Strategy and Competitive Advantage

Five Generic Strategies

Low-cost providerBroad differentiationBest-cost providerLow-cost nicheDifferentiation niche

Low-cost Provider Strategy

Achieve a cost advantage through:Manage internal costs better than rivalsEliminate cost-producing activities

Low-cost Provider Strategy:Controlling the Cost Drivers

Economies or diseconomies of scaleLearning and experience curve effectsKey resources inputs

Union vs. nonunion laborBargaining power and suppliersLocational variablesSupply chain management expertise

Low-cost Provider Strategy:Controlling the Cost Drivers

Link with other activitiesShare opportunities with other business unitsVertical integration vs. outsourcingTiming and first-mover advantageCapacity utilization

Low-cost Provider Strategy:Controlling the Cost Drivers

Managerial decisions:Services to buyersProduct featuresWages and benefitsDistribution channelsDelivery timesIncentive compensationSpecifications to suppliers

Low-cost Provider Strategy:Revamping the Value Chain

Shift to e-business technologiesDirect to end-user sales and marketingSimplify product designGet rid of the “extras”Reengineer processes

CheaperSimplerMore flexible

Low-cost Provider Strategy:Revamping the Value Chain

Eliminate high-cost materials and componentsRelocate facilitiesFocus on limited products and servicesConsolidate work stepsEliminate low value-added activities

Low-cost Provider Strategy:When the Strategy Works Best

Vigorous price competitionStandardized or commodity productDifferentiation has little value to buyersBuyers use the product in the same wayLow buyer switching costsBuyers have bargaining powerNew entrants slash prices

Low-cost Provider Strategy:Risks of Strategy

Cut prices more than cost savingsAdvantage may not be sustainableFixation on cost savings Technological breakthroughs

Differentiation Strategy

Successful implementation allows company to:

Command a premium priceImprove sales and market shareDevelop brand loyalty

Differentiation Strategy:Where to Create the “Difference”

Purchasing and procurementProduct designProcess designQuality controlDistribution channelsMarketing, sales and customer service

Differentiation Strategy:When the Strategy Works Best

When there are many ways to differentiate and buyers perceive valueBuyer needs and uses are diverseFew rivals follow similar approachFrequent technological change and innovation

Differentiation Strategy:Risks of Strategy

Value not perceived by buyer because:

Focus on incorrect features, attributes, etc.OverdifferentiatingCharging too high priceFailing to signal valueFailing to identify what buyers consider value

Best-cost Provider Strategy

Give customers more value for the moneyTargets value-conscious customersLower costs are a competitive advantageRisk of getting crushed between rival low-cost and differentiation strategies

Market Niche Strategy:When the Strategy Works Best

Target is big enough to be profitableIndustry leaders do not need presenceCostly for larger rivals to enterIndustry is multi-segmentedFew rivals in targetHave capabilities and resources to compete effectively

Market Niche Strategy:Risks of Strategy

Rivals learn to compete effectivelyTarget preferences and needs shift toward the mainstreamTarget becomes attractive to competitors

Strategic Alliances:Advantages

Quick access to critical country marketsGain knowledge of markets and culture from partnersGain access to valuable skills and competencies in new marketsDevelop synergiesEnhance organizational capabilities

Strategic Alliances:Disadvantages

Become dependent on partners for essential skills or expertisePartners guard most valuable resources

Mergers and Acquisitions

Provides more permanent ties than an allianceDramatic strengthening of:

Market positionAbility to exploit opportunitiesCompetitive advantage

May achieve cost savings

Vertical Integration:Advantages

Reduces costsAdds to technological or competitive strengthsHelps differentiate products

Vertical Integration:Disadvantages

High capital requirementsReduces flexibility in accommodating demandNeed to balance capacity at each stageReduces manufacturing flexibilityDifferent skills are needed to manage different businesses

Make or Buy: Reasons for Making

1. Maintain core competencies and protect personnel from layoff

2. Lower production cost

3. Unsuitable suppliers4. Assure adequate

supply5. Utilize surplus labor

and make a marginal contribution

6. Obtain desired quality

7. Remove supplier collusion

8. Obtain a unique item that would entail a prohibitive commitment from the supplier

9. Protect proprietary design or quality

10.Increase or maintain size of company

Make or Buy: Reasons for Buying

1. Frees management to deal with its primary business

2. Lower acquisition cost

3. Preserve supplier commitment

4. Obtain technical or management ability

5. Inadequate capacity

6. Reduce inventory costs

7. Ensure flexibility and alternate source of supply

8. Inadequate managerial or technical resources

9. Reciprocity10.Item is protected by

patent or trade secret

Outsourcing:When to Unbundle

Supplier has lower cost and/or higher qualityActivities are not crucial to sustaining a competitive advantageReduces risk of exposure to changing environmentStreamlines operations

Increases flexibilityReduces costsReduces time

Allows company to focus on core businesses

Outsourcing:Advantages

Higher quality and/or lower costImproves ability to innovateEnhances strategic flexibilityAccess to diverse expertiseFirm can concentrate on core competenciesStrengthen supplier commitment

Offensive Strategies

Meet or exceed competitor strengthsCapitalize on competitor weaknessesSimultaneous initiativesEnd-run offensivesGuerilla offensivesPreemptive strikes

Offensive Strategies:Whom to Attack

Market leadersRunner-up firmsStruggling firmsSmall regional and local firms

Defensive Strategies

Build obstacles to challengersSignal that retaliation is likely

Public announcementsMatch competitor offeringsOccasional counterresponseMaintain a war chest

First-mover StrategiesAdvantages

Build image and reputationNew technology reduces overall costBuild customer loyaltyPreemptive strikeLong-term profits are enhanced

DisadvantagesPioneering is costlyProducts may be easily reengineered by followersCompetitors may be able to leapfrog