Chapter 5 The Five Generic Competitive Strategies Mc

Chapter 5 The Five Generic Competitive Strategies Mc. Graw-Hill/Irwin Copyright © 2011 The Mc. Graw-Hill Companies, All Rights Reserved.

Competitive Strategy § Deals exclusively with management’s game plan for competing successfully and securing a competitive advantage over rivals üSpecific efforts to give customers superior value – A good product at a lower price – A superior product worth paying more for – An attractive mix of price, features, quality, service, and other appealing attributes 5 -2

Competitive Strategies and Industry Positioning 5 -3

Figure 5. 1: The Five Generic Competitive Strategies Type of Advantage Sought Market Target Lower Cost Broad Range of Buyers Narrow Buyer Segment or Niche Mc. Graw-Hill/Irwin Differentiation Overall Low-Cost Broad Provider Differentiation Strategy Stuck in the middle Focused Low-Cost Differentiation Strategy Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 4

Perils of “Stuck in the Middle” Strategy § Compromise strategies end up with a middle-of-the-pack industry rankings and provide for average performance ü ü An average cost structure Minimal product differentiation relative to rivals An average image and reputation Limited prospect of industry leadership § Compromise or middle-ground strategies rarely produce sustainable competitive advantage 5 -5

Low Cost Provider Strategies § Powerful competitive approach with price-sensitive buyers ü Have lower costs than rivals—but not necessarily the absolutely lowest possible cost ü Must include features and services that buyers consider essential ü Must not be viewed by consumers as offering little value even if priced lower than competing products. 5 -6

Translating a Low Cost Strategy Into Attractive Profit Performance § Option 1: Use lower-cost edge to under-price competitors and increase market share § Option 2: Maintain present price, be content with present market share, and use lower-cost edge to earn a higher profit margin on each unit sold 5 -7

Approaches to Achieving Low Costs 1. Perform essential value chain activities more costeffectively than rivals 2. Revamp the firm’s overall value chain to eliminate or bypass some costproducing activities altogether 5 -8

When a Low Cost Strategy Works Best § Price competition is vigorous § Product is standardized § There are few ways to achieve differentiation § Buyers incur low switching costs § Buyers are large and have significant bargaining power § Industry newcomers use introductory low prices to attract buyers and build customer base 5 -9

Hazards of a Low-Cost Strategy § Cutting price by an amount greater than size of cost advantage § Low cost methods are easily imitated § Becoming too fixated on reducing costs and ignoring ü Buyer interest in additional features ü Declining buyer sensitivity to price § Technological breakthroughs open up cost reductions for rivals 5 -10

Differentiation Strategies § Powerful competitive approach whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product or service 5 -11

Differentiation Strategies § Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals § Not spending more to achieve differentiation than the price premium that customers are willing to pay for all the differentiating extras 5 -12

Benefits of Successful Differentiation Successfully executed differentiation strategies allow a company to: § Command a premium price, and/or § Increase unit sales, and/or § Gain buyer loyalty to its brand 5 -13

Types of Differentiation Themes § Unique taste – Dr. Pepper § Multiple features – Microsoft Windows and Office § Wide selection – Amazon. com § Superior service – Ritz-Carlton § Spare parts availability – Caterpillar § Engineering design and performance – BMW § Prestige – Rolex § Product reliability – Johnson & Johnson § Quality manufacture – Toyota § Top-of-line image – Ralph Lauren, Starbucks, Chanel 5 -14

Creating Value for Customers through Differentiation § Incorporate product features/attributes that lower buyer’s overall costs of using product § Incorporate features/attributes that raise the performance a buyer gets out of the product § Incorporate features/attributes that enhance buyer satisfaction in noneconomic or intangible ways § Exploit competencies and competitive capabilities that rivals don’t have or can’t match 5 -15

Where to Find Opportunities to Differentiate § Supply chain activities § Product R&D and product design activities § Production R&D and technology-related activities § Manufacturing activities § Distribution-related activities § Marketing, sales, and customer service activities 5 -16

Perceived Value and Signaling § The price premium commanded by a differentiation strategy reflects actual value delivered and value perceived by the buyer. § Buyers seldom pay value that is not perceived for 5 -17

Perceived Value and Signaling § Important to signal value when: ü Nature of differentiation is subjective ü When buyers are making firsttime purchases ü When repurchase is infrequent ü When buyers are unsophisticated 5 -18

Market Conditions Favoring a Differentiation Strategy § There are many ways to differentiate a product that have value and please customers § Buyer needs and uses are diverse § Few rivals are following a similar differentiation approach § Technological change and product innovation are fast-paced 5 -19

Hazards of a Differentiation Strategy § Buyers see little value in a product’s unique attributes § Appealing product features are easily copied by rivals § Overspending on efforts to differentiate 5 -20

Hazards of a Differentiation Strategy § Overdifferentiating such that product features exceed buyers’ needs § Charging a price premium buyers perceive is too high § Failing to open up meaningful gaps in product or service attributes 5 -21

Focused Low-Cost Strategy § Reflects a concentration on a narrow piece of the total market defined by geographic uniqueness or special product attributes § Avenues to achieving cost advantage are the same as for lowcost leadership—outmanage rivals in keeping costs low and bypassing or reducing nonessential activities 5 -22

Focused Differentiation Strategy § Keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well-defined group of buyers 5 -23

Market Conditions Making a Focused Strategy Viable § The target niche is big enough to be profitable and offers good growth potential § Industry leaders have chosen not to compete in the niche § It is costly or difficult for multisegment competitors to meet the specialized needs of niche buyers § Industry has many niches and segments § Few rivals are attempting to specialize in the niche 5 -24

Hazards of a Focused Strategy § Competitors find effective ways to match a focuser’s capabilities in serving niche § Niche buyers’ preferences shift towards product attributes desired by majority of buyers § Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered 5 -25

Successful Strategies Must Be Well. Matched to Resources and Capabilities § Low-Cost Providers ü Must have the resources and capabilities to keep its costs below those of its competitors ü Must have expertise to cost-effectively manage value chain activities better than rivals § Differentiators ü Must have the resources and capabilities to incorporate unique attributes that a broad range of buyers will find appealing and worth paying for 5 -26

Successful Strategies Must Be Well. Matched to Resources and Capabilities § Narrow Segment Focusers ü Must have the capability to do an outstanding job of satisfying the needs and expectations of niche buyers 5 -27