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 Maintain core competencies and protect personnel from layoff Lower production cost Unsuitable suppliers Assure adequate supply Utilize surplus labor and make a marginal contribution Obtain desired quality Remove supplier collusion Obtain a unique item that would entail a prohibitive commitment from the supplier Protect proprietary design or quality Increase or maintain size of company

Make or Buy: Reasons for Buying Frees management to deal with its primary business Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity Reduce inventory costs Ensure flexibility and alternate source of supply Inadequate managerial or technical resources Reciprocity 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