CH: 5: The Five Generic Competitive Strategies

The essence of a broad differentiation strategy is to

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

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.

Best-cost provider strategies

are a hybrid of low-cost provider and differentiation strategies that aim at satisfying buyer expectations on key quality/features/performance/ service attributes and beating customer expectations on price.

Are a hybrid of low cost provider and differentiation strategies that:

( Best-Cost Provider Strategies) Involves giving customers more value for money by satisfying buyer expectations on key quality/features/ performance/service attributes while exceeding customer expectations on price. Is a powerful competitive approach with value-conscious buyers looking for a good-to-very-good product or service at an economical price. Create a "best-cost" status as the low-cost provider of a product or service with upscale attributes.

Low-Cost Providers (Successful Competitive Strategies are Resources Based)

- Must have the resources and capabilities to keep their costs below those of their competitors. - Must have expertise to cost-effectively manage value chain activities better than rivals

When a 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

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 firm's ability to stand apart from rivals competing in the same target market niche. 3. Concepts & Connections 5.3, Popchip's Focused Differentiation Strategy, provides details about the company's focused differentiation strategy.

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.

Perceived Value and the Importance of Signaling 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.

Approaches to Differentiation

1. Companies can pursue differentiation from many angles. 2. The most appealing approaches to differentiation are those that are hard or expensive for rivals to duplicate.

Pitfalls to Avoid in Pursuing a Differentiation Strategy

1. Differentiation strategies can fail for any of several reasons. 2. A differentiation strategy keyed to product or service attributes that are easily and quickly copied is always suspect. 3. Differentiation strategies can also falter when buyers see little value in the unique attributes of a company's product. 4. Over-spending on efforts to differentiate is a strategy flaw that can erode profitability. 6. 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.

The Two Major Avenues for Achieving Low-Cost Leadership

1. Perform essential value chain activities more cost-effectively than rivals. 2.Revamp the firm's overall value chain to eliminate or bypass some cost-producing activities altogether.

Pitfalls to Avoid in Pursuing 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 second big pitfall is relying on an approach to reduce costs that can be easily copied by rivals. 3. A third pitfall is becoming too fixated on cost reduction. 4. Even if these mistakes are avoided, a low-cost provider strategy still entails risk.

Delivering Superior Value via a Broad Differentiation Strategy

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 three basic differentiating approaches to take in delivering unique buyer value. 2. One route is to incorporate product attributes and user features that lower the buyer's overall costs of using the product. 3. A second route is to incorporate tangible features that raise product performance. 4. A third route is to incorporate intangible features that enhance buyer satisfaction in noneconomic or intangible ways.

Five Generic Competitive Strategies

1. low-cost provider 2. broad differentiation 3. focused low-cost 4. focused differentiation 5. best-cost provider

A low-cost leader's

basis for competitive advantage is lower overall costs than competitors. Success in achieving a low-cost edge over rivals comes from eliminating and/or curbing "nonessential" activities and/or outmanaging rivals in performing essential activities.

When a Best-Cost Provider Strategy Works Best

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. A best-cost provider usually needs to position itself near the middle of the market with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher-than-average price.

Perceived Value and the Importance of Signaling Value

A differentiation strategy's price premium reflects value actually delivered to the buyer and value perceived by the buyer. It is important to signal value when: The nature of differentiation is subjective When buyers are making first-time purchases When repurchase is infrequent When buyers are unsophisticated

Profitable best-cost strategies are contingent on: (Employing Best-Cost Strategies)

A superior value chain configuration that eliminates or minimizes activities that do not add value. Unmatched efficiency in managing essential value chain activities. Core competencies that allow differentiating attributes to be incorporated at a low cost.

A Focused Low-Cost Strategy

Aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and a lower price than rival competitors. Achieves its cost advantage in the same way as for low-cost leadership—by outmanaging rivals in keeping costs low and bypassing or reducing nonessential activities.

