Strategic analysis

What is Strategic Focus?

While there are different schools of thought about how strategy comes about, researchers generally agree that strategic focus is a common characteristic across successful organizations. Strategic focus is seen when an organization is very clear about its mission and vision and has a coherent, well-articulated strategy for achieving those. When a once high-flying firm encounters performance problems, it is not uncommon to hear business analysts say that the firm’s managers have lost focus on their customers or markets.

Example 5.1 Strategic Focus

Ladder Capital Corp., the New York-based real estate investment trust, is seeking strategic advice from investment bank Moelis & Co. as the mortgage-finance company facing the impact of the coronavirus pandemic. The trust’s share price plunged by 80% since the beginning of the year and is valued at a fraction of its value from two years ago — $400 million versus $1.5 billion. But the REIT has more than $300 million in cash after paying a quarterly dividend and has met all margin calls. REIT is a small “focused” portion of the $16 trillion (in 2018) U.S. commercial real estate market.

Source: Bloomberg, Gillian Tan, Mortgage Financier Ladder Taps Moelis for Financing Advice, Siyuan Wang, 2020Sp

The spirit of focus is echoed in the following two sections where we introduce you to the complementary notions of strategy as trade-offs and strategy as discipline.

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Strategy as Trade-Offs

Three of the most widely read books on competitive analysis in the 1980s were Michael Porter’s Competitive Strategy, Competitive Advantage, and Competitive Advantage of Nations. In his various books, Porter developed three generic strategies that, he argues, can be used singly or in combination to create a defendable position and to outperform competitors, whether they are within an industry or across nations. The strategies are (1) overall cost leadership, (2) differentiation, and (3) focus on a particular market niche.

Cost Leadership, Differentiation, and Scope

These strategies are termed generic because they can be applied to any size or form of business. We refer to them as trade-off strategies because Porter argues that a firm must choose to embrace one strategy or risk not having a strategy at all. Overall lower cost or cost leadership refers to the strategy where a firm’s competitive advantage is based on the bet that it can develop, manufacture, and distribute products more efficiently than competitors. Differentiation refers to competitive advantage based on superior products or service; superiority arises from factors other than low cost, such as customer service, product quality, or unique style. To put these strategies into context, you might think about Wal-Mart as pursuing a cost-leadership strategy and Harley Davidson as pursuing a differentiation strategy.

Porter suggests another factor affecting a company’s competitive position is its competitive scope. Competitive scope defines the breadth of a company’s target market. A company can have a broad (mass market) competitive scope or a narrow (niche market) competitive scope. A firm following the focus strategy concentrates on meeting the specialized needs of its customers. Products and services can be designed to meet the needs of buyers. One approach to focusing is to service either industrial buyers or consumers but not both.

Firms using a narrow focus strategy can also tailor advertising and promotional efforts to a particular market niche. Many automobile dealers advertise that they are the largest volume dealer for a specific geographic area. Other car dealers advertise that they have the highest customer satisfaction scores within their defined market or the most awards for their service department.

Another differentiation strategy is to design products specifically for a customer. Such customization may range from individually designing a product for a single customer to offering a menu from which customers can select options for the finished product. Tailor-made clothing and custom-built houses include the customer in all aspects of production, from product design to final acceptance, and involve customer input in all key decisions. However, providing such

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individualized attention to customers may not be feasible for firms with an industry-wide orientation. At the other end of the customization scale, customers buying a new car, even in the budget price category, can often choose not only the exterior and interior colors but also accessories such as navigation, rooftop racks, and upgraded tires.

By positioning itself in either broad scope or narrow scope and a low-cost strategy or differentiation strategy, an organization will fall into one of the following generic competitive strategies: cost leadership, cost focus, differentiation, and focused differentiation.

Example 5.2 Broad Scope

Amazon, an online retailer, is difficult to compete with due to its wide variety of product offerings and low cost products. Amazon has just about anything a person could want from apparel, electronics, and office products. If a person wants product choice, they will shop at Amazon. Companies such as Rent the Runway are forced to not compete on selection and scope, but rather by using another business level strategy.

Source: CNBC, Beating Bezos: Top online retailers like Rent the Runway are winning shoppers by offering what Amazon can’t, Sarah Cushing, 2018Fa

Example 5.3 Narrow Scope

In the face of continued fierce competition and increased uncertainty due to Coronavirus, McDonald’s keeps a narrow scope for its business-level strategy when compared to the greater restaurant industry. With its focus on fast food and its low-cost strategy, it has made itself the top family-friendly restaurant in the fast-food market. Despite a 3.4% decline in sales in the past two months due to the Coronavirus outbreak, the company has decided to keep most of its stores operating and to take measures to support its more than 35,000 franchised locations.

