MGMT 5560 Test 1; Chapter 5

The essence of a broad differentiation strategy is to

offer unique product attributes that a wide range of buyers find appealing and worth paying for.

Success in achieving a low-cost edge over rivals comes from

out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost efficiently. Identify the cost drivers for each value chain activity and use them as levers to drive down costs.

The Big Risk of a Best-Cost Provider Strategy

A best-cost provider is squeezed between low-cost and high-end differentiation rivals when: •Low-cost providers are able to lure customers away with a lower price (despite their less-appealing attributes) •High-end differentiators are able to steal customers away with better product attributes (despite the higher price tag) Thus, to be successful, a best-cost provider must •Offer buyers significantly better product attributes to justify a price above what low-cost leaders are charging •Achieve significantly lower costs in providing upscale features so it can outcompete high-end differentiators on the basis of a significantly lower price

What Does the Term "Competitive Strategy" Refer To?

A firm's "competitive strategy" deals exclusively with the specifics of management's game plan for competing successfully. A well-conceived competitive strategy includes: •Actions and approaches to please customers •Offensive and defensive moves to counter maneuvers of rivals •Responses to shifting market conditions •Initiatives to strengthen the firm's market position and achieve a particular kind of competitive advantage. •Competitive strategy is narrower in scope than business strategy

When a Low-Cost Provider Strategy Works Best

A low-cost provider strategy becomes increasingly appealing and competitively powerful when: •Price competition among rival sellers is vigorous •The products of rival sellers are essentially identical and supplies are readily available from several eager suppliers •It is hard to achieve product differentiations that buyers value •Most buyers use different brands of the product in same ways •Buyers incur low costs in switching purchases to other sellers •A big fraction of the industry's sales are made to large-volume buyers with significant power to bargain down prices •Industry newcomers use introductory low prices to attract buyers and build a customer base

Broad differentiation strategies fail when

Buyers don't value the brand's uniqueness A firm's approach to differentiation is easily copied or matched by its rivals.

Differentiation enhances profitability whenever a firm's product can:

Command a sufficiently higher price or produce sufficiently bigger sales to more than cover the added costs of achieving the differentiation

The Factors that Distinguish One Competitive Strategy from Another

Factors that distinguish one firm's competitive strategy from another •Whether a firm's market target is broad or narrow •Whether a firm is pursuing a competitive advantage linked to lower costs or differentiation These two factors give rise to five competitive strategy options for staking out a market position, operating the business, and delivering superior value to buyers •A low-cost provider strategy •A broad differentiation strategy •A focused low-cost strategy •A focused differentiation strategy A best-cost provider strategy

Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy

Getting carried away with overly aggressive price cutting to win sales and market share away from rivals •Reducing price does not lead to higher total profits unless the incremental gain in total revenues exceeds the incremental increase in total costs Relying on cost reduction approaches easily copied by rivals. •The value of a cost advantage depends on its sustainability in achieving cost savings that are hard for rivals to copy or otherwise overcome Becoming too fixated on reducing costs and ignoring: •Growing buyer interest in added features, service or an upscale product •Declining buyer sensitivity to price New developments that alter how buyers use the product

Nucor Corporation's Low-Cost Provider Strategy

Key Elements of Nucor's Strategy •Use electric arc furnaces to lower investment costs and eliminate expensive steps in making steel products from scratch •Use incentive compensation to achieve high productivity and low labor costs per ton produced •Locate plants close to customers to keep shipping costs down Cost Advantages and Bottom-line Results •Lower capital investment and operating costs •Ability to charge lower prices than traditional steel companies using make-it-from-scratch technology •Consistently good profitability in an industry where profits have often been terrible

When a Best-Cost Provider Strategy Works Best

Markets where product differentiation is the norm •The buying side of the market consists of attractively large numbers of value-conscious buyers that can be induced to purchase mid-range or near-luxury products rather than •The cheap basic products of low-cost producers •The expensive products of top-of-the-line differentiators •Economically tough times when there are even more buyers attracted to economically priced products/services with especially appealing attributes

Signaling value is particularly useful when:

Nature of differentiation is subjective or hard to quantify •Buyers are making a first-time purchase and are unsure what their experience with the product will be •Buyers are not fully aware of a product's many attributes •Repurchase is infrequent and buyers need to be reminded of a product's value

Translating a Low-Cost Competitive Advantage into Higher Profits

Option 1: •Use the lower-cost edge to underprice competitors and attract price-sensitive buyers in numbers sufficient to increase total profits Option 2: •Charge a price comparable to other low-priced rivals, be content with the resulting sales volume and market share, and rely upon the low-cost edge over rivals to earn a bigger profit margin per unit sold, thereby boosting the firm's total profits and return on investment

