Module 5

Strategy and Competitive Advantage

Module Outline
5 Generic Competitive Strategies
1. 2. 3. 4. 5. Low-Cost Leadership Strategy Broad Differentiation Strategies Best-Cost Provider Strategies Focus Strategies Based on Low Cost Focus Strategies Based on Differentiation

Offensive Strategies Defensive Strategies Vertical Integration Strategies First-Mover Advantages and Disadvantages

Strategy and Competitive Advantage

Competitive Advantage exists when firm has an edge in
Defending against competitive forces, and Securing customer

Key to Success Convince customers firms product / service offers superior value
Offer buyers a good product at a lower price Use differentiation to provide a better product buyer think is worth a premium price

Competitive Strategy Principle

Successful companies invest aggressively in creating sustainable competitive advantage, for it is their single most dependable contributor to above average ROI!

Ways to Win a Competitive Advantage

Become the low-cost producer Make the best-made product Provide customer more value for the money Save customer money Provide superior customer service Enhance performance buyer gets Provide more convenient locations Make a more reliable an durable product

Competitive Strategy: Definition

Competitive Strategy consists of moves to
Attract customer Withstand competitive pressures Strengthen firms market position

Objectives
Earn a competitive advantage Cultivate clientele of loyal customer Knock the socks of rivals, ethically and honorably

Competitive Strategy, narrower in scope than business strategy, focuses on managements plan to compete successfully

The 5 Generic Competitive Strategies

Type of Advantage Sought
Lower Cost Overall LowCost Leadership Strategy Broad Range of Buyers Differentiation

Market Target

Broad Differentiation Strategy

Buyer Segment or Niche

Best-Cost Provider Strategy Focused LowCost Strategy Focused Differentiation Strategy

The 5 Generic Competitive Strategies

Low-Cost Leadership
Striving to be the overall lo-cost provider in the industry

Broad Differentiation
Striving to build customer loyalty by differentiating ones product offering from rivals product

Best-Cost Provider Strategy

Striving to give customers more value for the money by combining an emphasis on low cost with an emphasis on upscale differentiation

The 5 Generic Competitive Strategies

Focus Strategy Based on Low Cost
Concentrating on a narrow buyer segment, outcompeting rivals on basis of lower cost

Focus Strategy Based on Differentiation

Offering niche members a product or service customized to their needs

Low-Cost Leadership
Objective Open up a sustainable cost advantage over rivals, using lower-cost edge as basis to
Under-price rivals and reap market share gains, or Earn higher profit margin selling at going price

Low-Cost Leadership
Key to Success Make achievement of low-cost relative to rivals the theme of firms business strategy Find ways to drive costs out of business year-after-year Low-cost leadership means low overall costs, not just low manufacturing or production costs!

Opening Up a Cost Advantage Over Rivals

Approach #1
Do better job of boosting efficiency and controlling costs along value chain by outmanaging rivals regarding both structural and executional cost drivers

Approach #2
Revamp firms value chain to bypass some costproducing activities altogether

Approach #3
A combination of approaches #1 and #2

Opening Up a Cost Advantage Over Rivals

Successful low-cost producers aggressively pursue cost savings throughout the value chain. No area is overlooked! No cost-saving opportunity is ignored!

Controlling Structural Cost Drivers

Capture scale economies and avoid scale diseconomies Capture learning and experience curve effects Consider linkage with other activities in chain Find sharing opportunities with other business units in enterprise Compare benefits of vertical integration vs. outsourcing Take advantage of locational variables

Controlling Executional Cost Drivers

Capitalize on timing considerations associated with first-mover advantages and disadvantages Try to increase capacity utilization Consider cost impact of strategic choices and operating decisions

Revamping the Value Chain

Simplify product design Offer basic, no-frills product / service Reengineer core business processes Shift to a simpler, less capital-intensive, or more streamline technological process Use direct-to-end user sales and marketing approaches Relocate facilities closer to suppliers or customers Pursue more vertical integration relative to rivals Focus on limited product / service to meet special needs of target segment

Characteristics of a Low-Cost Provider

Cost conscious organizational culture Spartan facilities Limited perks and frills for executives Intolerance of waste Intensive screening of budget requests Employee participation in cost control efforts Low-cost producers champion frugality while aggressively investing in cost-saving improvements!

What Managers Have to Do to Achieve Low-Cost Leadership?

Scrutinize each cost-creating activity, identifying cost drivers Use knowledge about cost drivers to manage costs for each activity down further year after year Consider fundamentally reengineering how activities are performed and coordinated Be entrepreneurially creative in cutting some activities out of value chain system

Competitive Strengths of a Low-Cost Provider Strategy

Provides defenses against competitive forces: Rival Competitors
Better positioned to compete offensively on basis of price

Buyers
Better protected from negotiating power of large customers

Suppliers
More insulated than competitors from powerful suppliers

Potential Entrants
Low-cost providers pricing power is a significant barrier

Substitutes
Better positioned to use low price as a defense against substitutes

When a Low-Cost Provider Strategy Works Best?

