STRATEGY AND STRATEGY AND

COMPETITIVE COMPETITIVE

ADVANTAGEADVANTAGE

MODULE 5

MODULE OUTLINEMODULE OUTLINE Five Generic Competitive Strategies Five Generic Competitive Strategies

Low-Cost Leadership Strategy Low-Cost Leadership Strategy Broad Differentiation Strategies Broad Differentiation Strategies Best-Cost Provider StrategiesBest-Cost Provider StrategiesFocus Strategies Based on Low CostFocus Strategies Based on Low CostFocus Strategies Based on DifferentiationFocus Strategies Based on Differentiation

Offensive StrategiesOffensive Strategies Defensive StrategiesDefensive Strategies Vertical Integration StrategiesVertical Integration Strategies First-Mover Advantages & DisadvantagesFirst-Mover Advantages & Disadvantages

STRATEGY & STRATEGY & COMPETITIVE ADVANTAGECOMPETITIVE ADVANTAGE

COMPETITIVE ADVANTAGE exists when firm has an edge in

Defending against competitive forces & securing

customer

KEY TO SUCCESSConvince customers firm’s product/service offers SUPERIOR VALUE

Offer buyers a good product at a lower price Use differentiation to provide a better product buyers think is worth a premium price

COMPETITIVE STRATEGY COMPETITIVE STRATEGY PRINCCIPLEPRINCCIPLE

Successful companies invest Successful companies invest Aggressively in creating sustainable Aggressively in creating sustainable Competitive advantage, for it is their Competitive advantage, for it is their Single most dependable contributorSingle most dependable contributor

To above average ROI!To above average ROI!

WAYS TOWAYS TO WINWIN A COMPETITIVE ADVANTAGE A COMPETITIVE ADVANTAGE

Become the low-cost producerBecome the low-cost producer

Make the best-made productMake the best-made product

Provide customer more value for the Provide customer more value for the money money

Save customer moneySave customer money

Provide superior customer service Provide superior customer service

Enhance performance buyer getsEnhance performance buyer gets

Provide more convenient locationsProvide more convenient locations

Make a more reliable & durable productMake a more reliable & durable product

COMPETITIVE STRATEGY:COMPETITIVE STRATEGY:DEFINITIONDEFINITION

COMPETITIVE STRATEGY consists of moves to COMPETITIVE STRATEGY consists of moves to

Attract customersAttract customers

Withstand competitive pressuresWithstand competitive pressures

Strengthen firm’s market positionStrengthen firm’s market position

OBJECTIVESOBJECTIVES

Earn a COMPETITIVE ADVANTAGEEarn a COMPETITIVE ADVANTAGE

Cultivate clientele LOYAL CUSTOMERSCultivate clientele LOYAL CUSTOMERS

COMPETITIVE STRATEGY, narrower in scope than COMPETITIVE STRATEGY, narrower in scope than business strategy, focuses on management’s plan to business strategy, focuses on management’s plan to compete successfullycompete successfully

THE FIVE GENERIC COMPETITIVETHE FIVE GENERIC COMPETITIVESTRATEGIESSTRATEGIES

Type of Advantage Sought

Broad RangeOf Buyers

BuyerSegmentOr Niche

BroadDifferentiation

Strategy

Overall Low-CostLeadership

Strategy

FocusedLow-CostStrategy

FocusedDifferentiation

Strategy

Best-CostProviderStrategy

Lower Cost Differentiation

MARKET TYPE

THE FIVE GENERIC THE FIVE GENERIC COMPETITIVE STRATEGIESCOMPETITIVE STRATEGIES

Striving to be the overall low-cost provider in Striving to be the overall low-cost provider in industryindustry

Striving to build customer loyalty by Striving to build customer loyalty by differentiating one’s product offerings differentiating one’s product offerings from rival’s productsfrom rival’s products

Striving to give customers more value for theStriving to give customers more value for themoney by combining an emphasis on low cost money by combining an emphasis on low cost with an emphasis on upscale differentiationwith an emphasis on upscale differentiation

THE FIVE GENERIC THE FIVE GENERIC COMPETITIVE STRATEGIESCOMPETITIVE STRATEGIES

Concentrating on a narrow buyer Concentrating on a narrow buyer segment, out competing rivals on basis of segment, out competing rivals on basis of lower costlower cost

Offering niche members a products or Offering niche members a products or service customized to needsservice customized to needs

LOW-COST LEADERSHIPLOW-COST LEADERSHIP

Objective

Open up a sustainable cost advantage over rivals, using lower-cost edge as basis to

Under price rivals & reap market share gainsor Earn higher profit margin selling at going price

LOW-COSY LEADERSHIPLOW-COSY LEADERSHIP

Keys to Success

Make achievement of low-cost relative to rivals the THEME Of firm’s business strategy Find ways to drive cists out of business year after-year

Low –Cost leadership means low OVERALL COSTS, Not just low

manufacturing or production costs!

