1. Strategy and Competitive Advantage
Chapter 5
OB/ Aug 09

2. Chapter Outline 5 Generic Competitive Strategies
Low Cost Provider Strategies
Differentiation Strategies
Best-Cost Provider Strategies
Focused or Market Niche Strategies

3. Competitive Strategy
Competitive Strategy consists of all the moves and approaches a firm has taken and is taking to attract buyers, withstand competitive pressures and improve its market position

4. 5 Generic Competitive Strategies
A low cost provider strategy – appeal to a broad spectrum of customers by being the overall low cost provider of good/ service
A broad differentiation strategy – seek to differentiate company’s product/ service from rivals in ways that will appeal to a broad spectrum of buyers

5. 5 Generic Competitive Strategies (cont)
A best cost strategy – give customers more value for money ( good to excellent attributes at lower costs than rivals)
A focused or niche market strategy based on lower costs – concentrate on a narrow buyer segment and serve niche buyers at lower costs than rivals
A focused or niche market strategy based on differentiation –concentrate on a narrow buyer segment and outcompete rivals by offering niche buyers attributes that meet their tastes and requirements better

6. Low Cost Strategy
Powerful competitive approach where buyers are price sensitive
Develop a sustainable cost advantage over competitors
Use lower costs as basis for underpricing competitors and gain market share or
Earn higher profits selling at the going price
But must be careful not to pursue low cost so much that product is too stripped down and lose buyer appeal

7. Figure 5.1: The Five Generic Competitive Strategies
Type of Advantage Sought
Lower Cost
Differentiation
Overall Low-Cost
Provider
Strategy
Broad
Differentiation
Strategy
Broad
Range of Buyers
Best-Cost
Provider
Strategy
Market Target
Focused
Low-Cost
Strategy
Focused
Differentiation
Strategy
Narrow
Buyer
Segment
or Niche

8. How to achieve Low Cost Advantage?
Firm’s cumulative costs across its activity cost chain must be lower than competitors’.
2 ways to accomplish this:
Improve efficiency and control costs along existing activity cost chain
Revamp firm’s activity cost chain to bypass some cost producing activities
Both approaches can be used simultaneously

9. Controlling Costs Drivers
Economies or diseconomies of scale
Learning curve effects
Costs of key inputs
Union v/s nonunion labour
Bargaining power vis a vis suppliers and supply chain
Location
Industry value chain
Sharing with other business units within the enterprise

10. Controlling Costs Drivers (cont)
Vertical integration v/s Outsourcing
First mover advantages and disadvantages
Capacity utilisation
Strategic choices and operating decisions
Adding/ removing services provided
Increasing/ decreasing distribution channels used
Lengthening/ shortening delivery times to customers
Raising / Lowering specifications of purchased materials
Putting more / less emphasis than rivals on incentive compensation,wage increases, fringe benefits to motivate employees and boost productivity

11. Revamping the Value Chain
Make greater use of internet technology applications
Using direct to end user sales and marketing approaches
Simplify the product design
Stripping away the extras
Shift to simpler/ less capital intensive/ more flexible technological process

12. Revamping the Value Chain (cont)
Bypass high cost raw materials or component parts
Relocate facilities
Dropping the something for everyone approach

13. Keys to success in achieving Low Cost Leadership
Scrutinise each cost creating activity and determine what drives costs
Manage costs downward
Restructure value chain
Create cost conscious corporate culture- employee participation in cost improvement efforts and limited perks for executives
Small corporate staff to keep admin costs low
Benchmark costs against best in class performers
Invest in resources and capacities to reduce costs

14. Advantages of being Low Cost Producer
Provides defenses against the five competitive forces:
Rivals > compete offensively on basis of price,defend against price war, win sales and market share, earn above average profits based on bigger profit margins or sales volume
Buyers > partial profit margin protection from powerful customers
Suppliers > protected from powerful producers if internal efficiency is source of cost advantage

15. Advantages of being Low Cost Producer
Potential entrants > can use price cutting to make it harder for new rival to win customers, acts as a barrier to entry
Substitutes > can use low price as a defense against substitutes

16. When to go for Low Cost Leadership
Low cost price leadership should be used when:
Price competition is a dominant competitive force
Product is standardised,commodity type available from a variety of sellers
There are few ways to achieve product differentiation
Most buyers use the product in the same ways – price and not features becomes the dominant competitive force
Low switching costs from one seller to another
Buyers have significant power to bargain prices

17. The Drawbacks of Low Cost Producer Strategy
Technological breakthroughs can open up cost reductions for rivals that nullify low previous low cost advantages
Rival firms may find it easy or inexpensive to imitate leader’s low cost methods
Too focused on driving down costs that fails to pick up on significant market changes- changing buyer preference, for added quality or service,shifts in how buyers use the product, declining buyer sensitivity to price.