Price competition among rivals is dominant competitive force Industrys product is a commodity-type item readily available Few ways to achieve product differentiation that have value to buyers Most buyers have similar needs / requirements Buyer incur low switching costs changing sellers Buyers are large and have significant bargaining power

Drawbacks to a Low-Cost Provider Strategy

Technical breakthrough open up cost reductions for rivals, negating a low-cost providers efficiency advantages Rivals find it comparatively easy or inexpensive to imitate leaders low cost methods Low-cost provider become so fixated on cost reduction it fails to respond to
Increased buyer desires for added quality or service features New developments in related products Declining buyer sensitivity to price

Differentiation Strategies
Objective Incorporate differentiating features to cause buyers to prefer firms product / service over rivals brand Key to Success Find ways to differentiate to create value for buyers that are not easily copied by rivals Not spending more to differentiate than price premium to be charged

Differentiation Strategies
Successful differentiation allows firm to
Command a premium price, and / or Increase unit sales, and / or Build brand loyalty

Approaches to Differentiation
Different taste Dr. Pepper Superior service Federal Express Spare parts availability Caterpillar More for your money McDonalds, Wal-Mart Engineering design and performance Mercedes Prestige Rolex Quality Honda automobiles Top-of-the-line image Ralph Lauren Technological leadership 3M Corporation Unconditional satisfaction L. L. Bean

Where to Look for Differentiation Opportunities?

Purchasing and procurement activities Product-oriented R&D activities Production process-oriented R&D activities Manufacturing activities Outbound logistic and distribution activities Marketing, sales, and service activities

Achieving a Differentiation-Based Competitive Advantage

Option 1
Incorporate product attributes and user features that lower buyers costs in using product

Option 2
Incorporate features that raise performance buyer gets out of product

Option 3
Incorporate features to enhance buyer satisfaction in non-economic / intangible ways

Signals of Value
Buyers often judge value on basis of signals
Price where it connotes quality How well known brand is said to be Whether seller has prestige customers

Signals of value may be as important as actual value when

Differences among competing brands are subjective Buyer are making first-time purchases Repurchase is infrequent Buyers are unsophisticated

Competitive Strengths of a Differentiation Strategy

Provides defenses against competitive forces Rival Competitors
Buyers develop loyalty to brand they like the best

Buyers
Mitigates bargaining power of large buyers since other products are less attractive

Suppliers
Seller may be in better position to withstand efforts of suppliers to raise prices

Potential Entrants
Buyer loyalty acts as entry barrier

Substitutes
Better positioned to fend off threats of substitutes based on customers attachment to differentiating attributes

What Kind of Differentiation to Pursue?

Most appealing types of differentiation strategies
Those least subject to imitation

Most likely to produce an attractive, longerlasting edge when its based on:
Technical superiority Quality Giving customer more support services Giving customer more value for money Core competencies

When a Differentiation Strategy Works Best?

There are many ways to differentiate product / service and differences are perceived by buyers to have value Buyer needs and uses of items are diverse Not many rivals are following a similar type of differentiation approach Differentiation strategies are most powerful when buyer needs and preferences are too diverse to be satisfied by a standardized product!

Pitfalls of a Differentiation Strategy

Trying to differentiate on a feature buyer do not perceive as lowering their cost or enhancing their well-being Over-differentiating such that product features exceed buyers needs Charging need to signal value, depending only on real bases of differentiation Not identifying what buyers will consider as value

Competitive Strategy Principle

a low-cost producer strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra attributes as worth paying additional money to obtain!

Best-Cost Producer Strategy

Combines 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

Objective Create superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations Be the low-cost producer of a product with goodto-excellent product attributes, then use cost advantage to under-price comparable brands

Best-Cost Producer Strategy

Key to Success Matching close rivals on key attributes and beating them on cost Expertise in incorporating upscale product attribute at a lower cost than rivals Ability to contain costs by providing buyer a better product

Power of a Best-Cost Producer Strategy

Competitive advantage comes from matching close rivals on key product attributes and beating them on price Most successful best-cost producer have skills to simultaneously manage costs down and product caliber upward Best-cost producer can often out-compete both a low-cost provider and a differentiator where
Buyer diversity makes product differentiation the norm, and Many buyers are price and value sensitive

Competitive Strategy Principle

The most powerful competitive approach a company can pursue is striving relentlessly to become a lower and lower cost producer of a higher and higher caliber product, with the eventual intent of becoming the industrys absolute lowest cost producer and, simultaneously, the producer of the industrys overall best product!