OPENING UP A COST OPENING UP A COST ADVANTAGE OVER RIVALSADVANTAGE OVER RIVALS

Do better job of booting efficiency &Do better job of booting efficiency &controlling costs along value chain by controlling costs along value chain by out-managing rivals regarding both out-managing rivals regarding both structural & exceptional cost drivers structural & exceptional cost drivers

Revamp firm’s value chain to bypass Revamp firm’s value chain to bypass some cost-producing activities altogethersome cost-producing activities altogether

A combination of approaches 1 & 2A combination of approaches 1 & 2

OPENING UP A COST OPENING UP A COST ADVANTAGE OVER RIVALSADVANTAGE OVER RIVALS

Successful low-cost producers Successful low-cost producers aggressively pursue cost savings aggressively pursue cost savings throughout the value chain.throughout the value chain.

NO AREA IS OVERLOOKED !NO AREA IS OVERLOOKED !

NO COST-SAVING OPPORTUNITY IS NO COST-SAVING OPPORTUNITY IS IGNORES!IGNORES!

CONTROLLING CONTROLLING STRUCTURALSTRUCTURAL

COST DRIVERSCOST DRIVERS

Capture scales economies & avoid scales Capture scales economies & avoid scales diseconomies.diseconomies.Capture learning & experience curve Capture learning & experience curve effects consider linkages with other effects consider linkages with other activities in chain activities in chain Find sharing opportunities with other Find sharing opportunities with other business units in enterprisebusiness units in enterpriseCompare benefits of vertical integration vs.Compare benefits of vertical integration vs.outsourcingoutsourcingTake advantage of vocational variablesTake advantage of vocational variables

CONTROLLING CONTROLLING EXECUTIONAL EXECUTIONAL COST DRIVERSCOST DRIVERS

Capitalize on timing considerations Capitalize on timing considerations associated with-mover advantages associated with-mover advantages & disadvantages& disadvantages

Try to increase capacity utilization Try to increase capacity utilization

Consider cost impact of strategic Consider cost impact of strategic choices & operating decisionschoices & operating decisions

REVAMPING THE VALUE REVAMPING THE VALUE CHAINCHAIN

Simplify product design Simplify product design

Offer basic, no-frills product/serviceOffer basic, no-frills product/service

Reengineer core business processesReengineer core business processes

Shift to a simpler, less capita-intensive,Shift to a simpler, less capita-intensive,

or more streamlines technological processor more streamlines technological process

Use direct-to-end user sales & marketing Use direct-to-end user sales & marketing approaches.approaches.

Relocate facilities closer to suppliers or Relocate facilities closer to suppliers or customerscustomers

Pursue more vertical integration relative to rivalsPursue more vertical integration relative to rivals

Focus on limited product/service to meetFocus on limited product/service to meet special special needs of target segmentneeds of target segment

CHARATERISTICS OF A CHARATERISTICS OF A LOW-COST PROVIDERLOW-COST PROVIDER

Cost conscious organizational culture Spartan facilitiesLimited sparks & frills for executivesIntolerance of wasteIntensive screening of budget requestsEmployee participation in cost control efforts

Low-Cost producers championFRUGALITY while aggressively

INVESTING in cost-saving improvements!

WHAT MANAGERS HAVE TO DO WHAT MANAGERS HAVE TO DO TO ACHIEVE LOW-COST TO ACHIEVE LOW-COST

LEADERSHIPLEADERSHIP

Scrutinize each-creating activity, identifying cost Scrutinize each-creating activity, identifying cost driversdrivers

Use knowledge about cost drivers to manage Use knowledge about cost drivers to manage

Costs of each activity down further ear after Costs of each activity down further ear after year year

Consider fundamentally reengineering how Consider fundamentally reengineering how activities are performed & coordinated activities are performed & coordinated

Be entrepreneurial creative in cutting some Be entrepreneurial creative in cutting some

Activities out of value chain systemActivities out of value chain system

COMPETITIVE STRENGTHS OF A COMPETITIVE STRENGTHS OF A LOW-COST PROVIDER STRATEGYLOW-COST PROVIDER STRATEGY

Providers defenses against competitive forcesProviders defenses against competitive forces

RIVAL COMPETITORSRIVAL COMPETITORS- Better positioned to compete - Better positioned to compete offensively on basis of priceoffensively on basis of price

BUYERSBUYERS-Better protected from negotiating power of -Better protected from negotiating power of large customerslarge customers

SUPPLIERSSUPPLIERS- More insulted than competitors from - More insulted than competitors from powerful suppliers powerful suppliers

POTENTIAL ENTRANTSPOTENTIAL ENTRANTS- Low-cost provider’s pricing - Low-cost provider’s pricing power is a significant entry barrierpower is a significant entry barrier

SUBSTITUTESSUBSTITUTES- Better positioned to use low price as a - Better positioned to use low price as a

Defense against substitutes Defense against substitutes

WHEN A LOW-COST WHEN A LOW-COST PROVIDERPROVIDER

STRATEGY WORKS BESTSTRATEGY WORKS BEST

Price competition among rivals is dominant Price competition among rivals is dominant competitive force competitive force Industry’s product is a commodity-typeIndustry’s product is a commodity-typeitem readily available item readily available Few ways to achieve product differentiation Few ways to achieve product differentiation that have value to buyersthat have value to buyersMost buyers have similar Most buyers have similar needs/requirementsneeds/requirementsBuyers incur low switching costs changing Buyers incur low switching costs changing sellers sellers Buyers are large & have signification Buyers are large & have signification bargaining powerbargaining power