Approach 2: Revamp the Value Chain

Reengineer the chain to eliminate costly work steps and bypass cost-producing chain activities: •Sell direct to consumers to cut out the activities and costs of distributors and dealers •Use technologies and/or information systems to bypass the need to perform certain value chain activities •Streamline operations by eliminating low-value-added or unnecessary work steps and activities •Have suppliers locate their plants or warehouses close to a firm's own facilities to reduce materials handling and shipping costs

Best-Cost Provider Strategies

Stake out a middle ground: •Between pursuing a low-cost advantage and a differentiation advantage •Between appealing to the broad market as a whole and a narrow market niche •Are aimed squarely at buyers looking for appealing extras and functionality at an appealingly low price

Signaling the Value to Buyers

Stronger differentiation is achieved by sending signals to buyers that a product offering has value

Successful Competitive Strategies Are Always Underpinned by Resources and Capabilities That Allow the Strategy to Be Well-Executed

Successful strategies rely on an appropriate set of resources, know-how, and competitive capabilities •A low-cost provider must have the resource strengths and capabilities to keep costs below those of competitors. •To pursue a differentiation strategy, a firm must have the resources and capabilities to incorporate unique attributes into its product offering that buyers will find appealing, valuable, and worth paying for. •Focus strategies require the resources and capabilities to outcompete rivals in satisfying the needs and expectations of buyers in the target market niche. •A best-cost strategy requires the resources and capabilities to incorporate upscale attributes/features at a lower cost than rivals.

The Standout Traits of Best-Cost Provider Strategies

The essence of a best-cost provider strategy is giving customers more value for the money by: •Satisfying buyer desires for appealing features/performance/quality/service •Charging a lower price for those attributes than its rivals •To profitably employ a best-cost provider strategy, a firm must incorporate attractive upscale attributes at lower costs than its rivals

Broad Low-Cost Provider Strategies

The objective of a broad low-cost leadership strategy is to produce a good or service for a broad range of buyers at a lower overall cost than rivals. •In striving for a low-cost advantage over rivals, it is first necessary to incorporate features and services that buyers consider essential, then go all out to provide these at a lower cost than rivals. •A product offering that is too frills-free sabotages the attractiveness of the firm's product even if it is cheaper-priced. Keys to Success •Having good cost-reduction skills and capabilities •Pursuing long-term cost-saving approaches and capabilities that are difficult for rivals to copy or match

A low-cost provider's product offering must

always contain enough attributes to be attractive to prospective buyers—low price, by itself, is not always appealing to buyers.

The competitive advantage of a best-cost provider is lower costs than rivals

in incorporating upscale attributes (appealing features or functionality or quality or more satisfying customer service), thereby putting the company in a position to underprice rivals whose products have similar upscale attributes.

A low-cost leader's basis for competitive advantage is

lower overall costs than rivals with similar product offerings. A low-cost advantage over rivals can translate into better profitability than rivals. Successful low-cost leaders are exceptionally good at finding ways to drive costs out of their businesses and using their lower cost advantage over rivals to achieve better profitability than rivals when competing on price.

A lower price improves profitability only if

the lower price results in gains in unit sales (and thus revenues) that are large enough to overcome the combined effects of a smaller profit margin and the added costs of the extra units sold.

The strategic aim of a broad differentiation strategy is

to offer unique product attributes that a wide range of buyers find appealing and worth paying for (because of the added value they deliver).

A company's competitive strategy is unlikely to result in good performance or sustainable competitive advantage...

unless the company has a competitively potent collection of resources and capabilities that enable the company to execute its strategy with great proficiency.

A Best-Cost Provider's Competitive Advantage

•A best-cost provider's competitive advantage is its lower costs in incorporating upscale attributes than rivals •This low-cost advantage allows a firm to underprice rivals and still earn attractive profits (provided the size of the price discount does not squeeze profit margins)

Pursuing a Differentiation Strategy: Three Principles to Keep in Mind

•A differentiating feature that works well is a magnet for imitators •Over-differentiating and overcharging are fatal strategy mistakes •Small differences among the product offerings of rival firms may not be important to buyers—a good differentiation strategy must aim at strong rather than weak product differentiation

Typical signals of value include:

