gba 490 chap 5 SA and vocab

Explain how the strategic target of a low-cost provider differs from the strategic target of a best-cost provider.

The strategic target of a low-cost provider are buyers looking for a basic product with few frills and thus at a low cost, while the target of best-cost providers are the value-conscious buyers willing to pay for additional attractive attributes, appealing extras and functionalities, at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

value driver

a factor that can have a strong differentiating effect

low-cost leaders

are exceptionally good at finding ways to drive costs out of their businesses and still provide a product or service that buyers find acceptable

low-cost provider

basis for competitive advantage is lower overall costs than competitors

broad differentiation strategy

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

What are the distinctive features of a focused low-cost strategy? How does it differ from a low-cost leadership strategy?

A focused low-cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment. The avenues to achieving a cost advantage over rivals also serving the target market niche are the same as those for low-cost leadership—use the cost drivers to keep the costs of value chain activities to a bare minimum and search for innovative ways to bypass nonessential activities. The only real difference between a low-cost provider strategy and a focused low-cost strategy is the size of the buyer group to which a company is appealing—the former involves a product offering that appeals broadly to almost all buyer groups and market segments, whereas the latter aims at just meeting the needs of buyers in a narrow market segment.

What strategy would you recommend for a small-sized company entering a highly segmented market, each segment with a complex set of needs and spending power?

A focused low-cost strategy or a focused differentiation strategy would be best. The advantages of focusing a company's entire competitive effort on a single market niche are considerable, especially for smaller and medium-sized companies that may lack the breadth and depth of resources to tackle going after a broader customer base with a more complex set of needs.

What are the distinctive features of a best-cost provider strategy? Under what circumstances is a best-cost provider strategy appealing?

Best-cost provider strategies stake out a middle ground between pursuing a low-cost advantage and a differentiation advantage and between appealing to the broad market as a whole and a narrow market niche. The essence of a best-cost provider strategy is giving customers more value for the money by satisfying buyer desires for appealing features and charging a lower price for these attributes compared to rivals with similar-caliber product offerings. A best-cost provider strategy works best in markets where product differentiation is the norm and an attractively large number of value-conscious buyers can be induced to purchase midrange products rather than cheap, basic products or expensive, top-of-the-line products. Best-cost provider strategies also work well in recessionary times, when masses of buyers become value-conscious and are attracted to economically priced products and services with more appealing attributes.

What type of competitive advantage does a best-cost provider strategy aim at achieving? Explain what a company has to do to achieve this advantage.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. 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. A best-cost provider strategy works best in markets with large numbers of value-conscious buyers desirous of purchasing better products and services for less money.

What are the distinctive features of a broad differentiation strategy? Under what circumstances is a broad differentiation strategy appealing?

Differentiation strategies are attractive whenever buyers' needs and preferences are too diverse to be fully satisfied by a standardized product offering. It allows a firm to do one or more of the following: · Command a premium price for its product. · Increase unit sales (because additional buyers are won over by the differentiating features). · Gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products). Differentiation strategies are most appealing under the following circumstances: · 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.

In what market and competitive circumstances are focused low-cost and focused differentiation strategies attractive?

Focused low-cost and focused differentiation strategies are attractive in the following market and competitive circumstances: · 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—in which case 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 their mainstream customers. · The industry has many different niches and segments, thereby allowing a focuser to pick the niche best suited to its resources and capabilities. Also, with more niches there is more room for focusers to avoid competing for the same customers. · Few if any rivals are attempting to specialize in the same target segment—a condition that reduces the risk of segment overcrowding.

What are the distinctive features of a focused differentiation strategy? How is it different from a broad differentiation strategy?

