Chapter 5 MGMT 4860

A focused differentiation strategy (5 Competitive Strategies)

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.

Competitive Strategy

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

Uniqueness Driver

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

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" status

it is the low-cost provider of a product or service with upscale attributes. A best-cost provider can use its low-cost advantage to underprice rivals whose products or services have similar upscale attributes and still earn attractive profits.

The Danger of an Unsound Best-Cost Provider Strategy

not having the requisite core competencies and efficiencies in managing value chain activities to support the addition of differentiating features without significantly increasing costs.

A broad differentiation strategy (5 Competitive Strategies)

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

A low-cost provider strategy (5 Competitive Strategies)

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

To profitably employ a best-cost provider strategy, a company must have...

the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

the two biggest factors that distinguish one competitive strategy from another

(1) whether a company's market target is broad or narrow, and (2) whether the company is pursuing a competitive advantage linked to lower costs or differentiation.

Pitfalls to avoid in pursing a differentiation strategy

-A differentiation strategy keyed to product or service attributes that are easily and quickly copied is always suspect. -Differentiation strategies can also falter when buyers see little value in the unique attributes of a company's product. -Overspending on efforts to differentiate is a strategy flaw that can erode profitability. -Overdifferentiating so that product quality or service levels exceed buyers' needs. -Trying to charge too high a price premium. -Being timid and not striving to open up meaningful gaps in quality or service or performance features vis-à-vis the products of rivals. T

Ways to Revamp the Value Chain to increase Differentiation

-Coordinating with channel allies to enhance customer value. -Coordinating with suppliers to better address customer needs.

Important Uniqueness Drivers in a Company's Value Chain

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

the capability to incorporate attractive or upscale attributes at a lower cost than rivals, This capability is contingent on...

(1) a superior value chain configuration that eliminates or minimizes activities that do not add value, (2) unmatched efficiency in managing essential value chain activities, and (3) core competencies that allow differentiating attributes to be incorporated at a low cost.

A best-cost provider strategy (5 Competitive Strategies)

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.

When a Best-Cost Provider Strategy Works Best

in markets where product differentiation is the norm and attractively large numbers of value-conscious buyers can be induced to purchase midrange products rather than the basic products of low-cost producers or the expensive products of top-of-the-line differentiators.

Revamping the value chain

reengineering the company's value chain in ways that eliminate costly work steps and bypass certain cost-producing value chain activities.

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.

A competitive strategy predicated on low-cost leadership is particularly powerful when:

-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.

Ways of revamping the value chain

-Selling directly to consumers and cutting out the activities and costs of distributors and dealers. -Streamlining operations by eliminating low-value-added or unnecessary work steps and activities. -Improving supply chain efficiency to reduce materials handling and shipping costs.

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

-The first major risk is the chance that competitors will find effective ways to match the focused firm's capabilities in serving the target niche. -A second risk of employing a focus strategy is the potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers.

A company's competitive strategy should be well matched to its...

... internal situation and predicated on leveraging its collection of competitively valuable resources and competencies.

As a rule, the more price-sensitive buyers are...

...the more appealing a low-cost strategy becomes

Signals of perceived quality to the consumer

1) when the nature of differentiation is subjective or hard to quantify, (2) when buyers are making a first-time purchase, (3) when repurchase is infrequent, and (4) when buyers are unsophisticated.

When a differentiation strategy works best

1. Buyer needs and uses of the product are diverse. Diverse buyer preferences allow industry rivals to set themselves apart with product attributes that appeal to particular buyers. 2. There are many ways to differentiate the product or service that have value to buyers. Industries that allow competitors to add features to product attributes are well suited to differentiation strategies. 3. Few rival firms are following a similar differentiation approach. The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. 4. Technological change is fast-paced and competition revolves around rapidly evolving product features. Rapid product innovation and frequent introductions of next-version products heighten buyer interest and provide space for companies to pursue distinct differentiating paths

Important Cost Drivers in a Companies Value Chain

1. Economics of Scale 2. Learning and experience 3. Capacity Utilization 4. Input costs 5. Production technology and design. 6. Communications systems and information technology. 7. Bargaining Power 8. Outsourcing or vertical integration. 9. Labor productivity and compensation costs

Ways to deliver 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

a firm's cumulative costs across its overall value chain must be lower than competitors' cumulative costs. There are two major avenues for accomplishing this:

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.

Focused (or Market Niche) Strategy

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 a lower price than rival competitors. What sets focused strategies apart from low-cost leadership or broad differentiation strategies is a concentration on a narrow piece of the total market. The targeted segment, or niche, can be defined by geographic uniqueness or by special product attributes that appeal only to niche members.

Successful differentiation allows a firm to...

Command a premium price, and/or Increase unit sales (because additional buyers are won over by the differentiating features), and/or Gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products).

Focused Differentiation Strategy

Focused differentiation strategies are 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)

A company has two options for translating a low-cost advantage over rivals into attractive profit performance.

Option 1 is to use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. Option 2 is to maintain the present price, be content with the present market share, and use the lower-cost edge to earn a higher profit margin on each unit sold, thereby raising the firm's total profits and overall return on investment.

Pitfalls to avoid in pursing a low-cost provider strategy

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. A low-cost/low-price advantage results in superior profitability only if (1) prices are cut by less than the size of the cost advantage or (2) the added volume is large enough to bring in a bigger total profit despite lower margins per unit sold. A second big pitfall is relying on an approach to reduce costs that can be easily copied by rivals. A third pitfall is becoming too fixated on cost reduction.

Ways to revamp the value chain

Selling directly to consumers and cutting out the activities of the distributors and dealers.

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.

Cost Driver

a factor having a strong effect on the cost of a company's value chain activities and cost structure.

Approaches to Differentiation

a 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 guarantees 48-hour spare parts delivery to any customer anywhere in the world or else the part is furnished free), engineering design and performance (Mercedes-Benz, BMW), luxury and prestige (Rolex, Gucci, Chanel), product reliability (Whirlpool and Bosch in large home appliances), quality manufacturing (Michelin in tires, Toyota and Honda in automobiles), technological leadership (3M Corporation in bonding and coating products), a full range of services (Charles Schwab in stock brokerage), and a complete line of products (Campbell soups, Frito-Lay snack foods).

A focused low-cost strategy . (5 Competitive Strategies)

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.