Competitive Strategy: The Core Concepts

Chapter 1

What is Competitive Strategy???

“ It is the search for a favourable competitive position in an industry and it aims to establish a profitable and sustainable position against the forces that determine competitive position”

Choice of Competitive Strategy

Two factors determine the choice of competitive strategy

1. Attractiveness of industries for long term profitability and the factors that determine it

2. The determinants of relative competitive position within an industry

Competitive strategy can shape industry attractiveness and competitive position

How to study Industry Attractiveness

It can be done by the structural analysis of industries

The tool for it is known as

“ The five competitive forces model”

This model determines industry profitability because it influences cost, price and required investment

How to study relative competitive position of the firm

• It is important to study this because relative position determines the firm’s profitability

• And this can happen only if the firm has a “sustainable competitive advantage” over rivals

• This “sustainable competitive advantage is of two types

1. Low cost

2. Differentiation

Competitive advantage and Generic strategies

• The two types of competitive advantages combined with scope of activities (broad and narrow) give three generic strategies

1. Cost leadership2. Differentiation3. FocusFocus has two variants1. Cost focus2. Differentiation focus Cost leadership and differentiation seeks

competitive advantage in broad segment whereas focus seeks competitive advantage in a narrow segment

Three Generic Strategies

Competitive advantage

Lower cost Differentiation

Broad

target

Competitive

Scope

Narrow

target

Cost leadership Differentiation

Cost focus Differentiation focus

Cost LeadershipIt can be achieved by1. Economies of scale2. Preferential access to raw material3. Proprietary technology4. Offering low cost, no frills product/services

The firm also needs to achieve parity or proximity to the bases of differentiation relative to its rivals in order to gain competitive advantage

(Toyota pitched its Lexus model as similar to Mercedes but at half the price)

DifferentiationThe firm seeks to be unique in its industry along

some dimension that are widely valued by buyers

(Sony is known for its technology in handy cams and so it charges a premium price)

Source of differentiation:1. Product2. Delivery system3. Marketing approach The differentiator needs to have cost parity or

proximity in relation to its rivals by reducing costs in areas that do not affect differentiation

Focus

• The focuses selects a narrow segment or group of segments and tailors its strategy to serve it and excludes other segments

• It has two variants: Cost focus and Differentiation focus

• Cost focus seeks cost advantage in its segment while differentiation focus seeks differentiation in its segment

Stuck in the middle

• If a firm engages in a generic strategy but fails to achieve any of them, then it is “ stuck in the middle”

• This firm is at a disadvantage because other firms may have achieved their generic strategies

• This firm may be profitable only if the industry structure is attractive or other firms are also “stuck in the middle”

Pursuit of more than one generic strategy

• It leads to a situation of “stuck in the middle” but in certain cases it can be pursued and can be successful

• Below are mentioned three conditions under which it is possible

1. Rivals are stuck in the middle2. Cost is strongly affected by market share

or interrelationships3. The firm pioneers a major innovation

Risk of Cost leadership

It cannot be sustained if:

1. Rivals imitate

2. Technology changes

3. Other bases of cost leadership erode

4. Proximity in differentiation is lost

5. Cost focusers achieve even lower cost in segments

Risks of differentiation

It cannot be sustained if:

1. Rivals imitate

2. Bases of differentiation become less important to buyers

3. Cost proximity is lost

4. Differentiation focusers achieve even greater differentiation in segments

Risk of Focus

It cannot be sustained if:

1. It is copied

2. Target segment becomes unattractive due to its structure eroding or the demand in it disappears

3. Broadly targeted rivals overwhelm the segment

4. New focusers sub-segment the industry