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5 TheFiveGenericCompetitive Strategies ChapterSummary Chapter describes the five basic competitive strategy options which of the five to employ is a companys first and foremost choice in crafting overall strategy and beginning its quest for competitive advantage. LectureOutline I. Introduction 1. By competitive strategy we mean the specifics of managements game plan for competing successfully how it plans to position the company in the marketplace, its specific efforts to please customers, and improve its competitive strength, and the type of competitive advantage it wants to establish. CORECONCEPT: A competitive strategy concerns the specifics of managements game plan for competing successfully and achieving a competitive edge over rivals. 2. A company achieves competitive advantage whenever it has some type of edge over rivals in attracting buyers and coping with competitive forces. 3. There are many routes to competitive advantage, but they all involve giving buyers what they perceive as superior value. 4. Delivering superior value whatever form it takes nearly always requires performing value chain activities differently than rivals and building competencies and resource capabilities that are not readily matched. II. Five Competitive Strategies 1. There are countless variations in the competitive strategies that companies employ, mainly because each companys strategic approach entails custom-designed actions to fit its own circumstances and industry environment. 2. The biggest and most important differences among competitive strategies boil down to: a. Whether a companys market target is broad or narrow b. Whether the company is pursuing a competitive advantage linked to low costs or product differentiation 3. Five distinct competitive strategy approaches stand out: a. A low-cost provider strategy: appealing to a broad spectrum of customers based by being the overall low-cost provider of a product or service b. A broad differentiation strategy: seeking to differentiate the companys product/service offering from rivals in ways that will appeal to a broad spectrum of buyers c. A best-cost provider strategy: giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest (best) costs and prices compared to rivals offering products with comparable attributes d. A focused or market niche strategy based on lower cost: concentrating on a narrow buyer segment and outcompeting rivals by serving niche members at a lower cost than rivals e. A focused or market niche strategy based on differentiation: concentrating on a narrow buyer segment and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals products 4. Figure 5.1, The Five Generic Competitive Strategies Each Stakes Out a Different Position in the Marketplace, examines how each of the five strategies stake out a different market position. III. Low-Cost Provider Strategies 1. A company achieves low-cost leadership when it becomes the industrys lowest-cost provider rather than just being one of perhaps several competitors with comparatively low costs. 2. In striving for a cost advantage over rivals, managers must take care to include features that buyers consider essential. 3. For maximum effectiveness, companies employing a low-cost provider strategy need to achieve their cost advantage in ways difficult for rivals to copy or match. CORECONCEPT: A low-cost leaders basis for competitive advantage is lower overall costs than competitors. Successful low-cost leaders are exceptionally good at finding ways to drive costs out of their businesses. 4. A company has two options for translating a low-cost advantage over rivals into attractive profit performance: a. Option 1: use the lower-cost edge to underprice competitors and attract pricesensitive buyers in great numbers to increase total profits b. Option 2: maintain the present price, be content with the current market share, and use the lower-cost edge to earn higher profit margin on each unit sold 5. Illustration Capsule 5.1, Nucor Corporations Low-Cost Provider Strategy, describes Nucor Corporations strategy for gaining low-cost leadership in manufacturing a variety of steel products. IllustrationCapsule5.1,NucorCorporationsLowCostProviderStrategy A. The Two Major Avenues for Achieving a Cost Advantage 1. To achieve a cost advantage, a firm must make sure that its cumulative costs across its overall value chain are lower than competitors cumulative costs. There are two ways to accomplish this: a. Outmanage rivals in efficiency with which value chain activities are performed and in controlling the factors driving the costs of value chain activities b. Revamp the firms overall value chain to eliminate or bypass some cost-producing activities 2. Controlling the Cost Drivers: There are nine major cost drivers that come into play in determining a companys costs in each activity segment of the value chain: a. Economies or diseconomies of scale The costs of a particular value chain activity are often subject to economies or diseconomies of scale. b. Learning and experience curve effects The cost of performing an activity can decline over time as the experience of company personnel builds. c. The cost of key resource inputs The cost of performing value chain activities depends in part on what a firm has to pay for key resource inputs: i. Union versus nonunion labor ii. Bargaining power vis--vis suppliers iii. Locational variables iv. Supply chain management expertise d. Links with other activities in the company or industry value chain When the cost of one activity is affected by how other activities are performed, costs can be managed downward by making sure that linked activities are performed in cooperative