swiftly to
localized changes in demandHas higher production and
distribution costsCan target reactions to the moves of local
rivalsIs not conductive to a worldwide competitive
advantageCan respond more quickly to local opportunities and
threats
TABLE 7.1 Advantages and Disadvantages of a
Global StrategyGlobal (think global, act
global)AdvantagesDisadvantagesHas lower costs due to scale
and scope economiesCannot address local needs preciselyCan
lead to greater efficiencies due to the ability to transfer best
practices across marketsIs less responsive to changes in local
market conditionsIncreases innovation from knowledge sharing

and capability transferInvolves higher transportation costs and
tariffsOffers the benefit of a global brand and reputationHas
higher coordination and integration costs
TABLE 7.1 Advantages and Disadvantages of Transnational
StrategyTransnational (think global, act
local)AdvantagesDisadvantagesOffers the benefits of both local
responsiveness and global integrationIs more complex and
harder to implementEnables the transfer and sharing of
resources and capabilities across bordersEntails conflicting
goals, which may be difficult to reconcile and require trade-
offsProvides the benefits of flexible coordinationInvolves more
costly and time-consuming implementation
Four Seasons Hotels:
Local Character, Global Service
Why has Four Seasons Hotels been so successful in expanding
its hospitality operations into a broad diversity of countries?
How should local hotel competitors respond to Four Seasons
Hotels’ continued expansion into their markets?
Why has the global economic slowdown not dampened demand
for the Four Seasons luxury hotel offerings?
USING LOCATION TO BUILD COMPETITIVE ADVANTAGE

To pursue a strategy of offering
a mostly standardized product worldwide
To customize offerings in each country market to match tastes
and preferences of local buyers
Key Location
Issues
Companies that compete internationally can pursue competitive
advantage in world markets by locating their value chain
activities in whatever nations prove most advantageous.
WHEN TO CONCENTRATE ACTIVITIES IN A FEW
LOCATIONS
The costs of manufacturing or other activities are significantly
lower in some geographic locations than in others.
There are significant scale economies in production or
distribution.
There are sizable learning and experience benefits associated
with performing an activity in a single location.
Certain locations have superior resources, allow better
coordination of related activities, or offer other valuable
advantages.
WHEN TO DISPERSE ACTIVITIES ACROSS MANY

LOCATIONS
Buyer-related activities can be conducted at a distance.
There are high transportation costs.
There are diseconomies of large size.
Trade barriers make a central location too expensive.
Dispersing activities reduces exchange rate risks.
Dispersion helps prevent supply interruptions.
Dispersion helps avoid adverse political developments.
Dispersion allows for location-based technology and production
cost competitive advantages.
SHARING AND TRANSFERRING RESOURCES AND
CAPABILITIES TO BUILD COMPETITIVE ADVANTAGE
Building a resource-based competitive advantage requires:
Using powerful brand names to extend a differentiation-based
competitive advantage beyond the home market
Coordinating activities for sharing and transferring resources
and production capabilities across different countries’ domains
to develop market dominating depth in key competencies
Profit sanctuaries are country markets that provide a firm with
substantial profits because of a strong or protected market
position.
Cross-market subsidization—supporting competitive offensives
in one market with resources and profits diverted from
operations in another market—can be a powerful competitive
weapon.

PROFIT SANCTUARY POTENTIAL OF DOMESTIC-ONLY
AND INTERNATIONAL COMPETITORS
PROFIT SANCTUARY POTENTIAL OF GLOBAL
COMPETITORS
DUMPING AS A STRATEGY
Dumping
Selling goods in foreign markets at prices
that are either below normal home market prices or below the
full costs per unit
Dumping is NOT a fair-trade practice.
Governments can be expected to retaliate against such practices
by foreign competitors.
The World Trade Organization (WTO) actively polices dumping
to discourage such practices.

USING PROFIT SANCTUARIES TO DEFEND AGAINST
INTERNATIONAL RIVALS
International Firm A
International Firm B
Profit Sanctuary
Firm A moves against Firm B in Country B
Firm B counters with a response in Country C
When the same companies compete against one another in
multiple geographic markets, the threat of cross-border
counterattacks may be enough to deter aggressive competitive
moves and encourage mutual restraint among international
rivals.
STRATEGY OPTIONS FOR COMPETING IN THE MARKETS
OF DEVELOPING COUNTRIES
Prepare to compete on the basis of low price.
Prepare to modify the firm’s business model or strategy to
accommodate local circumstances.
Try to change the local market to better match the way the firm
does business elsewhere.
Stay away from developing markets where it is impractical or
uneconomical to modify the company’s business model to
accommodate local circumstances.

DEFENDING AGAINST GLOBAL GIANTS: STRATEGIES
FOR LOCAL COMPANIES IN DEVELOPING COUNTRIES
Develop a business model that exploits shortcomings in local
distribution networks or infrastructure.
Utilize knowledge of local customer needs and preferences to
create customized products or services.
Take advantage of aspects of the local workforce with which
large multinational firms may be unfamiliar.
Use acquisition and rapid-growth strategies to defend against
expansion-minded internationals.
Transfer company expertise to cross-border markets and initiate
actions to contend on an international level.
Profitability in developing markets rarely comes quickly or
easily—new entrants have to adapt their business models to
local conditions and be patient in earning a profit.
How Ctrip Successfully Defended Against International Rivals
to Become China’s Largest Online Travel Agency
What were the key elements of Ctrip’s business model that
allowed it to successfully fend off the entry of major
international rivals in its market?
What changes in Ctrip’s external competitive environment will
eventually threaten its continued success?
How could the Diamond of National Competitive Advantage be

useful to Ctrip in predicting the future of the travel industry in
China?
Appendix 1 Why Companies Decide to Enter Foreign Markets
To gain access to new customers
To achieve lower costs through economies of scale, experience,
and increased purchasing power
To further exploit core competencies
To gain access to resources and capabilities located in foreign
markets
To spread business risk across a wider market base
Return to slide
Appendix 2 Figure 7.1 The Diamond of National Advantage
The four factors that influence each other and a company's
home-country advantage are:
Demand conditions: home-market size and growth rate; buyers'
tastes
First strategy, structure, and rivalry: different styles of
management and organization; degree of local rivalry
Factor conditions: availability and relative prices of inputs (e.g.
labor, materials)
Related and supporting industries: proximity of suppliers, end
users, and complementary industries
Return to slide
Appendix 3 Cross-Country Differences in Demographic,
Cultural, and Market Conditions