Focus / Niche Strategies

Objective Do a better job of serving buyers in target market niche than rivals Key to Success Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs Develop a unique ability to serve needs of a target buyer segment

Approaches to Focusing
Approach #1
Achieve lower costs than rivals in serving the segment a low-cost strategy

Approach #2
Offer niche buyers something different from rivals a differentiation strategy

Example: Focus Strategies

Rolls Royce
Luxury automobiles

Apple Computer
Desktop publishing

Fort Howard Paper

Paper products for industrial / commercial firms

Commuter Airlines
Link major airports with small population centers

Motel 6
Caters to price-conscious travelers

What Makes a Segment Attractive for Focusing?

Big enough to be profitable Good growth potential Not crucial to success of major competitors Focusing firm has resources to effectively serve segment Focuser can defend itself against challenger via customer goodwill and its superior ability to serve buyers in segment

Power of a Focus Strategy

Competitive power is greatest when
Industry has fast-growing segments
Big enough to be profitable, but Small enough to be of secondary interest to large rivals

No other rivals are concentrating on segment Buyers in segment require

Specialized expertise, or Customized product attributes

Competitive Strengths of a Focus Strategy

Provides defenses against competitive forces Rival Competitors
Rivals do not have ability to meet specialized needs of target clientele

Potential Entrants
Focusers core competence can act as a barrier

Substitutes
Focusers core competence provides obstacles to seller of substitutes

Buyers
Focusers unique ability to meet niche buyers needs can blunt bargaining power of largest niche buyers

When Does a Focus Strategy Work Best?

It is costly or difficult for multi-segment rivals to serve specialized needs of target niche No other rivals are concentrating on same segment Firms resources do not permit it to go after a wider portion of market Industry had many different segments, creating more focusing opportunities

Risks of a Focus Strategy

Broad-line competitors may find effective ways to match focused firm in serving target market Niche buyers preferences may move towards product attributes desired by market as a whole Segment may become co appealing it becomes crowded with aggressive rivals, causing segment profits to be split many ways

Offensive and Defensive Strategies

Offensive Strategies
Nearly always result in successful achievement of competitive advantage

Defensive Strategies
Can protect competitive advantage, but rarely are the basis for achieving competitive advantage

The Building and Eroding of Competitive Advantage

Size of Competitive Advantage
Buildup Period Benefit Period Erosion Period

Strategic Moves Produce Competitive Advantage

Size of Competitive Advantage Achieved

Moves by Rivals Reduce Competitive Advantage

Time

Building and Eroding of Competitive Advantage

Buildup Period
Offensive strategic moves succeed in producing a competitive advantage ideally, buildup period is short

Benefit Period
Length is governed by how long it takes rivals to respond effectively enough to close gap

Erosion Period
Characterized by launch of counter offensive of rivals to attack advantage and whittle it away

Strategic Management Principle

Any competitive advantage currently held will eventually be eroded by the actions of competent, resourceful competitors!

Options for Mounting Strategic Offensives

Initiatives to match or exceed rivals strengths Initiatives to capitalize on rivals weaknesses Simultaneously initiatives on many fronts End-run offensives Guerilla warfare tactics Preemptive strikes

Attacking Competitor Strengths

Appeal Gain market share by out-matching strengths of weaker rivals Whittle away at a rivals competitive advantage Challenging strong competitors with a lower price is foolhardy unless aggressor has a cost advantage or advantage of greater financial strength!

Attacking Competitor Strengths

Possible Offensive Options Under-pricing rivals Boost advertising Introduce new features to appeal to rivals customer Best Options Attack with equally good product and lower price Develop low-cost edge, use it to under-price rivals

Attacking Competitor Weaknesses

Basic Approach Concentrate ones competitive strengths and resources directly against rivals weaknesses Weaknesses to Attack Concentrate on geographic regions where rival has weak market share Go after buyer segments rival is neglecting Go after more performance-conscious customer of rivals who lag behind challenger Attack rivals with weaker advertising and brand recognition

Competitive Strategy Principle

Challenging rivals where they are must vulnerable is more likely to succeed than challenging them where they are strongest, especially when challenger possesses competitive advantage in areas where rivals are weak!

