1. COURSE TITLE : COMPETITIVE STRATEGY
Ashesi University
COURSE TITLE : COMPETITIVE STRATEGY
SEMESTER : 1ST 2011/2012
MODULE 5: Strategic Choices and Formulation: Business Level Strategy
Lecturer : Ebow Spio

2. Learning Objectives
Identify and gain command of the generic competitive strategies that lead to competitive advantage and deliver superior value to customers
Appreciate how the strategies counter each of the five competitive forces.
Identify the risks associated with each generic strategy
Appreciate why some of the generic strategies may work better in certain kinds of industry and competitive conditions than in others
Learning the major avenues for achieving a competitive advantage based on lower cost strategy
Learn the major avenues for achieving a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals in ways that better satisfy buyer needs and preferences

3. From Thinking Strategically about the Company’s Situation to Choosing a Strategy

4. Strategy and Competitive Advantage
Competitive advantage exists when a firm’s strategy gives it an edge in
Attracting customers and
Defending against competitive forces
Convince customers firm’s product / service offers superior value
A good product at a low price
A superior product worth paying more for
A best-value product
Key to Gaining a Competitive Advantage

5. What Is Competitive Strategy?
Deals exclusively with a company’s business plans to compete successfully
Specific efforts to please customers
Offensive and defensive moves to counter maneuvers of rivals
Responses to prevailing market conditions
Initiatives to strengthen its market position
Narrower in scope than business strategy
Competitive Strategy is taking offensive or defensive actions to create a defendable position in an industry to cope successfully with the 5 competitive forces and thereby yield a superior return on investment for the firm.
Competitive Strategy is about being different. It means deliberating choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.

6. Fig. 5.1: The Five Generic Competitive Strategies
Strategies referred to Generic because they are used in all industries and by all types of firms. Best Cost Provider Strategy also know as Integrated Leadership/Differentiation

7. Low-Cost Provider Strategies
Keys to Success
Make achievement of meaningful lower costs than rivals the theme of firm’s strategy
Include features and services in product offering that buyers consider essential
Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match
A cost leadership strategy is an action plan the firm develops to produce goods or services at the lowest cost. Producing at the lowest cost enables the firm to price its products lower than competitors can, and therefore gain larger share of its target market. Effective use of the cost leadership strategy positions the firm in the market-place in a way that enables it to create value for customers, especially through lower prices.
Low-cost leadership means low overall costs, not just low manufacturing or production costs!

8. Translating a Low-Cost Advantage into Higher Profits: Two Options
Option 1: Use lower-cost edge to under-price competitors and attract price-sensitive buyers in enough numbers to increase total profits
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, thereby increasing total profits

9. Nucor Corporation’s Low-Cost Provider Strategy
Eliminate some production processes from value chain used by traditional integrated steel mills; cut investment in facilities and equipment
Strive hard for continuous improvement in the efficiency of its plants and frequently invest in state-of-the art equipment to reduce unit costs
Carefully select plan sites to minimize inbound and outbound shipping costs and to take advantage of low rates for electricity
Hire a nonunion workforce that uses team-based incentive compensation systems
Heavily emphasize consistent product quality and maintain rigorous quality systems
Minimize general and administrative expenses by maintaining a lean staff at corporate headquarters and allowing only 4 levels of management

10. Approaches to Securing a Cost Advantage
Do a better job than rivals of performing value chain activities efficiently and cost effectively
Revamp value chain to bypass cost-producing activities that add little value from the buyer’s perspective
Approach 1
Control costs!
By-pass
costs!
Approach 2

11. Approach 1: Controlling the Cost Drivers
Capture scale economies; avoid scale diseconomies
Capture learning and experience curve effects
Control percentage of capacity utilization
Pursue efforts to boost sales and spread costs such as R&D and advertising over more units
Improve supply chain efficiency
Substitute use of low-cost for high-cost raw materials
Use online systems and sophisticated software to achieve operating efficiencies
Adopt labor-saving operating methods
Use bargaining power to gain concessions from suppliers
Compare vertical integration vs. outsourcing

