Current Presentation & Paper

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved

Chapter 5: The Five Generic Competitive Strategies

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.

Troy University

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved

“Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.”

Michael Porter

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved

“Winners in business play
rough and don’t apologize for
it. The nicest part of playing hardball is watching your competitors squirm.”

George Stalk Jr. and Rob Lachenauer

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Chapter Learning Objectives

Gain command of how each of the five generic competitive strategies lead to competitive advantage and deliver superior value to customers.

Learn why some of the five generic strategies work better in certain kinds of industry and competitive conditions than in others.

Learn the major avenues for achieving a competitive advantage based on lower costs.

Learn the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals in ways that better satisfy buyer needs and preferences.

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Chapter Roadmap

• The Five Competitive Strategies
• Low-Cost Provider Strategies
• Broad Differentiation Strategies
• Best-Cost Provider Strategies
• Focused (or Market Niche) Strategies
• The Contrasting Features of the Five Generic Competitive Strategies: A Summary

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Strategy and Competitive Advantage

• Competitive advantage exists when a firm’s strategy gives it an edge in
• Attracting customers and
• Defending against competitive forces
• Convince customers firm’s product / service offers superior value
• A good product at a low price
• A superior product worth paying more for
• A best-value product

Key to Gaining a Competitive Advantage

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What Is Competitive Strategy?

• Deals exclusively with a
  company’s business plans
  to compete successfully
• Specific efforts to please customers
• Offensive and defensive moves
  to counter maneuvers of rivals
• Responses to prevailing market conditions
• Initiatives to strengthen its market position
• Narrower in scope than business strategy

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Figure 5.1: The Five Generic Competitive Strategies

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Low-Cost Provider Strategies

• Make achievement of meaningful
  lower costs than rivals the theme
  of firm’s strategy
• Include features and services in product
  offering that buyers consider essential
• Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match

Keys to Success

Low-cost leadership means low overall costs, not just low manufacturing or production costs!

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Option 1: Use lower-cost edge to
under-price competitors and attract
price-sensitive buyers in 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,
thereby increasing total profits

Translating a Low-Cost Advantage into Higher Profits: Two Options

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Approaches to Securing
a Cost Advantage

Do a better job than rivals of
performing value chain activities
efficiently and cost effectively

Revamp value chain to bypass
cost-producing activities that add little value from the buyer’s perspective

Approach 1

Approach 2

Control costs!

By-pass

costs!

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Approach 1: Controlling the Cost Drivers

• Capture scale economies; avoid scale diseconomies
• Capture learning and experience curve effects
• Control percentage of capacity utilization
• Pursue efforts to boost sales and spread costs such as R&D and advertising over more units
• Improve supply chain efficiency
• Substitute use of low-cost for
  high-cost raw materials
• Use online systems and sophisticated
  software to achieve operating efficiencies
• Adopt labor-saving operating methods
• Use bargaining power to gain concessions from suppliers
• Compare vertical integration vs. outsourcing

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• Use direct-to-end-user
  sales/marketing methods
• Make greater use of online
  technology applications
• Streamline operations by eliminating low-value-added or unnecessary work steps
• Relocate facilities closer to suppliers or customers
• Offer basic, no-frills product/service
• Offer a limited product/service

Approach 2: Revamping the Value Chain

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Wal-Mart’s Approach to
Managing Its Value Chain

Institute extensive information sharing with vendors via online systems

Pursue global procurement of some items and centralize most purchasing activities

Invest in state-of-the-art automation at its distribution centers

Strive to optimize the product mix and achieve greater sales turnover

Install security systems and store operating procedures that lower shrinkage rates

Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites

Manage and compensate its workforce in a manner to yield lower labor costs

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Nucor Corporation’s
Low-Cost Provider Strategy

