17040501_SMG-MST_INDUSTRI_SLIDE_05_Indra Almahdy

8/8/2019 17040501_SMG-MST_INDUSTRI_SLIDE_05_Indra Almahdy

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[05] Strategies to Achieve

Competitive Advantage

Strategic Management

for Industrial Engineering

Indra Almahdy


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Reference

Acknowledgement for following references

Thompson. Strickland. Gamble. Crafting and Executing Strategy.The Quest for Competitive Advantage. Concepts and Cases.McGraw-Hill Companies, Inc. 15e/2007.

Dess. Lumpkin. Eisner. Strategic Management. McGraw-HillCompanies, Inc. 3e/2007

Hitt. Ireland. Hoskisson.Rowe. Sheppard. Strategic Management.Competitiveness and Globalization. Nelson Thomson CanadaLimited. 2eCanadian/2006

Saloner. Shepard. Podolny. Strategic Management. John Wiley &Sons, Inc. 2001.

Thompson. Strickland. Strategic Management. Concept and Cases.McGraw-Hill. 10e/1998. 12e/2001. 13e/2004. 14e/2006.

Pearce. Robinson. Strategic Management.


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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.Michael E. Porter


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Outline

The Five Competitive Strategies

Low-Cost Provider Strategies

Broad Differentiation Strategies

Best-Cost Provider Strategies

Focused (or Market Niche) Strategies

The Contrasting Features of the Five Generic

Competitive Strategies: A Summary


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Strategy and Competitive

Advantage Competitive advantage exists when a firms

strategy gives it an edge in

Attracting customers and

Defending against competitive forces

Convince customers firms product / service

offers superior value

A good productat a low price

A superior productworth paying more for

A best-value product

Key to Gaining a Competitive Advantage


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What Is Competitive Strategy?

Deals exclusively with a companys business

plans to compete successfully

Specific efforts toplease customers

Offensive and defensive moves

to counter maneuvers of rivals

Responses to prevailing market conditions

Initiatives to strengthen its market position

Narrower in scope than business strategy


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Fig. --- The Five Generic Competitive Strategies


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Low-Cost Provider Strategies

Make achievement ofmeaningful lower costs

than rivals the theme of firms strategy

Include features and services in product

offering that buyers consideressential

Find approaches to achieve a cost advantagein ways difficultfor rivals to copy or match

Keys to SuccessKeys to Success

Low-cost leadership means low overall costs, not

just low manufacturing or production costs!


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Option 1: Use lower-cost edge to

under-price competitors and attract

price-sensitive buyers in enoughnumbers to increase total profits

Option 2: Maintain present price, becontent with present market share,

and use lower-cost edge to earn a

higher profit margin on each unit sold,

thereby increasing total profits

Translating a Low-Cost Advantage

into Higher Profits: Two Options


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Nucor Corporations

Low-Cost Provider StrategyEliminate some production processes from value chain used by traditionalintegrated steel mills; cut investment in facilities and equipment

Strive hard for continuous improvement in the efficiency of its plants and

frequently invest in state-of-the art equipment to reduce unit costs

Carefully select plan sites to minimize inbound and outbound shipping

costs and to take advantage of low rates for electricity

Hire a nonunion workforce that uses team-based incentive compensation

systems

Heavily emphasize consistent product quality and maintain rigorous quality

systems

Minimize general and administrative expenses by maintaining a lean staff at

corporate headquarters and allowing only 4 levels of management


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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 littlevalue from the buyers perspective

Approach 1

Approach 2

Controlcosts!

By-passcosts!


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A pproach 1: Controlling the

Cost Drivers Capture scale economies; avoid scale diseconomies Capture learning and experience curve effects

Control percentage of capacity utilization

Pursue efforts to boost sales and spread costs such as R&D and

advertising over more units

Improve supply chain efficiency

Substitute use of low-cost for high-cost raw materials

Use online systems and sophisticated software to achieve operating

efficiencies

Adopt labor-saving operating methods

Use bargaining power to gain concessions from suppliers

Compare vertical integration vs. outsourcing


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Use direct-to-end-user sales/marketing methods

Make greater use of online technology applications

Streamline operations by eliminating low-value-added orunnecessary work steps

Relocate facilities closer to suppliers or customers

Offer basic, no-frills product/service

Offer a limited product/service as opposed to a full

product/service line

A pproach 2: Revamping the

Value Chain


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Keys to Success in Achieving

Low-Cost Leadership Scrutinize each cost-creating activity, identifying cost drivers Use knowledge about cost drivers to manage

costs of each activity down year after year

Find ways to restructure value chain to eliminatenonessential work steps and low-value activities

Work diligently to create cost-conscious corporate cultures

Feature broad employee participation in continuous cost-

improvement efforts and limited perks for executives

Strive to operate with exceptionally small corporate staffs

Aggressively pursue investments in resources and capabilities that

promise to drive costs out of the business


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Cost conscious corporate culture

Employee participation in cost-control efforts

Ongoing efforts to benchmark costs

Intensive scrutiny of budget requests

Programs promoting continuous cost

improvementSuccessful low-cost producers champion

frugalitybut wisely and aggressively

invest in cost-saving improvements !