Two key strategic considerations
To customize offerings in each country market to match the
tastes and preferences of local buyers
To pursue a strategy of offering a mostly standardized product
worldwide
Return to slide
Appendix 4 Figure 7.2 Three Approaches for Competing
Internationally
A grid is shown. The vertical axis, Benefits from Global
Integration and Standardization, is labeled “high” at the top and
“low” at the bottom. The horizontal axis, Need for Local
Responsiveness, is labeled “low” on the left side and “high” on
the right. Three strategies are charted on the graph:
Global strategy: think global, act global. High benefits; low
need for local responsiveness.
Transnational strategy: think global – act local. Mid-high
benefits; mid-high need for local responsiveness.
Multidomestic strategy: think local – act local. Low benefits;
high need for local responsiveness.
Return to slide
Appendix 5 International Operations and the Quest for
Competitive Advantage
Three ways to build competitive advantage in international
markets are:
Use international location to lower cost or differentiate product
Share resources and capabilities
Gain cross-border coordination benefits
Return to slide

Appendix 6 Using Location to Build
Competitive Advantage
Two key location issues are:
To customize offerings in each country market to match tastes
and preferences of local buyers
To pursue a strategy of offering a mostly standardized product
worldwide
Return to slide
Appendix 7 Profit Sanctuary Potential of Domestic-Only and
International Competitors
A domestic-only company only reaches out to the home market,
and thus only has one profit sanctuary. An international
company, on the other hand, reaches out to the home market, as
well as several other countries. This means the company usually
has a profit sanctuary in its home market, but may also have
other sanctuaries in other countries where it has a strong
position and market share.
Return to slide
Appendix 8 Profit Sanctuary Potential of Global Competitors
A globally competitive company generally has a profit
sanctuary in its home market and frequently has several other
profit sanctuaries in those countries where it is a market leader
and enjoys a strong competitive position.
Return to slide
Appendix 9 Using Profit Sanctuaries to Defend Against
International Rivals

Firm A moves against Firm B in Country B, where Firm B has a
presence. Firm B then counters by a response in Country C,
where Firm A has a presence.
Return to slide
CHAPTER 6 Strengthening a Company’s Competitive Position:
Strategic Moves, Timing, and Scope of Operations
1
LEARNING OBJECTIVES
Whether and when to pursue offensive or defensive strategic
moves to improve a firm’s market position
When being a first mover or a fast follower or a late mover is
most advantageous
The strategic benefits and risks of expanding a firm’s horizontal
scope through mergers and acquisitions
The advantages and disadvantages of extending the company’s
scope of operations via vertical integration
The conditions that favor outsourcing certain value chain
activities to outside parties
When and how strategic alliances can substitute for horizontal
mergers and acquisitions or vertical integration and how they
can facilitate outsourcing
MAXIMIZING THE POWER OF A STRATEGY
Offensive and defensive
competitive

actions
Competitive
dynamics and the timing of strategic moves
Scope of
operations along
the industry’s
value chain
Making choices that complement
a competitive approach and
maximize the power of strategy
CONSIDERING STRATEGY-ENHANCING MEASURES
Whether and when to go on the offensive strategically
Whether and when to employ defensive strategies
When to undertake strategic moves—first mover,
a fast follower, or a late mover
Whether to merge with or acquire another firm
Whether to integrate backward or forward into more stages of
the industry’s activity chain
Which value chain activities, if any, should be outsourced
Whether to enter into strategic alliances or partnership
arrangements
LAUNCHING STRATEGIC OFFENSIVES TO IMPROVE A
COMPANY’S MARKET POSITION
Strategic offensive principles
Focusing relentlessly on building competitive advantage and

then striving to convert it into sustainable advantage
Applying resources where rivals are least able to defend
themselves
Employing the element of surprise as opposed to doing what
rivals expect and are prepared for
Displaying a capacity for swift, decisive, and overwhelming
actions to overpower rivals
Sometimes a company’s best strategic option is to seize the
initiative, go on the attack, and launch a strategic offensive to
improve its market position.
CHOOSING THE BASIS FOR COMPETITIVE ATTACK
Avoid directly challenging a targeted competitor where it is
strongest.
Use the firm’s strongest strategic assets to attack a competitor’s
weaknesses.
The offensive may not yield immediate results
if market rivals are strong competitors.
Be prepared for the threatened competitor’s counter-response.
The best offensives use a company’s most powerful resources
and capabilities to attack rivals in the areas where they are
competitively weakest.

PRINCIPAL OFFENSIVE STRATEGY OPTIONS
Offering an equally good or better product at a lower price
Leapfrogging competitors by being first to market with next-
generation products
Pursuing continuous product innovation to draw sales and
market share away from less innovative rivals
Pursuing disruptive product innovations to create new markets
Adopting and improving on the good ideas of other companies
(rivals or otherwise)
Using hit-and-run or guerrilla marketing tactics to grab market
share from complacent or distracted rivals
Launching a preemptive strike to secure an industry’s limited
resources or capture a rare opportunity
CHOOSING WHICH RIVALS TO ATTACK
Market leaders
that are in
vulnerable competitive positions
Runner-up firms with weaknesses
in areas where
the challenger
is strong
Struggling enterprises on
the verge of
going under
Small local
and regional
firms with limited capabilities
Best Targets for

