Chapter 5 Quiz

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

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

concentration on a narrow piece of the total market.

Competitive Strategy

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

Particular attention needs to be paid to

cost drivers

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 low costs.

For a company's competitive strategy to succeed in delivering good 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.

This strategy has considerable attraction when a firm can lower costs significantly by limiting

its customer base to a well-defined buyer segment.

A product offering that is too frills-free can be viewed by consumers as offering

little value, regardless of its pricing.

Thus, a successful best-cost provider must offer buyers significantly better product attributes to justify a price above what

low-cost leaders are charging.

The avenues toPage 103 achieving a cost advantage over rivals also serving the target market niche are the same as for

low-cost leadership—outmanage rivals in keeping the costs to a bare minimum and searching for innovative ways to bypass or reduce nonessential activities.

To achieve a low-cost edge over rivals, a firm's cumulative costs across its overall value chain must be

lower than competitors' cumulative costs.

A best-cost provider usually needs to position itself near the

middle of the market.

Striving to be the industry's overall low-cost provider is a powerful competitive approach in markets with many

price-sensitive buyers.

Easy-to-copy differentiating features

produce sustainable competitive advantage; differentiation based on hard-to-copy competencies and capabilities tends to be more sustainable.

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.

Best-cost provider strategies also work well in

recessionary times when great masses of buyers become value-conscious and are attracted to economically priced products and services with especially appealing attributes.

The chances are (blank) that any two companies—even companies in the same industry—will employ competitive strategies that are exactly alike.

remote

A company's biggest vulnerability in employing a best-cost provider strategy is not having the

requisite core competencies and efficiencies in managing value chain activities to support the addition of differentiating features without significantly increasing costs.

Successful Competitive Strategies Are

resource based.

Broad differentiation strategy

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

Likewise, it has to achieve significantly lower costs in providing upscale features so that it can outcompete high-end differentiators on the basis of a

significantly lower price.

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.

Low-cost provider strategy

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

A company attempting to succeed through differentiation must

study buyers' needs and behavior carefully to learn what buyers think has value and what they are willing to pay for. Then the company must include these desirable features to clearly set itself apart from rivals lacking such product or service attributes.

Differentiation can be based on

tangible or intangible attributes or features.

he price premium commanded by a differentiation strategy reflects the value actually delivered to the buyer and

the value perceived by the buyer.

Differentiation Strategies

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

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's competitive strategy should be well matched to its internal situation and predicated on leveraging its collection of competitively

valuable resources and competencies.

While it is easy enough to grasp that a successful differentiation strategy must offer value in ways unmatched by rivals, a big issue in crafting a differentiation strategy is deciding

what is valuable to customers.

Such signals of value may be as important as actual value

(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.

the two biggest factors that distinguish one competitive strategy from another boil down to

(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.

When a company can incorporate appealing features, good-to-excellent product performance or quality, or more satisfying customer service into its product offering at a lower cost than that of rivals, then it enjoys

"best-cost" status—it is the low-cost provider of a product or service with upscale attributes

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.

To circumvent the need for distributors-dealers, a company can

(1) create its own direct sales force (which adds the costs of maintaining and supporting a sales force but may be cheaper than utilizing independent distributors and dealers to access buyers), and/or (2) conduct sales operations at the company's website (costs for website operations and shipping may be a substantially cheaper way to make sales to customers than going through distributor-dealer channels).

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.

Cost Drivers

1. Labor Productivity and Compensation Costs 2. Economies of Scale 3. Learning and Experience 4. Capacity Utilization 5. Input Costs 6. Production technology and design 7. Communication Systems and information technology 8. Bargaining power 9. Outsourcing or vertical integration

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

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.

Focusing carries several risks:

1. The chance that competitors will find effective ways to match the focused firm's capabilities in serving the target niche. 2. The potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. 3. The segment may become so attractive it is soon inundated with competitors, intensifying rivalry and splintering segment profits.

Costs in the wholesale/retail portions of the value chain frequently represent

35 to 50 percent

Differentiation strategies can fail for any of several reasons:

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.