•A high price (in instances where high price implies better quality or better performance) •More appealing or fancier packaging •Ongoing ad campaigns (which impact a product's image and make it more widely known) •Ad content that emphasizes a product's standout attributes •The quality of brochures and sales presentations •The luxuriousness and ambience of high-end retailers and sales sites frequented by customers •Making buyers aware that a company (or its products) has prestigious customers The professionalism, appearance, and personalities of the seller's employees

Focused Differentiation Strategies

•Aim at securing a competitive advantage with a product offering designed to appeal to the unique preferences and needs of a narrow well-defined group of buyers Depend on •A buyer segment looking for special product attributes or seller capabilities •A firm's ability to create a product offering that stands apart from the offerings of rivals in the same target market niche

Examples of Focused Low-Cost Strategies

•Budget motel chains Motel 6, Sleep Inn, Super 8, and Days Inn •The producers and retailers of private-label goods •The makers of generic prescription drugs •The makers of economically-priced replacement ink cartridges for printers (which carry a substantially lower price tag than those offered by makers of name brand printers)

When a Broad Differentiation Strategy Works Best

•Buyer needs and uses of the product are diverse. •There are many ways to differentiate the product or service that have value to buyers. •Few rival firms are following a similar differentiation approach. •Technological change is fast paced, and competition revolves around rapidly evolving product features and attributes.

The Risks of a Focused Low-Cost or Focused Differentiation Strategy

•Competitors find effective ways to match a focuser's capabilities in serving the niche •The preferences and needs of niche members shift over time to match those of mainstream buyers, thus causing the niche to dissolve into the overall market •A segment is so attractive that entry of new rivals results in overcrowding, thereby intensifying rivalry and splintering segment profits

Approach 1: Cost Efficient Management of Value Chain Activities

•Cost-saving approaches that demonstrate effective use of the cost drivers include: •Capturing all available economies of scale •Taking full advantage of experience and learning-curve effects •Operating facilities at full capacity •Substituting lower-cost inputs that do not lower product quality or performance •Using the firm's bargaining power vis-à-vis suppliers to gain concessions •Improving supply chain efficiency •Pursuing actions to lower per-unit labor costs and boost productivity •Improving product design and cost-saving production techniques •Using online systems and sophisticated software to achieve operating efficiencies •Being alert to the cost advantages of outsourcing and vertical integration

Ways that managers can use the value drivers to enhance differentiation include the following:

•Create value-adding product features and performance attributes that appeal to a wide range of buyers •Pursuing continuous quality improvements in products and processes •Emphasizing new product R&D and product innovation •Improving product selection •Investing in production-related R&D, striving for technological advances, and implementing better production techniques •Improving customer service and/or providing more service options. •Emphasizing human resource management activities that improve the skills, expertise, and knowledge of company personnel •Pursuing sales, marketing, and advertising activities that lead to greater brand name power. •Improving distribution capabilities and collaborating with distribution allies to enhance customer perceptions of value

Beware of Overly Aggressive Price-Cutting

•Cutting prices to draw sales and market share away from rivals does NOT automatically translate into higher profitability. WHY? •Because a bigger sales volume drives up total costs (due to the added production and distribution costs) and because the lower price will result in a lower profit margin per unit sold (unless the higher sales volumes result in costs per unit sold falling enough to totally offset the lower profit margin). RULE: Whenever the gain in unit sales from a lower price is not large enough to overcome the combined effects of a smaller profit margin and the added costs of the extra units sold, then total profits will be less at the lower price!!!!

Pitfalls to Avoid in Pursuing a Differentiation Strategy

•Differentiation keyed to product/service attributes and features that are easily and quickly copied •Incorporating differentiation attributes that produce an unenthusiastic response on the part of buyers •Overspending to differentiate the firm's product offering, thus eroding profitability •Failing to achieve meaningful differences in quality, service or performance features vis-à-vis rival products •Adding frills and extra features that exceed the needs and use patterns of most buyers Charging too high a price premium

Broad Differentiation Strategies

•Entail offering unique product attributes that a wide range of buyers find appealing, valuable, and worth paying for •Are attractive when buyer needs and preferences are too diverse to be fully satisfied by a single, standardized product offering Keys to Success •Incorporating buyer-desired attributes into product offering that: •Will appeal to a broad range of buyers •Will be different enough to stand apart from rival product offerings Creating a product offering that is strongly differentiated rather than weakly differentiated from the offerings of rivals

To build sustainable competitive advantage via broad differentiation, a firm typically must do one or more of the following:

