THE FIVE GENERIC COMPETITIVE
STRATEGIES
Chapter 5
MGT 4380
Strategic Management Process
What is a competitive strategy?
Competitive Strategy
Concerns management’s "game plan" for competing
successfully and securing a competitive advantage over
rivals (strategy as…PLAN)
Represents the firm’s specific efforts to provide superior
value to customers by offering:
An equally good product at a lower price (low cost)
A superior product with unique features perceived
as worth paying more for (differentiation)
An attractive overall mix of price, features, quality, service, and
other appealing attributes (best cost)
Creating Value…?
Customer
Value
Consumer Surplus
This area represents the value
created in each profitable sale and
consists of both profit to the firm
and surplus to the customer.
Selling
Price
Total
Value
Profit
Total Cost
to the Firm
COGS
KEY
Adopting and adapting a strategy or
strategies that balance firm costs, profit, and
overall value for customers
This area represents the firm’s
total costs in presenting the
product or service for sale. To
create new value, the firm must
cover its total costs.
The Five Generic Competitive Strategies
Low-Cost Strategies
Firms offer a broader array of products and/or
services at a relatively low price
Has a lower cost than rivals—but not necessarily
the absolutely lowest possible cost
Includes features and services that buyers
consider essential, but little more
Is viewed by consumers as offering equivalent or
higher value even if priced lower than competing
products (i.e., Great Value v. name-brand
products
How do low-cost strategies work?
Option 1
Use lower-cost advantage
to under-price
competitors and attract
price-sensitive buyers
Lower profit margins than
competitors mean firms
must sell in large volume
Option 2
Maintain present price
and current market share
and use lower-cost edge
to earn higher profit
margin
Higher profit margin
means that firms can sell
less than competitors and
earn more
How can firms develop a low-cost
strategy?
1. Perform essential value chain activities more
cost-effectively than rivals
•
E.g., better access to raw materials, more efficient
production, cheaper distribution, etc.
2. Revamp the firm’s overall value chain to
eliminate or bypass some cost-producing
activities
•
•
Eliminate non-essential costs
E.g., reduce input/production quality, concentrate on
markets that are easy to access
Other ways to manage the value chain…
Striving to capture all available
economies of scale
Taking full advantage of experience
and learning curve effects
Trying to operate facilities at full
capacity
Pursuing efforts to boost sales volumes
and thus spread outlays for R&D,
advertising, and general
administration over more units
Substituting lower-cost inputs
whenever there’s little or no sacrifice
in product quality or product
performance
Employing advanced production
technology and process design to
improve overall efficiency
Using communication systems and
information technology to achieve
operating efficiencies
Pursuing ways to reduce workforce
size and lower overall compensation
costs
Using the company’s bargaining power
vis-à-vis suppliers to gain concessions
Being alert to the cost advantages of
outsourcing and vertical integration
When does a low-cost strategy work best?
1. Price competition among rival sellers is especially vigorous.
2. The products of rival sellers are essentially identical and are
readily available from several sellers.
3. There are few ways to achieve product differentiation that
have value to buyers.
4. Buyers incur low costs in switching their purchases from one
seller to another.
5. The majority of industry sales are made to a few, largevolume buyers.
6. Industry newcomers use introductory low prices to attract
buyers and build a customer base.
What are the pitfalls to avoid in a low-cost
strategy?
1. Overly aggressive price cutting
Price cutting results in lower margins, no increase in sales volume,
and lower profitability
2. Reliance on easily-imitated cost reductions
3. Becoming too fixated on cost reduction
Ignoring buyer interest in additional features
Overlooking declining buyer sensitivity to price
Denying technological breakthroughs that will nullify cost advantages
Broad Differentiation Strategies
Firms offer broader array of products and/or
services that are unique from others
Useful whenever buyers’ needs and preferences are too
diverse to be fully satisfied by a standardized product or
service
Involves incorporating differentiating features that cause
buyers to prefer one firm’s brand, product, or service over
those of its rivals (i.e., branding, market pioneering, etc)
Requires not spending more to achieve differentiation
than the price premium that customers are willing to pay
for all the differentiating extras
What are the benefits of a differentiation
strategy?
Successful execution of a
differentiation strategy
allows a firm to:
Command a
premium price
Increase its
unit sales
Just think about Apple….
Gain buyer loyalty
to its brand
What are the different approaches to a
differentiation strategy?
Unique taste: Red Bull, Dr. Pepper
Multiple features: Microsoft Office, Apple iPhone
Wide selection and one-stop shopping: Home Depot, Amazon.com
Superior service: Ritz-Carlton, Nordstrom
Spare parts availability: Caterpillar, John Deere
Engineering design and performance: Mercedes-Benz, BMW
Luxury and prestige: Rolex, Gucci, Chanel
Product reliability: Johnson & Johnson
Quality manufacture: Michelin in tires, Honda in automobiles
Technological leadership: 3M Company
Full range of services: Charles Schwab in stock brokerage
Complete line of products: Campbell soups, Frito-Lay snack foods
How does a differentiation strategy create
value?