• Key elements of Nucor’s strategy
• Use of electric arc furnace technology allows for
  lower investment costs for facilities and equipment and eliminates many expensive steps in making steel products from scratch
• Use incentive compensation to achieve high productivity and low labor costs per ton produced
• Locate plants close to customers to keep shipping costs down
• Cost advantages and bottom-line results
• Lower capital investment and operating costs
• Ability to charge lower prices than traditional steel companies using make-it-from scratch technology
• Earned attractive profits for shareholders since 1966

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Key Characteristics of Southwest Airlines’ Low-Cost Provider Strategy

• Mastery of fast turnarounds at gates (25 minutes vs. 45 minutes for rivals) allows
• Planes to fly more hours per day
• More flights to be scheduled per day with fewer aircraft
• More revenue generated per plane on average than rivals
• Elimination of several services
  results in cost savings
• In-flight meals
• Assigned seating
• Baggage transfer to connecting airlines
• First-class seating and service
• Fast, user-friendly online reservation system
• Facilitates e-ticketing
• Reduces staffing requirements at telephone
  reservation centers and airport counters

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Keys to Success in Achieving
Low-Cost Leadership

• Scrutinize each cost-creating activity,
  identifying cost drivers
• Use knowledge about cost drivers to manage
  costs of each activity down year after year
• Find ways to restructure value chain to eliminate
  nonessential work steps and low-value activities
• Work diligently to create cost-conscious corporate cultures
• Feature broad employee participation in continuous cost-improvement efforts and limited perks for executives
• Strive to operate with exceptionally small corporate staffs
• Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business

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• Cost conscious corporate culture
• Employee participation in cost-control efforts
• Ongoing efforts to benchmark costs
• Intensive scrutiny of budget requests
• Strong commitment to continuous
  cost improvement

Characteristics of a Low-Cost Provider

Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !

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• Price competition is vigorous
• Product is standardized or readily available
  from many suppliers
• There are few ways to achieve
  differentiation that have value to buyers
• Most buyers use product in same ways
• Buyers incur low switching costs
• Buyers are large and have
  significant bargaining power
• Industry newcomers use
  introductory low prices to attract
  buyers and build customer base

When Does a Low-Cost
Strategy Work Best?

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Pitfalls of Low-Cost Strategies

• Being overly aggressive in cutting price
• Low cost methods are easily
  imitated by rivals
• Becoming too fixated on
  reducing costs and ignoring
• Buyer interest in additional features
• Declining buyer sensitivity to price
• Changes in how the product is used
• Technological breakthroughs open up cost reductions for rivals

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Test Your Knowledge

Striving to be the industry’s low-cost provider and achieving lower costs than rivals entails

A. doing a better job than rivals of performing value chain activities more cost-effectively.

B. having a smaller labor force than rivals, paying lower wages than rivals, locating all facilities in countries where labor costs are low, and outsourcing many value chain activities to suppliers with world-class technological capabilities.

C. revamping the firm’s overall value chain to eliminate or bypass cost-producing activities that produce little value added insofar as customers are concerned.

D. adopting activity-based costing, utilizing more best practices than rivals, and having a narrower product line than rivals.

E. Both A and C.

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Differentiation Strategies

• Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals
• Find ways to differentiate that create
  value for buyers and are not easily
  matched or cheaply copied by rivals
• Keeping the cost of achieving differentiation below the higher price that can be charged

Objective

Keys to Success

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Benefits of Successful Differentiation

A product / service with unique, appealing attributes allows a firm to

• Command a premium price and/or
• Increase unit sales and/or
• Build brand loyalty

= Competitive Advantage

Which
hat is unique?

