MODULE 5
STRATEGY AND
COMPETITIVE
ADVANTAGE
MODULE OUTLINE
Five Generic Competitive Strategies
Low-Cost Leadership Strategy
Broad Differentiation Strategies
Best-Cost Provider Strategies
Focus Strategies Based on Low Cost
Focus Strategies Based on Differentiation
Offensive Strategies
Defensive Strategies
Vertical Integration Strategies
First-Mover Advantages & Disadvantages
STRATEGY &
COMPETITIVE ADVANTAGE
COMPETITIVE ADVANTAGE exists when firm
has an edge in
Defending against competitive forces &
securing
customer
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
COMPETITIVE STRATEGY
PRINCCIPLE
Successful companies invest
Aggressively in creating sustainable
Competitive advantage, for it is their
Single most dependable contributor
To above average ROI!
WAYS TO WIN
A COMPETITIVE ADVANTAGE
Become the low-cost producer
Make the best-made product
Provide customer more value for the money
Save customer money
Provide superior customer service
Enhance performance buyer gets
Provide more convenient locations
Make a more reliable & durable product
COMPETITIVE STRATEGY:
DEFINITION
COMPETITIVE STRATEGY consists of moves to
Attract customers
Withstand competitive pressures
Strengthen firm’s market position
OBJECTIVES
Earn a COMPETITIVE ADVANTAGE
Cultivate clientele LOYAL CUSTOMERS
COMPETITIVE STRATEGY, narrower in scope than business
strategy, focuses on management’s plan to compete
successfully
THE FIVE GENERIC COMPETITIVE
STRATEGIES
Type of Advantage Sought
Differentiation
Lower Cost
Broad Range
Of Buyers
Broad
Overall Low-Cost
Differentiation
Leadership
Strategy Best-Cost Strategy
Provider
Strategy
Buyer
Segment
Or Niche
Focused
Low-Cost
Strategy
Focused
Differentiation
Strategy
MARKET TYPE
THE FIVE GENERIC
COMPETITIVE STRATEGIES
Striving to be the overall low-cost provider in
industry
Striving to build customer loyalty by
differentiating one’s product offerings
from rival’s products
Striving to give customers more value for the
money by combining an emphasis on low cost
with an emphasis on upscale differentiation
THE FIVE GENERIC
COMPETITIVE STRATEGIES
Concentrating on a narrow buyer segment,
out competing rivals on basis of lower cost
Offering niche members a products or service
customized to needs
LOW-COST LEADERSHIP
Objective
Open up a sustainable cost advantage over rivals,
using lower-cost edge as basis to
Under price rivals & reap market share gains
or
Earn higher profit margin selling at going price
LOW-COSY LEADERSHIP
Keys to Success
Make achievement of low-cost relative to rivals the THEME
Of firm’s business strategy
Find ways to drive cists out of business year after-year
Low –Cost leadership means low
OVERALL COSTS, Not just low
manufacturing or production costs!
OPENING UP A COST
ADVANTAGE OVER RIVALS
Do better job of booting efficiency &
controlling costs along value chain by
out-managing rivals regarding both
structural & exceptional cost drivers
Revamp firm’s value chain to bypass some
cost-producing activities altogether
A combination of approaches 1 & 2
OPENING UP A COST
ADVANTAGE OVER RIVALS
Successful low-cost producers
aggressively pursue cost savings
throughout the value chain.
NO AREA IS OVERLOOKED !
NO COST-SAVING OPPORTUNITY IS
IGNORES!
CONTROLLING STRUCTURAL
COST DRIVERS
Capture scales economies & avoid scales
diseconomies.
Capture learning & experience curve effects
consider linkages with other activities in chain
Find sharing opportunities with other
business units in enterprise
Compare benefits of vertical integration vs.
outsourcing
Take advantage of vocational variables
CONTROLLING EXECUTIONAL
COST DRIVERS
Capitalize on timing considerations
associated with-mover advantages &
disadvantages
Try to increase capacity utilization
Consider cost impact of strategic
choices & operating decisions
REVAMPING THE VALUE CHAIN
Simplify product design
Offer basic, no-frills product/service
Reengineer core business processes
Shift to a simpler, less capita-intensive,
or more streamlines technological process
Use direct-to-end user sales & marketing
approaches.