•Focus on continuous product innovation •Incorporate features that raise product performance and deliver added value to the buyer/end-user •Incorporate product attributes and user features that lower the buyer's overall costs of using the firm's product •Incorporate features or features that enhance buyer satisfaction in intangible ways •Deliver value to customers using competitively potent resources and capabilities that rivals do not have or cannot afford to match

Focused (or Market Niche) Strategies

•Focused strategies concentrate attention on a narrow piece of the total market •The target segment, or market niche, can be defined by: •Geographic uniqueness •Specialized requirements in using the product •Special product attributes that appeal only to those buyers that comprise the market niche

Other Cost-Saving Actions: Adopt Strategy Elements That Lead to Lower Costs Than Rivals

•Have lower specifications for purchased materials, parts, and components than rivals •Strip frills and features from product offerings that are not highly valued by price-sensitive or bargain-hunting buyers •Offer a limited product line, delete slow-selling items, and try to satisfy the needs of most buyers rather than all buyers •Distribute firm's product only through low-cost distribution channels and avoid high-cost distribution channels •Use the most economical method for delivering customer orders (even if it results in longer delivery times)

Managers at different firms have different views on:

•How to deal with competitive pressures and industry driving forces •What future market conditions will be like •What strategy specifics makes the most sense at their firm in light of •Its particular resources and capabilities (especially those that have the greatest competitive power in the marketplace) •Its resource weaknesses and competitive deficiencies •Its most attractive market opportunities •Its vulnerability to external threats •Its competitive strengths and weaknesses vis-à-vis rivals •Its strategic vision, mission, core values, and performance targets that firm's managers have established

Key Characteristics of Southwest Airlines' Low-Cost Provider Strategy

•Mastery of fast turnarounds at boarding gates (25 minutes versus 45 minutes for rivals) allows: •Planes to fly more hours per day •More flights to be scheduled per day with fewer aircraft •More revenue to be generated per plane on average than rivals •Elimination of several services results 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 needs at reservation centers and airport counters

The Keys to Being a Successful Low-Cost Provider

•Scrutinize each cost-creating activity—understand the cost drivers and use them as levers to lower costs •Use knowledge about the cost drivers to streamline or reengineer how activities are performed •Engage all personnel in continuous cost improvement •Use benchmarking to keep close tabs on how the firm's costs compare with its rivals and other firms performing comparable activities in other industries •Strive to operate with exceptionally small corporate staffs •Spend aggressively on resources and capabilities that promise to drive costs out of the business

Focused Low-Cost Strategies

•Seek competitive advantage by serving a target market niche at a lower cost and lower price than rivals •Are attractive when a firm can lower its costs significantly by limiting its customer base to a well-defined segment •Achieve a cost advantage over rivals by: •Managing value chain activities more cost effectively than rivals Finding innovative ways to bypass certain value chain activities

Using the Value Drivers to Achieve Stronger Differentiation and Deliver Added Value

•The most systematic approach to achieving successful differentiation involves focusing on the value drivers that are particularly effective in creating differentiation and adding value for buyers. •Using value drivers to create unique product attributes with high buyer appeal is "the secret" to creating successful differential strategies

When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive

•The target niche is big enough to be profitable and offers good growth potential •Industry leaders do not view having a presence in the niche as crucial to their own success •It is costly or difficult for multi-segment competitors to meet the specialized needs of niche members •The industry has many different niches and segments, thereby allowing a focuser to pick a competitively attractive niche suited to its resource strengths and capabilities •Few other rivals are specializing in same target niche (a condition that reduces the risk of segment overcrowding) •The focuser can draw upon customer goodwill and loyalty to defend against ambitious challengers

Options for Differentiating

•Unique taste - Dr. Pepper, Listerine •Multiple features - Microsoft Office, Apple's iPhone •Wide selection and one-stop shopping - Home Depot, Amazon.com •Superior service - Nordstrom, Ritz-Carlton •Engineering design and performance - Mercedes, BMW •Prestige and distinctiveness - Rolex •Quality manufacture - Michelin •Technological leadership - 3M Corporation •Spare parts availability - Caterpillar •Full range of services - Charles Schwab •Wide selection - Campbell's soups High-fashion design - Gucci, Chanel

How a Best-Cost Strategy Differs from a Low-Cost Strategy

•Upscale product attributes in a best-cost provider's offering entail added costs that a low-cost provider avoids by offering a basic product with few frills The two strategies are aimed at different buyers: •Best-cost provider's target market is value-conscious buyers looking for valued extras and utility at an appealingly low price •Low-cost provider's target market is price-conscious buyers seeking a basic product at a bargain price