Offensive Attacks
BLUE-OCEAN STRATEGY—A SPECIAL KIND OF
OFFENSIVE
The business universe is divided into:
An existing market with boundaries and rules in which rival
firms compete for advantage
A “blue ocean” market space, where the industry has not yet
taken shape, with no rivals and wide-open long-term growth and
profit potential for a firm that can create demand for new types
of products
A blue-ocean strategy offers growth in revenues and profits by
discovering or inventing new industry segments that create
altogether new demand.
Bonobos’s Blue-Ocean Strategy in the U.S. Men’s Fashion
Retail Industry
Given the rapidity with which most first-mover advantages
based on Internet technologies can be overcome by competitors,
what has Bonobos done to retain its competitive advantage?
Is Bonobos’s unique focused-differentiation entry into brick-
and-mortar retailing a sufficiently strong strategic move?
What would you predict is the likelihood of long-term success

for Bonobos in the retail clothing sector?
DEFENSIVE STRATEGIES—PROTECTING MARKET
POSITION AND COMPETITIVE ADVANTAGE
Purposes of
Defensive Strategies
Lower the firm’s
risk of being attacked
Weaken the impact
of an attack
that does occur
Influence challengers to aim their efforts
at other rivals
FORMS OF DEFENSIVE STRATEGIES
Defensive strategies can take either of two forms
Actions to block challengers
Actions to signal the likelihood of strong retaliation
Good defensive strategies can help protect a competitive
advantage but rarely are the basis for creating one.

There are many ways to throw obstacles in the path of would-be
challengers.
BLOCKING THE AVENUES OPEN TO CHALLENGERS
Introduce new features and models to broaden product lines to
close off gaps and vacant niches.
Maintain economy-pricing to thwart lower price attacks.
Discourage buyers from trying competitors’ brands.
Make early announcements about new products or price changes
to induce buyers to postpone switching.
Offer support and special inducements to current customers to
reduce the attractiveness of switching.
Challenge quality and safety of competitor’s products.
Grant discounts or better terms to intermediaries who handle the
firm’s product line exclusively.
SIGNALING CHALLENGERS THAT RETALIATION IS
LIKELY
Signaling is an effective defensive strategy when the firm
follows through by:
Publicly announcing its commitment to maintaining the firm’s
present market share
Publicly committing to a policy of matching competitors’ terms
or prices
Maintaining a war chest of cash and marketable securities
Making a strong counter-response to the moves of weaker rivals
to enhance its tough defender image

To be an effective defensive strategy, signaling needs to be
accompanied by a credible commitment to follow through.
Because of first-mover advantages and disadvantages,
competitive advantage can spring from when a move is made as
well as from what move is made.
TIMING A FIRM’S OFFENSIVE AND DEFENSIVE
STRATEGIC MOVES
Timing’s importance:
Knowing when to make a strategic move is as crucial as
knowing what move to make.
Moving first is no guarantee of success or competitive
advantage.
The risks of moving first to stake out a monopoly position
versus being a fast follower or even a late mover must be
carefully weighed.
CONDITIONS THAT LEAD TO FIRST-MOVER
ADVANTAGES
When pioneering helps build a firm’s reputation and creates
strong brand loyalty
When a first mover’s customers will thereafter face significant

switching costs
When property rights protections thwart rapid imitation of the
initial move
When an early lead enables movement down the learning curve
ahead of rivals
When a first mover can set the technical standard for the
industry
Uber’s First-Mover Advantage in Mobile
Ride-Hailing Services
Which first-mover advantages contributed to Uber’s domination
of the on-demand transportation markets in its chosen cities?
What first-mover advantages will Uber not have in entering
overseas markets?
How could Uber extend its success into smaller and less urban
markets as user growth in the larger urban markets peaks?
THE POTENTIAL FOR LATE-MOVER ADVANTAGES OR
FIRST-MOVER DISADVANTAGES
When pioneering is more costly than imitating and offers
negligible experience or learning-curve benefits
When the products of an innovator are somewhat primitive and
do not live up to buyer expectations
When rapid market evolution allows fast followers to leapfrog a
first mover’s products with more attractive next-version
products
When market uncertainties make it difficult to ascertain what
will eventually succeed

When customer loyalty is low and first mover’s skills, know-
how, and actions are easily copied or surpassed
TO BE A FIRST MOVER OR NOT
Does market takeoff depend on complementary products or
services that currently are not available?
Is new infrastructure required before buyer demand can surge?
Will buyers need to learn new skills or adopt new behaviors?
Will buyers encounter high switching costs in moving to the
newly introduced product or service?
Are there influential competitors in a position to delay or derail
the efforts of a first mover?
STRENGTHENING A FIRM’S MARKET POSITION VIA ITS
SCOPE OF OPERATIONS
Range of its
activities
performed
internally
Breadth of its
product and
service offerings
Extent of its geographic
market
presence and
its mix of
businesses
Size of its competitive footprint on

its market
or industry
Defining the Scope of
the Firm’s Operations
The scope of the firm refers to the range of activities that the
firm performs internally, the breadth of its product and service
offerings, the extent of its geographic market presence, and its
mix of businesses.
Scope issues are at the very heart of corporate-level strategy.
Horizontal scope is the range of product and service segments
that a firm serves within its focal market.
Vertical scope is the extent to which a firm’s internal activities
encompass one, some, many, or all of the activities that make
up an industry’s entire value chain system, ranging from raw-
material production to final sales and service activities.
HORIZONTAL MERGER AND ACQUISITION STRATEGIES
Merger:
Is the combining of two or more firms into a single corporate
entity that often takes on a new name
Acquisition:
Is a combination in which one firm, the "acquirer," purchases
and absorbs the operations of another firm, the "acquired"

STRATEGIC OJECTIVES FOR HORIZONTAL MERGERS
AND ACQUISITIONS
Creating a more cost-efficient operation out
of the combined companies
Expanding the firm’s geographic coverage
Extending the firm’s business into new product categories
Gaining quick access to new technologies or other resources and
capabilities
Leading the convergence of industries whose boundaries are
being blurred by changing technologies and new market
opportunities
BENEFITS OF INCREASING HORIZONTAL SCOPE
Increasing a firm’s horizontal scope strengthens its business and
increases its profitability by:
Improving the efficiency of its operations
Heightening its product differentiation
Reducing market rivalry
Increasing the firm’s bargaining power over
suppliers and buyers
Enhancing its flexibility and dynamic capabilities
Bristol-Myers Squibb’s “String-of-Pearls”

