3 What is a competitive strategy? Concerns management’s "game plan" for competing successfully and securing a competitive advantage over rivals (strategy as…PLAN)Represents the firm’s specific efforts to provide superior value to customers by offering:An equally good product at a lower price (low cost)A superior product with unique features perceived as worth paying more for (differentiation)An attractive overall mix of price, features, quality, service, and other appealing attributes (best cost)
4 Creating Value…?CustomerValueConsumer SurplusThis area represents the value created in each profitable sale and consists of both profit to the firm and surplus to the customer.SellingPriceTotal Costto the FirmProfitThis area represents the firm’s total costs in presenting the product or service for sale. To create new value, the firm must cover its total costs.KEYAdopting and adapting a strategy or strategies that balance firm costs, profit, and overall value for customersTotal ValueCOGS
6 Low-Cost StrategiesFirms offer a broader array of products and/or services at a relatively low priceHas a lower cost than rivals—but not necessarily the absolutely lowest possible costIncludes features and services that buyers consider essential, but little moreIs viewed by consumers as offering equivalent or higher value even if priced lower than competing products (i.e., Great Value v. name-brand products6
7 How do low-cost strategies work? Option 1Use lower-cost advantage to under-price competitors and attract price-sensitive buyersLower profit margins than competitors mean firms must sell in large volumeOption 2Maintain present price and current market share and use lower-cost edge to earn higher profit marginHigher profit margin means that firms can sell less than competitors and earn more
8 How can firms develop a low-cost strategy? Perform essential value chain activities more cost-effectively than rivalsE.g., better access to raw materials, more efficient production, cheaper distribution, etc.Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activitiesEliminate non-essential costsE.g., reduce input/production quality, concentrate on markets that are easy to access
9 Other ways to manage the value chain… Striving to capture all available economies of scaleTaking full advantage of experience and learning curve effectsTrying to operate facilities at full capacityPursuing efforts to boost sales volumes and thus spread outlays for R&D, advertising, and general administration over more unitsSubstituting lower-cost inputs whenever there’s little or no sacrifice in product quality or product performanceEmploying advanced production technology and process design to improve overall efficiencyUsing communication systems and information technology to achieve operating efficienciesPursuing ways to reduce workforce size and lower overall compensation costsUsing the company’s bargaining power vis-à-vis suppliers to gain concessionsBeing alert to the cost advantages of outsourcing and vertical integration
10 When does a low-cost strategy work best? Price competition among rival sellers is especially vigorous.The products of rival sellers are essentially identical and are readily available from several sellers.There are few ways to achieve product differentiation that have value to buyers.Buyers incur low costs in switching their purchases from one seller to another.The majority of industry sales are made to a few, large- volume buyers.Industry newcomers use introductory low prices to attract buyers and build a customer base.
11 What are the pitfalls to avoid in a low-cost strategy? Overly aggressive price cuttingPrice cutting results in lower margins, no increase in sales volume, and lower profitabilityReliance on easily-imitated cost reductionsBecoming too fixated on cost reductionIgnoring buyer interest in additional featuresOverlooking declining buyer sensitivity to priceDenying technological breakthroughs that will nullify cost advantages
12 Broad Differentiation Strategies Firms offer broader array of products and/or services that are unique from othersUseful whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product or serviceInvolves incorporating differentiating features that cause buyers to prefer one firm’s brand, product, or service over those of its rivals (i.e., branding, market pioneering, etc)Requires not spending more to achieve differentiation than the price premium that customers are willing to pay for all the differentiating extras
13 What are the benefits of a differentiation strategy? Command a premium priceGain buyer loyalty to its brandSuccessful execution of a differentiation strategy allows a firm to:Increase its unit salesJust think about Apple….
14 What are the different approaches to a differentiation strategy? Unique taste: Red Bull, Dr. PepperMultiple features: Microsoft Office, Apple iPhoneWide selection and one-stop shopping: Home Depot, Amazon.comSuperior service: Ritz-Carlton, NordstromSpare parts availability: Caterpillar, John DeereEngineering design and performance: Mercedes-Benz, BMWLuxury and prestige: Rolex, Gucci, ChanelProduct reliability: Johnson & JohnsonQuality manufacture: Michelin in tires, Honda in automobilesTechnological leadership: 3M CompanyFull range of services: Charles Schwab in stock brokerageComplete line of products: Campbell soups, Frito-Lay snack foods
15 How does a differentiation strategy create value? Includes product attributes and user features that lower the buyer’s costsE.g., hybrid cars save gas, professional tax prep may help save money, etcIncorporates tangible features that improve product performanceE.g., engine turbo, high performance processor, etcIncorporates intangible features that enhance buyer satisfaction in noneconomic waysE.g., supports a certain cause (i.e., Girl Scout cookies)
16 How can firms develop a differentiation strategy? Manufacturing activitiesDistribution and shipping activitiesMarketing, sales, and customer service activitiesActivities that Enhance DifferentiationSupply chain activitiesProduct R&DProduction R&D and technology-related activities
17 When does a differentiation strategy work best? Buyer needs and uses of the product are diverse.There are many ways to differentiate the product or service that have value to buyers.Few rival firms are following a similar differentiation approach.Technological change is fast-paced and competition revolves around rapidly evolving product features.