12. Approach 2: Revamping the Value Chain
Use direct-to-end-user sales/marketing methods
Make greater use of online technology applications
Streamline operations by eliminating low-value-added or unnecessary work steps
Relocate facilities closer to suppliers or customers
Offer basic, no-frills product/service
Offer a limited product/service as opposed to a full product/service line

13. Wal-Mart’s Approach to Managing Its Value Chain
Institute extensive information sharing with vendors via online systems
Pursue global procurement of some items and centralize most purchasing activities
Invest in state-of-the-art automation at its distribution centers
Strive to optimize the product mix and achieve greater sales turnover
Install security systems and store operating procedures that lower shrinkage rates
Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites
Manage and compensate its workforce in a manner to yield lower labor costs

14. Keys to Success in Achieving Low-Cost Leadership
Scrutinize each cost-creating activity, identifying cost drivers
Use knowledge about cost drivers to manage costs of each activity down year after year
Find ways to restructure value chain to eliminate nonessential work steps and low-value activities
Work diligently to create cost-conscious corporate cultures
Feature broad employee participation in continuous cost-improvement efforts and limited perks for executives
Strive to operate with exceptionally small corporate staffs
Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business

15. Characteristics of a Low-Cost Provider
Cost conscious corporate culture
Employee participation in cost-control efforts
Ongoing efforts to benchmark costs
Intensive scrutiny of budget requests
Programs promoting continuous cost improvement
Successful low-cost producers champion
frugality but wisely and aggressively
invest in cost-saving improvements !

16. When Does a Low-Cost Strategy Work Best?
Price competition is vigorous
Product is standardized or readily available from many suppliers
There are few ways to achieve differentiation that have value to buyers
Most buyers use product in same ways
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
Standardized products are widely available and have large customer demand e.g. automobile tyres.

17. Pitfalls of Low-Cost Strategies
Being overly aggressive in cutting price
Low cost methods are easily imitated by rivals
Becoming too fixated on reducing costs and ignoring
Buyer interest in additional features
Declining buyer sensitivity to price
Changes in how the product is used
Technological breakthroughs open up cost reductions for rivals

18. Overall Cost Leadership and 5 Competitive Forces
Rivalry with existing competitors
Lower means it can still earn returns after its rivals have competed away their profits through rivalry
Bargaining Power of Buyers
Can drive down prices to level of the next most efficient competitors
Bargaining Power of Suppliers
More flexibility to cope with input cost increases
Potential Entrants
Provides substantial entry barriers in terms of scale economies or cost advantages
Threat of Substitutes
Favourable position against substitutes relative to its competitors.
A product substitute is a product that can replace the focal product because it has essentially the same functionality e.g. NutraSweet is replacement for sugar.

19. Test Your Knowledge
Striving to be the industry’s low-cost provider and achieving lower costs than rivals entails
A. doing a better job than rivals of performing value chain activities more cost-effectively.
B. having a smaller labor force than rivals, paying lower wages than rivals, locating all facilities in countries where labor costs are low, and outsourcing many value chain activities to suppliers with world-class technological capabilities.
C. revamping the firm’s overall value chain to eliminate or bypass cost-producing activities that produce little value added insofar as customers are concerned.
D. adopting activity-based costing, utilizing more best practices than rivals, and having a narrower product line than rivals.
E. Both A and C.
Answer: D

20. Differentiation Strategies
Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals
Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals
Not spending more to achieve differentiation than the price premium that can be charged
Objective
Keys to Success
A differentiation strategy is an action plan the firm develops to produce goods or services that customers perceive as being unique in ways that are important to them. The ‘uniqueness’ a firm provides when using the differentiation strategy may be physical or psychological.

21. Benefits of Successful Differentiation
A product / service with unique, appealing attributes allows a firm to
Command a premium price and/or
Increase unit sales and/or
Build brand loyalty
= Competitive Advantage
Which hat is unique?