and coordinated fashion. e. Sharing opportunities with other organizational or business units within the enterprise Different product lines or business units within an enterprise can often share the same order processing and customer billing systems, maintain a common sales force to call on customers, share the same warehouse and distribution facilities, or rely on a common customer service and technical support team. f. The benefits of vertical integration versus outsourcing Vertical integration (expanding backward into sources of supply, forward to end-users, or both) allows affirm to bypass suppliers or buyers with considerable bargaining power. Most often it is cheaper to outsource or hire outside specialists to perform certain functions and activities. CORECONCEPT: Vertical integration is the backward expansion into sources of supply, the forward expansion toward end users, or both. CORECONCEPT: To outsource is to hire outside specialists to perform certain functions critical to the firm rather than performing them in-house. g. First-mover advantages and disadvantages Sometimes the first major brand in the market is able to establish and maintain its brand name at a lower cost than later brand arrivals. h. The percentage of capacity utilization Capacity utilization is a big cost driver for those value chain activities associated with substantial fixed costs. i. Strategic choices and operating decisions A companys cost can be driven up or down by a fairly wide assortment of managerial decisions: i. Adding/cutting the services provided to buyers ii. Incorporating more/fewer performance and quality features into the product iii. Increasing/decreasing the number of different channels utilized in distributing the firms product iv. Lengthening/shortening delivery times to customers v. Putting more/less emphasis than rivals on the use of incentive compensation, wage increases, and fringe benefits to motivate employees and boost worker productivity vi. Raising/lowering the specifications for purchased materials CORECONCEPT: Outperforming rivals in controlling the factors that drive costs is a very demanding managerial exercise. 3. Revamping the Value Chain: Dramatic costs advantages can emerge from finding innovative ways to eliminate or bypass cost-producing value chain activities. The primary ways companies can achieve a cost advantage by reconfiguring their value chains include: a. Making greater use of Internet technology applications In recent years the Internet has become a powerful and pervasive tool for reengineering company and industry value chains. i. Illustration Capsule 5.2, Utz Quality Foods Use of Internet Technology to Reengineer Value Chain Activities, describes how one company is using Internet technology to improve both the effectiveness and the efficiency of the activities comprising its potato chip business. IllustrationCapsule5.2,UtzQualityFoodsUseofInternetTechnologytoReengineer ValueChainActivities Discussion Question 1. Identify the advantages obtained by Utz Quality Foods through the reengineering of the value chain via utilization of the newest technology? Answer: The advantages obtained by Utz include cost saving efficiencies, improved effectiveness of operations, and sales are boosted. b. Using direct-to-end-user sales and marketing approaches Costs in the wholesaleretail portions of the value chain frequently represent 35-50 percent of the price final consumers pay. c. Simplifying product design Using computer-assisted design techniques, reducing the number of parts, standardizing parts and components across models and styles, and shifting to an easy-to-manufacture product design can all simplify the value chain. d. Stripping away the extras Offering only basic products or services can help a company cut costs associated with multiple features and options. e. Shifting to a simpler, less capital intensive, or more streamlined or flexible technological process Computer-assisted design and manufacture, or other flexible manufacturing systems, can accommodate both low-cost efficiency and product customization. f. Bypassing the use of high-cost raw materials or component parts High-cost raw materials and parts can be designed out of the product. g. Relocating facilities Moving plants closer to suppliers, customers, or both can help curtail inbound and outbound logistics costs. h. Dropping the something for everyone approach Pruning slow-selling items from the product lineup and being content to meet the needs of most buyers rather than all buyers can eliminate activities and costs associated with numerous product versions. 4. Examples of Companies That Created New Value Chain Systems and Reduced Costs: One example of accruing significant cost advantages from creating altogether new value chain systems can be found in the beef-packing industry. Southwest Airlines has reconfigured the traditional value chain of commercial airlines to lower costs and thereby offer dramatically lower fares to passengers. Dell Computer has proved a pioneer in redesigning its value chain architecture in assembling and marketing personal computers. B. The Keys to Success in Achieving Low-Cost Leadership 1. To succeed with a low-cost provider strategy, company managers have to scrutinize each cost creating activity and determine what drives its cost. CORECONCEPT: Success in achieving a low-cost edge over rivals comes from exploring avenues for cost reduction and pressing for continuous cost reductions across all aspects of the companys value chain year after year. 2. While low-cost providers are champions of frugality, they are usually aggressive in investing in resources and capabilities that promise to drive costs out of the business. 