Chapter 5 - Generic Competitive Strategies - Strategic Management

Competitive Advantage

Exists when a firm's strategy gives it an edge in defending against competitive forces or securing customers. -Good product at a lower price -Differentiate for better product at higher price (provide worth to buyer)

Competitive Strategy Principle

A low-cost producer strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra attributes as worth paying additional money to obtain.

Michael Porter's Generic Competitive Strategies

Compares Competitive Advantage (Lower Cost or Differentiation) to Competitive Scope (Narrow or Broad Target)

Objective of Decline Stage in Firm Life Cycle

Consolidate, maintain, harvest, or exit

Objective of Growth Stage in Firm Life Cycle

Create consumer demand

Objective of Maturity Stage in Firm Life Cycle

Defend market share and extend product life cycles

Competitive Strengths of Low-Cost Leadership

- Better positioned to compete on basis of price - protection from bargaining leverage of powerful buyers and/or suppliers - pricing power acts as a significant barrier for new entrants - use low price asa defense against substitute products.

Themes for Differentiation

- Unique Taste - Special features - Superior service - spare parts availability - more for your money - engineering design and performance - prestige - quality manufacture - technological leadership - top of the line image

The strengths of a differentiation strategy

- buyers develop loyalty - mitigate bargaining power of large buyers - puts seller in better position to withstand efforts of suppliers to raise prices - buyer loyalty acts as barrier to entry - puts a seller in position to fend off threats of substitutes by having comparable features

The benefits of successful differentiation

- can command a premium prices - increase unit sales - build brand loyalty These 3 things create a competitive advantage

Approach 1 to Securing a Cost Advantage: Controlling the Cost Drivers

- capture scale economies; avoid scam diseconomies - capture learning and experience curve effects - manage costs of key resource inputs - consider linkages with other activities in value chain - find sharing opportunities with other business units - compare vertigal integration vs. outsourcing - assess first-mover advantages and disadvantages - control % of capacity utilization - make prudent strategic choices related to operations

Risks of a Focus Strategy

- competitors entering the segment - niche buyers' preferences shift towards majority buyers - segment becomes so attractive it becomes crowded with rivals

What makes differentiation strategy fail?

- differentiating on a feature buyers do not perceive as lowering their costs or enhancing well being. - over differentiating to exceed buyers needs - price premium too high - failing to signal value - differentiating on the wrong things

A focus strategy works best when..

- difficult for multi-segment rivals to serve specialized needs of target niche - no other rivals are concentrating on same segment - resources don't allow it to go after bigger market share - many different segments, more focusing opportunities for rivals

When to use a differentiation strategy?

- many ways to differentiate a product that have value - buyers needs and uses are diverse - few rivals are following a similar type of differentiation approach - technological change is fast-paced and competition is focused on evolving product features

Signaling value may be as important as actual value when..

- nature of differentiation is hard to quantify - buyers are making first time purchases - repurchase is infrequent - buyers are unsophisticated

The best differentiation choices for gaining a longer lasting, more profitable competitive edge includes:

- new product innovation - technical superiority - product quality and reliability - comprehensive customer service

Low-Costs strategies should be used when...

- price competition is vigorous - standardized product - few ways to achieve differentiation - most buyers use product similarly - buyers incur low switching costs - buyers are large and have bargaining power

What makes a niche attractive for focusing?

- profitability - growth potential - unlikely that competitors will compete hard in niche - has resources to effectively serve segment - can defend against challenger via superior ability to serve buyers in segment

Disadvantages of Low-Cost Strategies

- revenue erosion if too aggressive in cutting price - low costs methods are easily imitated - become too fixated on reducing costs - ignore buyer interest, declining sensitivity to price, changes in use - tech breakthrough open up cost reductions to rivals

The Competitive Strength of Focus/Niche Strategies

- rivals don't have matching capabilities to meet specialized needs of segment - focuser's competencies/capabilities are a barrier to entry and pose an obstacle to sellers of substitutes - unique ability to meet niche buyers' needs can be blunt bargaining leverage of powerful buyers.

From the managerial level, what is needed to achieve low-cost leadership

- scrutinization of cost-creating activities and id cost drivers - use knowledge of cost drivers to manage costs down over the long run - reengineer how activities are performed, eliminate unnecessary steps - cut some activities out of the value chain system - reinvent industry value chain

Approach 2 to Securing a Cost Advantage: Revamping the Value Chain

- simplify product design - offer basic product/service - shift to a simpler, less capital intensive, technological process - find ways to bypass use of high-cost raw materials - use direct-to-end user sales/marketing approach - relocate closer to customers - reengineer cores business processes - use pc technology to delete work steps to cut out cost-producing activities.

Objectives of Competitive Strategy

1. Build a Competitive Advantage 2. Cultivate clientele of loyal customers. 3. Knock the socks of rivals, ethically and honorably

How to achieve a differentiation-based competitive advantage

1. Incorporate products features that lower buyers cost of using product 2. incorporate features that raise the performance 3. incorporate features that enhance buyer satisfaction in intangible ways 4. compete on the basis of superior capabilities

Approaches to Focus/Niche Strategies

1. achieve lower costs than rivals in serving the segment (low cost strategy) 2. offer niche buyers something different from rivals (differentiation strategy)

Differentiation Strategies

Incorporate differentiating features the cause buyers to prefer firm's product/service over the brand of its rivals. Differentiation must create value for buyers that are not easily matched by rivals. Don't spend more to achieve differentiation than the price premium that could be charged.

Objective of Introduction Stage in Firm Life Cycle

Increase market share awareness

Focus/Niche Strategies

Involve concentrated attention on a narrow piece of the total market. Serve niche buyers better than rivals.

What are the keys to success of a firm with a low-cost leadership strategy?

Make achievement of low-cost relative to rivals the THEME of firm's business strategy. Requires finding ways to drive costs out of business year-after-year. Low OVERALL costs not just production costs

Characteristics of Low-Cost Provider

champion frugality but wisely and aggressively invest in cost-saving improvements. 1. Cost conscious corporate culture 2. Employee buy in to cost control efforts 3. ongoing efforts to benchmark costs 4. intensive scrutiny of budget requests 5. programs promoting continuous cost improvement

low-cost leadership strategy

open a sustainable cost advantage over rivals, using lower-cost edge as a basis either to: 1. underprice rivals to reap market share gains or 2. earn higher profit margin selling at going price

Generic Strategies

three widely applicable classic strategies for businesses of all types- differentiation, low-cost leadership, and focus.