Chap005 Five Competitive Strategies Thompson

8/3/2019 Chap005 Five Competitive Strategies Thompson

1/48

McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5: The Five Generic

Competitive Strategies: WhichOne to Employ?

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University


2/48


3/48

Winners in business playrough and dont apologize for

it. The nicest part of playinghardball is watching your

competitors squirm.

George Stalk Jr. and Rob Lachenauer


4/48

5-4

Chapter Learning Objectives

1. Gain command of how each of the five genericcompetitive strategies lead to competitiveadvantage and deliver superior value tocustomers.

2. Learn why some of the five generic strategies

work better in certain kinds of industry andcompetitive conditions than in others.

3. Learn the major avenues for achieving acompetitive advantage based on lower costs.

4. Learn the major avenues for developing acompetitive advantage based on differentiatinga companys product or service offering from

the offerings of rivals in ways that better

satisfy buyer needs and preferences.


5/48

5-5

Chapter Roadmap

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 FiveGeneric Competitive Strategies: ASummary


6/48

5-6

Strategy and Competitive Advantage

Competitive advantageexists when afirms 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


7/48


8/485-8

Figure 5.1: The Five Generic Competitive Strategies


9/485-9

Low-Cost Provider Strategies

Make achievement of meaningfullower coststhan rivals the themeof firms strategy

Include features and servicesin productoffering that buyers consider essential

Find approaches to achieve a cost

advantagein ways difficultfor rivals tocopy or match

Keys to Success

Low-cost leadership means low overall costs, not

just low manufacturing or production costs!


10/485-10

Option 1: Use lower-cost edge tounder-price competitors and attractprice-sensitive buyers in enough

numbers to increase total profits

Option 2: Maintain present price, be

content with present market share,and use lower-cost edge to earn ahigher profit margin on each unit sold,thereby increasing total profits

Translating a Low-Cost Advantage intoHigher Profits: Two Options


11/485-11

Approaches to Securinga Cost Advantage

Do a better job than rivals ofperforming value chain activities

efficiently and cost effectively

Revamp value chain to bypasscost-producing activities that add

little value from the buyers

perspective

Controlcosts!

By-passcosts!

Approach 1

Approach 2


12/485-12

Approach 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 suchas R&D and advertising over more units

Improve supply chain efficiency

Substitute use of low-cost forhigh-cost raw materials

Use online systems and sophisticated

software to achieve operating efficiencies Adopt labor-saving operating methods

Use bargaining power to gain concessions fromsuppliers

Compare vertical integration vs. outsourcing


13/485-13

Use direct-to-end-usersales/marketing methods

Make greater use of onlinetechnology applications

Streamline operations by eliminating low-value-added or unnecessary work steps

Relocate facilities closer to suppliers orcustomers

Offer basic, no-frills product/service

Offer a limited product/service

Approach 2: Revamping the Value Chain


14/485-14

Wal-Marts Approach toManaging Its Value Chain

Institute extensive information sharing with vendors viaonline systems

Pursue global procurement of some items and centralizemost purchasing activities

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

centers

Strive to optimize the product mix and achieve greater salesturnover

Install security systems and store operating procedures

that lower shrinkage ratesNegotiate preferred real estate rental and leasing rates withreal estate developers and owners of its store sites

Manage and compensate its workforce in a manner to yieldlower labor costs


15/485-15

Nucor CorporationsLow-Cost Provider Strategy

Key elementsof Nucors strategy Use of electric arc furnace technology allows forlower investment costs for facilities and equipmentand eliminates many expensive steps in makingsteel products from scratch

Use incentive compensation to achieve highproductivity and low labor costs per ton produced

Locate plants close to customers to keep shippingcosts down

Cost advantages and bottom-line results Lower capital investment and operating costs

Ability to charge lower prices than traditional steelcompanies using make-it-from scratch technology

Earned attractive profits for shareholders since 1966

C S


16/485-16

Key Characteristics of SouthwestAirlines Low-Cost Provider Strategy

Mastery of fast turnarounds at gates (25 minutes vs.45 minutes for rivals) allows

Planes to fly more hours per day

More flights to be scheduled per day with fewer aircraft

More revenue generated per plane on average than rivals

Elimination of several servicesresults in cost savings

In-flight meals

Assigned seating

Baggage transfer to connecting airlines

First-class seating and service

Fast, user-friendly online reservation system Facilitates e-ticketing

Reduces staffing requirements at telephone

reservation centers and airport counters

K t S i A hi i


17/485-17

Keys to Success in AchievingLow-Cost Leadership

Scrutinize each cost-creating activity,

identifying cost drivers

Use knowledge about cost drivers to managecosts of each activity down year after year

Find ways to restructure value chain to eliminate

nonessential work steps and low-value activities

Work diligently to create cost-conscious corporatecultures

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 andcapabilities that promise to drive costs out of the

business


18/48

Wh D L C t


19/485-19

Price competition is vigorous

Product is standardized or readily availablefrom many suppliers

There are few ways to achieve

differentiation that have value to buyers Most buyers use product in same ways

Buyers incur low switching costs

Buyers are large and havesignificant bargaining power

Industry newcomers useintroductory low prices to attract

buyers and build customer base

When Does a Low-CostStrategy Work Best?


