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Gary Hamel and C.K. Prahalad
Amar Bhide

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Five Generic Competitive Strategies
Strategic Alliances and Partnerships
Merger and Acquisition Strategies
Vertical Integration Strategies
Outsourcing Strategies
Offensive and Defensive Strategies
Strategies for Using the Internet
Choosing Appropriate Functional-Area Strategies
Importance of Linking Strategy to Company
Values and Ethical Standards
First-Mover Advantages and Disadvantages
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Fig. 4.1: Menu of Strategy Options for Winning in the Marketplace
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 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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Strategy and
Advantage
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 Competitive advantage exists when a firm’s strategy gives it an edge in
 Attracting customers and
 Defending against competitive forces
Key to Gaining a Competitive Advantage
 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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Keys to Success
 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!
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Option 1: Use lower-cost edge to
 Underprice 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
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Approaches to Securing a Cost Advantage
Approach 1
Do a better job than rivals of performing value chain activities efficiently and cost effectively
Approach 2
Revamp value chain to bypass costproducing activities that add little value from the buyer’s perspective
Control costs!
By-pass costs!
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Approach 1: Controlling the Cost Drivers
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 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
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 Make greater use of Internet technology applications
 Use direct-to-end-user sales/marketing methods
 Simplify product design
 Offer basic, no-frills product/service
 Shift to a simpler, less capital-intensive, or more flexible technological process
 Find ways to bypass use of high-cost raw materials
 Relocate facilities closer to suppliers or customers
 Drop “something for everyone” approach and focus on a limited product/service
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Keys to Success in Achieving
Low-Cost Leadership
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 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 lowvalue activities
 Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business
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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
 Programs promoting continuous cost improvement
Successful low-cost producers champion frugality but wisely and aggressively
invest in cost-saving improvements !
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When Does a Low-Cost
Strategy Work Best?
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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
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 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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Objective
 Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals
Keys to Success
 Find ways to differentiate that create value for buyers and 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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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
Which hat is unique?
= Competitive Advantage
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 Unique taste -- Dr. Pepper
 Multiple features -- Microsoft Windows and Office
 Wide selection and one-stop shopping -- Home
Depot and Amazon.com
 Superior service -- FedEx, Ritz-Carlton
 Spare parts availability -- Caterpillar
 More for your money -McDonald’s, Wal-Mart
 Prestige -- Rolex
 Quality manufacture -- Honda, Toyota
 Technological leadership -- 3M Corporation
 Top-of-line image -- Ralph Lauren, Chanel, Cross
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Sustaining Differentiation: Keys to
Competitive Advantage
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 Most appealing approaches to differentiation
 Those hardest for rivals to match or imitate
 Those 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
Suppliers
Internally
Performed
Activities,
Costs, &
Margins
Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners
Buyer/User
Value
Chains
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How to Achieve a
Differentiation-Based Advantage
Approach 1
Incorporate product features/attributes that lower buyer’s overall costs of using product
Approach 2
Incorporate features/attributes that raise the performance a buyer gets out of the product
Approach 3
Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways
Approach 4
Compete on the basis of superior capabilities
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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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Buyers see little value in unique attributes of product
Appealing product features are easily copied by rivals
Differentiating on a feature buyers do not perceive as lowering their cost or enhancing their well-being
Over-differentiating such that product features exceed buyers’ needs
Charging a price premium buyers perceive is too high
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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
Objectives
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 goodto-excellent product attributes, then use cost advantage to underprice comparable brands
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Competitive Strength of a
Best-Cost Provider Strategy
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 A bestcost provider’s competitive advantage comes from matching close rivals on key product attributes and beating them on price
 Success depends on having the skills and capabilities to provide attractive performance and features at a lower cost than rivals
 A best-cost producer can often out-compete both a low-cost provider and a differentiator when
 Standardized features/attributes won’t meet the diverse needs of buyers
 Many buyers are price and value sensitive
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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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 Involve concentrated attention on a narrow piece of the total market
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Objective
Serve niche buyers better than rivals
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Keys to Success
 Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs
 Develop unique capabilities to serve needs of target buyer segment
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Approaches to Defining a Market Niche
 Geographic uniqueness
 Specialized requirements in using product/service
 Special product attributes appealing only to niche buyers
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 eBay
 Online auctions
 Porsche
 Sports cars
 Jiffy Lube International
 Maintenance for motor vehicles
 Pottery Barn Kids
 Children’s furniture and accessories
 Bandag
 Specialist in truck tire recapping
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Focus / Niche Strategies and Competitive Advantage
Approach 1
Achieve lower costs than rivals in serving the segment --
A low-cost strategy
Approach 2
Offer niche buyers something different from rivals --
A differentiation strategy
Which hat is unique?