Relocate facilities closer to suppliers or customers
Pursue more vertical integration relative to rivals
Focus on limited product/service to meet special
needs of target segment
CHARATERISTICS OF A
LOW-COST PROVIDER
Cost conscious organizational culture Spartan
facilities
Limited sparks & frills for executives
Intolerance of waste
Intensive screening of budget requests
Employee participation in cost control efforts
Low-Cost producers champion
FRUGALITY while aggressively
INVESTING in cost-saving improvements!
WHAT MANAGERS HAVE TO DO TO
ACHIEVE LOW-COST LEADERSHIP
Scrutinize each-creating activity, identifying cost
drivers
Use knowledge about cost drivers to manage
Costs of each activity down further ear after year
Consider fundamentally reengineering how activities
are performed & coordinated
Be entrepreneurial creative in cutting some
Activities out of value chain system
COMPETITIVE STRENGTHS OF A
LOW-COST PROVIDER STRATEGY
Providers defenses against competitive forces
RIVAL COMPETITORS- Better positioned to compete
offensively on basis of price
BUYERS-Better protected from negotiating power of large
customers
SUPPLIERS- More insulted than competitors from powerful
suppliers
POTENTIAL ENTRANTS- Low-cost provider’s pricing power is
a significant entry barrier
SUBSTITUTES- Better positioned to use low price as a
Defense against substitutes
WHEN A LOW-COST PROVIDER
STRATEGY WORKS BEST
Price competition among rivals is dominant
competitive force
Industry’s product is a commodity-type
item readily available
Few ways to achieve product differentiation
that have value to buyers
Most buyers have similar needs/requirements
Buyers incur low switching costs changing
sellers
Buyers are large & have signification
bargaining power
DRAWBACKS TO A LOW-COST
PROVIDER STRATEGY
Technical breakthroughs up cost reductions
for rivals, negating a low-cost provider’s
efficiency advantages
Rivals find it comparatively easy or
inexpensive to imitate leader’s low cost
methods
Low- cost provider becomes so fixated on cost
reduction it fails to respond to
Increased buyer desires for added quality
or service features
New developments in related products
Declining buyer sensitivity to price
DIFFERENTIATION STRATEGIES
Objective
Incorporate differentiating features to cause buyers to prefer
Firm’s product/service over rivals’ brand
Key to Success
Find ways to differentiate to CREATE VALUE for buyers
that are NOT EASILY COPIED by rivals
Not spending more to differentiate than price premium to be
Charged.
DIFFERENTIATION STRATEGIES
Successful differentiation allows firm to
Command a premium price
and/or increase unit sales
and/or build brand loyalty
APPROACHES TO DIFFERENTIATION
Different taste – Dr. Pepper
Superior service – Federal Express
Spare parts availability – caterpillar
More for your money-McDonald’s, Wal-Mart
Engineering design & performance- Mercedes
Prestige-Rolex
Quality-Honda automobiles
Top-of-the-line image- Ralph Lauren
Technological leadership-3M corporation
Unconditional satisfaction-L.L. Bean
Where to look for
Differentiation Opportunities
Purchasing & procurement activities
Product-oriented R&D activities
Production process-oriented R&D activities
Outbound logistics & distribution activities
Marketing, sales, & service activities
ACHIEVING A DIFFERENTIATION
BASED COMPETITIVE ADVANTAGE
Option 1
Incorporate product attributes & user features that
lower buyer’s costs in using product
Option 2
Incorporate features that raise performance buyer gets out
Of product
Option 3
Incorporate features that raise performance buyer satisfaction
In non-economic/intangible ways.
SIGNALS OF VALUE
Buyers often judge value on basis of SIGNALS
Price where it connotes quality
How “ well known “ brand is said to be whether
seller has “prestige” customers
SIGNALS OF VALUE may be as important as
ACTUAL VALUE when
Differences among competing brands are
subjective
Buyers are making first-time purchases
Repurchase is infrequent
Buyers are unsophisticated
COMPETITIVE STRENGTHS OF A
DIFFERENTIATION STRATEGY
Provides defenses against competitive
forces RIVAL COMPETITORS- Buyers
develop loyalty to brand they like best
BUYERS-Mitigates bargaining power of
large buyers since other products are less
attractive SUPPLIERS – Seller may be in
better position to POTENTIAL ENTRANTSBuyer loyalty acts as entry barrier
SUBSTITUTES- Better positioned to fend off
threats of substitutes based on customers’
attachment to differentiating attributes
WHAT KIND OF
DIFFERENTIATION TO PURSUE
Most appealing types of differentiation strategies
Those LEAST subject to imitation
Most likely to product an attractive, longer-lasting
Edge when it’s based on :
Technical superiority
Quality
Giving customers more support services
Giving customers more value for money
Core competencies
WHEN A DIFFERENTIATION
STRATEGY WORKS BESTS
There are many ways to differentiate
product/service & differences are perceived by
buyer to have value
Buyer needs & uses of item are diverse
Not many rivals are following a similar
type of differentiation approach
Differentiation strategies are most powerful when
buyer needs & preferences are too diverse
To be satisfied by a standardized product!
