CHAPTER 5

The Five Generic

Competitive
Strategies

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 LEARNING OBJECTIVES
THIS CHAPTER WILL HELP YOU UNDERSTAND:
1. 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
2. The major avenues for achieving a competitive
advantage based on lower costs
3. The major avenues to a competitive advantage based
on differentiating a company’s product or service
offering from the offerings of rivals
4. The attributes of a best-cost provider strategy—a hybrid
of low-cost provider and differentiation strategies

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 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
Is the competitive advantage
pursued linked to low costs
or product differentiation?

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 THE FIVE GENERIC COMPETITIVE STRATEGIES

Low-cost Striving to achieve lower overall costs than rivals on

provider products that attract a broad spectrum of buyers

Broad Differentiating the firm’s product offering from rivals’ with

differentiation attributes that appeal to a broad spectrum of buyers

Focused low- Concentrating on a narrow price-sensitive buyer segment

cost and on costs to offer a lower-priced product

Focused Concentrating on a narrow buyer segment by meeting

differentiation specific tastes and requirements of niche members

Best-cost Giving customers more value for the money by offering

provider upscale product attributes at a lower cost than rivals

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 FIGURE 5.1 The Five Generic Competitive Strategies

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 LOW-COST PROVIDER STRATEGIES
♦ Effective low-cost approaches
● Pursue cost savings that are difficult to imitate
● Avoid reducing product quality to unacceptable levels
♦ Competitive advantages and risks
● Greater total profits and increased market share
gained from underpricing competitors
● Larger profit margins when selling products at prices
comparable to and competitive with rivals
● Low pricing does not attract enough new buyers
● Rival’s retaliatory price-cutting sets off a price war

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 CORE CONCEPTS (1 of 5)
♦ 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.

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 STRATEGIC MANAGEMENT PRINCIPLE (1 of 7)

A low-cost advantage over rivals can translate into

better profitability than rivals attain.

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 MAJOR AVENUES FOR ACHIEVING
A COST ADVANTAGE

♦ Low-cost advantage
● Cumulative costs across the overall value chain must
be lower than competitors’ cumulative costs.
♦ How to gain a low-cost advantage
● Perform value-chain activities more cost-effectively
than rivals
● Revamp the firm’s overall value chain to eliminate or
bypass cost-producing activities

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 CORE CONCEPT (2 of 5)
A cost driver is a factor that has a strong
influence on a company’s costs.

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 COST-EFFICIENT MANAGEMENT
OF VALUE CHAIN ACTIVITIES

♦ Cost driver
● A factor with a strong influence on a firm’s costs
● Can be asset-based or activity-based
♦ Securing a cost advantage
● Use lower-cost inputs and hold minimal assets
● Offer only “essential” product features or services
● Offer only limited product lines
● Use low-cost distribution channels
● Use the most economical delivery methods

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 FIGURE 5.2 Cost Drivers: The Keys to
Driving Down Company Costs

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 COST-CUTTING METHODS (1 of 2)
1. Capturing 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-à-vis suppliers or
others in the value chain system to gain concessions
7. Using online systems and sophisticated software to
achieve operating efficiencies

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 COST-CUTTING METHODS (2 of 2)
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

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 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
♦ Streamlining operations to eliminate 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

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 How Walmart Managed Its Value 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?

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 Amazon’s Path to Becoming the
Low-Cost Provider in E-Commerce
♦ Describe the business segment in which Amazon
competes.
♦ How well are Amazon’s competitive strengths matched
to the five forces in its competitive environment?
♦ Which of Amazon’s value chain activities would be most
easily overcome by rivals?
♦ Which Amazon value chain activity would be the most
difficult to overcome by rivals?
♦ Assume you have been tasked to revamp a rival’s value
chain activities to better compete with Amazon. In what
order of expected payoff should you attempt to revamp
its value chain activities?