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What Makes a Niche
Attractive for Focusing?
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 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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 Competitors 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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Strategic Alliances and Partnerships
Companies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-to-company dealings but fall short of merger or formal joint venture.
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Why Cooperative Strategies Are Integral to a Firm’s Competitiveness
 Two demanding competitive challenges are faced by many companies
 Global race to build a market presence in many different national markets
 Race to seize opportunities on the frontiers of advancing technology
 Collaborative arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities
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Competitive Value of
Strategic Alliances to the Partners
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Capacity of partners to defuse organizational frictions
Ability to collaborate effectively over time and work through challenges
 Technological and competitive surprises
 New market developments
 Changes in their own priorities and competitive circumstances
Competitive advantage emerges when a company acquires valuable capabilities via alliances it could not obtain on its own
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Why Are Strategic Alliances Formed?
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 To collaborate on technology development or new product development
 To fill gaps in technical or manufacturing expertise
 To acquire new competencies
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To improve supply chain efficiency
To gain economies of scale in production and/or marketing
 To acquire or improve market access via joint marketing agreements
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Potential Benefits of Alliances to Achieve
Global and Industry Leadership
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 Get into critical country markets quickly to accelerate process of building a global presence
 Gain inside knowledge about unfamiliar markets and cultures
 Access valuable skills and competencies concentrated in particular geographic locations
 Establish a beachead to participate in target industry
 Master new technologies and build new expertise faster than would be possible internally
 Open up expanded opportunities in target industry by combining firm’s capabilities with resources of partners
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Ability of an alliance to endure depends on
 How well partners work together
 Success of partners in responding and adapting to changing conditions
 Willingness of partners to renegotiate the bargain
Reasons for alliance failure
 Diverging objectives and priorities of partners
 Inability of partners to work well together
 Emergence of more attractive technological paths
 Marketplace rivalry between one or more allies
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 Merger - Combination and pooling of equals, with newly created firm often taking on a new name
 Acquisition - One firm, the acquirer, purchases and absorbs operations of another, the acquired
 Merger-acquisition
 Much-used strategic option
 Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunities
 Ownership allows for tightly integrated operations, creating more control and autonomy than alliances
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Objectives of Mergers and Acquisitions
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 To pave way for acquiring firm to gain more market share and create a more efficient operation
 To expand a firm’s geographic coverage
 To extend a firm’s business into new product categories or international markets
 To gain quick access to new technologies
 To invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities
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 Combining operations may result in
 Resistance from rank-and-file employees
 Hard-to-resolve conflicts in management styles and corporate cultures
 Tough problems of integration
 Greater-than-anticipated difficulties in
 Achieving expected cost-savings
 Sharing of expertise
 Achieving enhanced competitive capabilities
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 Extend 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
Internally
Performed
Activities,
Costs, &
Margins
Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners
Buyer/User
Value
Chains
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Strategic Advantages of Backward Integration
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 Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers
 Potential to reduce costs exists when
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Suppliers have sizable profit margins
Item supplied is a major cost component
 Resource requirements are easily met
 Can produce a differentiation-based competitive advantage when it results in a better quality part
 Reduces risk of depending on suppliers of crucial raw materials / parts / components
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Strategic Advantages of Forward Integration
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 To gain better access to end users and better market visibility
 To compensate for undependable distribution channels which undermine steady operations
 To offset the lack of a broad product line, a firm may sell directly to end users
 To bypass regular distribution channels in favor of direct sales and Internet retailing which may
 Lower distribution costs
 Produce a relative cost advantage over rivals
 Enable lower selling prices to end users
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Strategic Disadvantages of Vertical Integration
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 Boosts resource requirements
 Locks firm deeper into same industry
 Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety
 Poses all types of capacity-matching problems
 May require radically different skills / capabilities
 Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products
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Pros and Cons of
Integration vs. De-Integration
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 Whether vertical integration is a viable strategic option depends on its
 Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activities
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Impact on investment cost, flexibility, and administrative overhead
Contribution to enhancing a firm’s competitiveness
Many companies are finding that de-integrating value chain activities is a more flexible, economic strategic option!