22. Types of Differentiation Themes
Unique taste – Dr. Pepper
Multiple features – Microsoft Windows and Office
Wide selection and one-stop shopping – Home Depot, Amazon.com
Superior service -- FedEx, Ritz-Carlton
Spare parts availability – Caterpillar
Engineering design and performance – Mercedes, BMW
Prestige – Rolex
Product reliability – Johnson & Johnson
Quality manufacture – Karastan, Michelin, Toyota
Technological leadership – 3M Corporation
Top-of-line image – Ralph Lauren, Starbucks, Chanel
Approaches to differentiating can take many forms: Design or brand image, technology, features, customer service, dealer network etc. Differentiation Strategy should not allow the firm to ignore costs, but rather they are not the primary strategic target.

23. Sustaining Differentiation: Keys to Competitive Advantage
Most appealing approaches to differentiation
Those hardest for rivals to match or imitate
Those buyers will find most appealing
Best choices to gain a longer-lasting, more profitable competitive edge
New product innovation
Technical superiority
Product quality and reliability
Comprehensive customer service
Unique competitive capabilities

24. Where to Find Differentiation Opportunities in the Value Chain
Purchasing and procurement activities
Product R&D and product design activities
Production process / technology-related activities
Manufacturing / production activities
Distribution-related activities
Marketing, sales, and customer service activities
Internally
Performed
Activities,
Costs, &
Margins
Margins of
Suppliers
Buyer/User
Value
Chains
Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners

25. How to Achieve a Differentiation-Based Advantage
Approach 1
Incorporate product features/attributes that lower buyer’s overall costs of using product
Approach 2
Incorporate features/attributes that raise the performance a buyer gets out of the product
Approach 3
Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways
Approach 4
Compete on the basis of superior capabilities

26. Test Your Knowledge
Which of the following is not one of the four basic routes to achieving a differentiation-based competitive advantage?
A. Appealing to high-income buyers who are willing and able to pay a premium price for a high-performing, multi-featured product
B. Incorporating features that raise product performance
C. Incorporating product attributes and user features that lower the buyer’s overall costs of using the company’s product
D. Delivering value to customers via competencies and competitive capabilities that rivals don’t have or can’t afford to match
E. Incorporating features that enhance buyer satisfaction in intangible or non-economic ways
Answer: A

27. Importance of Perceived Value
Buyers seldom pay for value that is not perceived
Price premium of a differentiation strategy reflects
Value actually delivered to the buyer
and
Value perceived by the buyer
Actual and perceived value can differ when buyers are unable to assess their experience with a product

28. Signaling Value as Well as Delivering Value
Incomplete knowledge of buyers causes them to judge value based on such signals as
Price
Attractive packaging
Extensive ad campaigns
Ad content and image
Seller facilities or professionalism and personality of employees
Having a list of prestigious customers
Signals of value may be as important as actual value when
Nature of differentiation is hard to quantify
Buyers are making first-time purchases
Repurchase is infrequent
Buyers are unsophisticated

29. When Does a Differentiation Strategy Work Best?
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

30. Pitfalls of Differentiation Strategies
Appealing product features are easily copied by rivals
Buyers see little value in unique attributes of product
Overspending on efforts to differentiate the product offering, thus eroding profitability
Over-differentiating such that product features exceed buyers’ needs
Charging a price premium buyers perceive is too high
Not striving to open up meaningful gaps in quality, service, or performance features vis-à-vis rivals’ products
Imitation narrows perceived differentiation, a common occurrence as industries mature
Achieving differentiation may sometimes preclude gaining a high market share. It often requires a perception of exclusivity, which may be incompatible with high market share. Differentiation may imply a trade-off with cost position if the activities required in creating it are inherently costly, such as extensive research, product design, high quality materials or intensive customer support.

31. Differentiation Strategy and 5 Competitive Forces
Rivalry with existing competitors
Insulation against rivals because of brand loyalty by customers and resulting lower sensitivity to price. It increases margins which avoids the need for low-cost position.
Bargaining Power of Buyers
Buyers lack comparative alternatives and thereby less price sensitive
Bargaining Power of Suppliers
Higher margin to deal with supplier power
Potential Entrants
Customer loyalty and the need for a competitor to overcome uniqueness provide entry barriers
Threat of Substitutes
Achieving customer loyalty positions against substitutes relative to its competitors.