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 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:
● Spending aggressively on resources and capabilities
that promise to drive costs out of the business
● Carefully estimating the cost savings of new
technologies before investing in them
● Constantly reviewing cost-saving resources to ensure
they remain competitively superior

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 STRATEGIC MANAGEMENT PRINCIPLE (2 of 7)
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.

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 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.

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 PITFALLS TO AVOID IN PURSUING A
LOW-COST PROVIDER STRATEGY
♦ Engaging in overly aggressive price cutting that 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

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 STRATEGIC MANAGEMENT PRINCIPLE
(3 of 7)

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.

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 STRATEGIC MANAGEMENT PRINCIPLE (4 of 7)
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.

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 STRATEGIC MANAGEMENT PRINCIPLE (5 of 7)
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.

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 BROAD DIFFERENTIATION STRATEGIES
♦ Effective Differentiation Approaches
● Carefully study buyer needs and behaviors, values,
and willingness to pay for a unique product or service
● Incorporate features that both appeal to buyers and
create a sustainably distinctive product offering
● Use higher prices to recoup differentiation costs
♦ Advantages of Differentiation
● Command premium prices for the firm’s products
● Increased unit sales due to attractive differentiation
● Brand loyalty that bonds buyers to the differentiating
features of the firm’s products

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 CORE CONCEPT (3 of 5)
Differentiation enhances profitability whenever a
company’s product can command a sufficiently
higher price or produce sufficiently greater unit
sales to more than cover the added costs of
achieving the differentiation.

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 CORE CONCEPTS (4 of 5)
The essence of a broad differentiation strategy
is to offer unique product attributes that a wide
range of buyers find appealing and worth paying
for.
A uniqueness driver is a factor that can have a
strong differentiating effect.

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 COST-EFFICIENT MANAGEMENT
OF VALUE CHAIN ACTIVITIES

♦ A uniqueness driver can

● Have a strong differentiating effect
● Be based on physical as well as functional attributes
of a firm’s products
● Be the result of superior performance capabilities of
the firm’s human capital
● Have an effect on more than one of the firm’s value
chain activities
● Create a perception of value (brand loyalty) in buyers
where there is little reason for it to exist

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 FIGURE 5.3 Value Drivers: The Keys to Creating a
Differentiation Advantage

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 MANAGING THE VALUE CHAIN TO CREATE
THE DIFFERENTIATING ATTRIBUTES
1. Create product features and performance attributes
that appeal to a wide range of buyers.
2. Improve customer service or add extra services.
3. Invest in production-related R&D activities.
4. Strive for innovation and technological advances.
5. Pursue continuous quality improvement.
6. Increase marketing and brand-building activities.
7. Seek out high-quality inputs.
8. Emphasize human resource management activities
that improve the skills, expertise, and knowledge of
company personnel.
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 REVAMPING THE VALUE CHAIN SYSTEM
TO INCREASE DIFFERENTIATION

Coordinating with channel

Approaches allies to enhance customer
to enhancing perceptions of value
differentiation
through changes
in the value Coordinating with suppliers
chain system to better address customer
needs

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 DELIVERING SUPERIOR VALUE VIA A
BROAD DIFFERENTIATION STRATEGY
Broad Differentiation:
Offering Customers Something That Rivals Cannot
Incorporate product attributes and user features that lower the
1. buyer’s overall costs of using the firm’s product

Incorporate tangible features (e.g., styling) that increase

2. customer satisfaction with the product

Incorporate intangible features (e.g., buyer image) that enhance

3. buyer satisfaction in noneconomic ways

Signal the value of the firm’s product offering to buyers (e.g.,

4. price, packaging, placement, advertising)

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 DIFFERENTIATION: SIGNALING VALUE
Signaling value is important when:
● The nature of differentiation is based on intangible
features and is therefore subjective or hard to quantify
by the buyer.
● Buyers are making a first-time purchase and are
unsure what their experience will be with the product.
● Product or service repurchase by buyers is infrequent.
● Buyers are unsophisticated.