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Concept
Involve withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities
Internally
Performed
Activities
Suppliers
Functional
Activities
Support
Services
Distributors or Retailers
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When Does Outsourcing
Make Strategic Sense?
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 Activity can be performed better or more cheaply by outside specialists
 Activity is not crucial to achieve a sustainable competitive advantage
 Risk exposure to changing technology and/or changing buyer preferences is reduced
 Operations are streamlined to
 Cut cycle time
 Speed decision-making
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 Reduce coordination costs
Firm can concentrate on “core” value chain activities that best suit its resource strengths
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Strategic Advantages of Outsourcing
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Improves firm’s ability to obtain high quality and/or cheaper components or services
Improves firm’s ability to innovate by interacting with “best-in-world” suppliers
Enhances firm’s flexibility should customer needs and market conditions suddenly shift
Increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently
Allows firm to concentrate its resources on performing those activities internally which it can perform better than outsiders
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 Farming out too many or the wrong activities, thus
 Hollowing out capabilities
 Losing touch with activities and expertise that determine overall long-term success
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Offensive Strategies Defensive Strategies
Used to build new or stronger market position and/or create competitive advantage
Used to protect competitive advantage
(rarely used to create advantage)
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1.
Initiatives to match or exceed competitor strengths
2.
Initiatives to capitalize on competitor weaknesses
3.
Simultaneous initiatives on many fronts
4.
End-run offensives
5.
Guerrilla offensives
6.
Preemptive strikes
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Objectives
 Whittle away at a rival’s competitive advantage
 Gain market share by out-matching strengths of weaker rivals
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
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Offer equally good product at a lower price
Develop low-cost edge , then use it to underprice rivals
Leapfrog
Add appealing
Run into next-generation technologies new features comparison ads
Construct new plant capacity strongholds in rival’s market
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Offer a wider product line
Develop better customer service capabilities
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Objective
Concentrate company strengths on exploiting rival’s weaknesses
Weaknesses to Attack
 Customers rival is least equipped to serve
 Rivals providing sub-par customer service
 Rivals with weaker marketing skills
 Geographic regions where rival is weak
 Segments rival is neglecting
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Launching Simultaneous
Offensives on Many Fronts
Objective
 Launch several major initiatives to
 Throw rivals off-balance
 Splinter their attention
 Force them to use substantial resources to defend their position
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A challenger with superior resources can overpower weaker rivals by out-competing them across-theboard long enough to become a market leader!
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Objectives
 Maneuver around strong competitors
 Capture unoccupied or less contested markets
 Change rules of competition in aggressor’s favor
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 Introduce new products that redefine market and terms of competition
 Build presence in geographic areas where rivals have little presence
 Create new segments by introducing products with different features to better meet buyer needs
 Introduce next-generation technologies to leapfrog rivals
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Approach
Use principles of surprise and hit-and-run to attack in locations and at times where conditions are most favorable to initiator
Appeal
Well-suited to small challengers with limited resources and market visibility
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 Make random, scattered raids on leaders’ customers
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Occasional low-balling on price
Intense bursts of promotional activity
Special campaigns to attract buyers from rivals plagued with a strike or delivery problems
 Challenge rivals encountering problems with quality or providing adequate technical support
 File legal actions charging antitrust violations, patent infringements, or unfair advertising
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Approach
Involves moving first to secure an advantageous position that rivals are foreclosed or discouraged from duplicating!
