The Five Generic Competitive Strategies: Chapter Title

5
TheChapter
Five Generic
Title
Competitive
Strategies
Screen graphics created by:

16/e PPT Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Strategy and Competitive Advantage
 Competitive advantage exists when a firm’s

strategy gives it an edge in
 Attracting customers and
 Defending against competitive forces
Key to Gaining a Competitive Advantage
 Convincecustomers firm’s product / service offers
superior value
 A good product at a low price
 A superior product worth paying more for
 A best-value product
5-2
Fig. 5.1: The Five Generic Competitive Strategies
5-3
Low-Cost Provider Strategies
Keys to Success
 Make achievement of meaningful lower costs
than rivals the theme of firm’s strategy
 Include features and services in product

offering that buyers consider essential
 Find approaches to achieve a cost advantage

in ways difficult for rivals to copy or match
Low-cost leadership means low overall costs, not

just low manufacturing or production costs!
5-4
Approaches to Securing
a Cost Advantage
Approach 1
Do a better job than rivals of
performing value chain activities
efficiently and cost effectively
Approach 2
Control
Revamp value chain to bypass costs!
cost-producing activities that add little
By-pass
value from the buyer’s perspective costs!
5-5
Keys to Success in Achieving
Low-Cost Leadership
 Scrutinize each cost-creating activity, identifying cost drivers
 Use knowledge about cost drivers to manage
costs 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 corporate cultures
 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 and
capabilities that promise to drive costs out of the business
5-6
Characteristics of a Low-Cost Provider
 Cost conscious corporate culture

 Employee participation in cost-control efforts
 Ongoing efforts to benchmark costs
 Intensive scrutiny of budget requests
 Programs promoting continuous cost improvement
Successful low-cost producers champion

frugality but wisely and aggressively
invest in cost-saving improvements !
5-7
When Does a Low-Cost
Strategy Work Best?
 Price competition is vigorous
 Product is standardized or readily available
from 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 have
significant bargaining power
 Industry newcomers use introductory low prices to
attract buyers and build customer base
5-8
Pitfalls of Low-Cost Strategies
 Being overly aggressive in cutting price

 Low cost methods are easily imitated by rivals
 Becoming too fixated on reducing costs
and ignoring
 Buyer interest in additional features
 Declining buyer sensitivity to price
 Changes in how the product is used
 Technological breakthroughs open up cost
reductions for rivals
5-9
Differentiation Strategies
Objective
 Incorporate differentiating features that cause
buyers to prefer firm’s product or service over
brands of rivals
Keys to Success
 Findways to differentiate that create value for
buyers and are not easily matched or cheaply
copied by rivals
 Not spending more to achieve differentiation
than the price premium that can be charged
5-10
Benefits of Successful Differentiation
A product / service with unique,

appealing attributes allows a firm to
 Command a premium price and/or

Which
 Increase unit sales and/or hat is
unique?
 Build brand loyalty
= Competitive Advantage
5-11
Types of Differentiation Themes
 Unique taste – Dr. Pepper
 Multiple features – Microsoft Windows and Office
 Wide selection and one-stop shopping – Home Depot,
Amazon.com
 Superior service -- FedEx, Ritz-Carlton
 Spare parts availability – Caterpillar
 Engineering design and performance – Mercedes, BMW
 Prestige – Rolex
 Product reliability – Johnson & Johnson
 Quality manufacture – Karastan, Michelin, Toyota
 Technological leadership – 3M Corporation
 Top-of-line image – Ralph Lauren, Starbucks, Chanel
5-12
Where to Find Differentiation
Opportunities in the Value Chain
 Purchasing and procurement activities
 Product R&D and product design activities
 Production process / technology-related activities
 Manufacturing / production activities
 Distribution-related activities
 Marketing, sales, and customer service activities
Internally Activities, Costs,

Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins Strategic Partners
5-13
How to Achieve a
Differentiation-Based Advantage
Approach 1
Incorporate product features/attributes that
lower buyer’s overall costs of using product
Approach 2
Incorporate features/attributes that raise the
performance a buyer gets out of the product
Approach 3
Incorporate features/attributes that enhance buyer
satisfaction in non-economic or intangible ways
Approach 4
Compete on the basis of superior capabilities
5-14
When Does a Differentiation
Strategy Work Best?
 There are many ways to differentiate a product
that have value and please customers
 Buyer needs and uses are diverse
 Few rivals are following a similar

differentiation approach
 Technological change and

product innovation are fast-paced
5-15
Pitfalls of Differentiation Strategies
 Appealing product features are easily copied by rivals

 Buyers see little value in unique attributes of product
 Overspending on efforts to differentiate the product
offering, thus eroding profitability
 Over-differentiating such that product
features exceed buyers’ needs
 Charging a price premium
buyers perceive is too high
 Not striving to open up meaningful gaps in quality,
service, or performance features vis-à-vis rivals’
products
5-16
Best-Cost Provider Strategies
 Combine a strategic emphasis on low-cost with

a strategic emphasis on differentiation
 Make an upscale product at a lower cost
 Give customers more value for the money
Objectives
 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 cost
advantage to underprice comparable brands
5-17
When Does a Best-Cost
Provider Strategy Work Best?
 Where buyer diversity makes

product differentiation the norm and
 Where many buyers are also

sensitive to price and value
5-18
Risk of a Best-Cost Provider Strategy
A best-cost provider may get squeezed between

strategies of firms using low-cost and
differentiation strategies
 Low-cost leaders may be able to siphon

customers away with a lower price
 High-end differentiators may be able to

steal customers away with better product attributes
5-19
Focus / Niche Strategies
 Involve concentrated attention on a narrow piece of

the total market
Objective
Serve niche buyers better than rivals
Keys to Success
 Choose a market niche where buyers
have distinctive preferences, special
requirements, or unique needs
 Develop unique capabilities to serve
needs of target buyer segment
5-20
Approaches to Defining a Market Niche
 Geographic uniqueness
 Specializedrequirements in
using product/service
 Special product attributes

appealing only to niche buyers
5-21
What Makes a Niche
Attractive for Focusing?
 Big enough to be profitable and offers good growth
potential
 Not crucial to success of industry leaders
 Costlyor difficult for multi-segment competitors
to meet specialized needs of niche members
 Focuser has resources and capabilities
to effectively serve an attractive niche
 Few other rivals are specializing in same niche
 Focuser can defend against challengers via
superior ability to serve niche members
5-22
Risks of a Focus Strategy
 Competitors find effective ways to match

a focuser’s capabilities in serving niche
 Niche buyers’ preferences shift towards product

attributes desired by majority of buyers – niche
becomes part of overall market
 Segment becomes so attractive it becomes

crowded with rivals, causing segment profits to be
splintered
5-23
Deciding Which Generic
Competitive 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 as market
circumstances unfold
 Each points to different ways of experimenting with the
basics of the strategy
 Each entails differences in product line, production
emphasis, marketing emphasis, and means to sustain the
strategy
The big risk – Selecting a “stuck in the middle” strategy!
This rarely produces a sustainable competitive
advantage or a distinctive competitive position!
5-24
5-25

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5

Screen graphics created by:

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

 Competitive advantage exists when a firm’s

 Include features and services in product

 Find approaches to achieve a cost advantage

Low-cost leadership means low overall costs, not

 Cost conscious corporate culture

Successful low-cost producers champion

 Being overly aggressive in cutting price

A product / service with unique,

 Command a premium price and/or

 Build brand loyalty

Internally Activities, Costs,

 Buyer needs and uses are diverse

 Few rivals are following a similar

 Technological change and

 Appealing product features are easily copied by rivals

 Combine a strategic emphasis on low-cost with

 Where buyer diversity makes

 Where many buyers are also

A best-cost provider may get squeezed between

 Low-cost leaders may be able to siphon

 High-end differentiators may be able to

 Involve concentrated attention on a narrow piece of

 Special product attributes

 Competitors find effective ways to match

 Niche buyers’ preferences shift towards product

 Segment becomes so attractive it becomes

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