chap005 five competitive strategies thompson
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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
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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
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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.
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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
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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
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Figure 5.1: The Five Generic Competitive Strategies
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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!
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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
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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
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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
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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
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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
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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
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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
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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
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Wh D L C t
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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?
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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
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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.
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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
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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?
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Table 5.1: Distinguishing Features of the Five Generic Competitive Strategies