Characteristics of a Low-Cost

Provider


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Price competition is vigorous

Product is standardized or readily availablefrom many suppliers

There are few ways to achievedifferentiation that have value to buyers

Most buyers use product in same ways

Buyers incur low switching costs Buyers are large and have

significant bargaining power

Industry newcomers use introductory low prices

to attract buyers and build customer base

When Does a Low-Cost

Strategy Work Best?


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Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price

Low cost methods are easily imitated by

rivals

Becoming too fixated on reducing costs

and ignoring

Buyer interest in additional features

Declining buyer sensitivity to price

Changes in how the product is used


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Test Your Knowledge

Striving to be the industrys 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 tosuppliers with world-class technological

capabilities.

C. revamping the firms overall value chain to

eliminate or bypass cost-producing activitiesthat roduce little value added insofar as


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Incorporate differentiating features that

cause buyers topreferfirmsproduct or

service over brands of rivals

Find ways to differentiate that create valuefor buyers and are not easily matchedor

cheaply copiedby rivals

Not spending more to achieve

ObjectiveObjective

Keys to SuccessKeys to Success

Differentiation Strategies


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Benefits of Successful

DifferentiationA product / service with unique,

appealing attributes allows a firm to

Command apremium price and/or

Increase unit sales and/or

Buildbrand loyalty

= Competitive Advantage

Whichhat is

unique?


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Multiple features Microsoft Windows and Office

Spare parts availability Caterpillar

Engineering design and performance Mercedes, BMW

Prestige Rolex

Product reliability Johnson & Johnson Quality manufacture Karastan, Michelin, Toyota

Technological leadership 3M Corporation

Top-of-line image Ralph Lauren, Starbucks, Chanel

Unique taste Dr. Pepper Wide selection and one-stop shopping Home Depot,

Amazon.com (Distribution)

Superior service -- FedEx,Ritz-Carlton (Services)

Types of Differentiation

Themes


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Sustaining Differentiation:

Keys to Competitive Advantage

Most appealing approaches to differentiation

Those hardest for rivals to match or imitate

Those buyers will find most appealing

Best choices to gain a longer-lasting, more

profitable competitive edge

New product innovation

Technical superiority

Product quality and reliability

Comprehensive customer service

Unique competitive capabilities


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Where to Find Differentiation

Opportunities in the Value Chain

Purchasing and procurement activities

Product R&D and product design activities

Production process / technology-related activities

Manufacturing / production activities

Distribution-related activities

Marketing, sales, and customer service activities

Internally

Performed

Activities,

Costs, &

Margins

Activities,

Costs, &

Margins of

Suppliers

Buyer/User

Value

Chains

Activities, Costs,

& Margins of

Forward Channel

Allies &

Strategic Partners


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How to Achieve a

Differentiation-Based AdvantageApproach 1

Incorporate features/attributes that raise theperformance a buyer gets out of the product

Approach 2

Incorporate features/attributes that enhance buyersatisfaction in non-economic or intangible ways

Approach 3

Compete on the basis ofsuperior capabilities

Approach 4

Incorporate product features/attributes thatlower buyers overall costs of using product


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Test Your Knowledge

Which of the following is notone of the four basic routes to

achieving a differentiation-based competitive advantage?

A. Appealing to high-income buyers who are willing and able

to pay a premium price for a high-performing, multi-

featured product

B. Incorporating features that raise product performance

C. Incorporating product attributes and user features that

lower the buyers overall costs of using the companys

product

D. Delivering value to customers via competencies and

competitive capabilities that rivals dont have or cant

afford to match

E. Incorporating features that enhance buyer satisfaction in

intangible or non-economic ways


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Importance of Perceived Value

Buyers seldom pay for value that is not perceived

Price premium of a differentiation strategy reflects

Value actually deliveredto the buyer

and

Value perceivedby the buyer

Actual and perceived value can differ when buyers are

unable to assess their experience with a product


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Signaling Value as Well

as Delivering Value Incomplete knowledge of buyers causes them tojudge value based on such signals as Price

Attractive packaging

Extensive ad campaigns Ad content and image

Seller facilities or professionalism andpersonality of employees

Having a list of prestigious customers

Signals of value may be as important asactual value when Nature of differentiation is hard to quantify

Buyers are making first-time purchases

Repurchase is infrequent

Buyers are unsophisticated


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When Does a Differentiation

Strategy Work Best? There are many ways to differentiate a productthat have value and please customers

Buyer needs and uses are diverse

Few rivals are following a similar

differentiation approach

Technological change and

product innovation are fast-paced


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Pitfalls of Differentiation

Strategies Appealing product features are easily copied by rivals Buyers see little value in unique attributes of product

Overspending on efforts to differentiate the product offering,

thus eroding profitability Over-differentiating such that product

features exceed buyers needs

Charging a price premium

buyers perceive is too high

Not striving to open up meaningful gaps in quality, service, or

performance features vis--vis rivals products


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For Discussion: Your Opinion

A low-cost provider strategy can defeat a

differentiation strategy when buyers are

satisfied with a basic product and dont think

extra attributes are worth a higher price.