Revamping the Value Chain to Increase Differentiation

Approaches to enhancing differentiation through changes in the value chain system >>Coordinating with downstream channel allies to enhance customer value >>Coordinating with upstream suppliers to better address customer needs

Focused (or Market Niche) Strategies

Are strategies developed especially for competing in a narrow piece of the total market as defined by geographic uniqueness or special product attributes. Are appealing to smaller and medium-sized firms that may lack the breadth and depth of resources to tackle going after a whole market customer base.

Broad Differentiation Strategies

Attractive competitive approaches to use whenever buyers' needs and preferences are too diverse to be fully satisfied by a standardized product or service. >>Involves offering differentiating features that clearly set the firm's products or services apart from rivals. >>Enhances profitability whenever the extra price the product commands outweighs the added costs of achieving the differentiation that is not easily copied or matched by rivals.

Best-Cost Provider Strategies

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.

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

Competitors will find effective ways to match a focuser's capabilities in serving the target niche. The preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. The segment may become so attractive it is soon inundated with competitors, intensifying rivalry and splintering segment profits.

Focused Low-Cost Strategy

Concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs than rivals and thus being able to serve niche members at a lower price

Focused Differentiation Strategy

Concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals' products

Important Uniqueness Drivers in a Company's Value Chain

Customer service Input quality Innovation and technological advances Product features, design, and performance Production R&D Continuous quality improvement Employee skills, training experience Marketing and bran building

Competitive Strategy

Deals exclusively with management's game plan for competing successfully and securing a competitive advantage over rivals Represents the firm's specific efforts to provide superior value to customers by offering: >>An equally good product at a lower price >>A superior product with unique features perceived as worth paying more for >>An attractive overall mix of price, features, quality, service, and other appealing attributes

Broad Differentiation Strategies

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.

The Two Major Avenues for Achieving a Cost Advantage 1. To achieve a low-cost advantage over rivals, a firm's cumulative costs across its overall value chain are lower than competitors' cumulative costs. There are two ways to accomplish this:

Do a better job than rivals in performing value chain activities more cost effectively. Revamp the firm's overall value chain to eliminate or bypass some cost-producing activities

(The Danger of an Unsound Best-Cost Provider Strategy) Losing at both ends of the market:

Dual vulnerability to both low-cost providers and high-end differentiators in not having the requisite core competencies and efficiencies in managing value chain activities to offer significantly differentiating product attributes or features at attractive lower prices without significantly increasing costs.

Best-Cost Provider Strategy

Giving customers more value for the money by satisfying buyers' expectations on key quality/features/performance/service attributes while beating their price expectations

Low-Cost Provider Strategy: A powerful competitive approach with price-sensitive buyers when a firm's offering:

Has a lower cost than rivals—but not necessarily the absolutely lowest possible cost. Includes features and services that buyers consider essential. Is viewed by buyers as offering equivalent or higher value even if priced lower than competing products.

Delivering Superior Value via a Differentiation Strategy

Include product attributes and user features that lower the buyer's costs. Incorporate tangible features that improve product performance Incorporate intangible features that enhance buyer satisfaction in noneconomic ways.

Focused Differentiation Strategy

Keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well-defined group of buyers (as opposed to a broad differentiation strategy aimed at many buyer groups and market segments).

Successful Competitive Strategies Are Resource Based

Low-Cost Providers Differentiators Narrow Segment Focusers Best Cost Providers

Cost-Efficient Management of Value Chain Activities

Managers must launch a concerted, ongoing effort to ferret out cost-saving opportunities in every part of the value chain.

Narrow Segment Focusers (Successful Competitive Strategies Are Resource Based)

Must have the capability to do an outstanding job of satisfying the needs and expectations of niche buyers.

Differentiators (Successful Competitive Strategies are Resources Based)

Must have the resources and capabilities to incorporate unique attributes that a broad range of buyers will find appealing and worth paying for.

Best Cost Providers (Successful Competitive Strategies Are Resource Based)

Must have the resources and capabilities to incorporate upscale product or service attributes at a lower cost than rivals.