Source: Bloomberg, Leslie Patton, McDonald’s Withdraws Forecast After Covid-19 Bludgeons Sales, Siyuan Wang, 2020Sp

Cost Leadership/Low Cost

Cost leadership is a low-cost market strategy. Firms pursuing this type of strategy must be particularly efficient in engineering tasks, production operations, and physical distribution; they must also be able to minimize costs in marketing and research and development (R&D). A low-cost leader can gain significant market share enabling it to procure a more powerful position relative to

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both suppliers and competitors. A firm employing this strategy uses product price as its primary competitive edge, minimizing its cost to enable it to provide an acceptable product at the lowest possible price while still maintaining a positive margin. This strategy is particularly effective for organizations in industries where there is limited possibility of product differentiation and where buyers are very price sensitive as with commodities and similar products or services.

Overall cost leadership is not without potential problems. Two or more firms competing for cost leadership may engage in price wars (a race to the bottom) that drive profits to very low levels. Ideally, a firm using a cost-leader strategy will develop an advantage that others cannot easily copy. Cost leaders also must maintain their investment in state-of-the-art equipment or face the possible entry of more cost-effective competitors. Major changes in technology may drastically change production processes so that previous investments in production technology are no longer advantageous. Finally, firms may become so concerned with maintaining low costs that they overlook needed changes in the product, production, or marketing.

The cost-leadership strategy may be more difficult in a dynamic environment because some of the expenses that firms may seek to minimize are research and development costs or marketing research costs—expenses the firm may need to incur to remain competitive.

Example 5.4 Broad Cost Leadership

As a leader in the super market industry for more than two decades, Walmart’s broad cost leadership strategy is based on providing low-prices and a wide range of products. By selling its British subsidiary, Asda, launching a $98/year paid membership program, Walmart+, and investing heavily in redesigning 1,000 stores, Walmart hopes to focus its operations in the interest of keeping current and attracting new customers. Critics argue, however, such moves may be not be a positive sign. The sale of Asda was at a $8B loss from the original purchase price, despite initial success with Walmart+ it is fighting an uphill battle against Amazon, and store remodels are long overdue. Whether these changes will signal a comeback from Walmart remains to be determined.

Source: Forbes, Walmart Still Needs To Get Better At These 3 Things, Zhizhang Zeng 2020Fa

Focused Low-Cost

A cost-focus strategy is a low-cost, narrowly focused market strategy. Firms employing this strategy may focus on a particular buyer segment or a particular geographic segment and must locate a niche market that wants or needs an efficient product and is willing to forgo extras to pay a lower price for the product. A company’s costs can be reduced by providing little or no service, providing a low-cost method of distribution, or producing a no-frills product.

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Example 5.5 Narrow Cost Leadership

Traditionally, realtor’s collect a commission as a percentage of the final selling price of the property, which is typically 5-6% of the selling price of the property, and comes from the proceeds of the seller. This fee covers all of the realtor’s services but remains relatively opaque in the overall process of buying and selling real estate. Flat fee realty service was introduced in recent years to compete with traditional realtors with a fixed fee instead of a percentage commission. This allows the seller access to the ubiquitous multiple-listing service (MLS) for a flat fee ranging from $49 to $500. MLS is how buyers know the property is for sale, but it is open only to licensed realtors. By paying a flat fee, the seller can access the MLS and sell the property themselves.

Source: MoneyWise, Ben Mizes, Why You’re Paying Realtors Too Much Commission — and What You Can Do About It, Siyuan Wang, 2020Sp

Differentiation

A differentiation strategy involves marketing a unique product in a market; because this type of strategy involves a unique product, price is not the significant factor. In fact, consumers may be willing to pay a high price for a product that they perceive as different. The product difference may be based on product design, method of distribution, or any aspect of the product (other than price) that is significant to the consumer. A company choosing this strategy must develop and maintain a product perceived as different enough from the competitors’ products to warrant the asking price.

Example 5.6 Broad Differentiation

CEO of ViacomCBS, Bob Bakish states on the company’s fourth-quarter earnings call that they created a new strategy in streaming to maximize the value of their content by reaching the largest addressable audience. It helps the company to differentiate its product in the overall media market.

Source: Nasdaq, ViacomCBS’ Streaming Strategy Leaves a Lot of Questions, 2020Wi

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Example 5.7 Narrow Differentiation

Boeing has made a $20 million investment into Virgin Galactic as it looks to increase its presence in space tourism. This market serves the ultra-wealthy, and is growing rapidly as other players such as Bezos’ Blue Origin and Musk’s SpaceX look to expand space exploration operations. Boeing’s investment serves as a strategic play to enter the space tourism market and broaden its technological innovation.