20/485-20

Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price Low cost methods are easily

imitated by rivals

Becoming too fixated onreducing costs and ignoring

Buyer interest in additional features

Declining buyer sensitivity to price

Changes in how the product is used

Technological breakthroughs open up costreductions for rivals


21/485-21

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 valuechain activities more cost-effectively.

B. having a smaller labor force than rivals, paying lowerwages than rivals, locating all facilities in countrieswhere labor costs are low, and outsourcing manyvalue chain activities to suppliers with world-classtechnological capabilities.

C. revamping the firms overall value chain to eliminateor bypass cost-producing activities that produce littlevalue added insofar as customers are concerned.

D. adopting activity-based costing, utilizing more bestpractices than rivals, and having a narrower productline than rivals.

E. Both A and C.


22/485-22

Differentiation Strategies

Incorporate differentiating featuresthatcause buyerstoprefer firms productorservice over brands of rivals

Find ways to differentiate that create

value for buyersand are not easilymatched or cheaply copiedby rivals

Keeping the cost of achieving differentiationbelow the higher price that can be charged

Objective

Keys to Success


23/485-23

Benefits of Successful Differentiation

A product / service with unique,

appealing attributes allows a firm to

Command a premium priceand/or

Increase unit salesand/or

Buildbrand loyalty

= Competitive Advantage

Whichhat is

unique?


24/48

5-24

Unique taste Dr. Pepper

Multiple features Microsoft Vista and Office, iPhone

Wide selectionand one-stop shopping Home Depot,Amazon.com

Superior service FedEx

Spare parts availability Caterpillar

Engineering design and performance Mercedes,BMW

Prestige and distinctiveness Rolex

Product reliability Johnson & Johnson

Quality manufacture Karastan, Michelin, Toyota

Technological leadership 3M Corporation

Top-of-line image Ralph Lauren and Starbucks

Types of Differentiation Themes

S staining Differentiation
http://www.amazon.com/http://www.amazon.com/


25/48

5-25

Sustaining Differentiation:Keys to Competitive Advantage

Most appealing approachestodifferentiation are those

Hardest for rivals to match or imitate

Buyers will find most appealing

Best choicesto gaina longer-lasting, moreprofitable competitive edge

New product innovation

Technical superiorityProduct quality and reliability

Comprehensive customer service

Unique competitive capabilities

Where to Find Differentiation


26/48

5-26

Where to Find DifferentiationOpportunities in the Value Chain

Purchasing and procurement activities Product R&D and product design activities

Production process / technology-relatedactivities

Manufacturing / production activities

Distribution-related activities

Marketing, sales, and customer serviceactivities

Activities,Costs, &

Margins ofForward

Channel Allies

InternallyPerformedActivities,Costs, &Margins

Activities,Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

How to Achieve a


27/48

5-27

How to Achieve aDifferentiation-Based Advantage

Incorporate features that raiseperformance a buyer getsout of the product

Incorporate features that enhance buyersatisfactionin non-economic or intangible ways

Outcompete rivals via superior capabilities

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

Approach 1

Approach 2

Approach 3

Approach 4


28/48

5-28

Test Your Knowledge

Which of the following is notone of the four basic

routes to achieving a differentiation-based competitiveadvantage?

A. Appealing to high-income buyers who are willing andable 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 featuresthat lower the buyers overall costs of using the

companys product

D. Delivering value to customers via competencies andcompetitive capabilities that rivals dont have or cant

afford to match

E. Incorporating features that enhance buyer

satisfaction in intangible or non-economic ways


29/48

5-29

Importance of Perceived Value

Buyers seldom pay forvalue that is not perceived

Price premium of adifferentiation strategy reflects

Value actually deliveredto the buyer

and

Value perceivedby the buyer

Actual and perceived value can differ whenbuyers are unable to assess theirexperience with a product

Signaling Value as


30/48

5-30

Signaling Value asWell as Delivering Value

Incomplete knowledge of buyers causes them tojudge value based on such signalsasPrice

Attractive packaging

Extensive ad campaigns

Ad content and imageSeller facilities or professionalism and

personality of employees

Having a list of prestigious customers

Signals of valuemay be as important asactual valuewhenNature of differentiation is hard to quantify

Buyers are making first-time purchases

Repurchase is infrequent

Buyers are unsophisticated

When Does a Differentiation


31/48

5-31

When Does a DifferentiationStrategy Work Best?

There are many ways to differentiate aproduct that have value and pleasecustomers

Buyer needs and uses are diverse

Few rivals are following a similar

differentiation approach

Technological change andproduct innovation are fast-paced


32/48

5-32

Pitfalls of Differentiation Strategies

Appealing product features are easily copied by

rivals

Buyers see little value in unique attributes ofproduct

Overspending on efforts to differentiate the productoffering, thus eroding profitability

Over-differentiating such that product featuresexceed buyers needs

Charging a price premiumbuyers perceive is too high

Not striving to open up meaningfulgaps in quality, service, or performancefeatures vis--vis rivals products


33/48

5-33

For Discussion: Your Opinion

A low-cost provider strategy can defeat adifferentiation strategy when buyers are

satisfied with a basic product and dont think

extra attributes are worth a higher price.True or false? Explain.

