CHAPTER 5

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CHAPTER 5

STRATEGY AND

COMPETITIVE

ADVANTAGE

Screen graphics created by:

Jana F. Kuzmicki, PhD, Indiana University Southeast

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Chapter Outline

 Generic Competitive Strategies

 Low-Cost Leadership Strategy

 Broad Differentiation Strategies

 Best-Cost Provider Strategies

Focused Low-Cost Strategies

 Focused Differentiation Strategies

 Vertical Integration Strategies

Cooperative Strategies

Offensive and Defensive Strategies

 First-Mover Advantages and Disadvantages

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Strategy and Competitive Advantage

COMPETITIVE ADVANTAGE

strategy gives it an edge in exists when a firm’s

 Defending against competitive forces and

 Securing customers

Key to Success

Convince customers firm’s product / service offers

SUPERIOR VALUE

 Offer buyers a good product at a

lower price

 Use differentiation to provide a

better product

buyers think is worth a premium price

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What Is Competitive Strategy?

 Consists of business approaches to

Attract

customers, fulfilling their expectations

Withstand

competitive pressures

Strengthen

market position

 Includes offensive and defensive moves to

Counter actions

of key rivals

Shift resources

to improve long-term market position

Respond

to prevailing market conditions

Narrower in scope

than business strategy

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Objectives of Competitive Strategy

 Build a

COMPETITIVE ADVANTAGE

 Cultivate clientele of

LOYAL CUSTOMERS

Knock the socks off rivals

, ethically and honorably

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The Five Generic

Competitive Strategies

Type of Advantage Sought

Lower Cost Differentiation

Broad Range of Buyers

Narrow

Buyer

Segment or Niche

Overall Low-Cost

Leadership

Strategy

Best-Cost

Provider

Strategy

Focused

Low-Cost

Strategy

Broad

Differentiation

Strategy

Focused

Differentiation

Strategy

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A Low-Cost Leadership Strategy

Objective

 Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to

 Under-price rivals and share gains

OR

reap market

 Earn higher profit margin selling at going price

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Approach 1: Controlling the Cost

Drivers

 Capture scale economies; avoid scale diseconomies

 Capture learning and experience curve effects

 Manage costs of key resource inputs

 Consider linkages with other activities in value chain

 Find sharing opportunities with other business units

 Compare vertical integration vs. outsourcing

 Assess first-mover advantages vs. disadvantages

 Control percentage of capacity utilization

 Make prudent strategic choices related to operations

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Approach 2: Revamping the Value

Chain

Simplify product design

Offer basic, no-frills product/service

Shift to a simpler, less capital-intensive, or more streamlined technological process

Find ways to bypass use of high-cost raw materials

Use direct-to-end user sales/marketing approaches

Relocate facilities closer to suppliers or customers

 Reengineer core business processes---be creative in finding ways to eliminate value chain activities

 Use PC technology to delete works steps, modify processes, cut out cost-producing activities

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Differentiation Strategies

Objective

Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals

Keys to Success

 Find ways to differentiate that

CREATE VALUE

for buyers and that are

NOT EASILY MATCHED

or

CHEAPLY COPIED

by rivals

 Not spending more to achieve differentiation than the price premium that can be charged

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Sustaining Differentiation: The Key to

Competitive Advantage

 Most appealing approaches to differentiation:

Those hardest for rivals to match or imitate

Those buyers will find most appealing

 Best choices for gaining a

longer-lasting, more profitable

competitive edge:

New product innovation

 Technical superiority

 Product quality and reliability

 Comprehensive customer service

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Where to Find Differentiation

Opportunities in the Value Chain

 Purchasing and procurement activities

 Product R&D activities

 Production R&D; technology-related activities

 Manufacturing activities

 Outbound logistics and distribution activities

 Marketing, sales, and customer service activities

Activities,

Costs, &

Margins of

Suppliers

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Internally

Performed

Activities,

Costs, &

Margins

Activities, Costs,

& Margins of

Forward Channel

Allies &

Strategic Partners

Buyer/User

Value

Chains

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Signaling Value as Well as Delivering

Value

 Buyers seldom pay for value that is not perceived

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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Best Cost Provider Strategies

 Combine a strategic emphasis on

low-cost

strategic emphasis on

differentiation

with a

Make an upscale product at a lower cost

Give customers more value for the money

Objectives

 Create superior value by

MEETING OR

EXCEEDING

buyer expectations on product attributes and

BEATING

their price expectations

 Be the low-cost producer of a product with

GOOD-

TO-EXCELLENT

product attributes, then use cost advantage to

UNDERPRICE

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What Makes a Niche

Attractive for Focusing?