3. Wal-Mart is one of the foremost practitioners of low-cost leadership. Other companies noted for their successful use of low-cost provider strategies include Lincoln Electric, Briggs & Stratton, Bic, Black & Decker, Stride Rite, Beaird-Poulan, and General Electric and Whirlpool. C. When a Low-Cost Provider Strategy Works Best 1. A competitive strategy predicated on low-cost leadership is particularly powerful when: a. Price competition among rival sellers is especially vigorous b. The products of rival sellers are essentially identical and suppliers are readily available from any of several eager sellers c. There are a few ways to achieve product differentiation that have value to buyers d. Most buyers use the product in the same ways e. Buyers incur low costs in switching their purchases from one seller to another f. Buyers are large and have significant power to bargain down prices g. Industry newcomers use introductory low prices to attract buyers and build a customer base CORECONCEPT: A low cost provider is in the best position to win the business of price-sensitive buyers, set the floor on market price, and still earn a profit. D. The Pitfalls of a Low-Cost Provider Strategy 1. Perhaps the biggest pitfall of a low-cost provider strategy is getting carried away with overly aggressive price cutting and ending up with lower, rather than higher, profitability. 2. A low-cost/low-price advantage results in superior profitability only if (1) prices are cut by less than the size of the cost advantage or (2) the added value gains in unit sales are large enough to bring in bigger total profit despite lower margins per unit sold. 3. A second big pitfall is not emphasizing avenues of cost advantages that can be kept proprietary or that relegate rivals to playing catch-up. 4. A third pitfall is becoming too fixated on cost reduction. 5. Even if these mistakes are avoided, a low-cost competitive approach still carries risk. CORECONCEPT: A low-cost providers product offering must always contain enough attributes to be attractive to prospective buyers low price, by itself, is not always appealing to buyers. IV. Differentiation Strategies 1. Differentiation strategies are attractive whenever buyers needs and preferences are too diverse to be fully satisfied by a standardized product or by sellers with identical capabilities. CORECONCEPT: The essence of a broad differentiation strategy is to be unique in ways that are valuable to a wide range of customers. 2. Successful differentiation allows a firm to: a. Command a premium price for its product b. Increase unit sales c. Gain buyer loyalty to its brand 3. Differentiation enhances profitability whenever the extra price the product commands outweighs the added costs of achieving the differentiation. A. Types of Differentiation Themes 1. Companies can pursue differentiation from many angles. 2. The most appealing approaches differentiation to are those that are hard or expensive for rivals to duplicate. CORECONCEPT: Easy to copy differentiating features cannot produce sustainable competitive advantage. B. Where along the Value Chain to Create the Differentiating Attributes 1. Differentiation opportunities can exist in activities all along an industrys value chain; possibilities include the following: a. Supply chain activities that ultimately spill over to affect the performance or quality of the companys end product. b. Product R&D activities that aim at improved product designs and performance features, expanded end uses and applications, more frequent first-on-the market victories, wider product variety and selection, added user safety, greater recycling capability, or enhanced environmental protection. c. Production R&D and technology-related activities that permit custom-order manufacture at an efficient cost, make production methods safer for the environment, or improve product quality, reliability, and appearance. d. Manufacturing activities that reduce product defects, prevent premature product failure, extend product life, allow better warranty coverages, improve economy of use, result in more end-user convenience, or enhance product appearance. e. Outbound logistics and distribution activities that allow for faster delivery, more accurate order filling, lower shipping costs, and fewer warehouse and on-the-shelf stockouts. f. Marketing, sales, and customer service activities that result in superior technical assistance to buyers, faster maintenance and repair services, more and better product information provided to customers, more and better training materials for end users, better credit terms, quicker order processing, or greater customer convenience. 4. Managers need keen understanding of the sources of differentiation and the activities that drive uniqueness to devise a sound differentiation strategy and evaluate various differentiation approaches. C. Achieving a Differentiation-Based Competitive Advantage 1. While it is easy enough to grasp that a successful differentiation strategy must entail creating buyer value in ways unmatched by rivals, the big question is which of four basic differentiating approaches to take in delivering unique buyer value. 2. One approach is to incorporate product attributes and user features that lower the buyers overall costs of using the product. 3. A second approach is to incorporate features that raise product performance. 