18. Differentiation Strategy
When buyer’s needs and preferences are too diverse to be satisfied by a standardised product
Must study buyers’ needs and behavior carefully to learn what they consider important and valuable
Competitive advantage results when buyers become strongly attached to the attributes of differentiator’s offering

19. Advantages of a Differentiating Strategy
Successful differentiation allows a firm to:
Command a premium price for its product
Sell more units
Gain greater buyer loyalty to its brand
Provides a buffer against rival strategies as buyers become loyal to the brand and are willing to pay more for it
Erects barriers to entry in the form of customer loyalty

20. Advantages of a Differentiating Strategy
Provides defenses against the five competitive forces
Mitigates bargaining power of large buyers
Helps to fend off threats from substitutes
The most appealing differentiation strategies are those who are least subject to quick or inexpensive imitation

21. Achieving Differentiation
Anything a firm can do to create buyer value represents a potential basis for differentiation
Differentiation can occur anywhere in the activity cost chain
Approaches to a differentiating strategy:
Taste
Special Features
Superior Service
After sales service
Prestige and Distinctiveness
Reliability
Technological leadership
OB/Aug 09

22. Real Value,Perceived Value and Signals of Value
Buyers will not pay for value they do not perceive even if extras are real
Price premium must reflect value actually delivered as well as the value perceived by the buyer
Actual and perceived value may differ when buyers have trouble assessing what their experience with the product will be
Incomplete knowledge on the part of buyers causes them to judge value on signals such as price, packaging, ad campaigns, firm’s market share, length of time firm has been in business, professionalism of employees, seller’s list of customers

23. Signals of Value (cont)
Such signals of value may be as important as actual value when:
The nature of the differentiation is subjective or hard to quantify
Buyers are making a first time purchase
When repurchase is infrequent
Buyers are unsophisticated

24. Achieving a Differentiation based Competitive Advantage
Incorporate product attributes and user features that lower the buyer’s overall costs of using the company’s product
Incorporate features that raise product performance
Incorporate features that enhance buyer satisfaction in non-economic or intangible ways
To deliver value to customers via competitive capabilities that rivals don’t have or can’t afford to match

25. Achieving a Differentiation based Competitive Advantage (cont)
Extra price of product must outweigh the costs of achieving differentiation
Buyers must value the additional features highly enough to buy the product in profitable quantities
Incorporate differentiating features that are not costly but that add to customer satisfaction
Sustainable differentiation usually has to be linked to core competencies, unique competitive capabilities and superior management of value chain activities that competitors cannot readily match or imitate

26. When a Differentiation Strategy Works Best
Differentiation strategies work best where:
There are many ways to differentiate the product or service and many buyers perceive these differences as having value
Buyer needs and uses are diverse
Few rival firms are following a similar differentiation approach
Technological change is fast paced and competition revolves around rapidly evolving product features

27. The Risks of a Differentiating Strategy
Pitfalls in pursuing differentiating strategy include:
Trying to differentiate on the basis of something that does not enhance buyers’ well-being as perceived by the buyer
Over-differentiate so that the product quality or service exceeds buyers’ needs
Try to charge too high a price premium
Tiny differences between rivals’ products offerings may not be visible or important enough to buyers
A low cost strategy can defeat a differentiation strategy when buyers are satisfied with a basic product and don’t think extras are worth a higher price

28. Best Cost Provider Strategies
Best cost provider strategies aim at giving customers more value for the money
Deliver superior value to buyers by satisfying their expectations on key quality/service/features/performance attributes and beating their expectations on price
Best cost strategies are hybrid strategies mid-ground between a low cost advantage and a differentiation advantage and the broad market and a narrow market niche
The target market is value conscious buyers, a sizable part of the overall market

29. Achieving Best Cost Provider Strategies
Best cost provider strategy is powerful where buyer diversity makes product differentiation the norm and where many buyers are also sensitive to price and value
Can position near the middle of the market with a medium quality products at a below average price or
A high quality product at an average price