 Big enough to be profitable

 Good growth potential

 Not crucial to success of major competitors

(making it unlikely they will compete hard in niche)

 Focuser has resources to effectively serve segment

 Focuser can defend against challengers via superior ability to serve buyers in segment and customer goodwill

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The Competitive Strength of

Focus / Niche Strategies

RIVAL COMPETITORS

do not have matching capabilities to meet specialized needs of niche members

Focuser’s competencies/capabilities act as a barrier to

POTENTIAL ENTRANTS

Focuser’s competencies/capabilities pose obstacle to sellers of

SUBSTITUTES

Focuser’s unique ability to meet niche buyers’ needs can blunt bargaining leverage of powerful

BUYERS

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Vertical Integration Strategies

Vertical integration extends a firm’s competitive scope within

same industry

Backward

into sources of supply

Forward

toward end-users of final product

 Can aim at either

full

or

partial

integration

Activities,

Costs, &

Margins of

Suppliers

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Internally

Performed

Activities,

Costs, &

Margins

Activities, Costs,

& Margins of

Forward Channel

Allies &

Strategic Partners

Buyer/User

Value

Chains

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Unbundling and

Outsourcing Strategies

Concept

Involves not performing certain value chain activities internally and relying on outside vendors to perform needed activities and services

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Pros and Cons of Vertical Integration

 The appeal of a vertical integration strategy depends on

 Its ability to

enhance performance

of strategy-critical activities by

Lowering costs or

Increasing differentiation

Its

impact

on

Resource requirements

Flexibility and response times

 Administrative overhead of coordination

 Its ability to create a

competitive advantage

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Cooperative Strategies

Companies sometimes use

strategic alliances

or

strategic partnerships

or

collaborative agreements

to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-tocompany dealings but fall short of merger or formal joint venture

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The Building and Eroding of

Competitive Advantage

Buildup Period Benefit Period Erosion Period

Strategic

Moves

Produce

Competitiv e

Advantage

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Size of

Competitive

Advantage

Achieved

Time

Moves by

Rivals

Reduce

Competitive

Advantage

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Attacking Competitor Strengths

Appeal

Gain market share by out-matching strengths of weaker rivals

Whittle away at a rival’s competitive advantage

Challenging strong competitors with a lower price is foolhardy unless the aggressor has a

COST

ADVANTAGE

or advantage of

GREATER

FINANCIAL STRENGTH !

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Options for Attacking a Competitor’s Strengths

 Offer

equally good product at a lower price

 Offer a

better product at the same price

Leapfrog

into next-generation

technologies

 Add appealing

new features

 Run

comparison ads

 Construct

new plant capacity

 Offer a

wider product line

 Develop

better customer service

capabilities

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Attacking Competitor Weaknesses

Basic Approach

Concentrate company strengths and resources directly against a rival’s weaknesses

Weaknesses to Attack

Geographic regions

where rival is weak

Segments

rival is neglecting

Go after those customers

is least equipped to serve a rival

Rivals with

weaker marketing skills

Introduce

new models

exploiting gaps in rivals’ product lines

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Preemptive Strikes

Approach

Involves moving first to secure an advantageous position that rivals are foreclosed or discouraged from duplicating!

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Preemptive Strike Options

Expand capacity ahead of demand in hopes of discouraging rivals from following suit

Tie up best or cheapest sources of essential raw materials

Move to secure best geographic locations

Obtain business of prestigious customers

Build an image in buyers’ minds that is unique & hard to copy

 Secure exclusive or dominant access to best distributors

 Acquire desirable, but struggling, competitor

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Choosing Whom to Attack

Four types of firms can be the target of an offensive:

Market leaders

Runner-up firms

Struggling rivals on verge of going under

Small local or regional firms not doing a good job for their customers

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Offensive Strategy and

Competitive Advantage

STRATEGIC OFFENSIVE

options offering strongest basis for

COMPETITIVE ADVANTAGE

 Develop lower-cost product design

 Make changes in production operations that lower costs or enhance differentiation

 Develop product features that deliver superior performance or lower users’ costs

 Give more responsive customer service

 Escalate marketing effort

 Pioneer new distribution channel

 Sell direct to end-users

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Offensive Strategy Principle

The chances for a successful offensive initiative are improved when it is based on a company’s resource strengths and strongest competencies and capabilities.

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Defensive Strategy

Objectives

Fortify firm’s present position

Help sustain any competitive advantage held

 Lessen risk of being attacked

Blunt impact of any attack that occurs

 Influence challengers to aim attacks at other rivals

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Defensive Strategies: Approaches

Approach 1

Block avenues challengers can take in mounting offensive attacks

Approach 2

Make it clear any challenge will be met with strong counterattack

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