DRAWBACKS TO A LOW-COSTDRAWBACKS TO A LOW-COSTPROVIDER STRATEGYPROVIDER STRATEGY

Technical breakthroughs up cost reductions Technical breakthroughs up cost reductions for rivals, negating a low-cost provider’s for rivals, negating a low-cost provider’s efficiency advantagesefficiency advantages

Rivals find it comparatively easy or Rivals find it comparatively easy or inexpensive to imitate leader’s low cost inexpensive to imitate leader’s low cost methodsmethods

Low- cost provider becomes so fixated on Low- cost provider becomes so fixated on cost reduction it fails to respond tocost reduction it fails to respond to

Increased buyer desires for added Increased buyer desires for added qualityquality

or service featuresor service features

New developments in related products New developments in related products

Declining buyer sensitivity to priceDeclining buyer sensitivity to price

DIFFERENTIATION DIFFERENTIATION STRATEGIESSTRATEGIES

ObjectiveIncorporate differentiating features to cause buyers to preferFirm’s product/service over rivals’ brand

Key to Success

Find ways to differentiate to CREATE VALUE for buyers that are NOT EASILY COPIED by rivals Not spending more to differentiate than price premium to be Charged.

DIFFERENTIATION DIFFERENTIATION STRATEGIESSTRATEGIES

Successful differentiation allows firm Successful differentiation allows firm toto

Command a premium priceCommand a premium price

and/or increase unit sales and/or increase unit sales and/or build brand loyalty and/or build brand loyalty

APPROACHES TO DIFFERENTIATIONAPPROACHES TO DIFFERENTIATIONDifferent taste – Dr. PepperDifferent taste – Dr. PepperSuperior service – Federal ExpressSuperior service – Federal ExpressSpare parts availability – caterpillar Spare parts availability – caterpillar More for your money-McDonald’s, Wal-MartMore for your money-McDonald’s, Wal-MartEngineering design & performance- Mercedes Engineering design & performance- Mercedes Prestige-RolexPrestige-RolexQuality-Honda automobilesQuality-Honda automobilesTop-of-the-line image- Ralph LaurenTop-of-the-line image- Ralph LaurenTechnological leadership-3M corporationTechnological leadership-3M corporationUnconditional satisfaction-L.L. BeanUnconditional satisfaction-L.L. Bean

Where to look for Where to look for Differentiation Differentiation OpportunitiesOpportunities

Purchasing & procurement activitiesPurchasing & procurement activities

Product-oriented R&D activitiesProduct-oriented R&D activities

Production process-oriented R&D Production process-oriented R&D activitiesactivities

Outbound logistics & distribution Outbound logistics & distribution activitiesactivities

Marketing, sales, & service activitiesMarketing, sales, & service activities

ACHIEVING A DIFFERENTIATION ACHIEVING A DIFFERENTIATION BASED COMPETITIVE ADVANTAGEBASED COMPETITIVE ADVANTAGE

Option 1

Incorporate product attributes & user features that lower buyer’s costs in using product

Option 2Incorporate features that raise performance buyer gets outOf product

Option 3Incorporate features that raise performance buyer satisfactionIn non-economic/intangible ways.

SIGNALS OF VALUESIGNALS OF VALUE

Buyers often judge value on basis of SIGNALSBuyers often judge value on basis of SIGNALSPrice where it connotes qualityPrice where it connotes qualityHow “ well known “ brand is said to be How “ well known “ brand is said to be whether seller has “prestige” customerswhether seller has “prestige” customers

SIGNALS OF VALUE may be as important asSIGNALS OF VALUE may be as important asACTUAL VALUE when ACTUAL VALUE when

Differences among competing brands are Differences among competing brands are subjective subjective Buyers are making first-time purchasesBuyers are making first-time purchasesRepurchase is infrequent Repurchase is infrequent Buyers are unsophisticatedBuyers are unsophisticated

COMPETITIVE STRENGTHS OF A COMPETITIVE STRENGTHS OF A DIFFERENTIATION STRATEGYDIFFERENTIATION STRATEGYProvides defenses against competitive Provides defenses against competitive forces RIVAL COMPETITORS- Buyersforces RIVAL COMPETITORS- Buyersdevelop loyalty to brand they like develop loyalty to brand they like bestbestBUYERS-Mitigates bargaining power of large BUYERS-Mitigates bargaining power of large buyers since other products are less buyers since other products are less attractive SUPPLIERS – Seller may be in attractive SUPPLIERS – Seller may be in better position to POTENTIAL ENTRANTS- better position to POTENTIAL ENTRANTS- Buyer loyalty acts as entry barrierBuyer loyalty acts as entry barrierSUBSTITUTES- Better positioned to fend off SUBSTITUTES- Better positioned to fend off threats of substitutes based on customers’ threats of substitutes based on customers’ attachment to differentiating attributesattachment to differentiating attributes