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 Secure exclusive/dominant access to best distributors
 Secure best geographic locations
 Tie up best or most sources of essential raw materials
 Obtain business of prestigious customers
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Expand capacity ahead of demand in hopes of discouraging rivals from following suit
Build an image in buyers’ minds that is unique or hard to copy
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 Four types of firms can be the target of a fresh offensive
 Vulnerable market leaders
 Runner-up firms with weaknesses where challenger is strong
 Struggling rivals on verge of going under
 Small local or regional firms with limited capabilities
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Offensive Strategy as a Basis to
Achieve Competitive Advantage
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 Strategic offensives offering strongest basis for competitive advantage usually entail
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An important core competence
A unique competitive capability
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Much-improved performance features
An innovative new product
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Technological superiority
A cost advantage in manufacturing or distribution
 Some type of differentiation advantage
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Objectives
 Lessen risk of being attacked
 Blunt impact of any attack that occurs
 Influence challengers to aim attacks at other rivals
Approaches
 Block avenues open to challengers
 Signal challengers vigorous retaliation is likely
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 Participate in alternative technologies
 Introduce new features, add new models, or broaden product line to close gaps rivals may pursue
 Maintain economy-priced models
 Increase warranty coverage
 Offer free training and support services
 Reduce delivery times for spare parts
 Make early announcements about new products or price changes
 Challenge quality or safety of rivals’ products using legal tactics
 Sign exclusive agreements with distributors
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Signal Challengers Retaliation Is Likely
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 Publicly announce management’s strong commitment to maintain present market share
 Publicly commit firm to policy of matching rivals’ terms or prices
 Maintain war chest of cash reserves
 Make occasional counterresponse to moves of weaker rivals
 Give out advance information about new products, technological breakthroughs, and other moves
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Strategies: Using the Internet as a Distribution Channel
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 Challenge -- How firms should use Internet in staking their position in marketplace
 Approaches to using the Internet
 Solely as a vehicle to disseminate product information
 Minor distribution channel
 One of several important distribution channels
 Primary distribution channel
 Exclusive distribution channel
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Using the Internet to
Disseminate Product Information
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 Approach -- Website used to provide product information of manufacturers or wholesalers
 Relies on click-throughs to websites of dealers for sales transactions
 Informs end-users of location of retail stores
 Issues -- Pursuing online sales may
 Signal weak strategic commitment to dealers
 Signal willingness to cannibalize dealers’ sales
 Prompt dealers to aggressively market rivals’ brands
 Avoids channel conflict with dealers -- Important where strong support of dealer networks is essential
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Using the Internet as a
Minor Distribution Channel
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 Approach -- Use online sales to
 Achieve incremental sales
 Gain online sales experience
 Conduct marketing research
 Learn more about buyer tastes and preferences
 Test reactions to new products
 Create added market buzz about products
 Unlikely to provoke much outcry from dealers
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Brick-and-Click Strategies: An
Appealing Middle Ground Strategy
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 Approach
 Sell directly to consumers and
 Use traditional wholesale/retail channels
 Reasons to pursue a brick-and-click strategy
 Manufacturer’s profit margin from online sales is bigger than that from sales through traditional channels
 Encouraging buyers to visit a firm’s website educates them to the ease and convenience of purchasing online
 Selling directly to end users allows a manufacturer to make greater use of build-to-order manufacturing and assembly
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 Approach -- Use Internet as the exclusive channel
 of all buyer-seller contact
Success depends on a firm’s ability to incorporate following features
 Capability to deliver unique value to buyers
 Deliberate efforts to engineer a value chain that enables differentiation, lower costs, or better value for the money
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
Innovative, fresh, and entertaining website
Clear focus on a limited number of competencies and a relatively specialized number of value chain activities
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Innovative marketing techniques
Minimal reliance on ancillary revenues
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Choosing Appropriate
Functional-Area Strategies
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Involves strategic choices about how functional areas are managed to support competitive strategy and additional strategic moves
Functional strategies include
 Research and development
 Production
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Human resources
Sales and marketing
Finance
Tailoring functional-area strategies to support key business-level strategies is critical !
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Linking Strategy to Company Values and Ethics Standards
76
 Tightly linking a firm’s strategy to high ethical standards begins with


Managers with strong character and
A set of corporate values and ethical standards that genuinely govern a firm’s strategy and business conduct
 Responsibility of top management
 See that values statements and ethics codes are observed in devising strategies and
 Become a way of life for all employees
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 When to make a strategic move is often as crucial as what move to make
 First-mover advantages arise when
 Pioneering helps build firm’s image and reputation
 Early commitments to new technologies, new-style components, and distribution channels can produce cost advantage
 Loyalty of first time buyers is high
 Moving first can be a preemptive strike
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 Moving early can be a disadvantage (or fail to produce an advantage) when
 Costs of pioneering are sizable and loyalty of first time buyers is weak
 Innovator’s products are primitive, not living up to buyer expectations
 Rapid technological change allows followers to leapfrog pioneers
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Principle 1
Being a first-mover holds potential for competitive advantage in some cases but not in others
Principle 2
Being a fast follower can sometimes yield as good a result as being a first mover
Principle 3
Being a late-mover may or may not be fatal -it varies with the situation
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