Competitive stratergy

7/03/2016

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Topic 5

Business Level Strategy

MNG00114

Competitive Strategy

This week’s roadmap

� The Five Competitive Strategies

� Low-Cost Provider Strategies

� Broad Differentiation Strategies

� Focused (or Market Niche) Strategies

� Best-Cost Provider Strategies

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

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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

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

Low-Cost Provider Strategies

� Two main options when translating low cost advantage into higher profits:

1. Use lower-cost edge to under-price competitors and attract price-sensitive buyers in enough numbers to increase total profits

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

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Controlling Costs

� Capture scale economies

� Increase learning and experience

� Improve supply chain efficiency

� Substitute use of low-cost for high-cost raw materials

� Use online systems and sophisticated software to achieve operating efficiencies

� Use bargaining power to gain concessions from suppliers

� Compare vertical integration vs. outsourcing

Southwest’s Low Cost Approach

� 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

Characteristics of a Low Cost Provider

� 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

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

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Pitfalls of a Low Cost Strategy

� 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

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

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Differentiation Themes

� Multiple features – Microsoft Vista and Office, iPhone

� Wide selection and one-stop shopping – 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 – Michelin, Toyota

� Technological leadership – 3M Corporation

Sustaining Differentiation

� 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

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

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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

Approaches to Defining a Niche

� Geographic uniqueness

� Specialized requirements in using product/service

� Special product attributes appealing only to niche buyers

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Examples of Focus Strategies

� Animal Planet and History Channel – Special interest Cable TV programs

� Porsche – sports cars

� Shannons Insurance – speciality insurance

� Two approaches – Achieve lower costs than rivals in serving a well-defined buyer segment (focused low cost) OR offer a product appealing to unique preferences of a well-defined buyer segment (focused differentiation strategy)

Focused Strategy - Risks

� 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

A new generic strategy – Best Cost

� 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

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Best Cost – Toyota’s Lexus

� Lexus is the luxury vehicle division of Japanese automaker Toyota Motor Corporation

� 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

Best Cost Strategy – Risks

� 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