PITFALLS OF A
DIFFERENTIATION STRATEGY
Trying to differentiate on a feature buyers do
not perceive as lowering their
cost or enhancing their well-being
Over-differentiating such that product
features exceed buyer’s needs
Charging a price premium that buyers
perceive is too high
Ignoring need to signal value, depending only
on “ real” bases of differentiation
Not identifying what buyers will consider as
value
COMPETITIVE STRATEGY PRINCIPLE
A low-cost producer strategy can defeat a
Differentiation strategy when buyers are
Satisfied with a standard product and do
not See extra attribution as worth paying
Additional money to obtain!
BEST-COST PRODUCER STRATEGY
Combines 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
Create superior value by MEETING EXCEEDING buyer expectation
On product attributes & BEATING their price expectations
Be the low-cost producer of a product with GOOD-TO-EXCELLENT
Product attributes, then use cost advantage to UNDERPRICE
Comparable brands
BEST-COST PRODUCER STRATEGY
Keys to Success
Matching close rivals on key attributes & beating them on cost
Expertise in incorporating upscale product attributes at a lower
Than rivals
Ability to contain costs by providing buyers a BETTER product
POWER OF BEST-COST
PRODUCER STRATEGY
Competitive advantage comes from MATCHING
close rivals on key product attributes & BEATING
them on price
Most successful best-cost producers have skills to
SIMUL TANEOUSLY manage costs down & product
caliber upward
Best-cost producer can often out-compete both a
low-cost provider & a differentiator where
Buyer diversity makes product
differentiation the norm and
Many buyers are price & value
sensitive
COMPETITIVE STRATEGY
PRINCIPLE
The most powerful competitive approach a company
Can pursue is striving relentlessly to become a lower
and lower cost producer of a higher and higher caliber
product, with the eventual intent of becoming the
Industry’s absolute lowest cost producer and,
Simultaneously, the producer of the industry’s
Overall best product!
FOCUS/NICHE STRATEGIES
Objectives
Do a better job of serving buyers in target market niche than
rivals
Keys to Success
Choose a market niche where buyers have distinctive preferences,
Special requirements, or unique needs
Develop a unique ability to serve needs of target buyer segment
APPROACHES TO FOCUSING
Approach # 1
Achieve LOWER COSTS than rivals in serving the segmentA low-cost strategy
Approach # 2
Offer niche buyers SOMETHING DIFFERENT from rivals –
A differentiation strategy
EXAMPLES: FOCUS STRATEGIES
Rolls Royce
Luxury automobiles
Apple Computer
Desktop publishing
Fort Howard Paper
Paper products for industrial/commercial firms
Commuter airlines
Link major airports with small population centers
Motel 6
Caters to price-conscious travelers
WHAT MAKE A SEGMENT
ATTRACTIVE FOR FOCUSING?
Big enough to be profitable
Good growth potential
Not crucial to success of major competitors
Focusing firm has resources to effectively serve
segment
Focusing can defend itself against
Challengers via customer goodwill & its superior
ability to serve buyers in segment
POWER OF FOCUS STRATEGY
Competitive power is greatest when
industry
has fast-growing segments
Big enough to be profitable BUT
Small enough to be of secondary
interest to large rivals
No other rivals are concentrating on segment
Buyers in segment require
Specialized expertise OR
Customized product attributes
COMPETITIVE STRENGTHS
OF A FOCUS STRATEGY
Provides defenses against competitive
forces
RIVAL COMPETITORS- Rivals do not have
ability to meet specialized needs of target
clientele
POTENTIAL Entrants- Focuser’s core
competence can act as a barrier
SUBSTITUTES-Focuser’s core competence
provides obstacle to sellers of substitutes
BUYERS-Focuser’s unique ability to meet
power of largest niche buyers
WHEN DOES A FOCUS STRATEGY
WORK BEST?