Source: Investor’s Business Daily, Boeing Teams Up With This Billionaire As Rivals Eye Space Tourism, Michael Crennen, 2019Fa

Several studies have shown that a differentiation strategy is more likely to generate higher profits than a cost-leadership strategy, because differentiation creates stronger entry barriers. However, a cost-leadership strategy is more likely to generate increases in market share.

Example 5.8 Using Brand to Differentiate

Increasing market share, brand loyalty, and consumer trust are integral to maintaining and increasing profitability. Nike is an example of a company that invests a significant amount of money and resources into developing strong connections with their customers through product personalization, loyalty apps, and state- of-the-art retail shopping experiences. Nike also differentiates their brand through advocacy initiatives, most recently advocating for social justice through the Colin Kaepernick saga in the NFL. This brand differentiation strategy appeals to customers for reasons other than the expertise in footwear and sportswear.

Source: Forbes, How Foot Locker, Nike, North Face And Starbucks Created A Culture Of Customer Loyalty, 2018Fa

Focused Differentiation

A differentiation-focus strategy is the marketing of a differentiated product to a narrow market, often involving a unique product and a unique market. This strategy is viable for a company that can convince consumers that its narrow focus allows it to provide better goods and services than its competitors.

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Example 5.9 Private-label Product

Amazon is now finding new ways to entice potential consumers. With new retail stores Amazon is now giving customers a new way to experience their private label products. Although shopping with Amazon and buying their private label products is not something foreign to current customers, the idea of being able to hold, feel, and try these products is something customers are willing to participate in. For example, Wag, Amazon’s private label dog food is being displayed at these new stores alongside popular reviews in order to give the customer a cohesive experience.

Source: Forbes, Amazon Tries To Find A Home For Its Private Label Products With New ‘4-Star’ Store, 2018Fa

Differentiation does not allow a firm to ignore costs; it makes a firm’s products less susceptible to cost pressures from competitors because customers see the product as unique and are willing to pay extra to have the product with the desirable features. Differentiation can be achieved through real product features or through advertising that causes the customer to perceive that the product is unique.

Differentiation may lead to customer brand loyalty and result in reduced price elasticity. It may also lead to higher profit margins and reduce the need to be a low-cost producer. Since customers see the product as different from competing products and they like the product features, customers are willing to pay a premium for these features. As long as the firm can increase the selling price by more than the marginal cost of adding the features, the profit margin is increased. Firms must be able to charge more for their differentiated product than it costs them to make it distinct, or else they may be better off making generic, undifferentiated products. Firms must remain sensitive to cost differences. They must carefully monitor the incremental costs of differentiating their product and make certain the difference is reflected in the price.

Example 5.10 Best Cost Provider Success

Costco didn’t need Covid to get ahead, 65% annual returns are double that of the S&P 500 and it has been out-performing the larger market for more than ten years. The pandemic, however, has strengthened their market position. Its business model positions the company to focus on narrow product niches where it can offer good quality products and a competitive price. The “stock the pantry” attitude that marked the early days of the pandemic sent a surge of customers to Costco and, while April sales volume was down in comparison, their growing e-commerce sector has more than offset the closure of its optical, hearing aids, and food courts.

Source: Forbes , Costco Sells Its Way Into Attractive Rating, Chenbo Tang, 2020Fa

Firms pursuing a differentiation strategy are vulnerable to different competitive threats than firms pursuing a cost-leader strategy. Customers may sacrifice features, service, or image for cost

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savings. Price-sensitive customers may be willing to forgo desirable features in favor of a less costly alternative. This can be seen in the growth in popularity of store brands and private labels. Often, the same firms that produce name-brand products produce the private-label products. The two products may be physically identical, but stores are able to sell the private-label products for a lower price because very little money was put into advertising to differentiate the private-label product.

Imitation may also reduce the perceived differences between products when competitors copy product features. Thus, for firms to be able to recover the cost of marketing research or R&D, they may need to add a product feature that is not easily copied by a competitor.

A final risk for firms pursuing a differentiation strategy is changing consumer tastes. The feature that customers like and find attractive about a product this year may not make the product popular next year. Changes in customer tastes are especially obvious in the fashion industry. For example, although Ralph Lauren’s Polo has been a very successful brand of apparel, some younger consumers have shifted to Tommy Hilfiger and other youth-oriented brands.

For a variety of reasons, including the differences between intended versus realized strategies discussed in an earlier section, none of these competitive strategies is guaranteed to achieve success. Some companies that have successfully implemented one of Porter’s generic strategies have found that they could not sustain the strategy. Several risks associated with these strategies are based on evolved market conditions (buyer perceptions, competitors, etc.).