C S


34/48

5-34

Best-Cost Provider Strategies

Combinea strategic emphasison low-costwith 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 and

beating their price expectations

Be the low-cost provider of a product with good-to-excellent product attributes, then use costadvantage to underprice comparable brands

Objectives

Competitive Strength of a


35/48

5-35

Competitive Strength of aBest-Cost Provider Strategy

Competitive advantageis based on thecapability to include upscale attributes at alower cost than rivals comparable products

To achieve competitive advantage,

a company must be able toIncorporate attractive features

at a lower cost than rivals

Manufacture 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 rivals

Provide attractive customer service at a lower

cost than rivals

When Is a Best-Cost


36/48

5-36

When Is a Best-CostProvider Strategy Appealing?

When buyer diversitymakes product

differentiation the norm

When many buyers arealso sensitive to priceand value

Key Characteristics of Toyotas


37/48

5-37

Key Characteristics of Toyota sBest-Cost Provider Strategy for the Lexus

Design an array of high-performance characteristics and

upscale features into Lexus models to make them comparable

in performance/luxury to other high-end models, i.e. Mercedes,

BMW

Transfer its capabilities in making high-quality Toyota

models at low cost to making premium-quality Lexus modelsat costs below other luxury-car makers

Use its relatively lower manufacturing costs to

underprice comparable Mercedes and BMW models

Establish a new network of Lexus dealers, separate from

Toyota dealers, dedicated to providing a level of

personalized customer service unmatched in the industry


38/48

5-38

Risk of a Best-Cost Provider Strategy

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

Low-cost leadersmay be able to siphoncustomersaway with a lower price

High-end differentiatorsmaybe able to steal customersawaywith better product attributes


39/48

5-39

Test Your Knowledge

Which of the following are distinguishing features of a best-

cost provider strategy (based on the comparisons of the fivegeneric 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 featuresand attributes

C. A product line that stresses wide selection, manyproduct variations, and emphasis on differentiatingfeatures

D. A competitive advantage based on more value for themoney

E. Using constant product innovation, excellent R&Dskills, and periodic technological breakthroughs to

sustain the strategy

F / Ni h St t i


40/48

5-40

Focus / Niche Strategies

Involve concentrated attention on a narrowpiece of the total market

Serve niche buyers better than rivals

Choose a market niche where buyers

have distinctive preferences, specialrequirements, or unique needs

Develop unique capabilities toserve needs of target buyer segment

Objective

Keys to Success

A h D fi i M k Ni h


41/48

5-41

Geographic uniqueness

Specialized requirements inusing product/service

Special product attributesappealing only to niche buyers

Approaches to Defining a Market Niche

E l f F St t i


42/48

5-42

Examples of Focus Strategies

Community Coffee Specialty coffee retailer

Animal Planet and History Channel Special interest Cable TV programs

Porsche Sports cars

Bandag Specialist in truck tire recapping

CGA Inc. Specialty insurance provider

Match.com Online dating service

Focus / Niche Strategies
http://www.match.com/http://www.match.com/


43/48

5-43

Focus / Niche Strategiesand Competitive Advantage

Achieve lower costs than rivals inserving a well-defined buyer segment

Focused low-cost strategy

Offer a product appealing to uniquepreferences of a well-defined buyer segment

Focused differentiation strategy

Which hat

is unique?

Approach 1

Approach 2

What Makes a Niche


44/48

5-44

What Makes a NicheAttractive 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 specializedneeds of niche members

Focuser has resources and capabilitiesto effectively serve an attractive niche

Few other rivals are specializing in same niche

Focuser can defend against challengers viasuperior ability to serve niche members

Ri k f F St t


45/48

5-45

Risks of a Focus Strategy

Competitors with broad product lines havingwide appeal find effective ways to matcha focusers capabilities in serving niche

Niche buyers preferences shifttowards product attributes desiredby majority of buyers nichebecomes part of overall market

Segment becomes so attractive it becomescrowded with rivals, causing segment profitsto be splintered

F Di i Y O i i


46/48

5-46

For Discussion: Your Opinion

Which of the five generic competitivestrategies do you think the followingcompanies are employing:

The Saturn division of General Motors

Abercrombie & Fitch

Amazon.com

Avon Products

Deciding Which Generic
http://www.amazon.com/http://www.amazon.com/


47/48

5-47

Deciding Which GenericCompetitive Strategy to Use

Each positions a company differently in its market and

competitive environment Each establishes a central theme for how a company will

endeavor 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 sustain

the strategyThe big risk Mixing and matching pieces of the generic

strategies to create a mixed bag or stuck in the middle

strategy! This rarely producesa sustainable competitive

advantageor a distinctive competitive position !

Table 5.1: Distinguishing Features of the Five Generic Competitive Strategies


48/48

Table 5.1: Distinguishing Features of the Five Generic Competitive Strategies

Documents

Chap005 Five Competitive Strategies Thompson