4980 Strategic Management

Chapter Five
The Five Generic
Competitive Strategies
 Motivation
• Quotes
– Strategic positioning means performing different activities from
rivals or performing similar activities in different ways.
• Michael Porter, Great scholar
– Strategy 101 is about choices. You can’t be all things to all people.
• Michael Porter, Great scholar
– Strategy is all about combining choices of what to do and what not to
do into a system that creates a requisite fit between what the
environment needs and what the company does.
• Costas Markides, Professor
• Groups/sheets:
– What’s the common theme?
– Name a company that has well accomplished the common theme?
– Name a company that has not well accomplished the common
theme?
• You can name popular businesses or small firms
 Motivation
• The big choice…
– What strategy will we pursue?
• Do all business leaders make this choice?
• Generally, do successful business leaders
make this choice?
• Goal …equip you to make that vital decision.
 Motivation
• The approach…
– The five generic strategies…plus one
• What makes them different
• The advantages of each
• In what conditions does each work well
• I can’t give you the perfect answers as to
what generic strategy is best for every
situation
• We will build a foundation of knowledge that
will help you frame choices
 Topics

• Intro Thoughts
• Low-cost Provider
• Broad Differentiation
• Focused Low-cost and Focused Differentiation
• Best-cost Provider
• And one more approach...Specialization
 Intro Thoughts
Types GENERIC COMPETITIVE STRATEGIES
Broad, Broad lower overall costs than rivals on comparable products…
Low-cost that attract a broad spectrum of buyers.
Strategy Underpricing rivals
Broad Differentiate the firm’s product offering from its rivals.
Differentiation Product attributes that appeal to a broad spectrum of buyers.
Strategy
Focused Narrow buyer segment.
Low-cost Lower costs than rivals.
Strategy Serve niche members at a lower price.
Focused Narrow buyer segment (or market niche).
Differentiation Customized attributes that meet their specific tastes and requirements of
Strategy niche members better than rivals
Best-cost Incorporate upscale product attributes at a lower cost than rivals.
(Hybrid) Give customers more value for their money>
Strategy
 Is the firm’s market target
broad or narrow?
Key factors that
distinguish one strategy
from another
Is the competitive advantage
pursued linked to low costs
or product differentiation?
 Intro Thoughts

• Each generic strategy:

– Positions the firm differently in its market
– Establishes a central theme for how the firm
intends to outcompete rivals
– Creates boundaries or guidelines
 Topics

• Intro Thoughts
• Low-cost Provider
• Broad Differentiation
• Focused Low-cost and Focused Differentiation
• Best-cost Provider
• And one more approach...Specialization
Groups/Sheets:
Low-cost Provider
What is “scale”? How is scale related to the competitive
advantages?

• Effective low-cost approaches

– Pursue cost savings that are difficult to imitate
– Avoid reducing product quality to unacceptable levels
• Competitive advantages
– Greater profits and market share gained from
underpricing competitors
– Larger profit margins when selling products competitively
priced
• Risks
– Low pricing may not attract enough buyers
– Rival’s retaliatory price-cutting sets off a price war
 Low-cost Provider

• Successful low-cost leaders

– Are good at finding ways to reduce costs
– While providing a product or service buyers find
acceptable
• Cost driver
– Is a factor that has a strong influence on a firm’s
costs
Groups/Sheets:
Name two low-cost companies.
Identify at least one of their cost drivers.
 Low-cost Provider
• Revamping the value chain to lower costs
– Selling direct to consumers, bypassing
distributors and dealers
– Eliminate low value chain activities that provide
little value
Groups/Sheets:
• Name a hypothetical or real company, its product and target market.
Name a value-chain activity the leaders should consider
outsourcing…explain why.
 Low-cost Provider
• Executing the low-cost strategy
– Investing aggressively on resources and
capabilities that drive costs out of the business
– Estimating the cost savings of new technologies
before investing in them
– Constantly reviewing cost-saving resources to
ensure they remain competitively superior
– Finding ways to perform value chain activities
faster, more effectively, and more cost-
effectively…than rivals
 Low-cost Provider
• When low-cost strategy works best when…
– Identical products are available from many
sellers
– Few ways to differentiate industry products
– Buyers incur low switching costs
 Low-cost Provider
• Low-cost strategy pitfalls
– Overly aggressive price cutting does not result in
sales gains large enough to recoup forgone
profits
– Relying on a cost advantage that is not
sustainable
• Rival firms can easily copy or overcome it
– Becoming too fixated on cost reduction…firm’s
offering does not gain the interest of buyers
 Topics

