1. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 1 AND COMPETITIVE ADVANTAGE STRATEGY AND COMPETITIVE ADVANTAGE CHAPTER 5 Screen graphics created by: Jana F. Kuzmicki, PhD, Indiana University Southeast

2. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 2 Chapter Outline l Generic Competitive Strategies 4 Low-Cost Leadership Strategy 4 Broad Differentiation Strategies 4 Best-Cost Provider Strategies 4 Focused Low-Cost Strategies 4 Focused Differentiation Strategies l Vertical Integration Strategies l Cooperative Strategies l Offensive and Defensive Strategies l First-Mover Advantages and Disadvantages

3. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 3 Strategy and Competitive Advantage l COMPETITIVE ADVANTAGE exists when a firm’s strategy gives it an edge in 4 Defending against competitive forces and 4 Securing customers l Convince customers firm’s product / service offers SUPERIOR VALUE 4 Offer buyers a good product at a lower price 4 Use differentiation to provide a better product buyers think is worth a premium price Key to Success

4. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 4 What Is Competitive Strategy? l Consists of business approaches to 4 Attract customers, fulfilling their expectations 4 Withstand competitive pressures 4 Strengthen market position l Includes offensive and defensive moves to 4 Counter actions of key rivals 4 Shift resources to improve long-term market position 4 Respond to prevailing market conditions l Narrower in scope than business strategy

5. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 5 Objectives of Competitive Strategy l Build a COMPETITIVE ADVANTAGE l Cultivate clientele of LOYAL CUSTOMERS l Knock the socks off rivals, ethically and honorably

6. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 6 The Five Generic Competitive Strategies Market Target Type of Advantage Sought Overall Low-Cost Leadership Strategy Broad Differentiation Strategy Focused Low-Cost Strategy Focused Differentiation Strategy Best-Cost Provider Strategy Lower CostDifferentiation Broad Range of Buyers Narrow Buyer Segment or Niche

7. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 7 A Low-Cost Leadership Strategy l Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to 4 Under-price rivals and reap market share gains OR 4 Earn higher profit margin selling at going price Objective

8. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 8 Approach 1: Controlling the Cost Drivers l Capture scale economies; avoid scale diseconomies l Capture learning and experience curve effects l Manage costs of key resource inputs l Consider linkages with other activities in value chain l Find sharing opportunities with other business units l Compare vertical integration vs. outsourcing l Assess first-mover advantages vs. disadvantages l Control percentage of capacity utilization l Make prudent strategic choices related to operations

9. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 9 Approach 2: Revamping the Value Chain l Simplify product design l Offer basic, no-frills product/service l Shift to a simpler, less capital-intensive, or more streamlined technological process l Find ways to bypass use of high-cost raw materials l Use direct-to-end user sales/marketing approaches l Relocate facilities closer to suppliers or customers l Reengineer core business processes---be creative in finding ways to eliminate value chain activities l Use PC technology to delete works steps, modify processes, cut out cost-producing activities

10. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 10 Differentiation Strategies l Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals l Find ways to differentiate that CREATE VALUE for buyers and that are NOT EASILY MATCHED or CHEAPLY COPIED by rivals l Not spending more to achieve differentiation than the price premium that can be charged Keys to Success Objective

11. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 11 Sustaining Differentiation: The Key to Competitive Advantage l Most appealing approaches to differentiation: 4 Those hardest for rivals to match or imitate 4 Those buyers will find most appealing l Best choices for gaining a longer-lasting, more profitable competitive edge: 4 New product innovation 4 Technical superiority 4 Product quality and reliability 4 Comprehensive customer service

12. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 12 Where to Find Differentiation Opportunities in the Value Chain l Purchasing and procurement activities l Product R&D activities l Production R&D; technology-related activities l Manufacturing activities l Outbound logistics and distribution activities l Marketing, sales, and customer service activities Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

13. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 13 Signaling Value as Well as Delivering Value l Buyers seldom pay for value that is not perceived l Signals of value may be as important as actual value when 4 Nature of differentiation is hard to quantify 4 Buyers are making first-time purchases 4 Repurchase is infrequent 4 Buyers are unsophisticated

14. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 14 Best Cost Provider Strategies l Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation 4 Make an upscale product at a lower cost 4 Give customers more value for the money l Create superior value by MEETING OR EXCEEDING buyer expectations on product attributes and BEATING their price expectations l Be the low-cost producer of a product with GOOD- TO-EXCELLENT product attributes, then use cost advantage to UNDERPRICE comparable brands Objectives

15. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 15 What Makes a Niche Attractive for Focusing? l Big enough to be profitable l Good growth potential l Not crucial to success of major competitors (making it unlikely they will compete hard in niche) l Focuser has resources to effectively serve segment l Focuser can defend against challengers via superior ability to serve buyers in segment and customer goodwill

16. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 16 The Competitive Strength of Focus / Niche Strategies l RIVAL COMPETITORS do not have matching capabilities to meet specialized needs of niche members l Focuser’s competencies/capabilities act as a barrier to POTENTIAL ENTRANTS l Focuser’s competencies/capabilities pose obstacle to sellers of SUBSTITUTES l Focuser’s unique ability to meet niche buyers’ needs can blunt bargaining leverage of powerful BUYERS

17. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 17 Vertical Integration Strategies l Vertical integration extends a firm’s competitive scope within same industry 4 Backward into sources of supply 4 Forward toward end-users of final product l Can aim at either full or partial integration Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

18. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 18 Unbundling and Outsourcing Strategies Involves not performing certain value chain activities internally and relying on outside vendors to perform needed activities and services Concept

19. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 19 Pros and Cons of Vertical Integration l The appeal of a vertical integration strategy depends on 4 Its ability to enhance performance of strategy-critical activities by D Lowering costs or D Increasing differentiation 4 Its impact on D Resource requirements D Flexibility and response times D Administrative overhead of coordination 4 Its ability to create a competitive advantage

20. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 20 Cooperative Strategies Companies sometimes use strategic alliances or strategic partnerships or collaborative agreements to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-to- company dealings but fall short of merger or formal joint venture

21. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 21 The Building and Eroding of Competitive Advantage Size of Competitive Advantage Time Benefit PeriodErosion PeriodBuildup Period Strategic Moves Produce Competitiv e Advantage Moves by Rivals Reduce Competitive Advantage Size of Competitive Advantage Achieved

22. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 22 Attacking Competitor Strengths Appeal l Gain market share by out-matching strengths of weaker rivals l Whittle away at a rival’s competitive advantage Challenging strong competitors with a lower price is foolhardy unless the aggressor has a COST ADVANTAGE or advantage of GREATER FINANCIAL STRENGTH!

23. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 23 Options for Attacking a Competitor’s Strengths l Offer equally good product at a lower price l Offer a better product at the same price l Leapfrog into next-generation technologies l Add appealing new features l Run comparison ads l Construct new plant capacity l Offer a wider product line l Develop better customer service capabilities

24. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 24 Attacking Competitor Weaknesses Basic Approach Concentrate company strengths and resources directly against a rival’s weaknesses Weaknesses to Attack l Geographic regions where rival is weak l Segments rival is neglecting l Go after those customers a rival is least equipped to serve l Rivals with weaker marketing skills l Introduce new models exploiting gaps in rivals’ product lines

25. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 25 Preemptive Strikes Approach Involves moving first to secure an advantageous position that rivals are foreclosed or discouraged from duplicating!

26. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 26 Preemptive Strike Options l Expand capacity ahead of demand in hopes of discouraging rivals from following suit l Tie up best or cheapest sources of essential raw materials l Move to secure best geographic locations l Obtain business of prestigious customers l Build an image in buyers’ minds that is unique & hard to copy l Secure exclusive or dominant access to best distributors l Acquire desirable, but struggling, competitor

27. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 27 Choosing Whom to Attack l Four types of firms can be the target of an offensive: 4 Market leaders 4 Runner-up firms 4 Struggling rivals on verge of going under 4 Small local or regional firms not doing a good job for their customers

28. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 28 Offensive Strategy and Competitive Advantage l STRATEGIC OFFENSIVE options offering strongest basis for COMPETITIVE ADVANTAGE 4 Develop lower-cost product design 4 Make changes in production operations that lower costs or enhance differentiation 4 Develop product features that deliver superior performance or lower users’ costs 4 Give more responsive customer service 4 Escalate marketing effort 4 Pioneer new distribution channel 4 Sell direct to end-users

29. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 29 Offensive Strategy Principle The chances for a successful offensive initiative are improved when it is based on a company’s resource strengths and strongest competencies and capabilities.

30. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 30 Defensive Strategy Objectives l Fortify firm’s present position l Help sustain any competitive advantage held l Lessen risk of being attacked l Blunt impact of any attack that occurs l Influence challengers to aim attacks at other rivals

31. © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill 31 Defensive Strategies: Approaches Approach 1 Block avenues challengers can take in mounting offensive attacks Approach 2 Make it clear any challenge will be met with strong counterattack