Launching Offensives on Many Fronts

Objective Launch several major initiatives to
Throw rivals off-balance Splinter its attention in many direction, and Force it to use substantial resources to defend its position

Appeal A challenger with superior resources can overpower a weaker rival by outspending it across-the-board long enough to buy its way into the market

End-Run Offensives
Objective Dodge head-to-head confrontations that escalate competitive intensity and risk cutthroat competition attempt to maneuver around competition Appeal Gain first-mover advantage in a new arena Force competitors into playing catch up Change rules of competition in aggressors favor

End-Run Offensive: Approaches

Move aggressively into new geographic markets where rivals have no market presence Introduce product with different attributes and features to better meet buyer needs Introduce next-generation technologies and leapfrog rivals Come up with more support services for customers

Guerilla Offenses
Approach Use principles of surprise and hit-and-run to attack in locations and at times where conditions are most favorable to initiator Appeal Well-suited to small challengers with limited resources

Guerilla Offenses: Options

Focus on narrow target weakly defended by rivals Challenge rivals where they are overextended and when they are encountering problems Make random scattered raids on leaders with tactics such as
Occasional low-balling on price Intense bursts of promotional activity Legal actions charging antitrust violations, patent infringements, and unfair advertising

Preemptive Strike
Approach Involves moving first to secure an advantageous position that rivals are foreclosed or discouraged from duplicating!

Preemptive Strikes: Options

Expand capacity ahead of demand in hopes of discouraging rivals from following suit Tie up best or cheapest sources of essential raw materials Move to secure best geographic locations Obtain an image in buyers minds that is unique and hard to copy Secure exclusive or dominant access to best distributors Acquire desirable, but struggling, competitor

Choosing Whom to Attack

4 types of firms at which to aim an offensive
Market leaders Runner-up firms Struggling rivals on verge of going under Small local / regional firms not doing the job

Offensive Strategy and Competitive Advantage

Competitive advantage areas offering strongest basis for a strategic offensive
Develop lower-cost product design Make changes in production operations that lower costs or enhance differentiation Develop product features that deliver superior performance or lower users costs Give more responsive customer service Escalate marketing effort Pioneer new distribution channel Sell direct to end-users

Offensive Strategy and Competitive Advantage

Chances for strategic success are improved when offensive is tied to what firm does best:
Key skill Strong functional competence

Defensive Strategy
Objectives Lessen risk of being attacked Blunt impact of any attack that occurs Influence challengers to aim attacks at other rivals Strengthen firms present position Help sustain any competitive advantage held

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

Vertical Integration Strategies

Vertical integration extends a firms competitive scope within same industry
Backward into sources of supply Forward toward end-users of final product

Moves to vertically integrate can aim at becoming

Fully integrated Partially integrated

Competitive Strategy Principle

A vertical integration strategy has appeal only if it significantly strengthens a firms competitive position!

Appeal of Backward Integration

Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers Cost savings potential is strongest when
Suppliers have sizable profit margins Item being supplied is a major cost component Necessary technical skills are easily mastered

A differentiation-based competitive advantage arises when firms ends up with better quality part Spares firm uncertainty of defending on suppliers of crucial raw materials

Appeal of Forward Integration

Advantageous for firm to set up its own wholesaleretail distribution network if
Undependable distribution channels undermine steady production operations

Integration into distribution and retailing may be cheaper than going through independent distributors May help achieve greater product differentiation, allowing escape from price-oriented competition For manufacturer, may provide better access to ultimate consumer

Strategic Disadvantages of Vertical Integration

Boosts capital requirements Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety Extends firms scope of activity, locking it deeper into industry Poses problems of balancing capacity at each stage of value chain Requires radically different skills and capabilities Can reduce firms manufacturing flexibility, lengthening design time and ability to introduce new products

Unbundling and Outsourcing Strategies

Concept Involves withdrawing from certain stages in value chain system and relying on outside vendors to perform needed activities and services

Advantages of Outsourcing Strategies

Activity can be performed better or more cheaply by outside specialists Activity is not crucial to achieving competitive advantage Reduces firms risk exposure to changing technology and / or changing buyer preferences Streamlines firm operations in ways to
Cut cycle time Speed decision-making Reduce coordination costs

Allows firm to concentrate on its core business

Pros and Cons of Vertical Integration

Use of a vertical integration strategy depends on
If it can enhance performance of strategy-critical activities to either
Lower costs, or Increase differentiation

Impact on
Investment costs Flexibility and response times Administrative overhead of coordination

If a competitive advantage can be created

First-Mover Advantages
When to make a strategic move is often as crucial as what move to make First-mover advantages arise when
Pioneering helps build firms image and reputation Early commitments to raw material suppliers, new technologies, and distribution channels can produce cost advantage Loyalty of first time buyer is high Moving first can be a preemptive strike

First-Mover Disadvantages
Arise when
Costs of pioneering are sizable and loyalty of first buyers is weak Rapid technological change allows followers to leapfrog pioneers Skills and know-how of pioneers are easily imitated by late movers It is easy for latecomers to crack market

End of Module 5