Horizontal Acquisition Strategy
Which strategic outcomes did Bristol-Myers Squibb pursue
through its “string-of-pearls” acquisition strategy?
Why did Bristol-Myers Squibb choose to pursue an acquisition
strategy that was different from its industry competitors?
How did increasing the horizontal scope of Bristol-Myers
Squibb through acquisitions strengthen its competitive position
and profitability?
WHY MERGERS AND ACQUISITIONS SOMETIMES FAIL
TO PRODUCE ANTICIPATED RESULTS
Strategic issues
Cost savings may prove smaller than expected.
Gains in competitive capabilities take longer to realize or never
materialize at all.
Organizational issues
Cultures, operating systems and management styles fail to mesh
due to resistance to change from organization members.
Key employees at the acquired firm are lost.
Managers overseeing integration make mistakes in melding the
acquired firm into their own.
A vertically integrated firm is one that performs value chain
activities along more than one stage of an industry’s value chain
system.

VERTICAL INTEGRATION STRATEGIES
Vertically integrated firm
One that participates in multiple segments or stages of an
industry’s overall value chain
Vertical integration strategy
Can expand the firm’s range of activities backward into its
sources of supply or forward toward end users of its products
TYPES OF VERTICAL INTEGRATION STRATEGIES
Full integration
A firm participates in all stages of the vertical activity chain.
Partial integration
A firm builds positions only in selected stages of the vertical
chain.
Tapered integration
A firm uses a mix of in-house and outsourced activity in any
stage of the vertical chain.
THE ADVANTAGES OF A VERTICAL INTEGRATION
STRATEGY
Benefits of a Vertical
Integration Strategy
Add materially
to a firm’s technological capabilities
Strengthen
the firm’s competitive position
Boost

the firm’s profitability
Backward integration involves entry into activities previously
performed by suppliers or other enterprises positioned along
earlier stages of the industry value chain system.
Forward integration involves entry into value chain system
activities closer to the end user.
INTEGRATING BACKWARD TO ACHIEVE GREATER
COMPETITIVENESS
Integrating backwards by:
Achieving same scale economies as outside suppliers: low-cost
based competitive advantage
Matching or beating suppliers’ production efficiency with no
drop-off in quality: differentiation-based competitive advantage
Reasons for integrating backwards
Reduction of supplier power
Reduction in costs of major inputs
Assurance of the supply and flow of critical inputs
Protection of proprietary know-how
INTEGRATING FORWARD TO ENHANCE
COMPETITIVENESS
Reasons for integrating forward
To lower overall costs by increasing channel activity

efficiencies relative to competitors
To increase bargaining power through control of channel
activities
To gain better access to end users
To strengthen and reinforce brand awareness
To increase product differentiation
DISADVANTAGES OF A VERTICAL INTEGRATION
STRATEGY
Increased business risk due to large capital investment
Slow acceptance of technological advances or more efficient
production methods
Less flexibility in accommodating shifting buyer preferences
that require non-internally produced parts
Internal production levels may not reach volumes that create
economies of scale
Efficient production of internally-produced components and
parts hampered by capacity matching problems
New or different resources and capabilities requirements
WEIGHING THE PROS AND CONS OF VERTICAL
INTEGRATION
Will vertical integration enhance the performance of strategy-
critical activities ways that lower cost, build expertise, protect
proprietary know-how, or increase differentiation?
What impact will vertical integration have on investment costs,
flexibility, and response times?
What administrative costs are incurred by coordinating

operations across more vertical chain activities?
How difficult will it be for the firm to acquire the set of skills
and capabilities needed to operate in another stage of the
vertical chain?
Kaiser Permanente’s Vertical Integration Strategy
What are the most important strategic benefits that Kaiser
Permanente derives from its vertical integration strategy?
Over the long term, how could the vertical scope of Kaiser
Permanente’s operations threaten its competitive position and
profitability?
Why is a vertical integration strategy more appropriate in some
industries than in others?
Outsourcing involves contracting out certain value chain
activities that are normally performed in-house to outside
vendors.
OUTSOURCING STRATEGIES: NARROWING THE SCOPE
OF OPERATIONS
Outsource an activity if it:
Can be performed better or more cheaply by outside specialists
Is not crucial to achieving sustainable competitive advantage
Improves organizational flexibility and speeds time to market
Reduces risk exposure due to new technology or buyer

preferences
Allows the firm to concentrate on its core business, leverage
key resources, and do even better what it already does best
THE BIG RISKS OF OUTSOURCING VALUE CHAIN
ACTIVITIES
Hollowing out resources and capabilities that the firm needs to
be a master of its own destiny
Loss of direct control when monitoring, controlling, and
coordinating activities of outside parties by means of contracts
and arm’s-length transactions
Lack of incentives for outside parties to make investments
specific to the needs of the outsourcing firm’s value chain
A company must guard against outsourcing activities that
hollow out the resources and capabilities that it needs to be a
master of its own destiny.
A strategic alliance is a formal agreement between two or more
separate companies in which they agree to work cooperatively
toward some common objective.
A joint venture is a partnership involving the establishment of
an independent corporate entity that the partners own and
control jointly, sharing in its revenues and expenses.