WHAT KIND OF WHAT KIND OF DIFFERENTIATION TO DIFFERENTIATION TO

PURSUEPURSUE

Most appealing types of differentiation strategies Those LEAST subject to imitation

Most likely to product an attractive, longer-lastingEdge when it’s based on :

Technical superiorityQualityGiving customers more support servicesGiving customers more value for moneyCore competencies

WHEN A DIFFERENTIATIONWHEN A DIFFERENTIATIONSTRATEGY WORKS BESTSSTRATEGY WORKS BESTS

There are many ways to differentiate There are many ways to differentiate

product/service & differences are perceived product/service & differences are perceived by buyer to have value by buyer to have value

Buyer needs & uses of item are diverseBuyer needs & uses of item are diverse

Not many rivals are following a similar Not many rivals are following a similar

type of differentiation approachtype of differentiation approach

Differentiation strategies are most powerful when buyer needs & preferences are too diverseTo be satisfied by a standardized product!

PITFALLS OF A PITFALLS OF A DIFFERENTIATION DIFFERENTIATION

STRATEGYSTRATEGYTrying to differentiate on a feature Trying to differentiate on a feature buyers do not perceive as lowering their buyers do not perceive as lowering their cost or enhancing their well-beingcost or enhancing their well-beingOver-differentiating such that product Over-differentiating such that product features exceed buyer’s needsfeatures exceed buyer’s needsCharging a price premium that buyers Charging a price premium that buyers perceive is too high perceive is too high Ignoring need to signal value, depending Ignoring need to signal value, depending onlyonlyon “ real” bases of differentiationon “ real” bases of differentiationNot identifying what buyers will consider Not identifying what buyers will consider as valueas value

COMPETITIVE STRATEGY COMPETITIVE STRATEGY PRINCIPLEPRINCIPLE

A low-cost producer strategy can defeat aDifferentiation strategy when buyers are Satisfied with a standard product and do

not See extra attribution as worth paying Additional money to obtain!

BEST-COST PRODUCER BEST-COST PRODUCER STRATEGYSTRATEGY

Combines a strategic emphasis on Combines a strategic emphasis on low-low-costcost with a strategic emphasis on with a strategic emphasis on

differentiation differentiation

Make an upscale product at a lower Make an upscale product at a lower costcost

Give customers more value for theGive customers more value for the moneymoney

Objectives

Create superior value by MEETING EXCEEDING buyer expectationOn product attributes & BEATING their price expectationsBe the low-cost producer of a product with GOOD-TO-EXCELLENTProduct attributes, then use cost advantage to UNDERPRICE Comparable brands

BEST-COST PRODUCER BEST-COST PRODUCER STRATEGYSTRATEGY

Keys to Success

Matching close rivals on key attributes & beating them on cost

Expertise in incorporating upscale product attributes at a lower Than rivals

Ability to contain costs by providing buyers a BETTER product

POWER OF BEST-COSTPOWER OF BEST-COSTPRODUCER STRATEGYPRODUCER STRATEGY

Competitive advantage comes from MATCHING Competitive advantage comes from MATCHING close rivals on key product attributes & close rivals on key product attributes & BEATING them on priceBEATING them on price

Most successful best-cost producers have skills Most successful best-cost producers have skills to SIMUL TANEOUSLY manage costs down & to SIMUL TANEOUSLY manage costs down & product caliber upwardproduct caliber upward

Best-cost producer can often out-compete both Best-cost producer can often out-compete both a low-cost provider & a differentiatora low-cost provider & a differentiator where where

Buyer diversity makes product Buyer diversity makes product differentiation the norm anddifferentiation the norm and

Many buyers are price & value Many buyers are price & value sensitivesensitive

COMPETITIVE STRATEGY COMPETITIVE STRATEGY PRINCIPLEPRINCIPLE

The most powerful competitive approach a company Can pursue is striving relentlessly to become a lower

and lower cost producer of a higher and higher caliber product, with the eventual intent of becoming the

Industry’s absolute lowest cost producer and, Simultaneously, the producer of the industry’s

Overall best product!

FOCUS/NICHE STRATEGIESFOCUS/NICHE STRATEGIES

ObjectivesDo a better job of serving buyers in target market niche than rivals

Keys to Success

Choose a market niche where buyers have distinctive preferences,Special requirements, or unique needsDevelop a unique ability to serve needs of target buyer segment

APPROACHES TO FOCUSINGAPPROACHES TO FOCUSING

Approach # 1

Achieve LOWER COSTS than rivals in serving the segment-A low-cost strategy

Approach # 2

Offer niche buyers SOMETHING DIFFERENT from rivals – A differentiation strategy

EXAMPLES: FOCUS EXAMPLES: FOCUS STRATEGIESSTRATEGIES

Rolls RoyceRolls Royce

Luxury automobilesLuxury automobiles

Apple ComputerApple Computer

Desktop publishingDesktop publishing

Fort Howard PaperFort Howard Paper

Paper products for industrial/commercial firmsPaper products for industrial/commercial firms

Commuter airlinesCommuter airlines

Link major airports with small population Link major airports with small population centerscenters

Motel 6Motel 6

Caters to price-conscious travelersCaters to price-conscious travelers

WHAT MAKE A SEGMENTWHAT MAKE A SEGMENTATTRACTIVE FOR FOCUSING?ATTRACTIVE FOR FOCUSING?

