1-1 Chapter 3 Competitive Strategy and Advantage in the Marketplace McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

3-2 Competitive Strategy  Deals exclusively with a company’s business plans for securing a competitive advantage in the marketplace 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

3-3 Competitive Strategies and Industry Positioning

3-4 Competitive Advantages of a Low Cost Strategy  Advantage Option 1: Use lower-cost edge to under-price competitors and increase market share  Advantage 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

3-5 Approaches to Achieving Low Costs 1.Do a better job than rivals of controlling the costs of performing critical activities 2.Eliminate cost-producing activities that add little value from the buyer’s perspective

3-6 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

3-7 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

3-8 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

3-9 Types of Differentiation Themes  Unique taste – Dr. Pepper  Multiple features – Microsoft Windows and Office  Wide selection – Amazon.comAmazon.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

3-10 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

3-11 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

3-12 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

3-13 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

3-14 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

3-15 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

3-16 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

3-17 Hazards of a Differentiation Strategy  Over differentiating 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

3-18 When is a Niche an Attractive Market  It is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers  The industry has many different niches and segments  Few other rivals are specializing in same niche   Big enough to be profitable and offers good growth potential   Not crucial to success of industry leaders

3-19 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

3-20 Resource- and Competence- Based Approaches to Competitive Advantage  Competitive strategy elements used to supplement strategies keyed to unique industry positioning.  Utilizes a company’s resources and competitive capabilities to achieve a cost-based advantage or differentiation.

3-21 Resources, Capabilities, and Competencies as the Basis for Competitive Advantage  A competence represents real proficiency in performing an internal activity  A core competence is a well-performed internal activity central to a company’s competitiveness and profitability  A distinctive competence is a competitively valuable activity a company performs better than its rivals

3-22 Determining the Competitive Value of a Resource Strength  Is the resource strength really competitively valuable?  Is the resource strength rare and something rivals lack?  Is the resource hard to copy?  Can the resource strength be trumped by the substitute resource strengths and competitive capabilities of rivals?

3-23 Strategies for Addressing Resource Deficiencies  Companies lacking stand-alone resource strengths may develop a distinctive competence through bundled resource strengths.  Companies may be able to develop substitute resources to offset resource weaknesses or deficiencies in performing competitively critical activities.

3-24 Supplementing Resources and Competencies through Strategic Alliances  Strategic alliances involve formal agreements between two or more companies engage in strategically- relevant collaboration.  Allows partners to add to their collections of resources and competencies.

3-25 Factors Making Collaborative Partnerships “Strategic”  It is critical to a company’s achievement of an important objective  It helps build, sustain, or enhance a core competence or competitive advantage

3-26 Factors Making Collaborative Partnerships “Strategic”  It helps block a competitive threat  It helps open up important market opportunities  It mitigates a significant risk to a company’s business

3-27 How Collaborative Partnerships Build Resource Strengths and Core Competencies  Expedite the development of new technologies or products  Overcome deficits in technical or manufacturing expertise  To create new skill sets and capabilities by bringing together personnel of each partner  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

3-28 Why Strategic Alliances and Collaborative Partnerships Fail  Diverging objectives and priorities of partners  Inability of partners to work well together  Changing conditions rendering purpose of alliance obsolete  Emergence of more attractive technological paths  Marketplace rivalry between one or more allies