In a focused differentiation strategy the strategic target is a narrow market niche where buyer needs and preferences are distinctively different. Through small-scale production or custom-made products, it focuses on product features and attributes that appeal specifically to niche members. Its marketing emphasis is on communicating how product offering does the best job of meeting niche buyers' expectations. So it calls for staying committed to serving the niche better than rivals without blurring the firm's image by entering other market segments or adding other products to widen market appeal. In a broad differentiation strategy the strategic target is a broad cross-section of the market to which it offers something attractively different from competitors' offerings with many product variations, wide selection, and emphasis on differentiating features. It involves building in whatever differentiating features buyers are willing to pay for. Constantly innovating and concentrating on a few key differentiating features, it helps stay ahead of imitative competitors.

What market conditions and circumstances make a low-cost provider strategy attractive? What are the pitfalls in pursuing a low-cost provider strategy? What can go wrong?

Market conditions and circumstances that make a low-cost provider strategy attractive are: · Price competition among rival sellers is vigorous. · The products of rival sellers are essentially identical and readily available from many eager sellers. · It is difficult to achieve product differentiation in ways that have value to buyers. · Most buyers use the product in the same ways. · Buyers incur low costs in switching their purchases from one seller to another. The pitfalls in pursuing a low-cost provider strategy are: · Being overly aggressive in price cutting, as higher unit sales and market shares do not automatically translate into higher profits. · Relying on an approach to reduce costs that can be easily copied by rivals, as the advantage you gain will be too short-lived to yield a valuable edge in the marketplace. · Oversimplifying the product to the point of devaluation, as your offering ends up being too feature-poor to generate buyer appeal.

A mobile manufacturer decides to reduce the price of its latest line of smart phones, which are not the cheapest but have features that are popular among most users. Which strategy is the manufacturer using?

The best-cost provider strategy gives customers more value for their money by satisfying buyers' expectations on key quality, features, performance, and/or 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.

What are the five generic competitive strategies? Briefly describe each one and identify the type of competitive advantage that each strategy is aimed at achieving.

The five generic competitive strategies and their individual competitive advantage are as follows: · A low-cost provider strategy—striving to achieve lower overall costs than rivals on comparable products that attract a broad spectrum of buyers, usually by underpricing rivals. · A broad differentiation strategy—seeking to differentiate the company's product offering from rivals' products by offering superior attributes that will appeal to a broad spectrum of buyers. · A focused low-cost strategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals on costs, thus being able to serve niche members at a lower price. · A 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. · A best-cost provider strategy—giving customers more value for their money by satisfying buyers' expectations on key quality, features, performance, and/or 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.

Explain how the keys to sustaining a broad differentiation strategy differ from the keys to sustaining a best-cost producer strategy.

The keys to sustaining a broad differentiation strategy are an emphasis on constant innovation to stay ahead of imitative competitors and a focus on a few key differentiating features. The key to sustaining best-cost producer strategy is a unique expertise in simultaneously managing costs down while incorporating upscale features and attributes. For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

What are the keys to sustaining a focused low-cost strategy?

The keys to sustaining a focused low-cost strategy are staying committed to serving the niche at the lowest overall cost and making the effort not to blur the firm's image by entering other market segments or adding other products to widen market appeal. 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 those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

Which of the five generic competitive strategies are most likely to be best suited for an industry whose product may be customized to create a cheaper version? Explain.

The low-cost provider strategy will be suited if the intention is to attract a broad spectrum of buyers. You can use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. The focused low-cost strategy will be suited if you want to concentrate on a narrow buyer segment (or market niche) and outcompete rivals on costs. Successful use of this strategy depends on (1) the existence of a buyer segment that is looking for special product attributes or seller capabilities and (2) a firm's ability to stand apart from rivals competing in the same target market niche.

Explain how the marketing emphasis of a low-cost provider differs from the marketing emphasis of a best-cost provider.