Translating a Low Cost Strategy Into Attractive Profit Performance

Option 1: Use a lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. Option 2: Maintain present price, be content with present market share, and use lower-cost edge to earn a higher profit margin on each unit sold

Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy

Overly Aggressive Price Cutting >>Price cutting results in lower margins, no increase in sales volume and lower profitability Relying on easily imitated cost reductions Becoming too fixated on cost reduction >>Ignoring buyer interest in additional features >>Overlooking declining buyer sensitivity to price >>Technological breakthroughs nullify cost advantages

When a Low Cost Strategy Works Best

Price competition among rival sellers is especially vigorous. The products of rival sellers are essentially identical and are readily available from several sellers. There are few ways to achieve product differentiation that have value to buyers. Buyers incur low costs in switching their purchases from one seller to another. The majority of industry sales are made to a few, large-volume buyers. Industry newcomers use introductory low prices to attract buyers and build a customer base.

A best-cost provider strategy works best in markets where: (When a Best-Cost Provider Strategy Works Best)

Product differentiation is the norm. Large numbers of value-conscious buyers can be induced to purchase economically-priced mid-range products and services, especially during recessionary times. A provider can offer either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher-than-average price.

Pitfalls to Avoid in Pursuing a Differentiation Strategy

Pursuing a differentiation strategy keyed to product or service attributes that are easily and quickly copied. Incorporating product features or attributes in which buyers see little value or are easily copied by rivals. Overspending on efforts to differentiate that erode profitability. Over-differentiating so that product quality or service levels exceed buyers' needs. Trying to charge too high a price premium. Not establishing meaningful gaps in quality or service or performance features over the products of rivals.

Broad Differentiation Strategy

Seeking to differentiate the firm's product or service from rivals' in ways that will appeal to a broad spectrum of buyers

Low-Cost Provider Strategy

Striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals

Cost-Efficient Management of Value Chain Activities P1

Striving to capture all available economies of scale Taking full advantage of experience and learning curve effects Trying to operate facilities at full capacity Substituting lower cost inputs whenever there's little or no sacrifice in product quality or product performance. Employing advanced production technology and process design to improve overall efficiency.

Benefits of Successful Differentiation

Successful Execution of a differentiation strategy allows a firm to" Command a premium price Increase its unit sales Gain buyer loyally to its brand

Value Chain Activities That Enhance Differentiation

Supply chain activities Activities that enhance differentiation >>Product R&D >>Production R&D and technology-related activities Manufacturing Activities Distribution and shipping activities Marketing, sale and customer service activities.

The Danger of an Unsound Best-Cost Provider Strategy

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. 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.

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

The target market niche is big enough to be profitable and offers good growth potential. Industry leaders have chosen not to compete in the niche—focusers can avoid battling head-to-head against the industry's biggest and strongest competitors. It is costly or difficult for multisegment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customers. The industry has many different niches and segments, thereby allowing a focuser to pick a niche suited to its resource strengths and capabilities. Few, if any, rivals are attempting to specialize in the same target segment.

Approaches to Differentiation

Unique taste: Red Bull, Listerine Multiple features: Microsoft Office, Apple iPad Wide selection and one-stop shopping: Home Depot, Amazon.com Superior service: Ritz-Carlton, Nordstrom Spare parts availability: Caterpillar Engineering design and performance: Mercedes-Benz, BMW Luxury and prestige: Rolex, Gucci, Chanel Product reliability: Whirlpool and Bosch Quality manufacture: Michelin in tires, Toyota and Honda in autos Technological leadership: 3M Corporation Full range of services: Charles Schwab in stock brokerage Complete line of products: Campbell soups, Frito-Lay snack foods

Cost-Efficient Management of Value Chain Activities P2

Using communication systems and information technology to achieve operating efficiencies Using the company's bargaining power vis-à-vis suppliers to gain concessions Being alert to the cost advantages of outsourcing and vertical integration Pursuing ways to boost labor productivity and lower overall compensation costs.

