Chapter

5
The Five Generic Competitive Strategies
Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy State University-Florida and Western Region
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Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.
Michael E. Porter

Chapter Roadmap
Five Competitive Strategies Low-Cost Provider Strategies Differentiation Strategies Best-Cost Provider Strategies Focused (or Market Niche) Strategies The Contrasting Features of the Five Generic Competitive

Strategies: A Summary
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Strategy and Competitive Advantage

Competitive advantage exists when a firms strategy gives it

an edge in

Attracting customers and Defending against competitive forces Key to Gaining a Competitive Advantage

Convince customers firms product / service offers superior

value

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A good product at a low price A superior product worth paying more for A best-value product

What Is Competitive Strategy?

Deals exclusively with a companys

business plans to compete successfully

Specific efforts to please customers Offensive and defensive moves to counter maneuvers of rivals Responses to prevailing market conditions Initiatives to strengthen its market position

Narrower in scope than business strategy

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Fig. 5.1: The Five Generic Competitive Strategies

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Low-Cost Provider Strategies

Keys to Success
Make achievement of meaningful lower costs

than rivals the theme of firms strategy

Include features and services in product

offering that buyers consider essential

Find approaches to achieve a cost advantage

in ways difficult for rivals to copy or match

Low-cost leadership means low overall costs, not just low manufacturing or production costs!
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Options: Achieving a Low-Cost Advantage

Option 1: Use lower-cost edge to

Underprice competitors and attract price-sensitive buyers in enough numbers to increase total profits

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, thereby increasing total profits

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Nucor Corporations Low-Cost Provider Strategy

Eliminate some production processes from value chain used by traditional Eliminate some production processes from value chain used by traditional integrated steel mills; cut investment in facilities and equipment integrated steel mills; cut investment in facilities and equipment Strive hard for continuous improvement in the efficiency of its plants and Strive hard for continuous improvement in the efficiency of its plants and frequently invest in state-of-the art equipment to reduce unit costs frequently invest in state-of-the art equipment to reduce unit costs Carefully select plan sites to minimize inbound and outbound shipping Carefully select plan sites to minimize inbound and outbound shipping costs and to take advantage of low rates for electricity costs and to take advantage of low rates for electricity Hire aanonunion workforce that uses team-based incentive compensation Hire nonunion workforce that uses team-based incentive compensation systems systems Heavily emphasize consistent product quality and maintain rigorous Heavily emphasize consistent product quality and maintain rigorous quality systems quality systems Minimize general and administrative expenses by maintaining aalean staff Minimize general and administrative expenses by maintaining lean staff at corporate headquarters and allowing only 44levels of management at corporate headquarters and allowing only levels of management
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Approaches to Securing a Cost Advantage

Approach 1
Do a better job than rivals of performing value chain activities efficiently and cost effectively

Approach cost-producing Revamp value chain to bypass 2 activities that add little value from the buyers perspective

Control costs! By-pass costs!

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Approach 1: Controlling the Cost Drivers

Capture scale economies; avoid scale diseconomies Capture learning and experience curve effects Manage costs of key resource inputs Consider linkages with other activities in value chain Find sharing opportunities with other business units Compare vertical integration vs. outsourcing Assess first-mover advantages vs. disadvantages Control percentage of capacity utilization Make prudent strategic choices related to operations
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Approach 2: Revamping the Value Chain

Make greater use of Internet technology applications Use direct-to-end-user sales/marketing methods Simplify product design Offer basic, no-frills product/service Shift to a simpler, less capital-intensive, or more flexible

technological process
Find ways to bypass use of high-cost raw materials Relocate facilities closer to suppliers or customers Drop something for everyone approach and focus on a

limited product/service
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 Scrutinize each cost-creating activity, identifying cost drivers Use knowledge about cost drivers to manage

Keys to Success in Achieving Low-Cost Leadership

costs of each activity down year after year

Find ways to restructure value chain to eliminate

nonessential work steps and low-value activities

Work diligently to create cost-conscious corporate cultures

Feature broad employee participation in continuous cost-improvement efforts and limited perks for executives Strive to operate with exceptionally small corporate staffs

Aggressively pursue investments in resources and capabilities that

promise to drive costs out of the business

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Characteristics of a Low-Cost Provider

Cost conscious corporate culture Employee participation in cost-control efforts Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost improvement

Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !
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When Does a Low-Cost Strategy Work Best?

Price competition is vigorous Product is standardized or readily available

from many suppliers There are few ways to achieve differentiation that have value to buyers Most buyers use product in same ways 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
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Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price Low cost methods are easily imitated by rivals Becoming too fixated on reducing costs

and ignoring

Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used

Technological breakthroughs open up cost reductions for

rivals
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Differentiation Strategies
Objective
Incorporate differentiating features that cause buyers to

prefer firms product or service over brands of rivals

Keys to Success
Find ways to differentiate that create value for buyers and are

not easily matched or cheaply copied by rivals

Not spending more to achieve differentiation

than the price premium that can be charged

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Benefits of Successful Differentiation

A product / service with unique, appealing attributes allows a firm to
Command Increase Build

a premium price and/or

Which hat is unique?

unit sales and/or

brand loyalty

= Competitive Advantage
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Types of Differentiation Themes

Unique taste -- Dr. Pepper Multiple features -- Microsoft Windows and Office Wide selection and one-stop shopping -- Home Depot and
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Amazon.com Superior service -- FedEx, Ritz-Carlton Spare parts availability -- Caterpillar More for your money -- McDonalds, Wal-Mart Prestige -- Rolex Quality manufacture -- Honda, Toyota Technological leadership -- 3M Corporation Top-of-line image -- Ralph Lauren, Chanel, Cross