FACTORS THAT MAKE AN ALLIANCE “STRATEGIC”
A strategic alliance:
Facilitates achievement of an important business objective
Helps build, sustain, or enhance a core competence or
competitive advantage
Helps remedy an important resource deficiency or competitive
weakness
Helps defend against a competitive threat, or mitigates a
significant risk to a company’s business
Increases the bargaining power over suppliers or buyers.
Helps open up important new market opportunities
Speeds development of new technologies or product innovations
BENEFITS OF STRATEGIC ALLIANCES AND
PARTNERSHIPS
Minimize the problems associated with vertical integration,
outsourcing, and mergers and acquisitions
Are useful in extending the scope of operations via international
expansion and diversification strategies
Reduce the need to be independent and self-sufficient when
strengthening the firm’s competitive position
Offer greater flexibility should a firm’s resource requirements
or goals change over time
Are useful when industries are experiencing high-velocity
technological advances simultaneously

Companies that have formed a host of alliances need to manage
their alliances like a portfolio.
WHY AND HOW STRATEGIC ALLIANCES ARE
ADVANTAGEOUS
Strategic Alliances:
Expedite development of promising new technologies or
products
Help overcome deficits in technical and manufacturing expertise
Bring together the personnel and expertise needed to create new
skill sets and capabilities
Improve supply chain efficiency
Help partners allocate venture risk sharing
Allow firms to gain economies of scale
Provide new market access for partners
CAPTURING THE BENEFITS OF STRATEGIC ALLIANCES
Picking a good partner
Being sensitive to cultural differences
Recognizing that the alliance must benefit both sides
Adjusting the agreement over time to fit new circumstances
Structuring the decision-making process for swift actions
Ensuring both parties keep their commitments
Strategic Alliance Factors

The best alliances are highly selective, focusing on particular
value chain activities and on obtaining a specific competitive
benefit.
Alliances enable a firm to learn and to build on its strengths.
REASONS FOR ENTERING INTO STRATEGIC ALLIANCES
When seeking global market leadership
Enter into critical country markets quickly.
Gain inside knowledge about unfamiliar markets and cultures
through alliances with local partners.
Provide access to valuable skills and competencies concentrated
in particular geographic locations.
When staking out a strong industry position
Establish a stronger beachhead in target industry.
Master new technologies and build expertise and competencies.
Open up broader opportunities in the target industry.
PRINCIPLE ADVANTAGES OF STRATEGIC ALLIANCES
They lower investment costs and risks for each partner by
facilitating resource pooling and risk sharing.
They are more flexible organizational forms and allow for a
more adaptive response to changing conditions.
They are more rapidly deployed—a critical factor when speed is
of the essence.

STRATEGIC ALLIANCES VERSUS OUTSOURCING
Key advantages of strategic alliances
The increased ability to exercise control over the partners’
activities.
A greater commitment and willingness of the partners to make
relationship-specific investments as opposed to arm’s-length
outsourcing transactions.
ACHIEVING LONG-LASTING STRATEGIC ALLIANCE
RELATIONSHIPS
Collaborating with partners that do not compete directly
Establishing
a permanent trusting relationship
Continuing to collaborate is
in the parties’
mutual interest
Factors Influencing
the Longevity of Alliances
THE DRAWBACKS OF STRATEGIC ALLIANCES AND
PARTNERSHIPS
Culture clash and integration problems due to different
management styles and business practices
Anticipated gains not materializing due to an overly optimistic
view of the potential for synergies or the unforeseen poor fit of
partners’ resources and capabilities

Risk of becoming dependent on partner firms for essential
expertise and capabilities
Protection of proprietary technologies, knowledge bases, or
trade secrets from partners who are rivals
HOW TO MAKE STRATEGIC ALLIANCES WORK
Create a system for managing the alliance.
Build trusting relationships with partners.
Set up safeguards to protect from the threat of opportunism by
partners.
Make commitments to partners and see that partners do the
same.
Make learning a routine part of the management process.
Appendix 1 Maximizing the Power
of a Strategy
Making choices that complement a competitive approach and
maximize the power of strategy includes:
Offensive and defensive competitive actions
Competitive dynamics and the timing of strategic moves
Scope of operations along the industry's value chain
Return to slide
Appendix 2 Choosing Which
Rivals to Attack
The best targets for offensive attacks are: market leaders that

are in vulnerable competitive positions, runner-up firms with
weaknesses in areas where the challenger is strong, struggling
enterprises on the verge of going under, and small local and
regional firms with limited capabilities.
Return to slide
Appendix 3 Defensive Strategies—Protecting Market Position
and Competitive Advantage
The three purposes of defensive strategies
Lower the firm's risk of being attacked
Weaken the impact of an attack that does occur
Influence challengers to aim their efforts at other rivals
Return to slide
Appendix 4 Strengthening a Firm’s Market Position Via Its
Scope of Operations
The scope of a firm's operations is defined as: the range of its
activities performed internally; the breadth of its product and
service offerings; the extent of its geographic market presence
and its mix of business; and the size of its competitive footprint
on its market or industry.
Return to slide
Appendix 5 The Advantages of a Vertical Integration Strategy
Three benefits of a vertical integration strategy
Add materially to a firm's technological capabilities
Strengthen the firm's competitive positon
Boost the firm's profitability
Return to slide

Appendix 6 Capturing the Benefits of Strategic Alliances
The strategic alliance factors are:
Being sensitive to culture differences
Recognizing that the alliance must benefit both sides
Adjusting the agreement over time to fit new circumstances
Structuring the decisions-making process for swift actions
Ensuring both parties keep their commitments
Picking a good partner
Return to slide
Appendix 7 Achieving Long-Lasting Strategic Alliance
Relationships
Three factors that influence the longevity of alliances
Collaborating with partners that do not compete directly
Establishing a permanent trusting relationship
Continuing to collaborate is in the parties' mutual interest
Return to slide
CHAPTER 5
The Five Generic Competitive Strategies
Copyright © McGraw-Hill Education. Permission required for
reproduction or display.
LEARNING OBJECTIVES
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
The major avenues for achieving a competitive advantage based
on lower costs
The major avenues to a competitive advantage based on
differentiating a company’s product or service offering from the
offerings of rivals
The attributes of a best-cost provider strategy—a hybrid of low-
cost provider and differentiation strategies
2
WHY DO STRATEGIES DIFFER?
A firm’s competitive strategy deals exclusively with the
specifics of its efforts to position itself in the market-place,
please customers, ward off competitive threats, and achieve a
particular kind of competitive advantage.
Is the competitive advantage
pursued linked to low costs
or product differentiation?
Is the firm’s market target
broad or narrow?
Key factors that
distinguish one strategy
from another
THE FIVE GENERIC COMPETITIVE STRATEGIESLow-cost
providerStriving to achieve lower overall costs than rivals on