32. Best-Cost Provider Strategies or Integrated Cost Leadership/Differentiation
Combine 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
Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations
Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands
Objectives
The integrated cost leadership/differentiation strategy is an action plan the firm develops to produce goods and services with strong emphasis on both differentiation and low cost. With strategy, firms produce products that have some differentiated features (but not as many or sophisticated as the firms using differentiation strategy) and that are produced at a low cost (but not at a cost as low as those of the firm using cost leadership strategy)

33. Competitive Strength of a Best-Cost Provider Strategy
A best-cost provider’s competitive advantage is based on its capability to include upscale attributes at a lower cost than rivals’ comparable products
To achieve competitive advantage, a company must be able to
Incorporate attractive features at a lower cost than rivals
Manufacture a good-to-excellent quality product at a lower cost than rivals
Develop a product that delivers good-to-excellent performance at a lower cost than rivals
Provide attractive customer service at a lower cost than rivals

34. When Does a Best-Cost Provider Strategy Work Best?
Where buyer diversity makes product differentiation the norm and
Where many buyers are also sensitive to price and value

35. Risk of a Best-Cost Provider Strategy
A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies
Low-cost leaders may be able to siphon customers away with a lower price
High-end differentiators may be able to steal customers away with better product attributes

36. Test Your Knowledge
Which of the following are distinguishing features of a best-cost provider strategy (based on the comparisons of the five generic competitive strategies shown in Figure 5.1)?
A. The strategic target is price-conscious buyers
B. A marketing emphasis on charging a slightly higher price than rival brands having comparable features and attributes
C. A product line that stresses wide selection, many product variations, and emphasis on differentiating features
D. A competitive advantage based on more value for the money
E. Using constant product innovation, excellent R&D skills, and periodic technological breakthroughs to sustain the strategy
Answer: D

37. Focus / Niche Strategies
Involve concentrated attention on a narrow piece of the total market
Serve niche buyers better than rivals
Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs
Develop unique capabilities to serve needs of target buyer segment
Objective
Keys to Success
A focus strategy is an action plan the firm develops to produce goods or services to serve the needs of a specific market segment. Serves a narrower segment within a broader market.
The focused cost leadership is an action plan the firm develops to produce good or services for a market segment at the lowest cost e.g. Ikea
The focused differentiation strategy is an action plan the firm develops to produce goods and services that a narrow group of customer perceive as being unique in ways that are important to them.

38. Approaches to Defining a Market Niche
Geographic uniqueness
Specialized requirements in using product/service
Special product attributes appealing only to niche buyers

39. Examples of Focus Strategies
Animal Planet and History Channel
Cable TV
Google
Internet search engines
Porsche
Sports cars
Cannondale
Top-of-the line mountain bikes
Enterprise Rent-a-Car
Provides rental cars to repair garage customers
Bandag
Specialist in truck tire recapping

40. Focus / Niche Strategies and Competitive Advantage
Achieve lower costs than rivals in serving a well-defined buyer segment –
Focused low-cost strategy
Approach 1
Offer a product appealing to unique preferences of a well-defined buyer segment –
Focused differentiation strategy
Which hat is unique?
Approach 2

41. What Makes a Niche Attractive for Focusing?
Big enough to be profitable and offers good growth potential
Not crucial to success of industry leaders
Costly or difficult for multi-segment competitors to meet specialized needs of niche members
Focuser has resources and capabilities to effectively serve an attractive niche
Few other rivals are specializing in same niche
Focuser can defend against challengers via superior ability to serve niche members
Focus strategy always implies limitation on the overall market share achievable. Focus necessarily involves a trade-off between profitability and sales volume

42. Risks of a Focus 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 – niche becomes part of overall market
Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

43. Deciding Which Generic Competitive Strategy to Use
Each positions a company differently in its market and competitive environment
Each establishes a central theme for how a company will endeavor to outcompete rivals
Each creates some boundaries for maneuvering as market circumstances unfold
Each points to different ways of experimenting with the basics of the strategy
Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy
The big risk – Selecting a “stuck in the middle” strategy! This rarely produces a sustainable competitive advantage or a distinctive competitive position!