 Most appealing approaches to differentiation

Sustaining Differentiation: Keys to Competitive Advantage

Those hardest for rivals to match or imitate Those buyers will find most appealing

Best choices to gain a longer-lasting, more profitable

competitive edge

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New product innovation Technical superiority Product quality and reliability Comprehensive customer service Unique competitive capabilities

Where to Find Differentiation Opportunities in the Value Chain

Purchasing and procurement activities Product R&D and product design activities Production process / technology-related activities Manufacturing / production activities Distribution-related activities Marketing, sales, and customer service activities
Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Buyer/User Value Chains

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How to Achieve a Differentiation-Based Advantage

Approach 1 Incorporate product features/attributes that lower buyers overall costs of using product Approach 2 Incorporate features/attributes that raise the performance a buyer gets out of the product Approach 3 Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways Approach 4 Compete on the basis of superior capabilities
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Importance of Perceived Value

Buyers seldom pay for value that is not perceived Price premium of a differentiation strategy reflects

Value actually delivered to the buyer and Value perceived by the buyer

Actual and perceived value can differ when buyers are unable

to assess their experience with a product

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Signaling Value as Well as Delivering Value

Incomplete knowledge of buyers causes them to

judge value based on such signals as Price Attractive packaging Extensive ad campaigns Ad content and image Characteristics of seller

Facilities Customers Professionalism and personality of employees

Signals of value may be as important as actual value when

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Nature of differentiation is hard to quantify Buyers are making first-time purchases Repurchase is infrequent Buyers are unsophisticated

 There are many ways to differentiate a product

When Does a Differentiation Strategy Work Best?

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

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When Does a Differentiation Strategy Work Best?

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

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 Buyers see little value in unique attributes of product Appealing product features are easily copied by rivals Differentiating on a feature buyers do not perceive as lowering

Pitfalls of Differentiation Strategies

their cost or enhancing their well-being

Over-differentiating such that product

features exceed buyers needs

Charging a price premium

buyers perceive is too high

Not striving to open up meaningful gaps in quality, service, or

performance features vis--vis rivals products

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Best-Cost Provider Strategies

Combine 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

Objectives
Deliver superior value by meeting or exceeding buyer

expectations on product attributes and beating their price expectations

Be the low-cost provider of a product with good-to-excellent

product attributes, then use cost advantage to underprice comparable brands

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Competitive Strength of a Best-Cost Provider Strategy A best-cost providers competitive advantage comes
from matching close rivals on key product attributes and beating them on price Success depends on having the skills and capabilities to provide attractive performance and features at a lower cost than rivals A best-cost producer can often out-compete both a low-cost provider and a differentiator when
Standardized features/attributes wont meet diverse needs of buyers Many buyers are price and value sensitive

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Risk of a Best-Cost Provider Strategy

A best-cost provider may get squeezed between strategies of

firms using low-cost and differentiation strategies

Low-cost leaders may be able to siphon customers away with a lower price High-end differentiators may be able to steal customers away with better product attributes

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Focus / Niche Strategies

Involve concentrated attention on a narrow piece of the total

market

Objective
Serve niche buyers better than rivals

Keys to Success
Choose a market niche where buyers have distinctive

preferences, special requirements, or unique needs

Develop unique capabilities to serve needs of target buyer

segment
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Approaches to Defining a Market Niche

Geographic uniqueness

Specialized requirements in

using product/service

Special product attributes

appealing only to niche buyers

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Examples of Focus Strategies

eBay

Online auctions Sports cars Maintenance for motor vehicles Childrens furniture and accessories Specialist in truck tire recapping

Porsche

Jiffy Lube International

Pottery Barn Kids

Bandag

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Focus / Niche Strategies and Competitive Advantage

Approach 1
Achieve lower costs than

rivals in serving the segment -A focused low-cost strategy

Approach 2
Offer niche buyers something

Which hat is unique?

different from rivals -A focused differentiation strategy

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What Makes a Niche Attractive for Focusing?

Big enough to be profitable and offers good growth potential Not crucial to success of industry leaders Costly or difficult for multi-segment competitors

to meet specialized needs of niche members

Focuser has resources and capabilities

to effectively serve an attractive niche

Few other rivals are specializing in same niche Focuser can defend against challengers via superior ability to

serve niche members

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Risks of a Focus Strategy

Competitors find effective ways to match

a focusers capabilities in serving niche

Niche buyers preferences shift towards product attributes

desired by majority of buyers niche becomes part of overall market

Segment becomes so attractive it becomes crowded with

rivals, causing segment profits to be splintered

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 Each positions a company differently in its market and

Deciding Which Generic Competitive Strategy to Use

competitive environment Each establishes a central theme for how a company will endeavor to outcompete rivals Each creates some boundaries for maneuvering as market circumstances unfold Each points to different ways of experimenting with the basics of the strategy Each entails differences in product line, production emphasis, marketing emphasis, and means to sustainthe strategy
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 Each positions a company differently in its market Each establishes a central theme for how a company will endeavor

Deciding Which Generic Competitive Strategy to Use

to outcompete rivals Each creates some boundaries for maneuvering as market circumstances unfold Each points to different ways of experimenting with the basics of the strategy Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy The big risk Selecting a stuck in the middle strategy! This rarely produces a sustainable competitive advantage or a distinctive competitive position.
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