4. A third approach is to incorporate features that enhance buyer satisfaction in noneconomic or intangible ways. 5. A fourth approach is to differentiate on the basis of capabilities to deliver value to customers via competitive capabilities that rivals do not have or cannot afford to match. CORECONCEPT: A differentiators basis for competitive advantage is either a product/service offering whose attributes differ significantly from the offering of rivals or a set of capabilities for delivering customer value that rivals do not have. D. The Importance of Perceived Value 1. Buyers seldom pay for value they do not perceive, no matter how real the unique extras may be. Thus, the price premium commanded by a differentiation strategy reflects the value actually delivered to the buyer and the value perceived by the buyer. 2. Signals of value that may be as important as actual value include: (1) when the nature of differentiation is subjective or hard to quantify, (2) when buyers are making first-time purchases, (3) when repurchase is infrequent, and (4) when buyers are unsophisticated. E. Keeping the Cost of Differentiation in Line 1. The trick to profitable differentiation is either to keep the costs of achieving differentiation below the price premium the differentiating attributes can command in the marketplace or to offset thinner profit margins with enough added volume to increase total profits. 2. It usually makes sense to incorporate differentiating features that are not costly but that add to buyer satisfaction. F. When a Differentiation Strategy Works Best 1. Differentiation strategies tend to work best in market circumstance where: a. There are many ways to differentiate the product or service and many buyers perceive these differences as having value b. Buyer needs and uses are diverse c. Few rival firms are following a similar differentiation approach d. Technological change and product innovation are fast-paced and competition revolves around rapidly evolving product features CORECONCEPT: Any differentiating feature that works well tends to draw imitators. G. The Pitfalls of a Differentiation Strategy 1. There are no guarantees that differentiation will produce a meaningful competitive advantage. 2. If buyers see little value in the unique attributes or capabilities of a product then the companys differentiation strategy will get a ho-hum market reception. 3. Attempts at differentiation are doomed to fail if competitors can quickly copy most or all of the appealing product attributes a company comes up with. 4. Other common pitfalls and mistakes in pursuing differentiation may include: a. Trying to differentiate on the basis of something that does not lower a buyers cost or enhance a buyers well being, as perceived by the buyer b. Overdifferentiating so that the product quality or service level exceeds buyers needs c. Trying to charge too high a price premium d. Being timid and not striving to open up meaningful gaps in quality or service or performance features vis--vis the products of rivals tiny differences between rivals product offerings may not be visible or important to buyers 5. A low-cost provider strategy can defeat a differentiation strategy when buyers are satisfied with a basic product and do not think extra attributes are worth a higher price. V. Best-Cost Provider Strategies 1. Best-cost provider strategies aim at giving customers more value for the money. The objective is to deliver superior value to buyers by satisfying their expectations on key quality/service/features/performance attributes and beating their expectations on price. 2. A company achieves best-cost status from an ability to incorporate attractive attributes at a lower cost than rivals. 3. Best-cost provider strategies stake out a middle ground between pursuing a low-cost advantage and a differentiation advantage and between appealing to the broader market as a whole and a narrow market niche. 4. From a competitive positioning standpoint, best-cost strategies are a hybrid, balancing a strategic emphasis on low cost against a strategic emphasis on differentiation. 5. The market target is value-conscious buyers. 6. The competitive advantage of a best-cost provider is lower costs than rivals in incorporating good-to-excellent attributes, putting the company in a position to underprice rivals whose products have similar appealing attributes. 7. A best-cost provider strategy is very appealing in markets where buyer diversity makes product differentiation the norm and where many buyers are also sensitive to price and value. 8. Illustration Capsule 5.3, Toyotas Best-Cost Producer Strategy for Its Lexus Line, describes how Toyota has used a best-cost approach with its Lexus models. IllustrationCapsule5.3,ToyotasBestCostProducerStrategyforItsLexusLine Discussion Question 1. Discuss how Toyota has been able to achieve its low-cost leadership status in the industry. Answer: Toyota has achieved low-cost leadership status because it has developed considerable skills in efficient supply chain management and low-cost assembly capabilities and because its models are so well-positioned in the low-to-medium end of the price spectrum. These are enhanced by Toyotas strong emphasis on quality. A. The Big Risk of a Best-Cost Provider Strategy 1. The danger of a best-cost provider strategy is that a company using it will get squeezed between the strategies of firms using low-cost and differentiation strategies. 2. To be successful, a best-cost provider must offer buyers significantly better product attributes in order to justify a price above what low-cost leaders are charging. VI. Focused (or Market Niche) Strategies 1. What sets focused strategies apart from low-cost leadership or broad differentiation strategies is concentrated attention on a narrow piece of the total market. 2. The target segment or niche can be defined by: a. Geographic uniqueness b. Specialized requirements in using the product c. Special product attributes that appeal only to niche members A. A Focused Low-Cost Strategy 1. A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than rival competitors. 2. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment. 3. Focused low-cost strategies are fairly common. 4. Illustration Capsule 5.4, Motel 6s Focused Low-Cost Strategy, describes how Motel 6 has kept its costs low in catering to budget conscious travelers. IllustrationCapsule5.4,Motel6sFocusedLowCostStrategy Discussion Question 1. Discuss the advantages this organization achieves from its focused low-cost provider strategy. Answer: Through utilization of this type of strategy, the Motel 6 organization is able to capitalize on the market segment that is comprised of price-conscious travelers who want clean, no-frills accommodations for a reasonable price. B. A Focused Differentiation Strategy 1. A focused strategy based on differentiation aims at securing a competitive advantage by offering niche members a product they perceive is better suited to their own unique tastes and preferences. 2. Successful use of a focused differentiation strategy depends on the existence of a buyer segment that is looking for special product attributes or seller capabilities and on a firms ability to stand apart from rivals competing in the same target market niche. 3. Illustration Capsule 5.5, Progressive Insurances Focused Differentiation Strategy in Auto Insurance, provides details about the companys focused differentiation strategy. IllustrationCapsule5.5,ProgressiveInsurancesFocusedDifferentiationStrategyinAuto Insurance Discussion Question 1. How does Progressives choice of strategy differentiate it from other insurance companies in the marketplace? Answer: Progressives choice of a focused differentiation strategy is one that caters to the more high-risk driver. Such drivers are not overly welcomed in the more traditional insurance companies of today. This company also has teams of roving claim adjusters to settle claims on the spot and offers motorcycle coverage as well as luxury car insurance. These are significantly different offerings from those of the more traditional insurance carriers that have been predominate within the industry. C. When A Focused Low-Cost or Focused Differentiation Strategy is Attractive 1. A focused strategy aimed at securing a competitive edge based either on low cost or differentiation becomes increasingly attractive as more of the following conditions are met: a. The target niche is big enough to be profitable and offers good growth potential b. Industry leaders do not see that having a presence in the niche is crucial to their own success c. It is costly or difficult for multisegment competitors to put capabilities in place to meet specialized needs of the target market niche and at the same time satisfy the expectations of their mainstream customers d. The industry has many different niches and segments e. Few, if any, other rivals are attempting to specialize in the same target segment f. The focuser can compete effectively against challengers based on the capabilities and resources it has to serve the targeted niche and the customer goodwill it may have built up 4. When an industry has many different niches and segments, the strength of competition varies across and within segments, a condition that makes it important for a focuser to pick a niche that is both competitively attractive and well suited to its resource strengths and capabilities. CORECONCEPT: Even though a focuser may be small, it still may have substantial competitive strength because of the attractiveness of its product offering and its strong, expertise and capabilities in meeting the needs and expectations of niche members. D. The Risks of a Focused Low-Cost or Focused Differentiation Strategy 1. Focusing carries several risks such as: a. The chance that competitors will find effective ways to match the focused firms capabilities in serving the target niche b. The potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers c. The segment may become so attractive it is soon inundated with competitors, intensifying rivalry and splintering segment profits VII. The Contrasting Features of the Five Generic Competitive Strategies: A Summary 1. Deciding which generic competitive strategy should serve as the framework for hanging the rest of the companys strategy is not a trivial matter. 2. Each of the five generic competitive strategies positions the company differently in its market and competitive environment. 3. Each establishes a central theme for how the company will endeavor to outcompete rivals. 4. Each creates some boundaries or guidelines for maneuvering as market circumstances unfold and as ideas for improving the strategy are debated. 5. Each points to different ways of experimenting and tinkering with the basic strategy. 6. Deciding which generic strategy to employ is perhaps the most important strategic commitment a company makes it tends to drive the rest of the strategic actions a company decides to undertake. 7. Each entails differences in terms of product line, production emphasis, marketing emphasis, and means for sustaining the strategy. Table 5.1, Distinguishing Features of the Five Generic Strategies, examines the distinguishing features of each of the five generic strategies. 8. One of the big dangers here is that managers will opt for stuck in the middle strategies that represent compromises between lower costs and greater differentiation and between broad and narrow market appeal. 9. Only if a company makes a strong and unwavering commitment to one of the five generic competitive strategies does it stand much chance of achieving sustainable competitive advantage that such strategies can deliver if properly executed. ... View Full Document

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