Big enough to be profitableBig enough to be profitable

Good growth potentialGood growth potential

Not crucial to success of major competitorsNot crucial to success of major competitors

Focusing firm has resources to effectively Focusing firm has resources to effectively serve serve

segmentsegment

Focusing can defend itself againstFocusing can defend itself against

Challengers via customer goodwill & its Challengers via customer goodwill & its superior ability to serve buyers in segmentsuperior ability to serve buyers in segment

POWER OF FOCUS STRATEGYPOWER OF FOCUS STRATEGY

Competitive power is greatest when Competitive power is greatest when industry has industry has fast-growing segmentsfast-growing segments

Big enough to be profitable BUTBig enough to be profitable BUTSmall enough to be of secondary Small enough to be of secondary interest to large rivalsinterest to large rivals

No other rivals are concentrating on No other rivals are concentrating on segmentsegmentBuyers in segment requireBuyers in segment require

Specialized expertise ORSpecialized expertise ORCustomized product attributesCustomized product attributes

COMPETITIVE STRENGTHSCOMPETITIVE STRENGTHSOF A FOCUS STRATEGYOF A FOCUS STRATEGY

Provides defenses against competitiveProvides defenses against competitiveforcesforcesRIVAL COMPETITORS- Rivals do not have RIVAL COMPETITORS- Rivals do not have ability to meet specialized needs of ability to meet specialized needs of target clientele target clientele POTENTIAL Entrants- Focuser’s core POTENTIAL Entrants- Focuser’s core competence can act as a barriercompetence can act as a barrierSUBSTITUTES-Focuser’s core SUBSTITUTES-Focuser’s core competencecompetenceprovides obstacle to sellers of substitutes provides obstacle to sellers of substitutes BUYERS-Focuser’s unique ability to meet BUYERS-Focuser’s unique ability to meet power of largest niche buyerspower of largest niche buyers

WHEN DOES A FOCUS STRATEGY WHEN DOES A FOCUS STRATEGY WORK BEST?WORK BEST?

It is costly or difficult for multi-segment It is costly or difficult for multi-segment rivals to serve specialized needs of rivals to serve specialized needs of target niche target niche

No other rivals are concentrating on No other rivals are concentrating on same segmentsame segment

Firm’s resources do not permit it to go Firm’s resources do not permit it to go after a wider portion of marketafter a wider portion of market

Industry has many different segments,Industry has many different segments,

creating more focusing opportunitiescreating more focusing opportunities

RISKS OF A FOCUS STRATEGYRISKS OF A FOCUS STRATEGY

Broad –line competitors may find Broad –line competitors may find effective ways to match focused firm in effective ways to match focused firm in serving target marketserving target market

Niche buyer’s preferences may move Niche buyer’s preferences may move

towards product attributes desired by towards product attributes desired by market as a wholemarket as a whole

Segment may become so appealing itSegment may become so appealing it

becomes crowded with aggressive rivals,becomes crowded with aggressive rivals,

causing segment profiles to be split causing segment profiles to be split many waysmany ways

OFFENSIVE & DEFENSIVE OFFENSIVE & DEFENSIVE STRATEGIESSTRATEGIES

Nearly always results in successful Nearly always results in successful achievement of competitive advantageachievement of competitive advantage

Can protect competitive advantage, Can protect competitive advantage, butbut

RARELY are the basis for achieving RARELY are the basis for achieving competitive advantagecompetitive advantage

The Building and Eroding of The Building and Eroding of Competitive AdvantageCompetitive Advantage

Size of competitive Advantage

Buildup Period Benefit Period Erosion Period

Strategic MoveProduceCompetitiveAdvantage

Size of CompetitiveAdvantageAchieved

Moves byRivalsReduceCompetitiveAdvantage

TIME

BUILDING & ERODING OFBUILDING & ERODING OF COMPETITIVE ADVANTAGECOMPETITIVE ADVANTAGE

Offensive strategic moves succeed in Offensive strategic moves succeed in producing a competitive advantage – producing a competitive advantage –

Ideally, buildup period is shortIdeally, buildup period is short

Length is governed by how long it takes rivals Length is governed by how long it takes rivals to respond effectively enough to close gapto respond effectively enough to close gap

Characterized by launch of counter offensives Characterized by launch of counter offensives of rivals to attack advantage & whittle it of rivals to attack advantage & whittle it awayaway

PRINCIPLEPRINCIPLE

Any competitive advantage Any competitive advantage

currently held Will eventually be currently held Will eventually be

eroded by the actions of eroded by the actions of

competent, resourcefulcompetent, resourceful

competitors! competitors!

