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The Five Generic Competitive Strategy

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BRIAN IVAN DHARMAWAN
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The Five Generic Competitive Strategy

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BRIAN IVAN DHARMAWAN
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© © All Rights Reserved
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CHAPTER 5 THE FIVE GENERIC COMPETITIVE STRATEGIES — - Crafting & Executing =~ 2 STRATEGY THE QUEST FOR COMPETITIVE ADVANTAGE fal Concepts and Cases THOMPSON | PETERAF | GAMBLE | STRICKLAND. 20e Learning Objectives THIS CHAPTER WILL HELP YOU UNDERSTAND: LO1 What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others. LO 2 The major avenues for achieving a competitive advantage based on lower costs. LO 3 The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals. LO 4 The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies. {2016 by McGann Education, Tiss propritary material slay for authorized instructor use, Not uthried fr sale or distribution ee Iman manner. Ths dociment may not be copies, scanned, duplicated forwarded dstbited, or posted on a website, n whole or pat. | WHY DO STRATEGIES DIFFER? « A firm’s competitive strategy deals exclusively with the specifics of its efforts to position itself in the market- place, please customers, ward off competitive threats, and achieve a particular kind of competitive advantage. Is the firm’s market target broad or narrow? Key factors that distinguish one strategy from another (2.18 Mera acto hs prop mata ac or aor mac nee worn sie tton Po pled, scanned, duplestod, forwarded, ditbuled,orposiad on a wobale, In wh NERIC COMPETITIVE RATEGIE | aia hd Striving to achieve lower overall costs than rivals on products that attract a broad spectrum of buyers. Broad Differentiating the firm’s product offering from rivals’ with icle-vielieime attributes that appeal to a broad spectrum of buyers. Focused Concentrating on a narrow price-sensitive buyer Low-Cost segment and on costs to offer a lower-priced product. Focused Concentrating on a narrow buyer segment by meeting leyiif-e-neritelaie specific tastes and requirements of niche members Giving customers more value for the money by offering upscale product attributes at a lower cost than rivals os FIGURE 5.1 The Five Generic Competitive Strategies Cena wecrewt Eezaton Pras mau open ob) Type of Competitive Advantage Being Pursued Lower Cost Differentiation A Broad Cross-Section of Buyers A Narrow Buyer Segment (or Market Niche) Market Target {2.206 Necro Education Thi proprtary matil sity autores cos use No ators aaibuton ve In'any manner: This document mayo! be copie, scanned, duplicate, forwarded distributed, or posled on a wabet, in whole Opa. LOW-COST PROVIDER STRATEGIES « Effective Low-Cost Approaches: e Pursue cost-savings that are difficult imitate. e Avoid reducing product quality to unacceptable levels. « Competitive Advantages and Risks: e Greater total profits and increased market share gained from underpricing competitors. e Larger profit margins when selling products at prices comparable to and competitive with rivals. e Low pricing does not attract enough new buyers. e Rival’s retaliatory price cutting set off a price war. {028 by Mere austin hs ropitny matl aly aurea ina ue taurine druton x manner. This decument may not be copid, scanned pleated, forwarded, catibuod, or posied ona wabet, in whoo or Pat. + A low-cost provider's basis for competitive advantage is lower overall costs than competitors. Successful low-cost leaders, who have the lowest industry costs, are exceptionally good at finding ways to drive costs out of their businesses and still provide a product or service that buyers find acceptable. + A cost driver is a factor that has a strong influence on a firm's costs. {612016 by Mecraw- Education. This is proprietary material oll or authorized instuctor use. No authorised forsale oF etrbution Inany manner. This document may not be copied, ecanned, duplicated, forwarded, lerioved, oF poste ona web, n whoo oF Pat. #7 STRATEGIC MANAGEMENT PRINCIPLE ¢ A low-cost advantage over rivals can translate into better profitability than rivals attain. Eduction. This is propitary material oll for authorized instructor use. No authorized for eae oF dtrbuton = ‘Sony manna Tnssocomert may nabs copie scanned upicne fonarcesnttedor poss ont mebate mente pr MAJOR AVENUES FOR ACHIEVING A COST ADVANTAGE « Low-Cost Advantage e A firm’s cumulative costs across its overall value chain must be lower than competitors’ cumulative costs. «# How to Gain a Low-cost Advantage: 1. Perform value chain activities more cost-effectively than rivals. 2. Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities. (2208 Metron Eaventon Ti propery mata! ay stored actos use, Nt autora rae or ribuon “a ‘manner. This documentmay Not be coped, scanned, duplicated lorarded, darbuted, or posted on e website whole o part ¢ A cost driver is a factor that has a strong influence on a company’s costs. (6) 2016 by craw Education. This popstar materi solely for authorized instructor use, Not authorize or ale stribution Inany manner. This document may not be Gepled, scanned, duplicated, forwarded, leibved or posted ona webst,n whol or part. #10 COST-EFFICIENT MANAGEMENT OF VALUE CHAIN ACTIVITIES Cost Driver e Is a factor with a strong influence on a firm’s costs. « Can be asset- or activity-based. Securing a Cost Advantage: e Use lower-cost inputs and hold minimal assets e Offer only “essential” product features or services e Offer only limited product lines e Use low-cost distribution channels e Use the most economical delivery methods (6) 2016 by McGraw Education. This is propratry materi solely for authorized instructor use, Not authorize or sale or dsibution 2m Inany manner. This document may not be Cople, scanned, dupliate, forwarded, lsiouted, or posted ona webs, n whol oF part. FIGURE 5.2 Cost Drivers: The Keys to Driving Down Company Costs Conran Neca Easton Pemiion gute or eproton op (6) 2016 by Meraw-Hl Education. This i proprietary materia cel for authorized instructor wee Nt authorized fr eae or dribulon| Si In any manner This documentmay no! be copied, scanned, duplicated orwarde, sirbuted, er psiedion 8 website, n whole part COST-CUTTING METHODS 1. Striving to capture all available economies of scale. 