• Intro Thoughts
• Low-cost Provider
• Broad Differentiation
• Focused Low-cost and Focused Differentiation
• Best-cost Provider
• And one more approach...Specialization
Groups/Sheets:
Broad Differentiation
• In your words, how would you describe a “uniqueness
driver”?
• Provide an example.
• Broad differentiation strategy
– Offering unique product attributes that appeal to
wide range of buyers…it’s worth paying for
• Uniqueness driver
– Creates buyers’ perception of value (brand
loyalty
– Has a strong effect on differentiating.
Groups/Sheets:
• Name a company that is successful at broad differentiation
strategy?
• Identify their uniqueness driver(s)?
 Broad Differentiation

• Effective Differentiation Approaches

– Carefully study buyer needs and behaviors,
values, and willingness to pay for a unique
product or service
– Incorporate features that appeal to buyers and
create a sustainably distinctive product offering
– Use higher prices to recoup differentiation costs
 Broad Differentiation

• Advantages of effective differentiation

– Command premium prices
– Increased unit sales (large market)
– Brand loyalty
 When a Differentiation Strategy Works Best

Groups/Sheets:
• Identify a market reflecting each.
Market Circumstances
Favoring
Differentiation

Buyer needs There are Few rival There is rapid

and uses for many ways firms are change in the
the product that following a product’s
are diverse. differentiation similar technology
can have differentiation and features.
value to approach.
buyers.

© McGraw-Hill Education.
Groups/Sheets:
Broad Differentiation
• Would a company applying broad differentiation need to focus on all of these?
• Name a product and its broad differentiation attributes.
• As the company leader, on which of these big picture methods would you
focus? Why

• Executing a broad differentiation strategy

– Improve customer service
– Strive for innovation and technological advances.
– Pursue continuous quality improvement.
– Increase marketing and brand-building activities.
 Broad Differentiation
• Broad differentiation strategy pitfalls
– Relying on product attributes easily copied by rivals
– Product attributes that do not evoke an enthusiastic
buyer response
– Overspending on differentiation efforts… hurts
profits
– Offering trivial improvements in quality, service, or
performance features
– Over-differentiating the product…exceeds the needs
of most buyers
– Charging a price premium that’s too high
 Topics

• Intro Thoughts
• Low-cost Provider
• Broad Differentiation
• Focused Low-cost and Focused Differentiation
• Best-cost Provider
• And one more approach...Specialization
 Focused Low-cost
and Focused Differentiation
Focused Strategy
Approaches

Focused
Low-Cost Focused Market
Strategy Niche Strategy
 Focused Low-cost
and Focused Differentiation
• When a focused low-cost or a focused differentiation
strategy is effective
– The target market niche is big enough to be profitable
and offers growth potential.
– It’s costly or difficult for competitors to meet the
specialized needs of niche buyers.
– The industry has many different niches and segments.
– Rivals have little or no entry interest in the target
segment.
• Groups/sheets: name an industry for which a focused
approach is appropriate and two of the points above
that fit.
 Focused Low-cost
and Focused Differentiation
• The risks of a focused low-cost or a focused
differentiation strategy
– Competitors will find ways to match the focused
firm’s capabilities
– The specialized preferences and needs of niche
members shift over time
– As attractiveness of the segment increases, it
draws in more competitors
 Topics

