The Five Generic Competitive Strategies Chapter 5 The Five Generic Competitive Strategies

Competitive Strategy Deals exclusively with management’s game plan for competing successfully and securing a competitive advantage over rivals Specific efforts to give customers superior value A good product at a lower price A superior product worth paying more for An attractive mix of price, features, quality, service, and other appealing attributes

Competitive Strategies and Industry Positioning

Figure 5.1: The Five Generic Competitive Strategies Type of Advantage Sought Lower Cost Differentiation Overall Low-Cost Provider Strategy Broad Differentiation Strategy Broad Range of Buyers Stuck in the middle Market Target Focused Low-Cost Strategy Focused Differentiation Strategy Narrow Buyer Segment or Niche

Perils of “Stuck in the Middle” Strategy Compromise strategies end up with a middle-of-the-pack industry rankings and provide for average performance 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

Low Cost Provider Strategies Powerful competitive approach with price-sensitive buyers Have lower costs than rivals—but not necessarily the absolutely lowest possible cost Must include features and services that buyers consider essential Must not be viewed by consumers as offering little value even if priced lower than competing products. 6

Translating a Low Cost Strategy Into Attractive Profit Performance Option 1: Use lower-cost edge to under-price competitors and increase market share 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

Approaches to Achieving Low Costs Perform essential value chain activities more cost-effectively than rivals 2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities altogether

When a Low Cost Strategy Works Best Price competition is vigorous Product is standardized There are few ways to achieve differentiation 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

Hazards of a Low-Cost Strategy Cutting price by an amount greater than size of cost advantage Low cost methods are easily imitated Becoming too fixated on reducing costs and ignoring Buyer interest in additional features Declining buyer sensitivity to price Technological breakthroughs open up cost reductions for rivals

Differentiation Strategies Powerful competitive approach whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product or service

Differentiation Strategies Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals Not spending more to achieve differentiation than the price premium that customers are willing to pay for all the differentiating extras

Benefits of Successful Differentiation Successfully executed differentiation strategies allow a company to: Command a premium price, and/or Increase unit sales, and/or Gain buyer loyalty to its brand

Types of Differentiation Themes Unique taste – Dr. Pepper Multiple features – Microsoft Windows and Office Wide selection – Amazon.com Superior service – Ritz-Carlton Spare parts availability – Caterpillar Engineering design and performance – BMW Prestige – Rolex Product reliability – Johnson & Johnson Quality manufacture – Toyota Top-of-line image – Ralph Lauren, Starbucks, Chanel

Creating Value for Customers through Differentiation Incorporate product features/attributes that lower buyer’s overall costs of using product Incorporate features/attributes that raise the performance a buyer gets out of the product Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways Exploit competencies and competitive capabilities that rivals don’t have or can’t match

Where to Find Opportunities to Differentiate Supply chain activities Product R&D and product design activities Production R&D and technology-related activities Manufacturing activities Distribution-related activities Marketing, sales, and customer service activities

Perceived Value and Signaling The price premium commanded by a differentiation strategy reflects actual value delivered and value perceived by the buyer. Buyers seldom pay for value that is not perceived

Perceived Value and Signaling Important to signal value when: Nature of differentiation is subjective When buyers are making first-time purchases When repurchase is infrequent When buyers are unsophisticated

Market Conditions Favoring a Differentiation Strategy 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

Hazards of a Differentiation Strategy Buyers see little value in a product’s unique attributes Appealing product features are easily copied by rivals Overspending on efforts to differentiate

Hazards of a Differentiation Strategy Overdifferentiating such that product features exceed buyers’ needs Charging a price premium buyers perceive is too high Failing to open up meaningful gaps in product or service attributes

Focused Low-Cost Strategy Reflects a concentration on a narrow piece of the total market - defined by geographic uniqueness or special product attributes Avenues to achieving cost advantage are the same as for low- cost leadership—outmanage rivals in keeping costs low and 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, well-defined group of buyers

Market Conditions Making a Focused Strategy Viable The target niche is big enough to be profitable and offers good growth potential Industry leaders have chosen not to compete in the niche It is costly or difficult for multisegment competitors to meet the specialized needs of niche buyers Industry has many niches and segments Few rivals are attempting to specialize in the niche

Hazards of a Focused Strategy 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 Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

Successful Strategies Must Be Well-Matched to Resources and Capabilities Low-Cost Providers Must have the resources and capabilities to keep its costs below those of its 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

Narrow Segment Focusers Successful Strategies Must Be Well-Matched to Resources and Capabilities Narrow Segment Focusers Must have the capability to do an outstanding job of satisfying the needs and expectations of niche buyers