It is costly or difficult for multi-segment rivals
to serve specialized needs of target niche
No other rivals are concentrating on same
segment
Firm’s resources do not permit it to go after a
wider portion of market
Industry has many different segments,
creating more focusing opportunities
RISKS OF A FOCUS STRATEGY
Broad –line competitors may find effective
ways to match focused firm in serving target
market
Niche buyer’s preferences may move
towards product attributes desired by market
as a whole
Segment may become so appealing it
becomes crowded with aggressive rivals,
causing segment profiles to be split many
ways
OFFENSIVE & DEFENSIVE
STRATEGIES
Nearly always results in successful
achievement of competitive advantage
Can protect competitive advantage, but
RARELY are the basis for achieving
competitive advantage
The Building and Eroding of
Competitive Advantage
Buildup Period
Strategic
Move
Produce
Competitive
Advantage
Benefit Period
Size of
Competitive
Advantage
Achieved
TIME
Size of competitive Advantage
Erosion Period
Moves by
Rivals
Reduce
Competitive
Advantage
BUILDING & ERODING OF
COMPETITIVE ADVANTAGE
Offensive strategic moves succeed in producing
a competitive advantage –
Ideally, buildup period is short
Length is governed by how long it takes rivals
to respond effectively enough to close gap
Characterized by launch of counter offensives of
rivals to attack advantage & whittle it away
PRINCIPLE
Any competitive advantage
currently held Will eventually be
eroded by the actions of
competent, resourceful
competitors!
OPTION FOR MOUNTING
STRATEGY OFFENSIVE
Initiatives to match or exceed rivals’
Strengths
Initiatives to capitalize on rivals’
weaknesses
Simultaneous initiatives on many fronts
End-run offensives
Guerrilla warfare tactics
Preemptive strikes
Attacking competitors
strengths
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 aggressor has a
COST ADVANTAGE or advantage of GREATER
FINANCIAL STRENGT!
ATTACKING COMPETITOR
STRENGHS
Under price rivals
Boost advertising
Introduce new features to appeal to
rivals’ customers.
Attack with equally good product & lower
price
Develop low-cost edge, use it to under
price rivals.
ATTACKING COMPETOTOR
WEAKNESSES
Concentrate one’s competitive strengths &
resources directly against rivals’ weaknesses
Concentrate on geographic regions where
has weak market share
Go after more performance-conscious
customers of rivals who lag behind challenger
Attack rivals with weaker advertising & brand
recognition.
Competitive Strategy Principle
Challenging rivals where they are most vulnerable
is more likely to succeed than challenging them
Where they are strongest ESPECIALLY when
Challenger possesses competitive advantage in
Areas where rivals are weak!
LAUNCHING OFFENSIVE
ON MANY FRONTS
Launch several major initiatives to
Throw rival off-balance,
Splinter its attention in many
directions, and force it to use
substantial resources to defend its
position
A challenger with superior resources can
Overpower a weaker rival by outspending it
across-the-board long enough to “ buy its
way into the market” .
END-RUN OFFENSIVES
DODGE head-to-head confrontations that
escalate competitive intensity and RISK
cutthroat competition– Attempt to
MANEUVER AROUND competition.
Gain first-mover advantage in a new arena
Force competitors into playing catch up
change rules of competition in aggressor’s
favor.
END-RUN OFFENSIVES:
APPROACHES
Move aggressively into new geographic markets
Where rivals have no market presence
Introduce products with different attributes &
Features to better meet buyer needs
Introduce next-generation technologies &
leapfrog rivals
Come up with more support services for
customers
GUERRILLA OFFENSES
Use principles of surprise & hit-and-run
To attack in locations & at times where
conditions are most favorable to
initiator
Well-suited to small challengers with
limited resources
GUERRILLA OFFENES:
OPTIONS
Focus on narrow target weakly defended by
rivals challenge rivals where they are
overextended & when they are encountering
problems
Make random scattered raids on leaders
with tactics such as
Occasional low-balling on price
Intense bursts of promotional activity
Legal actions charging antitrust violations,
patent infringements, & unfair advertising
PREEMPTIVE STRIKES
Involves moving first to secure an
advantageous position that rivals are
foreclosed or discouraged from
duplicating !