Straddling Positions or Stuck in the Middle?

Can forms of competitive advantage be combined? That is, can a firm straddle strategies so that it is simultaneously the low-cost leader and a differentiator? Porter asserts that a successful strategy requires a firm to stake out a market position aggressively and that different strategies involve distinctly different approaches to competing and operating the business. Some research suggests that straddling strategies — also known as a Best Cost Provider strategy — is a recipe for below- average profitability compared to the industry. Porter also argues that straddling strategies is an indication that the firm’s managers have not made necessary choices about the business and its strategy. A straddling strategy may be especially dangerous for narrow scope firms that have been successful in the past, but then start neglecting their focus.

Example 5.11 Stuck in the Middle

Apple is now offering a cheaper version of the iPhone in an attempt to rejuvenate slowing iPhone sales; the phone is tentatively referred to as iPhone SE. Historically, Apple’s brand image has been known for its state-of-

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the-art minimalist technology that comes with a hefty price tag. However, after several quarters of lackluster iPhone sales, the company is offering a much cheaper version to accompany the higher-end model to reach a new customer base. No longer will Apple be solely focused on a differentiation strategy.

Source: A new smaller, cheaper iPhone could boost sales in early 2020, top Apple analyst Kuo predicts, Michael Crennen, 2019Fa

An organization pursuing a differentiation strategy seeks competitive advantage by offering products or services that are unique from those offered by rivals, either through design, brand image, technology, features, or customer service. Alternatively, an organization pursuing a cost- leadership strategy attempts to gain competitive advantage based on being the overall low-cost provider of a product or service. To be “all things to all people” can mean becoming “stuck in the middle” with no distinct competitive advantage. The difference between being “stuck in the middle” and successfully pursuing a combination best cost provider strategy merits discussion. Although Porter describes the dangers of not being successful in either cost control or differentiation, some firms have been able to succeed using combination strategies and research suggests that, in some limited cases, it is possible to be a cost leader while maintaining a differentiated product.

Some industries may actually call for such combination strategies. Trends suggest that highly complex environments do not have the luxury of choosing exclusively one strategy over another. The hospital industry may represent such an environment, as hospitals must compete on a variety of fronts. Combination (i.e., more complicated) strategies are both feasible and necessary to compete successfully. For instance, reimbursement to diagnosis-related groups, and the continual lowering of reimbursement ceilings have forced hospitals to compete on the basis of cost. At the same time, many of them jockey for position with differentiation based on such features as technology and birthing rooms. Thus, many hospitals may need to adopt some form of hybrid strategy to compete successfully.1

1. Walters, B. A., & Bhuian, S. (2004). Complexity absorption and performance: A structural analysis of acute-care hospitals. Journal of Management, 30, 97–121.

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Strategy as Discipline

While Michael Porter’s generic strategies were introduced in the 1980s and still dominate much of the dialogue about strategy and strategizing, a complementary approach was offered more recently by CSC Index consultants Michael Treacy and Fred Wiersema. Their value disciplines model is quite similar to the three generic strategies from Porter (cost leadership, differentiation, focus). However, there is at least one major difference. According to the value disciplines model, no discipline may be neglected: threshold levels on the two disciplines that are not selected must be maintained.

Example 5.12 Operational Excellence

Walmart pursues operational excellence to maintain its cost leadership BLS. It’s advanced automated processes and procedures help the company to streamline operations, reduce costs, and maintain a massive volume of sales – all with the impact of earning an industry-wide above average return. Walmart targets customers that value cost over choice through its “everyday low prices,” to maintain market share. It uses state-of-the-art inventory management, point-of-sales data, and an efficient distribution network to keep prices low, costs lower, margins thin, and still earn a profit.

Source: Investopedia, Rachael R. Hyde, How Walmart Model Wins With “Everyday Low Prices”, Siyuan Wang, 2020Sp

In their book, The Discipline of Market Leaders, they offered four rules that competing companies must obey with regard to strategy formulation:1

1. Provide the best offer in the marketplace, by excelling in one specific dimension of value. Market leaders first develop a value proposition, one that is compelling and unmatched.

2. Maintain threshold standards on other dimensions of value. You can’t allow performance in other dimensions to slip so much that it impairs the attractiveness of your company’s unmatched value.

3. Dominate your market by improving the value year after year. When a company focuses all its assets, energies, and attention on delivering and improving one type of customer value, it can nearly always deliver better performance in that dimension than another company that divides its attention among more than one.

4. Build a well-tuned operating model dedicated to delivering unmatched value. In a

1. Treacy, M., & Wiersema, F. (1997). The discipline of market leaders: Choose your customers, narrow your focus, dominate your market. Reading, M Addison-Wesley.