A uniqueness driver is

a value chain activity or factor that can have a strong effect on customer value and creating differentiation.

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.

a. A company achieves low-cost leadership when it becomes the industry's lowest-cost provider rather than just being one of perhaps several competitors with comparatively low costs. b. In striving for a cost advantage over rivals, managers must take care to include features that buyers consider essential. c. 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.

When a Differentiation Strategy Works Best 1. Differentiation strategies tend to work best in market circumstance where:

a. Buyer needs and uses of the product are diverse b. There are many ways to differentiate the product or service and many buyers perceive these differences as having value c. Few rival firms are following a similar differentiation approach . Technological change is fast-paced and competition revolves around rapidly evolving product features

Revamping the Value Chain to Increase Differentiation - Differentiation opportunities can exist in activities all along an industry's value chain; possibilities include the following:

a. Coordinating with channel allies to enhance customer perception of value b. Coordinating with suppliers to better address customer needs

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

5. Other common pitfalls and mistakes in pursuing differentiation may include:

a. Over differentiating so that the product quality or service level exceeds buyers' needs b. Trying to charge too high a price premium c. Being timid and not striving to open up meaningful gaps in quality or service or performance features vis-E0-vis the products of rivals - tiny differences between rivals' product offerings may not be visible or important to buyers

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. Buyers incur low costs in switching their purchases from one seller to another e. The majority of industry sales are made to a few, large-volume buyers. f. Industry newcomers use introductory low prices to attract buyers and build a customer ba

Managing the Value Chain in Ways that Enhance Differentiation 1. Differentiation opportunities can often be found in uniqueness drivers; possibilities include the following:

a. Seeking out high-quality inputs b. Striving for innovation and technological advances c. Creating superior product features, design, and performance. d. Investing in production-related R&D activities. Engaging e. Pursuing continuous quality improvement f. Emphasizing human resource management activities that improve the skills, expertise, and knowledge of company personnel. g. Increasing emphasis on marketing and brand-building activities h. Improving customer service or adding additional service.

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 includ

a. Selling direct to consumers and bypassing the activities and costs of distributors and dealers b. Streamlining operations by eliminating low value-added or unnecessary work steps and activities. c. Improving supply chain efficiency to reduce materials handling and shipping cost

A cost driver is a factor that has a strong influence on a company's costs.

a. Striving to capture all available economies of sale b. Taking full advantage of learning/experience curve effects c. Trying to operate facilities at full capacity d. Substituting lower cost inputs wherever doing so will not entail too great a sacrifice in quality e. Employing advanced production technology and process design to improve overall efficiency f. Using communications systems and information technology to achieve operating efficiencies g. Using the company's bargaining power vis-a-vis suppliers to gain concessions h. Being alert to the cost advantages of outsourcing and vertical integration i. Pursuing ways to boost labor productivity and lower overall compensation costs.

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 firm's 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

When a Focused Low-Cost or Focused Differentiation Strategy is Viable 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 multi-segment 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

Successful Competitive Strategies are Resource Based For a company's competitive strategy to succeed in delivering good performance and the intended competitive edge over rivals, it has to be:

a. Well-matched to a company's internal situation b. Supported by an appropriate set of resources c. Powered by know-how and competitive capabilities.

Successful differentiation allows a firm to

command a premium price for its product, and/or increase unit sales, and/or gain buyer loyalty to its brand.

What sets focused strategies apart from low-cost leadership or broad differentiation strategies is

concentrated attention on a narrow piece of the total market.

A competitive strategy

concerns the specifics of management's game plan for competing successfully and securing a competitive advantage over rivals in the marketplace.

A company achieves best-cost status

from an ability to incorporate attractive attributes at a lower cost than rivals.

The essence of a broad differentiation strategy

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

Differentiation enhances profitability

whenever the extra price the product commands outweighs the added costs of achieving the differentiation.