30. Risks of a Best Cost Provider Strategy
Unless a company has resources, know-how and capabilities to incorporate upscale attributes at a lower cost than rivals, this strategy is ill advised
Company may be squeezed between the strategies of firms using low cost and differentiation strategies
High end differentiators can steal customers with appeal of better products attributes – must achieve significantly lower costs in providing upscale features
Low cost leaders may steal away customers with appeal of a lower price – must provide significantly better product attributes to justify price above low price leaders

31. Focused or Market Niche Strategies
Concentrated attention on a narrow piece of the total market
Target segment or niche can be defined by:
Geographic uniqueness
Specialised requirements in using the product
Special product attributes that appeal to only relatively small numbers of buyers
Examples:
eBay : online auctions
Porsche : sports cars
Google: internet search engine

32. Focused Low-Cost Strategy
Based on low cost securing a competitive advantage by serving buyers in niche target market at lower cost and lower price than rivals
Strategy attractive a firm which can lower costs significantly by limited customer base to well defined buyer segment
Avenues to achieving cost advantage over rivals in niche market are same as for low cost leadership
Outmanage rivals in controlling factors that drive costs
Reconfigure the firm’s value chain in ways that yield cost edge over rivals

33. Focused Low-Cost Strategy (cont)
Examples:
Generic items imitative of name brand merchandise
e.g medicines, ink cartridge manufacturers
Selling directly to retail chains wanting a basic house brand to sell to price-sensitive shoppers

34. A Focused Differentiation Strategy
Based on differentiation aims at securing a competitive advantage by offering niche members a product they perceive as suited to their tastes and preferences
Successful use of a focused differentiation strategy depends on:
Existence of buyer segment that is looking for special product attributes or seller capabilities
Firm’s ability to stand apart from rivals competing in the same target market niche

35. Achieving a Focused Differentiation Strategy
Examples: Chanel, Gucci, Rolex, Rolls Royce
Most markets contain a buyer segment willing to pay a price premium for the finest items available opening a window to pursue differentiation based focused strategy aimed at the very top of the pyramid

36. When is a Focused Low-Cost or Focused Differentiation Strategy is Attractive
A focused strategy based either on low cost or differentiation becomes attractive when the following conditions are met:
The target market niche is big enough to be profitable and offers good growth potential
Industry leaders do not see that being present in the niche is crucial to their success
It is costly or difficult to meet the specialised needs of the niche and mainstream customers at the same time
The industry has many different niches and segments – less competition

37. When is a Focused Low-Cost or Focused Differentiation Strategy is Attractive (cont)
Few if any other rivals are attempting to specialise in the same target segment – reducing the risk of segment overcrowding
The focuser can compete effectively based on its capabilities and resources and goodwill to serve the targeted niche
A focuser’s unique capabilities in serving a market niche can also act as an entry barrier as well as a hurdle for makers of substitute products
Even if niche buyers may have substantial bargaining power, their power is reduced by having to shift to rival firms less capable of meeting their needs

38. The Risks of a Focused Low-Cost or Focused Differentiation Strategy
Focusing also carries risks:
Competitors may come up with ways to serve the niche market better than the focuser with more appealing offerings or by developing capabilities that offset the focuser’s strength
There is potential for the preferences and needs of the niche members to shift over time toward the product attributes desired by the majority of buyers

39. The Risks of a Focused Low-Cost or Focused Differentiation Strategy (cont)
Erosion of differences over buyer segments lowers the barriers to entry into the focuser’s niche and rivals in adjacent segments can start to compete for the focuser’s customers
The segment can be so attractive that it is flooded with competitors, intensifying rivalry and diminishing segment profits

40. 5 Generic Strategies: A Summary
Each of the 5 generic competitive strategies positions the company differently in its market and competitive environment
Each creates a central theme of how company will try to outcompete rivals
Each provides boundaries and guidelines for maneuvering
Each entails differences in product line,production, marketing and sustaining the strategy, affects how the business operated and manner in which value chain activities are managed

41. 5 Generic Strategies: A Summary (cont)
Deciding which generic strategy to employ is perhaps the most important strategic commitment a company makes- it tends to drive the rest of the strategic actions of the company
Compromise or middle ground strategies rarely produce sustainable competitive advantage or a distinctive competitive position except for a well executed best cost producer strategy
Companies with compromise strategies end up with a middle of the pack industry ranking - having a competitive edge over rivals is the most dependable contributor to above average profitability and industry leadership