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competitive marketplace, the customer value must be improved. This is the imperative of the market leader. The operating model is the key to raising and resetting customer expectation.

What Are Value Disciplines?

Treacy and Wiersema describe three generic value disciplines: operational excellence, product leadership, and customer intimacy. As with Porter’s perspective about the importance of making trade-offs, any company must choose one of these value disciplines and consistently and vigorously act on it, as indicated by the four rules mentioned earlier.

Product Leadership

Firms executing this strategy well are very strong in innovation and brand marketing. Organization leaders demonstrate a recognition that the company’s current success and future prospects lie in its talented product design people and those who support them. The company operates in dynamic markets. The focus is on development, innovation, design, time to market, and high margins in a short time frame. Company cultures are flexible to encourage innovation. Structure also encourages innovation through small ad hoc working groups, an experimentation-is-good mindset, and compensation systems that reward success.

Example 5.13 Product Leadership

Samsung, one of the leading smartphone companies in the world, has recently launched a set of new Samsung Galaxy series. In the battle of the smartphone industry, Samsung Galaxy S20 Ultra is now leading the market by providing the most innovative and unique features on his latest released smartphone. They have introduced a 108-megapixel camera, 100X zoom, 8k video recording, 5,000 mAh battery that no smartphone company has launched before. The perfect combination of product leadership features. They are competing against the iPhone, Google, Huawei, and others. Moreover, they have changed the dynamics of the industry by adding new high standards features in the smartphone industry.

Source: Cnet, Samsung’s Galaxy S20 raises the bar for phones in 8 ways, Muhammad Taha Abrar Khan 2020Wi

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Operational Excellence

Key characteristics of the strategy are superb operations and execution, often by providing a reasonable quality at a very low price, and task-oriented vision toward personnel. The focus is on efficiency, streamlined operations, supply chain management, no frills, and high volume. Most large international corporations strive to operate according to this discipline but circumstances impact their degree of success. Measuring systems are important, as is extremely limited variation in product assortment.

Customer Intimacy

Companies pursuing this strategy excel in customer attention and customer service. They tailor their products and services to individual or almost individual customers. There is large variation in product assortment. The focus is on: customer relationship management (CRM), delivery of products and services on time and above customer expectations, lifetime value concepts, reliability, and being close to the customer. Decision authority is given to employees who are close to the customer. The operating principles of this value discipline include having a full range of services available to serve customers upon demand—this may involve running what the authors call a “hollow company,” where a variety of goods or services are available quickly through contract arrangements, rather than the supplier business having everything in stock all the time.

Example 5.14 Customer Intimacy

Customer intimacy in its most basic form is aware of customer needs and how to position your business to adhere to them strategically. As described at Zappos, the shoe company, the best way to achieve this is by choosing a target population in which you think your product will be best suited and treating them well. By doing this, you foster a relationship with the customer that promotes feedback, customer-centric policies and develop events and resources that aid the customer loyalty to your brand.

Source: Business2community, 8 Customer Intimacy Strategies That Drive Revenue ( +Tips and Examples), 2020Wi

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Only One Discipline

Treacy and Wiersema maintain that, because of the focus of management time and resources that is required, a firm can realistically choose only one of these three value disciplines in which to specialize. This logic is similar to Porter’s in that firms that mix different strategies run the risk of being “stuck in the middle.” Most companies, in fact, do not specialize in any of the three, and thus they realize only mediocre or average levels of achievement in each area.

Example 5.15 Cult of the Customer

Amazon is a shining example of how to create a cult customer following. CEO Jeff Bezos has built Amazon on three pillars, Amazon Prime, Amazon Marketplace, and Amazon Web Services. The culmination of these services has created a wide range of customer types, from the average prime user doing their daily online shopping, to multinational corporations using Amazon Web Services.

Source: Motley Fool, 5 Ways to Build Customer Loyalty, 2018Fa

The companies that do not make the hard choices associated with focus are in no sense market leaders. In today’s business environment of increased competition and competitive differentiation, their complacency will not lead to increased market share, sales, or profits.

“When we look at these managers’ businesses [complacent firms], we invariably find companies that don’t excel, but are merely mediocre on the three disciplines…What they haven’t done is create a breakthrough on any one dimension to reach new heights of performance. They have not traveled past operational competence to reach operational excellence, past customer responsiveness to achieve customer intimacy, or beyond product differentiation to establish product leadership. To these managers we say that if you decide to play an average game, to dabble in all areas, don’t expect to become a market leader.”2

Within the context of redesigning the operating model of a company to focus on a particular value discipline, Treacy and Wiersema discuss creating “the cult of the customer.” This is a mindset that is oriented toward making customer’s needs the key priority throughout the company, at all levels. They also review some of the challenges involved in sustaining market leadership once it is attained (i.e., avoiding the natural complacency that tends to creep into an operation once dominance of the market is achieved).