products that attract a broad spectrum of buyersBroad
differentiationDifferentiating the firm’s product offering from
rivals’ with attributes that appeal to a broad spectrum of
buyersFocused low-costConcentrating on a narrow price-
sensitive buyer segment and on costs to offer a lower-priced
productFocused differentiationConcentrating on a narrow buyer
segment by meeting specific tastes and requirements of niche
membersBest-cost providerGiving customers more value for the
money by offering upscale product attributes at a lower cost
than rivals
FIGURE 5.1 The Five Generic Competitive Strategies
LOW-COST PROVIDER STRATEGIES
Effective low-cost approaches
Pursue cost savings that are difficult to imitate
Avoid reducing product quality to unacceptable levels
Competitive advantages and risks
Greater total profits and increased market share gained from
underpricing competitors
Larger profit margins when selling products at prices
comparable to and competitive with rivals
Low pricing does not attract enough new buyers
Rival’s retaliatory price-cutting sets off a price war

Core CONCEPTS (1 of 5)
A low-cost provider’s basis for competitive advantage is lower
overall costs than competitors.
Successful low-cost leaders, who have the lowest industry costs,
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.
A low-cost advantage over rivals can translate into better
profitability than rivals attain.
MAJOR AVENUES FOR ACHIEVING A COST ADVANTAGE
Low-cost advantage
Cumulative costs across the overall value chain must be lower
than competitors’ cumulative costs.
How to gain a low-cost advantage
Perform value-chain activities more cost-effectively than rivals
Revamp the firm’s overall value chain to eliminate or bypass
cost-producing activities
A cost driver is a factor that has a strong influence on a

company’s costs.
COST-EFFICIENT MANAGEMENT OF VALUE CHAIN
ACTIVITIES
Cost driver
A factor with a strong influence on a firm’s costs
Can be asset-based or activity-based
Securing a cost advantage
Use lower-cost inputs and hold minimal assets
Offer only “essential” product features or services
Offer only limited product lines
Use low-cost distribution channels
Use the most economical delivery methods
FIGURE 5.2 Cost Drivers: The Keys to Driving Down Company
Costs
COST-CUTTING METHODS (1 of 2)
Capturing all available economies of scale
Taking full advantage of experience and learning-curve effects
Operating facilities at full or near-full capacity
Improving supply chain efficiency
Substituting lower-cost inputs wherever there is little or no
sacrifice in product quality or performance

Using the firm’s bargaining power vis-à-vis suppliers or others
in the value chain system to gain concessions
Using online systems and sophisticated software to achieve
operating efficiencies
COST-CUTTING METHODS (2 of 2)
Improving process design and employing advanced production
technology
Being alert to the cost advantages of outsourcing or vertical
integration
Motivating employees through incentives and company culture
REVAMPING THE VALUE CHAIN SYSTEM TO LOWER
COSTS
Selling direct to consumers and bypassing the activities and
costs of distributors and dealers by using a direct sales force
and a company website
Streamlining operations to eliminate low value-added or
unnecessary work steps and activities
Reduce materials handling and shipping costs by having
suppliers locate their plants or warehouses close to the firm’s
own facilities
How Walmart Managed Its Value Chain to Achieve a Huge
Low-Cost Advantage over Rival Supermarket Chains
Which Walmart value chain activity would be most easily
overcome by rival supermarket chains?
Which Walmart value chain activities would be the most

difficult to overcome by rival supermarket chains?
Assume you have been tasked to revamp a rival supermarket’s
value chain activities to better compete with Walmart. In what
order of expected payoff should you attempt to revamp its value
chain activities?
Amazon’s Path to Becoming the Low-Cost Provider in E-
Commerce
Describe the business segment in which Amazon competes.
How well are Amazon’s competitive strengths matched to the
five forces in its competitive environment?
Which of Amazon’s value chain activities would be most easily
overcome by rivals?
Which Amazon value chain activity would be the most difficult
to overcome by rivals?
Assume you have been tasked to revamp a rival’s value chain
activities to better compete with Amazon. In what order of
expected payoff should you attempt to revamp its value chain
activities?
THE KEYS TO BEING A SUCCESSFUL LOW-COST
PROVIDER
Success in achieving a low-cost edge over rivals comes from
out-managing rivals in finding ways to perform value chain
activities faster, more accurately, and more cost-effectively by:
Spending aggressively on resources and capabilities that
promise to drive costs out of the business
Carefully estimating the cost savings of new technologies

before investing in them
Constantly reviewing cost-saving resources to ensure they
remain competitively superior
Success in achieving a low-cost edge over rivals comes from
out-managing rivals in finding ways to perform value chain
activities faster, more accurately, and more cost-effectively.
WHEN A LOW-COST PROVIDER STRATEGY WORKS BEST
Price competition among rival sellers is vigorous.
Identical products are available from many sellers.
There are few ways to differentiate industry products.
Most buyers use the product in the same ways.
Buyers incur low costs in switching among sellers.
PITFALLS TO AVOID IN PURSUING A LOW-COST
PROVIDER STRATEGY
Engaging in overly aggressive price cutting that 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
Becoming too fixated on cost reduction such that the firm’s
offering is too features-poor to gain the interest of buyers
Having a rival discover a new lower-cost value chain approach
or develop a cost-saving technological breakthrough