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• Unique taste – Dr. Pepper
• Multiple features – Microsoft Vista and Office, iPhone
• Wide selection and one-stop shopping – Home Depot, Amazon.com
• Superior service – FedEx
• Spare parts availability – Caterpillar
• Engineering design and performance – Mercedes, BMW
• Prestige and distinctiveness – Rolex
• Product reliability – Johnson & Johnson
• Quality manufacture – Karastan, Michelin, Toyota
• Technological leadership – 3M Corporation
• Top-of-line image – Ralph Lauren and Starbucks

Types of Differentiation Themes

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Sustaining Differentiation:
Keys to Competitive Advantage

• Most appealing approaches to differentiation are those
• Hardest for rivals to match or imitate
• Buyers will find most appealing
• Best choices to gain a longer-lasting, more profitable competitive edge
• New product innovation
• Technical superiority
• Product quality and reliability
• Comprehensive customer service
• Unique competitive capabilities

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Where to Find Differentiation
Opportunities in the Value Chain

• Purchasing and procurement activities
• Product R&D and product design activities
• Production process / technology-related activities
• Manufacturing / production activities
• Distribution-related activities
• Marketing, sales, and customer service activities

Activities,

Costs, &

Margins of

Forward

Channel Allies

Internally

Performed

Activities,

Costs, &

Margins

Activities,

Costs, &

Margins of

Suppliers

Buyer/User

Value

Chains

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How to Achieve a
Differentiation-Based Advantage

Incorporate features that raise
performance a buyer gets out of the product

Incorporate features that enhance buyer satisfaction in non-economic or intangible ways

Outcompete rivals via superior capabilities

Incorporate product features/attributes that
lower buyer’s overall costs of using product

Approach 1

Approach 2

Approach 3

Approach 4

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Test Your Knowledge

Which of the following is not one of the four basic routes to achieving a differentiation-based competitive advantage?

A. Appealing to high-income buyers who are willing and able to pay a premium price for a high-performing, multi-featured product

B. Incorporating features that raise product performance

C. Incorporating product attributes and user features that lower the buyer’s overall costs of using the company’s product

D. Delivering value to customers via competencies and competitive capabilities that rivals don’t have or can’t afford to match

E. Incorporating features that enhance buyer satisfaction in intangible or non-economic ways

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Importance of Perceived Value

• Buyers seldom pay for
  value that is not perceived
• Price premium of a
  differentiation strategy reflects
• Value actually delivered to the buyer

and

• Value perceived by the buyer
• Actual and perceived value can differ when buyers are unable to assess their experience with a product

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Signaling Value as
Well as Delivering Value

• Incomplete knowledge of buyers causes them to
  judge value based on such signals as
• Price
• Attractive packaging
• Extensive ad campaigns
• Ad content and image
• Seller facilities or professionalism and
  personality of employees
• Having a list of prestigious customers
• Signals of value may be as important as
  actual value when
• Nature of differentiation is hard to quantify
• Buyers are making first-time purchases
• Repurchase is infrequent
• Buyers are unsophisticated

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When Does a Differentiation
Strategy Work Best?

• There are many ways to differentiate a product that have value and please customers
• Buyer needs and uses are diverse
• Few rivals are following a similar
  differentiation approach
• Technological change and
  product innovation are fast-paced

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Pitfalls of Differentiation Strategies

• Appealing product features are easily copied by rivals
• Buyers see little value in unique attributes of product
• Overspending on efforts to differentiate the product offering, thus eroding profitability
• Over-differentiating such that product features exceed buyers’ needs
• Charging a price premium
  buyers perceive is too high
• Not striving to open up meaningful
  gaps in quality, service, or performance
  features vis-à-vis rivals’ products

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For Discussion: Your Opinion

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

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Best-Cost Provider Strategies

• Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation
• Make an upscale product at a lower cost
• Give customers more value for the money

• Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations
• Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands

Objectives

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Competitive Strength of a
Best-Cost Provider Strategy

• Competitive advantage is based on the capability to include upscale attributes at a lower cost than rivals’ comparable products
• To achieve competitive advantage,
  a company must be able to
• Incorporate attractive features
  at a lower cost than rivals
• Manufacture a good-to-excellent quality
  product at a lower cost than rivals
• Develop a product that delivers good-to-excellent performance at a lower cost than rivals
• Provide attractive customer service at a lower cost than rivals

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When Is a Best-Cost
Provider Strategy Appealing?

