CHAPTER 5

THE FIVE GENERIC COMPETITIVE STRATEGIES - Which One to Employ?

Copyright 2012 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

1. Understand what distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of industry and competitive conditions than in others. 2. Gain command of the major avenues for achieving a competitive advantage based on lower costs. 3. Learn the major avenues to a competitive advantage based on differentiating a companys product or service offering from the offerings of rivals. 4. Recognize the attributes of a best-cost provider strategy and the way in which some firms use a hybrid strategy to go about building a competitive advantage and delivering superior value to customers.

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Why Do Strategies Differ?

Is the firms market target broad or narrow? Key factors that distinguish one strategy from another
Is the competitive advantage pursued linked to low costs or product differentiation?
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THE FIVE GENERIC COMPETITIVE STRATEGIES

Low-Cost Provider

Striving to achieve lower overall costs than rivals on products that attract a broad spectrum of buyers.

Broad Differentiation
Focused Low-Cost Focused Differentiation Best-Cost Provider

Differentiating the firms product offering from rivals with attributes that appeal to a broad spectrum of buyers.
Concentrating on a narrow price-sensitive buyer segment and on costs to offer a lower-priced product. Concentrating on a narrow buyer segment by meeting specific tastes and requirements of niche members Giving customers more value for the money by offering upscale product attributes at a lower cost than rivals
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5.1

The Five Generic Competitive Strategies: Each Stakes Out a Different Market Position

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LOW-COST PROVIDER STRATEGIES

Effective Low-Cost Approaches:

Pursue cost-savings that are difficult imitate. Avoid reducing product quality to unacceptable levels.

Competitive Advantages and Risks:

Greater total profits and increased market share gained from underpricing competitors. Larger profit margins when selling products at prices comparable to and competitive with rivals. Low pricing does not attract enough new buyers. Rivals retaliatory price cutting set off a price war.
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Major Avenues for Achieving a Cost Advantage

Low-Cost Advantage

A firms cumulative costs for its overall value chain must be lower than its rivals cumulative costs. Do a better job than rivals of performing value chain activities more cost-effectively. Revamp the firms overall value chain to eliminate or bypass cost-producing activities.

How to Gain a Low-cost Advantage:

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Cost-Efficient Management of Value Chain Activities Cost Driver

Is a factor with a strong influence on a firms costs. Can be asset- or activity-based. Use lower-cost inputs and hold minimal assets Offer only essential product features or services Offer only limited product lines Use low-cost distribution channels Use the most economical delivery methods

Ways to Secure a Cost Advantage:

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5.2

Cost Drivers: The Keys to Driving Down Company Costs

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A cost driver is a factor that has a strong influence on a companys costs. a. Striving to capture all available economies of sale b. Taking full advantage of learning/experience curve effects c. Trying to operate facilities at full capacity d. Improving supply chain efficiency e. Using lower cost inputs wherever doing so will not entail too great a sacrifice in quality f. Using the companys bargaining power vis-E0-vis suppliers to gain concessions g. Using communications systems and information technology to achieve operating efficiencies h. Employing advanced production technology and process design to improve overall efficiency i. Being alert to the cost advantages of outsourcing and vertical integration j. Motivating employees through incentives and company culture

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Revamping

(Review)

the Value Chain System to Lower Costs

1. Bypass the activities and costs of distributors and dealers by selling directly to consumers. 2. Coordinate with suppliers to bypass activities, speed up their performance, or otherwise increase overall efficiency. 3. Reduce handling and shipping costs by locating suppliers close to the firms own facilities.

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When a Low-Cost Provider Strategy Works Best

1. Price competition among rival sellers is vigorous.

2. Products are readily available from many sellers.

3. Industry products are not easily differentiated. 4. Most buyers use the product in the same ways.

5. Buyers incur low costs in switching among sellers.

6. Large buyers have the power to bargain down prices. 7. New entrants can use introductory low prices to attract buyers and build a customer base.

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Pitfalls of a Low-Cost Provider Strategy

1. Lowering selling prices results in gains that are smaller than the increases in total costs, reducing profits rather than raising them. 2. Relying on a cost advantage that is not sustainable because rivals can copy or otherwise overcome it. 3. Becoming too fixated on cost reduction such that the firms offering is too features-poor to generate sufficient buyer appeal.

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BROAD DIFFERENTIATION STRATEGIES

Effective Differentiation Approaches:
A. B. C.

Carefully study buyer needs and behaviors, values and willingness to pay a unique product or service. Incorporate features that both appeal to buyers and create a sustainably distinctive product offering. Use higher prices to recoup differentiation costs. Premium prices for products Increased unit sales Brand loyalty
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Advantages of Differentiation:
1. 2. 3.