• Intro Thoughts
• Low-cost Provider
• Broad Differentiation
• Focused Low-cost and Focused Differentiation
• Best-cost Provider
• And one more approach...Specialization
 Best-cost Provider
Differentiation: Low Cost Provider:
Providing desired quality, Charging a lower price
features, performance, than rivals with similar
service attributes caliber product offerings

Best-Cost Provider
Hybrid Approach

Value-Conscious Buyer
 Best-cost Provider

• Best-cost provider strategies

– A hybrid of low-cost provider and differentiation
strategies
– Aimed at providing more desirable attributes
(quality, features, performance, service)
– ....while beating rivals on price
 Best-cost Provider

• When a best-cost provider strategy works

best
– Product differentiation is the market norm.
– There are many value-conscious buyers who
prefer mid-range products.
– Economic conditions have caused more buyers to
become value-conscious.
 Best-cost Provider

• The risk...squeeze!

Best-Cost
Low-Cost High-End
Providers
Provider Differentiators
Strategy
Groups/sheets:
• How each business model above fits the
strategy it portrays?
• Where does Apple fall?
• A hotel chain provides superior customer
service at value prices. What strategy is the
hotelier using to gain competitive advantage?
a) a focused differentiation strategy
b) a focused low-cost strategy
c) a low-cost provider strategy
d) a broad differentiation strategy
e) a best-cost provider strategy
• A hotel chain provides superior customer
service at value prices. What strategy is the
hotelier using to gain competitive advantage?
a) a focused differentiation strategy
b) a focused low-cost strategy
c) a low-cost provider strategy
d) a broad differentiation strategy
e) a best-cost provider strategy
 Topics

• Intro Thoughts
• Low-cost Provider
• Broad Differentiation
• Focused Low-cost and Focused Differentiation
• Best-cost Provider
• And one more approach...Specialization
 And one more
approach...Specialization
• The specialization concept is based on laws of
science and nature
– A piece of paper spread over a square centimeter
is much more resistant than a piece spread over a
square meter
– Light intensity diminishes when the same energy
is spread over a larger area
 And one more
approach...Specialization
• Firms that horizontally specialize identify a
specific market to which the firm will offer a
complete solution consisting of many
components
– Offering a wide range of products and/or
services to a narrow range of customer types
– Horizontally specialized firms leverage their
knowledge about, and relationships with, a
specific type of customers.
 And one more
approach...Specialization
• Vertically specialized firms
– Provide a narrow range of products or services to
a wide range of potential markets
– Vertically specialized firms gain economies of
scale from their narrow product scope
– Develop abilities related to the few products or
services they provide
• Doing one thing and doing it extremely well
– Such as a musician who focuses on one style of
music (classical, jazz, or pop)
 And one more
approach...Specialization
• Specialization strategy would seem similar the
generic strategies
• But generic strategy is directed toward attracting
customers through…
– Aggressive pricing (cost leadership)
– Making a product different or special (differentiation)
– Applying either the low-cost strategy or differentiation
strategy to a specifically defined market (focus).
• However, specialization strategy is not concerned
with pricing or product attributes but is concerned
with the range of products offered or the scope of the
market targeted.
Vertical Specialization Horizontal Specialization

Narrow
Wide Range of
Range
Products
of
Products

Narrow
Market
Wide Market
 Closing Thoughts

• A firm’s competitive strategy will succeed if it

is predicated on leveraging a competitively
valuable collection of resources and
capabilities that match the strategy
• Sustaining a firm’s competitive advantage
depends on its resources, capabilities, and
competences that are difficult for rivals to
duplicate
 Closing Thoughts

• Choosing a strategy...
• Hopefully, we’ve helped you develop this
talent
• Why do I use the word “talent”?
• Because few business leaders do this well
• But when they do....Wow!