Strategic Management Capstone Chapter 5

The Five Generic Competitive Strategies:

1. A low-cost provider strategy—striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals. 2. A broad differentiation strategy—seeking to differentiate the firm's product or service from rivals' in ways that will appeal to a broad spectrum of buyers. 3. 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. 4. 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. 5. A 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.

Competing to successfully gain a competitive advantage involves giving buyers what they perceive as a 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.

Best-Cost Provider Strategies is

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.

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.

Profitable best-cost strategies are contingent on the firm having the capability to deliver attractive or upscale attributes at a lower cost than rivals through:

A superior value chain configuration that eliminates or minimizes activities that do not add value. Unmatched efficiency in managing essential value chain activities. Core competencies that allow differentiating attributes to be incorporated at a low cost.

When does a Differentiation Strategy Works Best?

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.

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

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

Approaches to enhancing differentiation through changes in the value chain system include:

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

Competitive Strategy

Deals exclusively with the specifics of management's game plan for competing successfully in securing a particular competitive advantage over rivals that offers superior value to customers, strengthens its market position, and counters the maneuvers of its rivals.

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

Has meaningfully lower costs than rivals—but not necessarily the absolutely lowest possible cost. Includes features and services that buyers consider essential. Is viewed by buyers as offering equivalent or higher value even if priced lower than competing products.

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.

Successful execution of a differentiation strategy:

Involves offering differentiating features that clearly set the firm's products or services apart from rivals, allowing the firm to command a premium price. Enhances profitability whenever the extra price the product commands outweighs the added costs of achieving differentiation that is not easily copied or matched by rivals. Gains buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products).

The Danger of an Unsound Best-Cost Provider Strategy is...

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.

narrow segment focusers must have...

Must have the capability to do an outstanding job of satisfying the needs and expectations of niche buyers.

differentiators must have..

Must have the resources and capabilities to incorporate unique attributes that a broad range of buyers will find appealing and are will paying for.

best-cost providers must have...

Must have the resources and capabilities to incorporate upscale product or service attributes at a lower cost than rivals.

Low-Cost Providers must have...

Must have the resources and capabilities to keep their costs below those of their competitors. Must have expertise to cost-effectively manage value chain activities better than rivals.

a company has two options for Translating a Low-Cost advantage over rivals into attractive profit performance::

Option 1: Use a lower-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.

pitfalls to avoid in pursuing a low-cost provider strategy:

Overly Aggressive Price Cutting: Price cutting results in lower margins, no increase in sales volume and lower profitability. Relying on easily imitated cost reductions: The value of a cost advantage depends on its sustainability. 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.

The Two Major Avenues for Achieving Low-Cost Leadership:

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 altogether.

When does a Low-Cost Strategy Works Best/ is the moat powerful?

Price competition among rival sellers is especially vigorous when the majority of industry sales are made to a few, large-volume buyers. 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 and industry newcomers successfully use introductory low prices to attract buyers and build a customer base.

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.

Pitfalls to Avoid in Pursuing a Differentiation Strategy:

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

Activities That Enhance Differentiation include:

Seeking out high-quality inputs. Striving for innovation and technological advances. Creating superior product features, design, and performance. Production-related research and development activities. Pursuing continuous quality improvement. Emphasizing human resource management activities. Emphasizing marketing and brand-building activities. Improving customer service or adding additional services.

You can Reengineer/revamp the firm's value chain by:

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. Collaborating with suppliers to improve supply chain efficiency by reducing materials handling, shipping and inventory costs.

Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively by:

Spending aggressively on resources and capabilities that promise to drive costs out of the business. Carefully estimating the cost savings of new technologies before investing in them. Constantly reviewing cost-saving resources to ensure they remain competitively superior.

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. Using communication systems and information technology to achieve operating efficiencies. Using the company's bargaining power vis-à-vis suppliers to gain concessions. Being alert to the cost advantages of outsourcing and vertical integration. Pursuing ways to boost labor productivity and lower overall compensation costs.

It is important to signal value when:

The nature of differentiation is subjective. Buyers are making a first-time purchase. Repurchase is infrequent. Buyers are unsophisticated.

a focused strategy aimed at securing a competitive edge based on wither 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 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 industry has many different niches and segments, allowing a focuser to pick a niche suited to its strengths and capabilities. Few, if any, rivals attempt to specialize in the same target segment.

examples of companies pursuing differentiation:

Unique taste: Red Bull, Doritos. Multiple features: Microsoft Office, Apple iPhone. Wide selection and one-stop shopping: Home Depot, Amazon.com. Superior service: Ritz-Carlton, Nordstrom. Spare parts availability: Caterpillar. Engineering design and performance: Mercedes-Benz, BMW. Luxury and prestige: Rolex, Gucci, Chanel. Product reliability: Whirlpool and Bosch. Quality manufacture: Michelin, Toyota and Honda. Technological leadership: 3M Corporation. Full range of services: Charles Schwab in stock brokerage. Complete line of products: Campbell soups, Frito-Lay snack foods.

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

Whether a firm's market target is broad or narrow. Whether the firm is pursuing a competitive advantage linked to lower costs or differentiation. (these two factors give rise to the five competitive strategy options)

Focused (or market niche) strategies are developed especially for...

competing in a narrow piece of the total market as defined by geographic uniqueness or special product attributes.

Important Cost Drivers in a Company's Value Chain include:

economies of scale learning and experience capacity utilization input costs production technology and design communication systems and information technology bargaining power outsourcing or vertical integration labor productivity and compensation costs

Success in achieving a low-cost edge over rivals comes from...

eliminating and/or curbing "nonessential" activities and/or outmanaging rivals in performing essential activities.

A cost driver is a...

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

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, and service attributes while beating customer expectations on price.

important value drivers creating a differentiation advantage (uniqueness drivers) include:

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

A low-cost leader's basis for competitive advantage is...

lower overall costs than competitors.

as a rule, the more price sensitive buyers are, the...

more appealing low-cost strategy becomes.

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.

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).

Easy-to-copy differentiating features cannot...

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

Successful Competitive Strategies Are...

resource based

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.

A competitive strategy concerns the...

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

Differentiation can be based on...

tangible or intangible features and attributes.

A differentiation strategy's price premium reflects the...

value actually delivered to the buyer and the value perceived by the buyer.

A uniqueness driver is a...

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

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.