The marketing emphasis of a low cost provider is on low prices and good value while trying to make a virtue out of product features that lead to low cost. The marketing emphasis of a best cost provider is on delivery of best value for the money. Being a best-cost provider is different from being a low-cost provider because the additional attractive attributes entail additional costs (which a low-cost provider can avoid by offering buyers a basic product with few frills). Moreover, the two strategies aim at a distinguishably different market target. The target market for a best-cost provider is value-conscious buyers— buyers who are looking for appealing extras and functionality at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

What are the pitfalls to be avoided in pursuing a broad differentiation strategy?

The pitfalls in pursuing a broad differentiation strategy are: · Focusing on product or service attributes that are easily and quickly copied. · Buyers seeing little value in the unique attributes of a company's product. · Overspending on efforts to differentiate the company's product offering, thus eroding profitability. · Offering only trivial improvements in quality, service, or performance features vis-à-vis rivals' products. · Over-differentiating so that product quality, features, or service levels exceed the needs of most buyers. · Charging too high a price premium.

One of the big dangers in crafting a competitive strategy is that managers, torn between the pros and cons of the various generic strategies, will opt for "stuck in the middle" strategies that represent compromises between lower costs and greater differentiation and between broad and narrow market appeal. True or false? Explain your answer.

The statement is false. That managers would go for a mix of the various generic strategies is not to be seen as a danger at all. With changing markets it is important for companies to change their strategies and this may involve a hybrid of two or more strategies. The wise approach would be to respond to the market and the opportunities present in it rather than to be straitjacketed by "pure" strategies.

For a company's competitive strategy to succeed in delivering favorable performance and the intended competitive edge over rivals, it has to be well-matched to a company's internal situation and underpinned by an appropriate set of resources, know-how, and competitive capabilities. True or false? Explain your answer.

The statement is true. To succeed in employing a low-cost provider strategy, a company must have the resources and capabilities to keep its costs below those of its competitors. This means having the expertise to cost-effectively manage value chain activities better than rivals, leveraging the cost drivers effectively, and/or having the innovative capability to bypass certain value chain activities being performed by rivals. To succeed in a differentiation strategy, a company must have the resources and capabilities to leverage value drivers effectively and incorporate attributes into its product offering that a broad range of buyers will find appealing. Successful focused strategies (both low cost and differentiation) require the capability to do an outstanding job of satisfying the needs and expectations of niche buyers. Success in employing a best cost strategy requires the resources and capabilities to incorporate upscale product or service attributes at a lower cost than rivals. For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

Describe the strategy of striving to be the industry's overall low-cost provider. What does a company have to do to achieve low-cost provider status?

The strategy of striving to be the industry's overall low-cost provider involves offering comparable products that attract a broad spectrum of buyers, usually by underpricing rivals. To achieve a low-cost provider status, a company must incorporate features and services that buyers consider essential, keeping the frills down to a minimum. 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.

Describe the two basic cost-reducing approaches a company can take to become a low-cost provider in its industry.

The two basic cost-reducing approaches a company can take to become a low-cost provider in its industry are: 1. Perform value chain activities more cost-effectively than rivals. You may do this by: · Capturing all available economies of scale · Taking full advantage of experience- and learning-curve effects · Operating facilities at full capacity · Improving supply chain efficiency · Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance · Using the company's bargaining power vis-à-vis suppliers or others in the value chain system to gain concessions · Using online systems and sophisticated software to achieve operating efficiencies · Improving process design and employing advanced production technology · Being alert to the cost advantages of outsourcing or vertical integration · Motivating employees through incentives and company culture 2. Revamp the firm's overall value chain to eliminate or bypass some cost-producing activities. You may do this by: · Selling direct to consumers and bypassing the activities and costs of distributors and dealers · Streamlining operations by eliminating low-value-added or unnecessary work steps and activities · Reducing materials handling and shipping costs by having suppliers locate their plants or warehouses close to the company's own facilities.

cost driver

a factor that has a strong influence on a company's costs

best-cost provider strategy

a hybrid of low-cost provider and differentiation strategies that aim at providing desired quality/features/performance/service attributes while beating rivals on price.