OPTION FOR MOUNTING OPTION FOR MOUNTING STRATEGY OFFENSIVESTRATEGY OFFENSIVE

Initiatives to match or exceed rivals’Initiatives to match or exceed rivals’StrengthsStrengthsInitiatives to capitalize on rivals’ Initiatives to capitalize on rivals’ weaknessesweaknessesSimultaneous initiatives on many Simultaneous initiatives on many fronts End-run offensivesfronts End-run offensivesGuerrilla warfare tacticsGuerrilla warfare tacticsPreemptive strikesPreemptive strikes

Attacking competitorsAttacking competitorsstrengthsstrengths

Gain market share by out-matching Gain market share by out-matching strengths of weaker rivalsstrengths of weaker rivalsWhittle away at a rival’s competitive Whittle away at a rival’s competitive advantageadvantage

Challenging strong competitors with a Challenging strong competitors with a lower price is foolhardy unless lower price is foolhardy unless aggressor has a COST ADVANTAGE or aggressor has a COST ADVANTAGE or advantage of GREATERadvantage of GREATERFINANCIAL STRENGT!FINANCIAL STRENGT!

ATTACKING ATTACKING COMPETITORCOMPETITORSTRENGHSSTRENGHS

Under price rivals Under price rivals Boost advertisingBoost advertisingIntroduce new features to appeal Introduce new features to appeal

to to rivals’ customers.rivals’ customers.

Attack with equally good product & Attack with equally good product & lower price lower price

Develop low-cost edge, use it to Develop low-cost edge, use it to under price rivals.under price rivals.

ATTACKING COMPETOTOR ATTACKING COMPETOTOR WEAKNESSESWEAKNESSES

Concentrate one’s competitive strengths & Concentrate one’s competitive strengths & resources directly against rivals’ weaknessesresources directly against rivals’ weaknesses

Concentrate on geographic regions where Concentrate on geographic regions where has weak market share has weak market share Go after more performance-conscious customers Go after more performance-conscious customers of rivals who lag behind challengerof rivals who lag behind challengerAttack rivals with weaker advertising & brand Attack rivals with weaker advertising & brand recognition.recognition.

Competitive Strategy Competitive Strategy PrinciplePrinciple

Challenging rivals where they are most vulnerable is more likely to succeed than challenging themWhere they are strongest ESPECIALLY whenChallenger possesses competitive advantage in

Areas where rivals are weak!

LAUNCHING OFFENSIVELAUNCHING OFFENSIVEON MANY FRONTS ON MANY FRONTS

Launch several major initiatives to Launch several major initiatives to Throw rival off-balance,Throw rival off-balance,Splinter its attention in many Splinter its attention in many

directions, and force it to use directions, and force it to use substantial resources to defend its substantial resources to defend its position position

A challenger with superior resources can A challenger with superior resources can Overpower a weaker rival by outspending Overpower a weaker rival by outspending

it across-the-board long enough to “ buy it across-the-board long enough to “ buy its way into the market” .its way into the market” .

END-RUN OFFENSIVESEND-RUN OFFENSIVES

DODGE head-to-head confrontations DODGE head-to-head confrontations that escalate competitive intensity and that escalate competitive intensity and RISK cutthroat competition– Attempt toRISK cutthroat competition– Attempt toMANEUVER AROUND competition.MANEUVER AROUND competition.

Gain first-mover advantage in a new Gain first-mover advantage in a new arena Force competitors into playing arena Force competitors into playing catch up change rules of competition in catch up change rules of competition in aggressor’s favor. aggressor’s favor.

END-RUN OFFENSIVES:END-RUN OFFENSIVES:APPROACHESAPPROACHES

Move aggressively into new geographic Move aggressively into new geographic marketsmarkets

Where rivals have no market presence Where rivals have no market presence Introduce products with different attributes & Introduce products with different attributes & Features to better meet buyer needsFeatures to better meet buyer needsIntroduce next-generation technologies &Introduce next-generation technologies &leapfrog rivalsleapfrog rivalsCome up with more support services for Come up with more support services for

customerscustomers

GUERRILLA OFFENSESGUERRILLA OFFENSES

Use principles of surprise & hit-and-Use principles of surprise & hit-and-runrun

To attack in locations & at times To attack in locations & at times where conditions are most where conditions are most favorable to initiator favorable to initiator

Well-suited to small challengers with Well-suited to small challengers with limited resourceslimited resources

GUERRILLA OFFENES:GUERRILLA OFFENES:OPTIONSOPTIONS

Focus on narrow target weakly defended by Focus on narrow target weakly defended by rivals challenge rivals where they are rivals challenge rivals where they are overextended & when they are encountering overextended & when they are encountering problemsproblemsMake random scattered raids on leaders Make random scattered raids on leaders with tactics such as with tactics such as

Occasional low-balling on priceOccasional low-balling on priceIntense bursts of promotional activityIntense bursts of promotional activityLegal actions charging antitrust violations,Legal actions charging antitrust violations,patent infringements, & unfair advertisingpatent infringements, & unfair advertising

PREEMPTIVE STRIKESPREEMPTIVE STRIKES

Involves moving first to secure an Involves moving first to secure an advantageous position that rivals advantageous position that rivals are are

foreclosed or discouraged from foreclosed or discouraged from duplicating !duplicating !