Presence in a broad range of market segments Value Keyed to differentiating features

Broad Differentiation Strategy

Differentiation strategies tend to work best in market circumstances where:

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.

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 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

If Toyota introduces lane departure warning or adaptive cruise control features, so can Ford and Honda. Socially complex intangible attributes, such as

company reputation, long-standing relationships with buyers, and image are much harder to imitate.

Other common pitfalls and mistakes in crafting a differentiation strategy include:

Failing to open up meaningful gaps in quality or service or performance features vis-à-vis the products of rivals. Over-differentiating so that product quality or service levels exceed buyers' needs. Trying to charge too high a price premium.

Presence in a limited number of market segments Value Creation Keyed to Low Cost

Focused Low-Cost Provider Strategy

Presence in a limited number of market segments Value keyed to differentiating features

Focused differentiation strategy

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.

Typically, value can be delivered to customers in three basic ways:

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.

Uniqueness Drivers

Input Quality Innovation and Technological Advances Product Features, design, and performance Production R&D Continuous Quality Improvement Employee skills, training, experience Marketing and brand-building Customer service

Presence in a broad range of market segments Value Creation keyed to low cost

Overall Low-Cost Provider Strategy

There are two major avenues for accomplishing this:

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

Pitfalls to Avoid in Pursuing 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 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 that managers can enhance differentiation through the systematic management of uniqueness drivers include the following:

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

Dramatic cost advantages can often emerge from reengineering the company's value chain in ways that eliminate costly work steps and bypass certain cost-producing value chain activities. Such value chain revamping can include:

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.

Cost-saving approaches that demonstrate effective management of the cost drivers in a company's value chain include:

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 is little or no sacrifice in product quality or product performance. Employing advanced production technology and process design to improve overall efficiency.

Chapter 5

The Five Generic Competitive Strategies

A focused strategy aimed at securing a competitive edge based on either low cost or differentiation becomes increasingly attractive as more of the following conditions are met:

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.

Differentiation Strategies

are attractive whenever buyers' needs and preferences are too diverse to be fully satisfied by a standardized product or service.

Cost Drivers

are factors that have an especially strong effect on the costs of a company's value chain activities.

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.

Successful differentiators go to great lengths to make buyers knowledgeable about a product's value and incorporate signals of value such as

attractive packaging, extensive ad campaigns, the quality of brochures and sales presentations, the seller's list of customers, the length of time the firm has been in business, and the professionalism, appearance, and personality of the seller's employees.

Cost Driver

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

Best-Cost Provider Strategies

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.

Best-cost provider strategy 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.

Companies can pursue differentiation from many angles:

a unique taste (Red Bull, Doritos), multiple features (Microsoft Office, Apple iPhone), wide selection and one-stop shopping (Home Depot) Etc.!

Uniqueness Driver

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

Successful low-cost providers boast meaningfully lower costs than rivals, but not necessarily the

absolutely lowest possible cost.

The value of a cost advantage depends on its sustainability. Sustainability, in turn, hinges on whether the company achieves its cost advantage in ways difficult for rivals to replicate or match. If rivals find it relatively easy or inexpensive to imitate the leader's low-cost methods, then the leader's

advantage will be too short-lived to yield a valuable edge in the marketplace.

A low-cost provider strategy can always defeat a differentiation strategy when buyers are satisfied with a

basic product and do not think "extra" attributes are worth a higher price.

Company differentiation strategies fail when

buyers do not value the brand's uniqueness and/or when a company's approach to differentiation is easily copied or matched by its rivals.

Competitive Strategy

deals exclusively with the specifics of management's game plan for competing successfully—its specific efforts to please customers, strengthen its market position, counter the maneuvers of rivals, respond to shifting market conditions, and achieve a particular competitive advantage.

The targeted segment, or niche, can be defined by

geographic uniqueness or by special product attributes that appeal only to niche members.

The most appealing approaches to differentiation are those that are

hard or expensive for rivals to duplicate.

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.