1. Includes product attributes and user features that
lower the buyer’s costs
• E.g., hybrid cars save gas, professional tax prep may
help save money, etc
2. Incorporates tangible features that improve
product performance
• E.g., engine turbo, high performance processor, etc
3. Incorporates intangible features that enhance
buyer satisfaction in noneconomic ways
• E.g., supports a certain cause (i.e., Girl Scout cookies)
How can firms develop a differentiation
strategy?
Manufacturing
activities
Supply chain
activities
Product
R&D
Production R&D
and technologyrelated activities
Activities
that Enhance
Differentiation
Distribution and
shipping activities
Marketing, sales,
and customer
service activities
When does a differentiation strategy work
best?
1. Buyer needs and uses of the product are diverse.
2. There are many ways to differentiate the product or service
that have value to buyers.
3. Few rival firms are following a similar differentiation
approach.
4. Technological change is fast-paced and competition revolves
around rapidly evolving product features.
What are the pitfalls to avoid in a
differentiation strategy?
Pursuing a differentiation strategy keyed to product or
service attributes that are easily and quickly copied.
Incorporating product features or attributes in which buyers
see little value or are easily copied by rivals.
Overspending on efforts to differentiate.
Over-differentiating so that product quality or service levels
exceed buyers’ needs.
Trying to charge too high a price premium.
Not opening up meaningful gaps in quality or service or
performance features over the products of rivals.
Focused Strategies
Reflect a concentration on a narrow piece of the
total market defined by geographic uniqueness
or special product attributes
Can be either (1) low-cost focused or (2)
differentiation focused
Appeal to smaller and medium-sized firms that
may lack the breadth and depth of resources to
tackle going after a whole market customer
base
Focused Low-Cost Strategy
A focused strategy based on low cost aims at
securing a competitive advantage by serving
buyers in the target market niche at a lower cost
and a lower price than rival competitors
E.g., Vizio TVs, Acer PCs, etc.
Avenues to achieving cost advantage are the
same as for low-cost leadership
1. out-manage rivals in keeping costs low
2. bypassing or reducing nonessential activities
Focused Differentiation Strategy
Keyed to offering carefully designed products
or services to appeal to the unique
preferences and needs of a narrow, welldefined group of buyers
E.g., Kashi, Tesla, Helly Hanson, etc.
As opposed to a broad differentiation strategy
aimed at many buyer groups and market
segments
When is a focused strategy viable?
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
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
What are the pitfalls of a focused strategy?
1. If and when competitors find effective ways to match a
focuser’s capabilities in serving the target niche
2. If and when the preferences and needs of niche members
shift over time toward the product attributes desired by the
majority of buyers (the few join the many)
3. If and when the segment may become so attractive it is soon
inundated with competitors
Best-Cost Strategies
Are a hybrid of low-cost provider and
differentiation strategies that:
Involves giving customers more value for money by
satisfying buyer expectations on key quality/features/
performance/service attributes and beating customer
expectations on price
Is a powerful competitive approach with value-conscious
buyers looking for a good-to-very-good product or
service at an economical price
Creates a “best-cost” status as the low-cost provider of a
product or service with upscale attributes
How can firms develop a best-cost
strategy?
Best-cost strategies are contingent on:
1. A superior value chain configuration that
eliminates or minimizes activities that do not add
value
2. Unmatched efficiency in managing essential value
chain activities
3. Core competencies that allow differentiating
attributes to be incorporated at a low cost
When does a best-cost strategy work
best?
A best-cost provider strategy works best in
markets where:
Product differentiation is the norm (e.g., clothing)
The market is comprised of large numbers of valueconscious buyers attracted to economically priced
midrange products and services, especially during
recessionary times (e.g., food service)
A provider can offer either a medium-quality product at a
below-average price or a high-quality product at an
average or slightly higher-than-average price (e.g.,
automobiles)
What are the pitfalls of a best-cost
strategy?
Vulnerability to both low-cost providers and
high-end differentiators
May not have the core capabilities to manage the
value chain such that the firm can produce
higher-quality products at a lower price
Difficult to “serve two masters”—quality and
price
Often, firms that attempt a best-cost strategy get
“stuck in the middle”
Getting “stuck in the middle”
Compromise strategies can result in middle-of-the-pack
industry rankings and, at best, average performance
due to:
An average cost structure
Minimal product differentiation relative to rivals
An average image and reputation
Limited prospect of industry leadership
Compromise or middle-ground strategies rarely
produce sustainable competitive advantage
Examples include: K-Mart, GM, American Airlines
Successful Competitive Strategies Are
Resource Based
Low-Cost Providers
Must have the resources and capabilities to keep
costs below those of competitors
Must have expertise to cost-effectively manage
value chain activities better than rivals
Differentiators
Must have the resources and capabilities to
incorporate unique attributes that a broad range
of buyers will find appealing and worth paying for
Successful Competitive Strategies Are
Resource Based
Narrow Segment Focusers
Must have the capability to do an outstanding job
of identifying and satisfying the needs and
expectations of niche buyers
Best-Cost Providers
Must have the resources and capabilities to
incorporate upscale product or service attributes
at a lower cost than rivals