True or false? Explain.


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Best-Cost Provider Strategies

Combine a strategic emphasis on low-cost

with a strategic emphasis on differentiation

Make an upscale product at a lower cost

Give customers more value for the money

Deliver superior value by meeting or exceeding

buyer expectations on product attributes andbeating their price expectations

Be the low-cost provider of a product with good-

to-excellent product attributes, then use cost

advantage to underprice comparable brands

Objectives


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A best-cost providers competitive advantage is based

on its capability to include upscale attributes at a lower

cost than rivals comparable products

To achieve competitive advantage,a company must be able to

Incorporate attractive features at a lower cost than rivals

Manufacture a good-to-excellent quality product at a lower cost

than rivals

Develop a product that delivers good-to-excellent performanceat a lower cost than rivals

Provide attractive customer

service at a lower cost than rivals

Competitive Strength of a

Best-Cost Provider Strategy


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When Does a Best-Cost

Provider Strategy Work Best?

Where buyer diversity makes

product differentiation the norm and

Where many buyers are alsosensitive to price and value


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Risk of a Best-Cost Provider

Strategy A best-cost providermay get squeezedbetween strategies of firms using low-costand

differentiation strategies

Low-cost leaders may be able to siphon

customers away with a lower price

High-end differentiators may be able to

steal customers away with better product

attributes


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Test Your Knowledge

Which of the following are distinguishing features of a best-cost

provider strategy (based on the comparisons of the five generic

competitive strategies shown in Figure ---)?

A. The strategic target is price-conscious buyers

B. A marketing emphasis on charging a slightly higher price than

rival brands having comparable features and attributes

C. A product line that stresses wide selection, many product

variations, and emphasis on differentiating features

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

E. Using constant product innovation, excellent R&D skills, and

periodic technological breakthroughs to sustain the strategy


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Focus / Niche Strategies

Involve concentrated attention on a narrow piece

of the total market

Serve niche buyers better than rivals

Choose a market niche where buyers

have distinctive preferences, special

requirements, or unique needs

Develop unique capabilities to serve

needs of target buyer segment

Objective

Keys to Success


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Geographic uniqueness

Specialized requirements in

using product/service

Special product attributes

appealing only to niche buyers

Approaches to Defining a

Market Niche


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Examples of Focus Strategies

Porsche Sports cars

Cannondale Top-of-the line mountain bikes

Bandag Specialist in truck tire recapping

Animal Planet and History Channel Cable TV (Services)

Google Internet search engines (Services)

Enterprise Rent-a-Car Provides rental cars to repair garage customers (Services)


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Focus / Niche Strategies

and Competitive Advantage

Achieve lower costs than rivals in

serving a well-defined buyer segment

Focused low-cost strategy

Offer a product appealing to unique

preferences of a well-defined buyer segment

Focused differentiation strategy

Approach 1

Approach 2Which

hat is

unique?


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What Makes a Niche

Attractive for Focusing? Big enough to be profitable and offers goodgrowth potential

Not crucial to success of industry leaders

Costly or difficult for multi-segment competitors

to meet specialized needs of niche members

Focuser has resources and capabilities

to effectively serve an attractive niche

Few other rivals are specializing in same niche

Focuser can defend against challengers via

superior ability to serve niche members


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Risks of a Focus Strategy

Competitors find effective ways to match

a focusers capabilities in serving niche

Niche buyers preferences shift towards productattributes desired by majority of buyers niche

becomes part of overall market

Segment becomes so attractive it becomes

crowded with rivals, causing segment profits to

be splintered


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For Discussion: Your Opinion

Which of the five generic competitive strategies do

you think the following companies are employing:

The Saturn division of General Motors

Abercrombie & Fitch

Avon Products

Amazon.com (Services)


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Deciding Which Generic

Competitive Strategy toU

se Each positions a company differently in its market andcompetitive environment

Each establishes a central theme for how a company willendeavor to outcompete rivals

Each creates some boundaries for maneuvering asmarket circumstances unfold

Each points to different ways of experimenting with thebasics of the strategy

Each entails differences in product line, productionemphasis, marketing emphasis, and means to sustainthe strategy

The big risk Selecting a stuck in the middlestrategy!This rarely produces a sustainable competitive

advantage or a distinctive competitive position!


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NON-MANUFACTURING

AND/OR SERVICES


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Wal-Marts Approach to

Managing Its Value ChainInstitute extensive information sharing with vendors via onlinesystems

Pursue global procurement of some items and centralize mostpurchasing activities

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

Strive to optimize the product mix and achieve greater sales turnover

Install security systems and store operating procedures that lower

shrinkage rates

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

Manage and compensate its workforce in a manner to yield lowerlabor costs

Documents

17040501_SMG-MST_INDUSTRI_SLIDE_05_Indra Almahdy