PREEMPTIVE STRIKES: PREEMPTIVE STRIKES: OPTIONSOPTIONS

Expand capacity ahead of demand in hopes of Expand capacity ahead of demand in hopes of discouraging rivals from following suit discouraging rivals from following suit Tie up best or cheapest sources of essential raw Tie up best or cheapest sources of essential raw materials materials Move to secure best geographic locationsMove to secure best geographic locationsObtain business of prestigious customers Obtain business of prestigious customers Build an image in buyers’ minds that is unique & Build an image in buyers’ minds that is unique & hard to copy hard to copy Secure exclusive or dominant access to best Secure exclusive or dominant access to best distributorsdistributorsAcquire desirable, but struggling, competitorAcquire desirable, but struggling, competitor

CHOOSING WHOM TO CHOOSING WHOM TO ATTACKATTACK

Four types of firms at which to aim an Four types of firms at which to aim an offensive offensive

Market leadersMarket leaders

Runner-up firmsRunner-up firms

Struggling rivals on verge of going Struggling rivals on verge of going under under

Small local/regional firms not doing Small local/regional firms not doing the jobthe job

OFFENSIVE STRATEGY &OFFENSIVE STRATEGY &COMPETITIVE ADVANTAGECOMPETITIVE ADVANTAGE

Competitive advantage areas offering Competitive advantage areas offering strongest basis for a strongest basis for a STRATEGIC OFFENSIVE STRATEGIC OFFENSIVE

Develop lower-cost product operations Develop lower-cost product operations that lower costs or enhance that lower costs or enhance

differentiation differentiation Develop product features that deliver superiorDevelop product features that deliver superiorperformance or lower users’ costsperformance or lower users’ costsGive more responsive customer serviceGive more responsive customer serviceEscalate marketing effortEscalate marketing effortPioneer new distribution channelPioneer new distribution channelSell direct to end-usersSell direct to end-users

OFFENSIVE STRATEGY & OFFENSIVE STRATEGY & COMPETITIVE ADVANTAGECOMPETITIVE ADVANTAGE

Chances for strategic success are improved when offensive is tied to

what firm best:Key skill

Strong function competence

DEFENSIVE STRATEGYDEFENSIVE STRATEGY

Lesson risk of being attacked Lesson risk of being attacked

Blunt impact of any attack that Blunt impact of any attack that occursoccurs

Influence challengers to aim attacks Influence challengers to aim attacks at other rivalsat other rivals

Strengthen firm’s present position Strengthen firm’s present position

Help sustain any competitive Help sustain any competitive advantage heldadvantage held

DEFENSIVE STRATEGIES:DEFENSIVE STRATEGIES:APPROACHESAPPROACHES

Block avenues challengers can Block avenues challengers can take in take in

mounting offensive attacksmounting offensive attacks

Make it clear any challenge will be Make it clear any challenge will be met with strong counterattack.met with strong counterattack.

DEFENSIVE STRATEGIES:DEFENSIVE STRATEGIES:APPROACH#1APPROACH#1

Broaden product line to fill gaps rivals may go after Broaden product line to fill gaps rivals may go after Keep prices low on models that match rivals Keep prices low on models that match rivals Sign exclusive agreements distributorsSign exclusive agreements distributorsOffer free training buyers’ personnelOffer free training buyers’ personnelGive better credit terms to buyersGive better credit terms to buyersReduce delivery times for spare partsReduce delivery times for spare partsIncrease warranty overages Increase warranty overages Patent alternative technologiesPatent alternative technologiesSign exclusive contracts with best suppliersSign exclusive contracts with best suppliersProtect proprietary know-howProtect proprietary know-how

DEFENSIVE STRATEGIES :DEFENSIVE STRATEGIES :APPROACH #2APPROACH #2

Publicly announce management’s strongPublicly announce management’s strongCommitment to maintain present market shareCommitment to maintain present market sharePublicly announce plans to construct new Publicly announce plans to construct new production capacity to meet forecasted demand production capacity to meet forecasted demand Give out advance information about new products, Give out advance information about new products, technological breakthroughs, & other moves technological breakthroughs, & other moves Publicly commit firm to policy of matching & terms Publicly commit firm to policy of matching & terms offered by rivalsoffered by rivalsMaintain war chest of cash reserves Maintain war chest of cash reserves Make occasional counter-responses to rivals’ Make occasional counter-responses to rivals’ moves moves

VERTICAL INTEGRATIONVERTICAL INTEGRATIONSTRATEGIESSTRATEGIES

Vertical integration extends a firm’s competitiveVertical integration extends a firm’s competitive

Scope within same industry Scope within same industry

BACKWARD into sources of supply BACKWARD into sources of supply

FORWARD toward end-users of final FORWARD toward end-users of final productproduct

Moves to vertically integrate can aim Moves to vertically integrate can aim becoming becoming

FULLY INTEGRATEDFULLY INTEGRATED

PARTIALLY INTEGRATEDPARTIALLY INTEGRATED

COMPETITIVE STRATEGY COMPETITIVE STRATEGY PRINCIPLEPRINCIPLE

A vertical integration strategy has appeal ONLY if it Significantly strengthens a firm’s competitive

Position!