Cost-Efficient Management of Value Chain Activities

A Uniqueness Driver Can:

Have a strong differentiating effect. Be based on physical as well as functional attributes of a firms products. Be the result of superior performance capabilities of the firms human capital. Have an effect on more than one of the firms value chain activities. Create a perception of value (brand loyalty) in buyers where there is little reason for it to exist.
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5.3

Uniqueness Drivers: The Keys to Creating a Differentiation Advantage

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A uniqueness driver is a factor that can have a strong differentiating effect. a. Striving to create superior product features, design, and performance. b. Improving customer service or adding additional service. c. Pursuing production R&D activities d. Striving for innovation and technological advances e. Pursuing continuous quality improvement f. Increasing the intensity of marketing and sales activity g. Seeking out high-quality inputs h. Improving employee skill, knowledge, and experience through human resource management activity

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Revamping the Value Chain System to Increase Differentiation

Coordinating with channel allies to enhance customer perceptions of value

Approaches to enhancing differentiation

Coordinating with suppliers to better address customer needs

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When a Differentiation Strategy Works Best

Market Circumstances Favoring Differentiation

Diversity of buyer needs and uses for the product

Many ways that differentiation can have value to buyers

Few rival firms follow a similar differentiation approach

Rapid change in technology and product features

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Pitfalls of a Differentiation Strategy

1. Relying on product attributes easily copied by rivals.

2. Introducing product attributes that do not evoke an enthusiastic buyer response.

3. Eroding profitability by overspending on efforts to differentiate the firms product offering. 4. Not opening up meaningful gaps in quality, service, or performance features vis--vis the products of rivals. 5. Adding frills and features such that the product exceeds the needs and uses of most buyers. 6. Charging too high a price premium.
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FOCUSED (OR MARKET NICHE) STRATEGIES

Focused Strategy Approaches

Focused Low-Cost Strategy

Focused Market Niche Strategy

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When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive

1. The target market niche is big enough to be profitable and offers good growth potential.
2. Industry leaders do not see that having a presence in the niche is crucial to their own success.

3. It is costly or difficult for multi-segment competitors to meet the needs of target market niche buyers.
4. The industry has many different niches and segments.

5. Rivals have little or no interest in the target segment.

6. The focuser has a reservoir of buyer goodwill and long-term loyalty.
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The Risks of a Focused Low-Cost or Focused Differentiation Strategy

1. Competitors will find ways to match the focused firms capabilities in serving the target niche. 2. The specialized preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. 3. As attractiveness of the segment increases, it draws in more competitors, intensifying rivalry and splintering segment profits.
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BEST-COST PROVIDER STRATEGIES

Differentiation: Providing desired quality/ features/performance/ service attributes Low Cost Provider: Charging a lower price than rivals with similar caliber product offerings

Best-Cost Provider Hybrid Approach

Value-Conscious Buyer
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Market Characteristics Favoring a Best-Cost Provider Strategy

Product differentiation is the market norm. There are a large number of value-conscious buyers who prefer midrange products.

There is competitive space near the middle of the market for a competitor with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price. Economic conditions have caused more buyers to become value-conscious.

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The Big Risk of a Best-Cost Provider Strategy Getting Squeezed on Both Sides
Squeezed

?
Low-Cost Providers Best-Cost Provider Strategy High-End Differentiators

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Follow-up

How can product quality lower product costs?

In which stages of the industry life cycle are low-cost leadership, differentiation, focused niche, and best-cost provider strategies most appropriate?
Could differences in the sticker prices of the luxury-car market be used as a proxy for measuring the strength of Toyotas best-cost strategy?
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THE CONTRASTING FEATURES OF THE FIVE GENERIC COMPETITIVE STRATEGIES: A SUMMARY

Each Generic Strategy:

Positions the firm differently in its market.

Establishes a central theme for how the firm intends to outcompete rivals.
Creates boundaries or guidelines for strategic change as market circumstances unfold. Points to different ways of experimenting and tinkering with the basic strategy.
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5.1 Distinguishing Features of the Five Generic Competitive Strategies

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5.1 Distinguishing Features of the Generic Competitive Strategies (contd)

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5.1 Distinguishing Features of the Generic Competitive Strategies (contd)

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Successful Competitive Strategies Are Resource-Based

A firms competitive strategy is unlikely to succeed unless it is predicated on leveraging a competitively valuable collection of resources and capabilities that match the strategy.
Sustaining a firms competitive advantage depends on its resources, capabilities, and competences that are difficult for rivals to duplicate and have no good substitutes.

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