18 What are the pitfalls to avoid in a differentiation strategy? Pursuing a differentiation strategy keyed to product or service attributes that are easily and quickly copied.Incorporating product features or attributes in which buyers see little value or are easily copied by rivals.Overspending on efforts to differentiate.Over-differentiating so that product quality or service levels exceed buyers’ needs.Trying to charge too high a price premium.Not opening up meaningful gaps in quality or service or performance features over the products of rivals.
19 Focused StrategiesReflect a concentration on a narrow piece of the total market defined by geographic uniqueness or special product attributesCan be either (1) low-cost focused or (2) differentiation focusedAppeal to smaller and medium-sized firms that may lack the breadth and depth of resources to tackle going after a whole market customer base
20 Focused Low-Cost Strategy A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and a lower price than rival competitorsE.g., Vizio TVs, Acer PCs, etc.Avenues to achieving cost advantage are the same as for low-cost leadershipout-manage rivals in keeping costs lowbypassing or reducing nonessential activities
21 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 buyersE.g., Kashi, Tesla, Helly Hanson, etc.As opposed to a broad differentiation strategy aimed at many buyer groups and market segments
22 When is a focused strategy viable? The target market niche is big enough to be profitable and offers good growth potentialIndustry leaders have chosen not to compete in the niche—focusers can avoid battling head-to-head against the industry’s biggest and strongest competitorsIt is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customersThe industry has many different niches and segments, thereby allowing a focuser to pick a niche suited to its resource strengths and capabilitiesFew, if any, rivals are attempting to specialize in the same target segment
23 What are the pitfalls of a focused strategy? If and when competitors find effective ways to match a focuser’s capabilities in serving the target nicheIf and when the preferences and needs of niche members shift over time toward the product attributes desired by the majority of buyers (the few join the many)If and when the segment may become so attractive it is soon inundated with competitors
24 Best-Cost StrategiesAre a hybrid of low-cost provider and differentiation strategies that:Involves giving customers more value for money by satisfying buyer expectations on key quality/features/ performance/service attributes and beating customer expectations on priceIs a powerful competitive approach with value-conscious buyers looking for a good-to-very-good product or service at an economical priceCreates a “best-cost” status as the low-cost provider of a product or service with upscale attributes
25 How can firms develop a best-cost strategy? Best-cost strategies are contingent on:A superior value chain configuration that eliminates or minimizes activities that do not add valueUnmatched efficiency in managing essential value chain activitiesCore competencies that allow differentiating attributes to be incorporated at a low cost
26 When does a best-cost strategy work best? A best-cost provider strategy works best in markets where:Product differentiation is the norm (e.g., clothing)The market is comprised of large numbers of value- conscious buyers attracted to economically priced midrange products and services, especially during recessionary times (e.g., food service)A provider can offer either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher-than-average price (e.g., automobiles)
27 What are the pitfalls of a best-cost strategy? Vulnerability to both low-cost providers and high-end differentiatorsMay not have the core capabilities to manage the value chain such that the firm can produce higher-quality products at a lower priceDifficult to “serve two masters”—quality and priceOften, firms that attempt a best-cost strategy get “stuck in the middle”
28 Getting “stuck in the middle” Compromise strategies can result in middle-of-the-pack industry rankings and, at best, average performance due to:An average cost structureMinimal product differentiation relative to rivalsAn average image and reputationLimited prospect of industry leadershipCompromise or middle-ground strategies rarely produce sustainable competitive advantageExamples include: K-Mart, GM, American Airlines
29 Successful Competitive Strategies Are Resource Based Low-Cost ProvidersMust have the resources and capabilities to keep costs below those of competitorsMust have expertise to cost-effectively manage value chain activities better than rivalsDifferentiatorsMust have the resources and capabilities to incorporate unique attributes that a broad range of buyers will find appealing and worth paying for
30 Successful Competitive Strategies Are Resource Based Narrow Segment FocusersMust have the capability to do an outstanding job of identifying and satisfying the needs and expectations of niche buyersBest-Cost ProvidersMust have the resources and capabilities to incorporate upscale product or service attributes at a lower cost than rivals