APPEAL OF APPEAL OF BACKWARD INTEGRATION BACKWARD INTEGRATION

Generates cost savings only if volume Generates cost savings only if volume Needed is big enough to capture efficiencies of Needed is big enough to capture efficiencies of

suppliers cost saving potential is strongest when suppliers cost saving potential is strongest when Suppliers have sizable profit marginsSuppliers have sizable profit marginsItem being supplied is a major costItem being supplied is a major cost

componentcomponentNecessary technical skills are easily mastered Necessary technical skills are easily mastered

A differentiation-based competitive advantage arises A differentiation-based competitive advantage arises when firm ends up with a better quality part spares when firm ends up with a better quality part spares firm uncertainty of depending on suppliers of firm uncertainty of depending on suppliers of crucial raw materialscrucial raw materials

APPEAL OF FORWARDAPPEAL OF FORWARDINTEGRATIONINTEGRATION

Advantageous for firm to set up its own wholesale retail distribution network if

Undependable distribution channelsUndermine into distribution & retailing may be cheaper than going through independent distributorsMay help achieve greater product differentiation, allowing escape from price-oriented competition for manufacturer, may provide better access to ultimate consumer.

STRATEGIC STRATEGIC DISADVANTAGES DISADVANTAGES

OF VERTICAL OF VERTICAL INTEGRATIONINTEGRATION

Boosts capital requirementsBoosts capital requirementsResults accommodating buyer demands Results accommodating buyer demands for product varietyfor product varietyExtends firm’s scope of activity, locking it Extends firm’s scope of activity, locking it deeper into industrydeeper into industryPoses problems of balancing capacity at Poses problems of balancing capacity at each stage of value chaineach stage of value chainRequires radically different skills & Requires radically different skills & capabilitiescapabilitiescan reduce firm’s manufacturing flexibility,can reduce firm’s manufacturing flexibility,Lengthening design time & ability to Lengthening design time & ability to introduce new products introduce new products

UNBUNDLING & UNBUNDLING & OUTSOURCINGOUTSOURCING

STRSTEGIESSTRSTEGIES

Concept

Involves withdrawing from certain stages in value chainSystem and relying on outside vendors to perform neededActivities and services

ADVANTAGES OF ADVANTAGES OF OUTSOURCING STRATEGIESOUTSOURCING STRATEGIES

Activity can be performed better or more Activity can be performed better or more cheaply by outside specialistscheaply by outside specialistsActivity is not crucial to achieving competitive Activity is not crucial to achieving competitive advantageadvantageReduces firm’s risk exposure to changing Reduces firm’s risk exposure to changing technology and/or changing buyer preference technology and/or changing buyer preference streamlines firm operations in ways to streamlines firm operations in ways to

cut cycle timecut cycle timeSpeed decision-makingSpeed decision-makingReduce coordination costsReduce coordination costs

Allows firm to concentrate on its core Allows firm to concentrate on its core businessbusiness

PROS & CONS OF PROS & CONS OF VERTICAL INTEGRATIONVERTICAL INTEGRATIONUse of a vertical integration strategy Use of a vertical integration strategy depends on if it can enhance performance of depends on if it can enhance performance of strategy critical activities to EITHERstrategy critical activities to EITHER

Lower costs ORLower costs ORIncrease differentiation impact onIncrease differentiation impact on

Investment costs Investment costs Flexibility & response times Flexibility & response times Administrative overhead of Administrative overhead of

coordinationcoordinationif a competitive advantage can be createdif a competitive advantage can be created

FIRST-MOVER ADVANTAGESFIRST-MOVER ADVANTAGES

WHEN to make a strategic move is often WHEN to make a strategic move is often as crucial as WHAT move to makeas crucial as WHAT move to makeFirst-mover advantages arise WHEN First-mover advantages arise WHEN Pioneering helps build firm’s image &Pioneering helps build firm’s image &reputationreputationEarly commitments to raw material Early commitments to raw material suppliers, new technologies, & suppliers, new technologies, & distribution channels can produce cost distribution channels can produce cost advantageadvantageLoyalty of first time buyers is highLoyalty of first time buyers is highMoving first can be a preemptive strikeMoving first can be a preemptive strike

FIRST-MOVER DISADVANTAGESFIRST-MOVER DISADVANTAGES

Arise WHENArise WHENCosts of pioneering are sizable & Costs of pioneering are sizable &

loyalty of first loyalty of first

time buyers is weaktime buyers is weak

Rapid technological change allows Rapid technological change allows followers to followers to Leapfrog pioneers Leapfrog pioneers

Skills & know-how of pioneers are Skills & know-how of pioneers are easilyeasily

imitated by latecomers to crack marketimitated by latecomers to crack market

FIRST- MOVER FIRST- MOVER DISADVANTAGESDISADVANTAGES

Arise WHEN Arise WHEN

Costs of pioneering are sizable & Costs of pioneering are sizable & loyalty of first time buyers is weakloyalty of first time buyers is weak

Rapid technological change allows Rapid technological change allows followers to leapfrog & know-how of followers to leapfrog & know-how of pioneers are easily imitated by late pioneers are easily imitated by late moversmovers

It is easy for latecomers to crack market It is easy for latecomers to crack market