2. Treacy, M., & Wiersema, F. (1997). The discipline of market leaders: Choose your customers, narrow your focus, dominate your market (p. 40). Reading, M Addison-Wesley.

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Generating Advantage

A company’s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully—its specific efforts to please customers, its offensive and defensive moves to counter the maneuvers of rivals, its responses to whatever market conditions prevail at the moment, and its approach to securing a competitive advantage relative to rivals. There are countless variations in the competitive strategies that companies employ, mainly because each company’s strategic approach entails custom-designed actions to fit its own circumstances and industry environment. The custom-tailored nature of each company’s strategy is also the result of management’s efforts to uniquely position the company in its market.

Example 5.16 A Unique Value Proposition

Tesla has changed the dynamics of the electric car industry. It has unveiled the first electric pickup in the industry. Cybertruck has a unique and futuristic design along with bulletproof glass, which cannot be found on the local vehicles. Tesla is already leading the electric car industry and introducing its new Cybertruck will provide them with a competitive advantage. However, Cybertruck will be competing with the Ford F series, the best-selling pickup so far in the market.

Source: CNBC, Tesla unveils its first electric pickup, the Cybertruck, starting at $39,900, 2020Wi

Companies are much more likely to achieve competitive advantage and earn above-average profits if they find a unique way of delivering superior value to customers.

By choosing a unique approach to providing value to customers, a firm achieves an enduring brand loyalty that makes it difficult for others to triumph by merely copying its strategic approach. “Me too” strategies can rarely be expected to deliver competitive advantage and stellar performance unless the imitator possesses resources or competencies that allow it to provide greater value to customers than that offered by firms with similar strategic approaches.

Competitive strategies that provide distinctive industry positioning and competitive advantage in the marketplace involve choosing between a market target that is either broad or narrow, and whether the company should pursue a competitive advantage linked to low costs or product differentiation. These two factors give rise to five competitive strategy options:

1. A low-cost provider strategy — striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by under-pricing rivals.

2. A 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.

3. A focused low-cost strategy — concentrating on a narrow buyer segment (or market niche)

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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 product attributes (e.g., quality, features, performance, or service) while beating their price expectations. Alternatively, it may provide a product with better attributes as a comparable price to competitors. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies.

When a Low-cost Provider Strategy Works Best

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

1. Price competition among rival sellers is especially vigorous. Low-cost providers are in the best position to compete offensively on the basis of price and to survive price wars.

2. The products of rival sellers are essentially identical and are readily available from several sellers. Commodity-like products and/or ample supplies set the stage for lively price competition; in such markets, it is the less efficient, higher-cost companies that are most

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vulnerable. 3. There are few ways to achieve product differentiation that have value to buyers. When the

product or service differences between brands do not matter much to buyers, buyers nearly always shop the market for the best price.

4. Buyers incur low costs in switching their purchases from one seller to another. Low switching costs give buyers the flexibility to shift purchases to lower-priced sellers having equally good products. A low-cost leader is well positioned to use low price to induce its customers not to switch to rival brands.

5. The majority of industry sales are made to a few, large-volume buyers. Low-cost providers are in the best position among sellers in bargaining with high-volume buyers because they are able to beat rivals’ pricing to land a high-volume sale while maintaining an acceptable profit margin.

6. Industry newcomers use introductory low prices to attract buyers and build a customer base. The low-cost leader can use price cuts of its own to make it harder for a new rival to win customers.

As a rule, the more price-sensitive buyers are, the more appealing a low-cost strategy becomes. A low-cost company’s ability to set the industry’s price floor and still earn a profit erects protective barriers around its market position.

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 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. Thus, a company with a 5 percent cost advantage cannot cut prices 20 percent, end up with a volume gain of only 10 percent, and still expect to earn higher profits!

A second big pitfall is relying on an approach to reduce costs that can be easily copied by rivals. 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 third pitfall is becoming too fixated on cost reduction. Low costs cannot be pursued so zealously that a firm’s offering ends up being too features-poor to gain the interest of buyers. Furthermore, a company driving hard to push its costs down has to guard against misreading or ignoring increased buyer preferences for added features or declining buyer price sensitivity. Even if these mistakes are avoided, a low-cost competitive approach still carries risk. Cost-saving

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technological breakthroughs or process improvements by rival firms can nullify a low-cost leader’s hard-won position.