• When buyer diversity makes product differentiation the norm
• When many buyers are also sensitive to price and value

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Key Characteristics of Toyota’s
Best-Cost Provider Strategy for the Lexus

Design an array of high-performance characteristics and upscale features into Lexus models to make them comparable in performance/luxury to other high-end models, i.e. Mercedes, BMW

Transfer its capabilities in making high-quality Toyota models at low cost to making premium-quality Lexus models at costs below other luxury-car makers

Use its relatively lower manufacturing costs to
underprice comparable Mercedes and BMW models

Establish a new network of Lexus dealers, separate from Toyota dealers, dedicated to providing a level of personalized customer service unmatched in the industry

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Risk of a Best-Cost Provider Strategy

• A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies
• Low-cost leaders may be able to siphon
  customers away with a lower price
• High-end differentiators may
  be able to steal customers away
  with better product attributes

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Test Your Knowledge

Which of the following are distinguishing features of a best-cost provider strategy (based on the comparisons of the five generic competitive strategies shown in Figure 5.1)?

A. The strategic target is price-conscious buyers

B. A marketing emphasis on charging a slightly higher price than rival brands having comparable features and attributes

C. A product line that stresses wide selection, many product variations, and emphasis on differentiating features

D. A competitive advantage based on more value for the money

E. Using constant product innovation, excellent R&D skills, and periodic technological breakthroughs to sustain the strategy

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Focus / Niche Strategies

• Involve concentrated attention on a narrow piece of the total market

Serve niche buyers better than rivals

• Choose a market niche where buyers
  have distinctive preferences, special
  requirements, or unique needs
• Develop unique capabilities to
  serve needs of target buyer segment

Objective

Keys to Success

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• Geographic uniqueness
• Specialized requirements in
  using product/service
• Special product attributes
  appealing only to niche buyers

Approaches to Defining a Market Niche

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Examples of Focus Strategies

• Community Coffee
• Specialty coffee retailer
• Animal Planet and History Channel
• Special interest Cable TV programs
• Porsche
• Sports cars
• Bandag
• Specialist in truck tire recapping
• CGA Inc.
• Specialty insurance provider
• Match.com
• Online dating service

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Focus / Niche Strategies
and Competitive Advantage

• Achieve lower costs than rivals in
  serving a well-defined buyer segment

Focused low-cost strategy

• Offer a product appealing to unique
  preferences of a well-defined buyer segment

Focused differentiation strategy

Approach 1

Approach 2

Which hat is unique?

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What Makes a Niche
Attractive for Focusing?

• Big enough to be profitable and offers good growth potential
• Not crucial to success of industry leaders
• Costly or difficult for multi-segment
  competitors to meet specialized
  needs of niche members
• Focuser has resources and capabilities
  to effectively serve an attractive niche
• Few other rivals are specializing in same niche
• Focuser can defend against challengers via superior ability to serve niche members

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Risks of a Focus Strategy

• Competitors with broad product lines having wide appeal find effective ways to match
  a focuser’s capabilities in serving niche
• Niche buyers’ preferences shift
  towards product attributes desired
  by majority of buyers – niche
  becomes part of overall market
• Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

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For Discussion: Your Opinion

Which of the five generic competitive strategies do you think the following companies are employing:

• The Saturn division of General Motors
• Abercrombie & Fitch
• Amazon.com
• Avon Products

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Deciding Which Generic
Competitive Strategy to Use

• Each positions a company differently in its market and competitive environment
• Each establishes a central theme for how a company will endeavor to outcompete rivals
• Each creates some boundaries for maneuvering as market circumstances unfold
• Each points to different ways of experimenting with the basics of the strategy
• Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy

The big risk – Mixing and matching pieces of the generic strategies to create a mixed bag or “stuck in the middle”
strategy! This rarely produces a sustainable competitive advantage or a distinctive competitive position !

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Table 5.1: Distinguishing Features of the Five Generic Competitive Strategies