2. Taking full advantage of experience and learning-curve effects. 3. Operating facilities at full or near-full capacity. 4. Improving supply chain efficiency. 5. Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance.. 6. Using the firm’s bargaining power vis-a-vis suppliers or others in the value chain system to gain concessions. 7. Using online systems and sophisticated software to achieve operating efficiencies.. {2.206 Mec Eaton. is propriety mss ot athornd nro use, Nl waza or ale of tition document may not be copog, scanned, duplicate, forwarded, lbvied, or posted ona webets In whole or par. UTTING METHODS (cont'd) es 8. Improving process design and employing advanced production technology.. 9. Being alert to the cost advantages of outsourcing or vertical integration. 10. Motivating employees through incentives and company culture. {2.26 by Necro Ewen. Tha propia mata eyo suoreed nett e.Nol urd se osbuon — Irony manna. Ths document may not be epled, canned, duplicated, fowardod, levied or posted ona webs, nwhole or par. REVAMPING THE VALUE CHAIN SYSTEM TO LOWER COSTS Selling direct to consumers and bypassing the activities and costs of distributors and dealers by using a direct sales force and a company website. ¢ Streamline operations by eliminating low value-added or unnecessary work steps and activities. « Reduce materials handling and shipping costs by having suppliers locate their plants or warehouses close to the firm’s own facilities. {2,206 Moora erat Tie ropintny mtr ey fr mba nur vw Nomura rea bon eas treny menner. This document ‘Scanned uphated, foarded, dtbuted or How Walmart Managed Its Value 2 © Chain to Achieve a Huge Low-Cost Advantage over Rival Supermarket Chains ¢ Which Walmart value chain activity would be most easily overcome by rival supermarket chains? ¢ Which Walmart value chain activities would be the most difficult to overcome by rival supermarket chains? + Assume you have been tasked to revamp a rival supermarket’'s value chain activities to better compete with Walmart. In what order of expected payoff should you attempt to revamp its value chain activities? {25 mein auction, a pep mata sly to aan arcu Net andr may notbe copied, seared, duplicates forwarded, csirbuted. or posied aha webs, n wh i THE KEYS TO BEING A SUCCESSFUL LOW-COST PROVIDER Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively by: e Spending aggressively on resources and capabilities that promise to drive costs out of the business. e Carefully estimating the cost savings of new technologies before investing in them. e Constantly reviewing cost-saving resources to ensure they remain competitively superior. (2,210 pyran cacao Te prop mar sly ona nrc une. Ho aborted io aor atom _ Ineny manner. This document may ot be Gopted, scanned, duplested,orware,dsibuted, or posted ona webst,n whole or par. STRATEGIC MANAGEMENT PRINCIPLE ¢ Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost- effectively. (gmt Neen eucaton Te propyl ely fo auhofaed nde ue ot auorand elo detbuton ee jer. This document may not be copled, scanned, dupliste,trarded, leibved, or posted on a webs, In whale or pat WHEN A LOW-COST PROVIDER STRATEGY WORKS BEST 1. Price competition among rival sellers is vigorous. 2. Identical products are available from many sellers. 3. There are few ways to differentiate industry products. 4. Most buyers use the product in the same ways. 5. Buyers incur low costs in switching among sellers. {0.21 by necro Tie propria maar ny guia err wt. ol utr ret dton This document mey note coped scanned, dupiestes fontardd, datos, posted ona webat,n PITFALLS TO AVOID IN PURSUING A LOW-COST PROVIDER STRATEGY « Engaging in overly aggressive price cutting does not result in unit sales gains large enough to recoup forgone profits. @ Relying on a cost advantage that is not sustainable because rival firms can easily copy or overcome it. « Becoming too fixated on cost reduction such that the firm’s offering is too features-poor to gain the interest of buyers. @ Having a rival discover a new lower-cost value chain approach or develop a cost-saving technological breakthrough. {2.208 by ecm Eaton, This propriate sly author nro se, Nt ahorted orale dition manner. This document may not be copied, scanned duleatod, forwarded, detrbuod, r posted on a webai,n whoo or Par. STRATEGIC MANAGEMENT PRINCIPLE ¢ A low-cost provider is in the best position to win the business of price-sensitive buyers, set the floor on market price, and still earn a profit. {2,218 Mero Esato Tie prot mate oy fy auratus No auhorz slo itbuon ex {many manner. This document may not be copied, scanned, duplicated forwarded, dsiibuted,o posted on a webst, in whol oF pat. STRATEGIC MANAGEMENT PRINCIPLE ¢ Reducing price does not lead to higher total profits unless the added gains in unit sales are large enough to bring in a bigger total profit despite lower margins per unit sold. {2,200 Meare Edenton. Ti propia mal ely fo ahora nur wt. wuz feel doen aaa none Ws Socom ty web ipod scosnd Gephcts trae toed er pones ona wabeke mone poe STRATEGIC MANAGEMENT PRINCIPLE ¢ A low-cost provider's product offering must always contain enough attributes to be attractive to prospective buyers—low price, by itself, is not always appealing to buyers. {2.2 by crn eaorton Te propia maa ety fara nd ue, ot moran fo ett dbton

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