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When a Differentiation Strategy Works Best

Differentiation strategies tend to work best in market circumstances where:

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. For instance, the diversity of consumer preferences for menu selection, ambience, pricing, and customer service gives restaurants exceptionally wide latitude in creating differentiated concepts. Other industries offering opportunities for differentiation based upon diverse buyer needs and uses include magazine publishing, automobile manufacturing, footwear, kitchen appliances, and computers.

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 for differentiation strategies. For example, hotel chains can differentiate on such features as location, size of room, range of guest services, in-hotel dining, and the quality and luxuriousness of bedding and furnishings. Similarly, cosmetics producers are able to differentiate based upon prestige and image, formulations that fight the signs of aging, UV light protection, exclusivity of retail locations, the inclusion of antioxidants and natural ingredients, or prohibitions against animal testing.

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. A differentiator encounters less head-to-head rivalry when it goes its own separate way to create uniqueness and does not try to out-differentiate rivals on the very same attributes. When many rivals are all claiming “ours tastes better than theirs” or “ours gets your clothes cleaner than theirs,” competitors tend to end up chasing the same buyers with very similar product offerings.

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. In video game hardware and video games, golf equipment, PCs, mobile phones, and automobile navigation systems, competitors are locked into an ongoing battle to set themselves apart by introducing the best next-generation products; companies that fail to come up with new and improved products and distinctive performance features quickly lose out in the marketplace.

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Pitfalls to Avoid in Pursuing a Differentiation Strategy

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. Rapid imitation means that no rival achieves meaningful differentiation, because whatever new feature one firm introduces that strikes the fancy of buyers is almost immediately added by rivals. This is why a firm must search out sources of uniqueness that are time-consuming or burdensome for rivals to match if it hopes to use differentiation to win a sustainable competitive edge over rivals.

Differentiation strategies can also falter when buyers see little value in the unique attributes of a company’s product. Thus even if a company sets the attributes of its brand apart from its rivals’ brands, its strategy can fail because of trying to differentiate on the basis of something that does not deliver adequate value to buyers. Any time many potential buyers look at a company’s differentiated product offering and conclude “so what,” the company’s differentiation strategy is in deep trouble; buyers will likely decide the product is not worth the extra price and sales will be disappointingly low.

Overspending on efforts to differentiate is a strategy flaw that can erode profitability. Company efforts to achieve differentiation nearly always raise costs. The trick to profitable differentiation is either to keep the costs of achieving differentiation below the price premium the differentiating attributes can command in the marketplace or to offset thinner profit margins by selling enough additional units to increase total profits. If a company goes overboard in pursuing costly differentiation, it could be saddled with unacceptably thin profit margins or even losses. The need to contain differentiation costs is why many companies add little touches of differentiation that add to buyer satisfaction but are inexpensive to institute.

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

• Over-differentiating so that product quality or service levels exceed buyers’ needs. Buyers are unlikely to pay extra for features and attributes that will go unused. For example, consumers are unlikely to purchase programmable large appliances such as washers, dryers, and ovens if they are satisfied with manually controlled appliances.

• Trying to charge too high of a price premium. Even if buyers view certain extras or deluxe features as “nice to have,” they may still conclude that the added benefit or luxury is not worth the price differential over that of lesser differentiated products.

• Being timid and not striving to open up meaningful gaps in quality or service or performance features vis-à-vis the products of rivals. Tiny differences between rivals’ product offerings may not be visible or important to buyers.

A low-cost provider strategy can always defeat a differentiation strategy when buyers are satisfied with a basic product and don’t think “extra” attributes are worth a higher price.

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Focused (or Market Niche) Strategies

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. 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 national customer base with a “something for everyone” lineup of models, styles, and product selection.

Example 5.17 Niche Success

Wallplate, an entrepreneur company, found a niche within an online market to create a business for over sixteen years. The entrepreneur used the technique of drop shipping to sell wall plates and light switch covers. By starting his internet business early and growing it, he can pull in around 1.3 million dollars in sales a year by finding a successful niche and forming a company around it.

Source: Oberlo, 16 Years of Dropshipping: The Unlikely Niche That Made This Entrepreneur a Seven-Figure Success, 2020Wi

Examples of firms that concentrate on a well-defined market niche keyed to a particular product or buyer segment include Discovery Channel and Comedy Central (in cable TV), Google (in Internet search engines), Porsche (in sports cars), and CGA, Inc. (a specialist in providing insurance to cover the cost of lucrative hole-in-one prizes at golf tournaments). Microbreweries, local bakeries, bed-and-breakfast inns, and local owner-managed retail boutiques are all good examples of enterprises that have scaled their operations to serve narrow or local customer segments.

When a Market Niche Strategy Is Viable

A focused strategy aimed at securing a competitive edge based either on 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 multi-segment competitors to meet the specialized needs of niche

buyers and at the same time satisfy the expectations of mainstream customers.