STRATEGIC MANAGEMENT PRINCIPLE
(3 of 7)
A low-cost provider is in the best position to win the business
of price-sensitive buyers, set the floor on market price, and still
earn a profit.
Reducing price does not lead to higher total profits unless the
added gains in unit sales are large enough to bring in a bigger
total profit despite lower margins per unit sold.
A low-cost provider’s product offering must always contain
enough attributes to be attractive to prospective buyers. Low
price, by itself, is not always appealing to buyers.
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 differentiating features

of the firm’s products
Differentiation enhances profitability whenever a company’s
product can command a sufficiently higher price or produce
sufficiently greater unit sales to more than cover the added
costs of achieving the differentiation.
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
differentiating effect.
COST-EFFICIENT MANAGEMENT OF VALUE CHAIN
ACTIVITIES
A uniqueness driver can
Have a strong differentiating effect
Be based on physical as well as functional attributes of a firm’s
products
Be the result of superior performance capabilities of the firm’s
human capital
Have an effect on more than one of the firm’s value chain
activities
Create a perception of value (brand loyalty) in buyers where
there is little reason for it to exist

FIGURE 5.3 Value Drivers: The Keys to Creating a
Differentiation Advantage
MANAGING THE VALUE CHAIN TO CREATE THE
DIFFERENTIATING ATTRIBUTES
Create product features and performance attributes that appeal
to a wide range of buyers.
Improve customer service or add extra services.
Invest in production-related R&D activities.
Strive for innovation and technological advances.
Pursue continuous quality improvement.
Increase marketing and brand-building activities.
Seek out high-quality inputs.
Emphasize human resource management activities that improve
the skills, expertise, and knowledge of company personnel.
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
DELIVERING SUPERIOR VALUE VIA A BROAD
DIFFERENTIATION STRATEGYBroad Differentiation:
Offering Customers Something That Rivals Cannot1.Incorporate
product attributes and user features that lower the buyer’s
overall costs of using the firm’s product2.Incorporate tangible
features (e.g., styling) that increase customer satisfaction with
the product3.Incorporate intangible features (e.g., buyer image)
that enhance buyer satisfaction in noneconomic ways4.Signal
the value of the firm’s product offering to buyers (e.g., price,
packaging, placement, advertising)
DIFFERENTIATION: SIGNALING VALUE
Signaling value is important when:
The nature of differentiation is based on intangible features and
is therefore subjective or hard to quantify by the buyer.
Buyers are making a first-time purchase and are unsure what
their experience will be with the product.
Product or service repurchase by buyers is infrequent.
Buyers are unsophisticated.
STRATEGIC MANAGEMENT PRINCIPLES (6 of 7)
Differentiation can be based on tangible or intangible attributes.
Easy-to-copy differentiating features cannot produce a

sustainable competitive advantage.
Any differentiating feature that works well is a magnet for
imitators.
Overdifferentiating and overcharging are fatal strategy
mistakes.
SUCCESSFUL APPROACHES TO SUSTAINABLE
DIFFERENTIATION
Differentiation that is difficult for rivals to duplicate or imitate
Company reputation
Long-standing relationships with buyers
A unique product or service image
Differentiation that creates substantial switching costs that lock
in buyers
Patent-protected product innovation
Relationship-based customer service
WHEN A DIFFERENTIATION STRATEGY WORKS BEST
Buyer needs
and uses for
the product are diverse.
There are many ways that differentiation
can have value
to buyers.
Few rival firms are following
a similar differentiation approach
There is rapid change in the product’s technology and features
Market Circumstances
Favoring Differentiation

PITFALLS TO AVOID IN PURSUING A DIFFERENTIATION
STRATEGY
Relying on product attributes easily copied by rivals
Introducing product attributes that do not evoke an enthusiastic
buyer response
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
Over-differentiating the product quality, features, or service
levels exceeds the needs of most buyers
Charging too high a price premium
FOCUSED (OR MARKET NICHE) STRATEGIES
Focused Market Niche Strategy
Focused
Low-Cost
Strategy
Focused Strategy
Approaches
Clinícas del Azúcar’s Focused Low-Cost Strategy
Which uniqueness drivers are responsible for the success of
Clinícas del Azúcar?
Which competitive conditions would mitigate against successful

entry of the Clinícas del Azúcar into the U.S. diabetes care
market?
What part do customer expectations about patient-doctor
relationships play in the delivery of health care in the U.S.?
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 chose 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.
Rivals have little or no entry interest in the target segment.
THE RISKS OF A FOCUSED LOW-COST OR FOCUSED
DIFFERENTIATION STRATEGY
Competitors will find ways to match the focused firm’s
capabilities in serving the target niche.
The specialized preferences and needs of niche members shift
over time toward the product attributes desired by the majority
of buyers.
As attractiveness of the segment increases, it draws in more
competitors, intensifying rivalry and splintering segment
profits.

Canada Goose’s Focused Differentiation Strategy
Which decisions did CEO Dani Reiss make that launched
Canada Goods on its chosen strategic path?
Which uniqueness drivers are responsible for the success of
Canada Goose?
Which of Canada Goose’s uniqueness drivers are competitors
likely to attempt to copy first?
BEST-COST PROVIDER STRATEGIES
Value-Conscious Buyer
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
Best-cost provider strategies are a hybrid of low-cost provider
and differentiation strategies that aim at providing more
desirable attributes (quality, features, performance, service)

while beating rivals on price.
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
mid-range products.
There is competitive space near the middle of the market for a
competitor 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.
THE RISK OF A BEST-COST PROVIDER STRATEGY—
GETTING SQUEEZED ON BOTH SIDES
High-End
Differentiators
Low-Cost
Providers
Best-Cost
Provider
Strategy
American Giant’s Best-Cost

