BUS 495:CH 5

Competing to successfully gain a competitive advantage involves giving buyers what they perceive as superior value proposition by offering:

-A good product at a lower price -A superior product that is worth paying more for -A best-value product that represents an attractive combination of price, features, quality, service, and other appealing attributes.

The Five Generic Competitive Strategies

-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

-Overly aggressive price cutting -relying on easily imitated reductions -Becoming too fixated on cost reduction

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

-has meaningful lower costs than rivals-but not necissarily the absolute lowest possible cost. -includes features and services that buyers consider essential -is viewed by buyers as offering equivalent or higher value even if prices lower than competing products

The two major avenues for achieving low-cost leadership

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

When a low cost strategy works best

1. Price competition among rival sellers is especially vigorous. 2. The products of rival sellers are essentially identical and are readily available from several sellers. 3. There are few ways to achieve product differentiation that have value to buyers 4. Buyers incur low costs in switching their purchases from one seller to another. 5. The majority of industry sales are made to a few, large-volume buyers. 6. Industry newcomers use introductory low prices to attract buyers and build a customer base.

The two principal factors that distinguish one competitive strategy from another are:

1. Whether a firm's market target is broad or narrow 2. Whether the firms is pursuing a competitive advantage linked to lower costs or differentiation

When a Differentiation Strategy Works Best

1.Buyer needs and uses of the product are diverse. 2.There are many ways to differentiate the product or service that have value to buyers. 3.Few rival firms are following a similar differentiation approach. 4.Technological change is fast-pacedand competition revolves around rapidly evolving product features.

Delivering Superior Value via a Differentiation Strategy

1.Include product attributes and user features that lower the buyer's costs 2.Incorporate tangible features that improve product performance 3.Incorporate intangible features that enhance buyer satisfaction in noneconomic ways

Pitfalls to Avoid in Pursuing aDifferentiation Strategy

1.Pursuing a differentiation strategy keyed to product or service attributes that are easily and quickly copied 2.Offering product features or unique attributes in which buyers see little value or are easily copied by rivals 3.Overspending on efforts to differentiate that erode profitability 4.Not establishing meaningful gaps in quality or service or performance features over the products of rivals 5.Over-differentiating so that product quality or service levels exceed buyers' needs 6.Trying to charge too high a price premium

A Focused Low-Cost Strategy

A strategy that 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. A strategy that 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.

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 ofbuyers. The segment may become so attractive it is soon inundated with competitors, intensifying rivalry, and splintering segment profits.

A 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

Focused differentiation strategy is 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).

Focused (or Market Niche) Strategies

Focused strategies are developed especially for competing in a narrow piece of the total market as defined by geographic uniqueness or special product attributes. Focused strategies 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.

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. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best) costs and prices among sellers offering products with comparable differentiating attributes.

Translating a Low Cost Strategy Into Attractive Profit Performance

OPTION 1: Use a low-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.

Overly aggressive price cutting

Price cutting results in lower margins, no increase in sales volume and lower profitability.

A broad differentiation

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

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. Market leaders have chosen not to compete in the niche—focusers can avoid battling head-to-head against the biggest and strongest competitors. It is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customers. The market has many different niches and segments, allowing a focuser to pick a niche suited to its strengths and capabilities. Few rivals attempt to specialize in the same target segment.

Relying on easily imitated cost reductions

The value of a cost advantage depends on its sustainability.

A focused differentiation strategy

concetrating on 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.

Low-cost provider strategy

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

Becoming too fixated on cost reduction

•Buyer interest in additional features might be ignored. •Declining buyer sensitivity to price might be overlooked. •Technological breakthroughs might nullify cost advantages.

Successful execution of a differentiation strategy allows a firm to:

•Command a premium price. •Increase its unit sales. •Gain buyer loyalty to its brand.

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. •features at attractive lower prices without significantly increasing costs.

A hybrid of low-cost provider and differentiation strategies that:

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

Attractive competitive approaches to use whenever buyers' needsand 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

A best-cost provider strategy works best in markets where:

•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.