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• 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.

The Risks of a Market Niche Strategy

Focusing carries several risks. 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. In the lodging business, large chains such as Marriott and Hilton have launched multi-brand strategies that allow them to compete effectively in several lodging segments simultaneously. Marriott has flagship hotels with a full complement of services and amenities that allow it to attract travelers and vacationers going to major resorts; it has J.W. Marriott and Ritz-Carlton hotels that provide deluxe comfort and service to business and leisure travelers; it has Courtyard by Marriott and SpringHill Suites brands for business travelers looking for moderately priced lodging; it has Marriott Residence Inns and TownePlace Suites designed as a “home away from home” for travelers staying five or more nights; and it has more than 650 Fairfield Inn locations that cater to travelers looking for quality lodging at an “affordable” price.

Similarly, Hilton has a lineup of brands (Waldorf Astoria, Conrad Hotels, Doubletree Hotels, Embassy Suites Hotels, Hampton Inns, Hilton Hotels, Hilton Garden Inns, and Homewood Suites) that enable it to compete in multiple segments and compete head-to-head against lodging chains that operate only in a single segment. Multi-brand strategies are attractive to large companies such as Marriott and Hilton precisely because they enable a company to enter a market niche and siphon business away from companies that employ a focus strategy.

Example 5.18 Shifting Market Focus

The popular Campbell Soup Company is shifting its marketing focus from “Millennials” to “Generation X.” To do this, it will begin focusing on snacks and simple meals and beverages. Their marketing will emphasize easy, affordable, and tasty meal solutions. They will make package re-designs to make the products more convenient and add unique and adventurous flavors. To support their existing chunky soup franchise, new marketing efforts will focus on the convenience of these products as well.

Source: Media Post, Campbell Soup Brand To Shift Focus From Millennials To Gen X, 2018Fa

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. An erosion of the differences across buyer segments lowers entry barriers into a focused market niche and provides an open invitation for rivals in adjacent segments to begin competing for the

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focuser’s customers. A third risk is that the segment may become so attractive it is soon inundated with competitors, intensifying rivalry and splintering segment profits.

Best-cost Provider Strategy

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. Companies pursuing best-cost strategies aim squarely at the sometimes great mass of value-conscious buyers looking for a good-to-very-good product or service at an economical price. The essence of a best-cost provider strategy is giving customers more value for the money by satisfying buyer desires for appealing product attributes in terms of features, performance, quality, service, or related characteristics and charging a lower price for these attributes compared to rivals with similar caliber product offerings. Alternatively, the firm could provide a superior product at a comparable price. Either approach yields a comparable best- cost product.

When a Best-Cost Provider Strategy Works Best

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. A best-cost provider usually needs to position itself in the middle of the market with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher-than-average price. 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 Danger of an Unsound Best-Cost Provider Strategy

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. A company with a modest degree of differentiation and no real cost advantage will most likely find itself squeezed between the firms using low-cost strategies and those using differentiation strategies. Low-

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cost providers may be able to siphon customers away with the appeal of a lower price (despite having marginally less appealing product attributes). High-end differentiators may be able to steal customers away with the appeal of appreciably better product attributes (even though their products carry a somewhat higher price tag). Thus, a successful best-cost provider must offer buyers significantly better product attributes to justify a price above what low-cost leaders are charging. 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.

Successful Strategies are Resource-based

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. To succeed in employing a low-cost provider strategy, a company has to 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 and/or the innovative capability to bypass certain value chain activities being performed by rivals.

To succeed in strongly differentiating its product in ways that are appealing to buyers, a company must have the resources and capabilities (such as better technology, strong skills in product innovation, expertise in customer service) to incorporate unique attributes into its product offering that a broad range of buyers will find appealing and worth paying for.

Strategies focusing on a narrow segment of the market require the capability to do an outstanding job of satisfying the needs and expectations of niche buyers. Success in employing a strategy keyed to a best value offering requires the resources and capabilities to incorporate upscale product or service attributes at a lower cost than rivals.

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KEY TAKEAWAY

Strategic focus is a common element in the strategies across successful firms. Two prevalent views of strategy are strategy as trade-offs and strategy as discipline. Michael Porter identifies three flavors of strategy: (1) cost leadership, (2) differentiation, or (3) focus of cost leadership or differentiation on a particular market niche; the combination of these flavors creates his five generic business-level strategies, see Figure 5.1. Firms can straddle these strategies, but such straddling is likely to dilute strategic focus. Strategy also provides discipline. Treacy and Wiersema’s three strategic disciplines are (1) operational excellence, (2) product leadership, and (3) customer intimacy. In the strategy as discipline mindset successful firms focus on one of these disciplines only creating a cult of the customer.

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