Provider Strategy
How can product quality lower product costs?
In which stages of an industry life cycle are low-cost
leadership, differentiation, focused niche, and best-cost
provider strategies most appropriate?
Could the higher-selling prices of American Giant’s clothing
versus its competitors be used as a proxy for measuring the
strength of its best-cost strategy?
THE CONTRASTING FEATURES OF THE FIVE GENERIC
COMPETITIVE STRATEGIES:
A SUMMARY
Each generic strategy:
Positions the firm differently in its market
Establishes a central theme for how the firm intends to
outcompete rivals
Creates boundaries or guidelines for strategic change as market
circumstances unfold
Entails different ways and means of maintaining the basic
strategy
Table 5.1 Distinguishing Features of the Five Generic
Competitive Strategies (1 of 2)Low-Cost ProviderBroad
DifferentiationFocused low-cost providerFocused
differentiationBest-Cost ProviderStrategic targetA broad cross-
section of the marketA broad cross-section of the marketA
narrow market niche where buyer needs and preferences are
distinctively differentA narrow market niche where buyer needs

and preferences are distinctively differentValue-conscious
buyers. Or, a middle-market rangeBasis of competitive
strategyLower overall costs than competitorsAbility to offer
buyers something attractively different from competitors’
offeringsLower overall cost than rivals in serving niche
membersAttributes that appeal specifically to niche
membersAbility to offer better goods at attractive pricesProduct
lineA good basic product with few frills (acceptable quality and
limited selection)Many product variations, wide selection,
emphasis on differentiating featuresFeatures and attributes
tailored to the tastes and requirements of niche
membersFeatures and attributes tailored to the tastes and
requirements of niche membersItems with appealing attributes
and assorted features; better quality, not bestProduction
emphasisA continuous search for cost reduction without
sacrificing acceptable quality and essential featuresBuild in
whatever differentiating features buyers are willing to pay for;
strive for product superiorityA continuous search for cost
reduction for products that meet basic needs of niche
membersSmall-scale production or custom-made products that
match the tastes and requirements of niche membersBuild in
appealing features and better quality at lower cost than rivals
Table 5.1 Distinguishing Features of the Five Generic
Competitive Strategies (2 of 2)Low-Cost ProviderBroad
DifferentiationFocused low-cost providerFocused
differentiationBest-Cost ProviderMarketing emphasisLow
prices, good value
Also, try to make a virtue out of product features that lead to
low costTout differentiating features.
Also, charge a premium price to cover the extra costs of
differentiating featuresCommunicate attractive features of a

budget-priced product offering that fits niche buyers’
expectationsCommunicate how product offering does the best
job of meeting niche buyers’ expectationsEmphasize delivery of
best value for the moneyKeys to maintaining the
strategyEconomical prices, good value
Also, strive to manage costs down, year after year, in every area
of the businessStress constant innovation to stay ahead of
imitative competitors
Also, concentrate on a few key differentiating features.Stay
committed to serving the niche at the lowest overall cost; don’t
blur the firm’s image by entering other market segments or
adding other products to widen market appealStay committed to
serving the niche better than rivals; don’t blur the firm’s image
by entering other market segments or adding other products to
widen market appeal.Unique expertise in simultaneously
managing costs down while incorporating upscale features and
attributesResources and capabilities requiredCapabilities for
driving costs out of the value chain syste.
Examples: large-scale automated plants, an efficiency-oriented
culture, bargaining powerCapabilities concerning quality,
design, intangibles, and innovation Examples: marketing
capabilities, R&D teams, technologyCapabilities to lower costs
on niche goods Examples: Lower input costs for the specific
product desired by the niche, batch production
capabilitiesCapabilities to meet the highly specific needs of
niche members
Examples: custom production, close customer
relations.Capabilities to simultaneously deliver lower cost and
higher-quality or differentiated feature
Examples: TQM practices, mass customization
SUCCESSFUL COMPETITIVE STRATEGIES ARE

RESOURCE-BASED
A firm’s competitive strategy is most likely to succeed if it is
predicated on leveraging a competitively valuable collection of
resources and capabilities that match the strategy.
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.
A company’s competitive strategy should be well-matched to its
internal situation and predicated on leveraging its collection of
competitively valuable resources and capabilities.
Appendix 1 Why Do Strategies Differ?
Two key factors that distinguish one strategy from another
Is the firm's market target broad or narrow?
Is the competitive advantage pursued linked to low costs or
product differentiation?
Return to slide
Appendix 2 Figure 5.1 The Five Generic Competitive Strategies
The illustration lists two types of competitive advantages being
pursued: lower cost and differentiation. It also lists two market
targets: a broad cross-section of buyers, and a narrow buyer
segment (or market niche). The combination of these types
creates the five generic strategies:
Overall low-cost provider strategy (lower cost or a broad cross-
section of buyers)

Focused low-cost strategy (lower cost or a narrow buyer
segment)
Broad differentiation strategy (differentiation or a broad cross-
section of buyers)
Focused differentiation strategy (differentiation or a narrow
buyer segment)
Best-Cost Provider strategy (an equal balance of competitive
advantages and market targets)
Return to slide
Appendix 3 Figure 5.2 Cost Drivers: The Keys to Driving Down
Company Costs
The cost drivers listed are:
Incentive systems and culture; economies of scale; learning and
experience; capacity utilization; supply chain efficiencies; input
costs; production technology and design; communication
systems and information technology; bargaining power; and
outsourcing or vertical integration.
Return to slide
Appendix 4 Figure 5.3 Value Drivers: The Keys to Creating a
Differentiation Advantage
The value drivers listed are: quality control processes; product
features and performance; customer services; production R&D;
technology and innovation; input quality; employee skill,
training, experience; and sales and marketing.
Return to slide
Appendix 5 Revamping the Value Chain System to Increase
Differentiation

The two approaches to enhancing differentiation through
changes in the value chain system are:
Coordinating with channel allies to enhance customer
perceptions of value
Coordinating with suppliers to better address customer needs
Return to slide
Appendix 6 When a Differentiation Strategy Works Best
The four market circumstances that favor differentiation are:
Diversity of buyer needs and uses for the product
Many ways that differentiation can have value to buyers
Few rival firms follow a similar differentiation approach
Rapid change in technology and product features
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Appendix 7 Best-Cost Provider Strategies
A combination of differentiation (providing desired quality,
features, performance, service attributes) and low-cost provider
(charging a lower price than rivals with similar caliber product
offerings) leads to the best-cost provider hybrid approach,
which connects with the value-conscious buyer.
Return to slide

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