PREEMPTIVE STRIKES:
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
CHOOSING WHOM TO
ATTACK
Four types of firms at which to aim an offensive
Market leaders
Runner-up firms
Struggling rivals on verge of going under
Small local/regional firms not doing the job
OFFENSIVE STRATEGY &
COMPETITIVE ADVANTAGE
Competitive advantage areas offering strongest
basis for a STRATEGIC OFFENSIVE
Develop lower-cost product 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
OFFENSIVE STRATEGY &
COMPETITIVE ADVANTAGE
Chances for strategic success are
improved when offensive is tied to
what firm best:
Key skill
Strong function competence
DEFENSIVE STRATEGY
Lesson risk of being attacked
Blunt impact of any attack that occurs
Influence challengers to aim attacks at
other rivals
Strengthen firm’s present position
Help sustain any competitive advantage
held
DEFENSIVE STRATEGIES:
APPROACHES
Block avenues challengers can take in
mounting offensive attacks
Make it clear any challenge will be met
with strong counterattack.
DEFENSIVE STRATEGIES:
APPROACH#1
Broaden product line to fill gaps rivals may go after
Keep prices low on models that match rivals
Sign exclusive agreements distributors
Offer free training buyers’ personnel
Give better credit terms to buyers
Reduce delivery times for spare parts
Increase warranty overages
Patent alternative technologies
Sign exclusive contracts with best suppliers
Protect proprietary know-how
DEFENSIVE STRATEGIES :
APPROACH #2
Publicly announce management’s strong
Commitment to maintain present market share
Publicly announce plans to construct new
production capacity to meet forecasted demand
Give out advance information about new products,
technological breakthroughs, & other moves
Publicly commit firm to policy of matching & terms
offered by rivals
Maintain war chest of cash reserves
Make occasional counter-responses to rivals’ moves
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
Moves to vertically integrate can aim becoming
FULLY INTEGRATED
PARTIALLY INTEGRATED
COMPETITIVE STRATEGY PRINCIPLE
A vertical integration strategy has appeal ONLY if it
Significantly strengthens a firm’s competitive
Position!
APPEAL OF
BACKWARD INTEGRATION
Generates cost savings only if volume
Needed is big enough to capture efficiencies of
suppliers cost saving potential is strongest when
Suppliers have sizable profit margins
Item being supplied is a major cost
component
Necessary technical skills are easily mastered
A differentiation-based competitive advantage
arises when firm ends up with a better quality
part spares firm uncertainty of depending on
suppliers of crucial raw materials
APPEAL OF FORWARD
INTEGRATION
Advantageous for firm to set up its own wholesale retail
distribution network if
Undependable distribution channels
Undermine into distribution & retailing may be cheaper
than going through independent distributors
May help achieve greater product differentiation, allowing
escape from price-oriented competition for manufacturer,
may provide better access to ultimate consumer.
STRATEGIC DISADVANTAGES
OF VERTICAL INTEGRATION
Boosts capital requirements
Results accommodating buyer demands
for product variety
Extends firm’s scope of activity, locking it
deeper into industry
Poses problems of balancing capacity at
each stage of value chain
Requires radically different skills & capabilities
can reduce firm’s manufacturing flexibility,
Lengthening design time & ability to introduce
new products
UNBUNDLING & OUTSOURCING
STRSTEGIES
Concept
Involves withdrawing from certain stages in value chain
System and relying on outside vendors to perform needed
Activities and services
ADVANTAGES OF OUTSOURCING
STRATEGIES
Activity can be performed better or more
cheaply by outside specialists
Activity is not crucial to achieving competitive
advantage
Reduces firm’s risk exposure to changing
technology and/or changing buyer preference
streamlines firm operations in ways to
cut cycle time
Speed decision-making
Reduce coordination costs
Allows firm to concentrate on its core business
PROS & CONS OF
VERTICAL INTEGRATION
Use of a vertical integration strategy
depends on if it can enhance performance of
strategy critical activities to EITHER
Lower costs OR
Increase differentiation impact on
Investment costs
Flexibility & response times
Administrative overhead of coordination
if a competitive advantage can be created
FIRST-MOVER ADVANTAGES
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 &
reputation
Early commitments to raw material suppliers,
new technologies, & distribution channels can
produce cost advantage
Loyalty of first time buyers is high
Moving first can be a preemptive strike
FIRST-MOVER DISADVANTAGES
Arise WHEN
Costs of pioneering are sizable & loyalty of first
time buyers is weak
Rapid technological change allows followers to
Leapfrog pioneers
Skills & know-how of pioneers are easily
imitated by latecomers to crack market
FIRST- MOVER DISADVANTAGES
Arise WHEN
Costs of pioneering are sizable & loyalty
of first time buyers is weak
Rapid technological change allows
followers to leapfrog & know-how of pioneers
are easily imitated by late movers
It is easy for latecomers to crack market