Strategy and Competitive
Advantage
Five Generic Strategies
Low-cost provider
Broad differentiation
Best-cost provider
Low-cost niche
Differentiation niche
Low-cost Provider Strategy
Achieve a cost advantage through:
Manage internal costs better than rivals
Eliminate cost-producing activities
Low-cost Provider Strategy:
Controlling the Cost Drivers
Economies or diseconomies of scale
Learning and experience curve effects
Key resources inputs
Union vs. nonunion labor
Bargaining power and suppliers
Locational variables
Supply chain management expertise
Low-cost Provider Strategy:
Controlling the Cost Drivers
Link with other activities
Share opportunities with other business
units
Vertical integration vs. outsourcing
Timing and first-mover advantage
Capacity utilization
Low-cost Provider Strategy:
Controlling the Cost Drivers
Managerial decisions:
Services to buyers
Product features
Wages and benefits
Distribution channels
Delivery times
Incentive compensation
Specifications to suppliers
Low-cost Provider Strategy:
Revamping the Value Chain
Shift to e-business technologies
Direct to end-user sales and marketing
Simplify product design
Get rid of the “extras”
Reengineer processes
Cheaper
Simpler
More flexible
Low-cost Provider Strategy:
Revamping the Value Chain
Eliminate high-cost materials and
components
Relocate facilities
Focus on limited products and services
Consolidate work steps
Eliminate low value-added activities
Low-cost Provider Strategy:
When the Strategy Works Best
Vigorous price competition
Standardized or commodity product
Differentiation has little value to buyers
Buyers use the product in the same way
Low buyer switching costs
Buyers have bargaining power
New entrants slash prices
Low-cost Provider Strategy:
Risks of Strategy
Cut prices more than cost savings
Advantage may not be sustainable
Fixation on cost savings
Technological breakthroughs
Differentiation Strategy
Successful implementation allows
company to:
Command a premium price
Improve sales and market share
Develop brand loyalty
Differentiation Strategy:
Where to Create the “Difference”
Purchasing and procurement
Product design
Process design
Quality control
Distribution channels
Marketing, sales and customer service
Differentiation Strategy:
When the Strategy Works Best
When there are many ways to
differentiate and buyers perceive value
Buyer needs and uses are diverse
Few rivals follow similar approach
Frequent technological change and
innovation
Differentiation Strategy:
Risks of Strategy
Value not perceived by buyer because:
Focus on incorrect features, attributes, etc.
Overdifferentiating
Charging too high price
Failing to signal value
Failing to identify what buyers consider
value
Best-cost Provider Strategy
Give customers more value for the
money
Targets value-conscious customers
Lower costs are a competitive
advantage
Risk of getting crushed between rival
low-cost and differentiation strategies
Market Niche Strategy:
When the Strategy Works Best
Target is big enough to be profitable
Industry leaders do not need presence
Costly for larger rivals to enter
Industry is multi-segmented
Few rivals in target
Have capabilities and resources to
compete effectively
Market Niche Strategy:
Risks of Strategy
Rivals learn to compete effectively
Target preferences and needs shift
toward the mainstream
Target becomes attractive to
competitors
Strategic Alliances:
Advantages
Quick access to critical country markets
Gain knowledge of markets and culture
from partners
Gain access to valuable skills and
competencies in new markets
Develop synergies
Enhance organizational capabilities
Strategic Alliances:
Disadvantages
Become dependent on partners for
essential skills or expertise
Partners guard most valuable resources
Mergers and Acquisitions
Provides more permanent ties than an
alliance
Dramatic strengthening of:
Market position
Ability to exploit opportunities
Competitive advantage
May achieve cost savings
Vertical Integration:
Advantages
Reduces costs
Adds to technological or competitive
strengths
Helps differentiate products
Vertical Integration:
Disadvantages
High capital requirements
Reduces flexibility in accommodating
demand
Need to balance capacity at each stage
Reduces manufacturing flexibility
Different skills are needed to manage
different businesses
Make or Buy: Reasons for Making
1. Maintain core
competencies and
protect personnel from
layoff
2. Lower production cost
3. Unsuitable suppliers
4. Assure adequate
supply
5. Utilize surplus labor
and make a marginal
contribution
6. Obtain desired quality
7. Remove supplier
collusion
8. Obtain a unique item
that would entail a
prohibitive
commitment from the
supplier
9. Protect proprietary
design or quality
10. Increase or maintain
size of company
Make or Buy: Reasons for Buying
1. Frees management to
deal with its primary
business
2. Lower acquisition cost
3. Preserve supplier
commitment
4. Obtain technical or
management ability
5. Inadequate capacity
6. Reduce inventory costs
7. Ensure flexibility and
alternate source of
supply
8. Inadequate managerial
or technical resources
9. Reciprocity
10. Item is protected by
patent or trade secret
Outsourcing:
When to Unbundle
Supplier has lower cost and/or higher quality
Activities are not crucial to sustaining a
competitive advantage
Reduces risk of exposure to changing
environment
Streamlines operations
Increases flexibility
Reduces costs
Reduces time
Allows company to focus on core businesses
Outsourcing:
Advantages
Higher quality and/or lower cost
Improves ability to innovate
Enhances strategic flexibility
Access to diverse expertise
Firm can concentrate on core
competencies
Strengthen supplier commitment
Offensive Strategies
Meet or exceed competitor strengths
Capitalize on competitor weaknesses
Simultaneous initiatives
End-run offensives
Guerilla offensives
Preemptive strikes
Offensive Strategies:
Whom to Attack
Market leaders
Runner-up firms
Struggling firms
Small regional and local firms
Defensive Strategies
Build obstacles to challengers
Signal that retaliation is likely
Public announcements
Match competitor offerings
Occasional counterresponse
Maintain a war chest
First-mover Strategies
Advantages
Build image and reputation
New technology reduces overall cost
Build customer loyalty
Preemptive strike
Long-term profits are enhanced
Disadvantages
Pioneering is costly
Products may be easily reengineered by followers
Competitors may be able to leapfrog