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 STRATEGIC MANAGEMENT PRINCIPLES (6 of 7)

♦ Differentiation can be based on tangible or

intangible attributes.
♦ Easy-to-copy differentiating features cannot
produce a sustainable competitive advantage.
♦ Any differentiating feature that works well is a
magnet for imitators.
♦ Overdifferentiating and overcharging are fatal
strategy mistakes.

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 SUCCESSFUL APPROACHES TO
SUSTAINABLE DIFFERENTIATION
♦ Differentiation that is difficult for rivals to
duplicate or imitate
● Company reputation
● Long-standing relationships with buyers
● A unique product or service image
♦ Differentiation that creates substantial switching
costs that lock in buyers
● Patent-protected product innovation
● Relationship-based customer service

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 WHEN A DIFFERENTIATION STRATEGY
WORKS BEST

Market Circumstances
Favoring Differentiation

There are many Few rival firms There is rapid

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

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 PITFALLS TO AVOID IN PURSUING A
DIFFERENTIATION STRATEGY
♦ Relying on product attributes easily copied by rivals
♦ Introducing product attributes that do not evoke an
enthusiastic buyer response
♦ Eroding profitability by overspending on efforts to
differentiate the firm’s product offering
♦ Offering only trivial improvements in quality, service, or
performance features vis-à-vis the products of rivals
♦ Over-differentiating the product quality, features, or
service levels exceeds the needs of most buyers
♦ Charging too high a price premium

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 FOCUSED (OR MARKET NICHE) STRATEGIES

Focused Strategy
Approaches

Focused Focused
Low-Cost Market Niche
Strategy Strategy

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 Clinícas del Azúcar’s Focused
Low-Cost Strategy
♦ Which uniqueness drivers are responsible for the
success of Clinícas del Azúcar?
♦ Which competitive conditions would mitigate against
successful entry of the Clinícas del Azúcar into the U.S.
diabetes care market?
♦ What part do customer expectations about patient-
doctor relationships play in the delivery of health care in
the U.S.?

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 WHEN A FOCUSED LOW-COST OR
FOCUSED DIFFERENTIATION
STRATEGY IS ATTRACTIVE
♦ The target market niche is big enough to be profitable
and offers good growth potential.
♦ Industry leaders chose not to compete in the niche;
focusers avoid competing against strong competitors.
♦ It is costly or difficult for multi-segment 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.

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 THE RISKS OF A FOCUSED LOW-COST OR
FOCUSED DIFFERENTIATION STRATEGY

1. Competitors will find ways to match the focused

firm’s capabilities in serving the target niche.
2. The specialized preferences and needs of
niche members shift over time toward the
product attributes desired by the majority of
buyers.
3. As attractiveness of the segment increases, it
draws in more competitors, intensifying rivalry
and splintering segment profits.

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 Canada Goose’s Focused Differentiation Strategy

♦ Which decisions did CEO Dani Reiss make that launched

Canada Goods on its chosen strategic path?
♦ Which uniqueness drivers are responsible for the
success of Canada Goose?
♦ Which of Canada Goose’s uniqueness drivers are
competitors likely to attempt to copy first?

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 BEST-COST PROVIDER STRATEGIES

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

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 CORE CONCEPT (5 of 5)
Best-cost provider strategies are a hybrid of
low-cost provider and differentiation strategies that
aim at providing more desirable attributes (quality,
features, performance, service) while beating rivals
on price.

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 WHEN A BEST-COST PROVIDER
STRATEGY WORKS BEST

♦ Product differentiation is the market norm.

♦ There are a large number of value-conscious
buyers who prefer mid-range products.
♦ There is competitive space near the middle of
the market for a competitor with either a
medium-quality product at a below-average
price or a high-quality product at an average or
slightly higher price.
♦ Economic conditions have caused more buyers
to become value-conscious.
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 THE RISK OF A BEST-COST PROVIDER
STRATEGY—GETTING SQUEEZED ON
BOTH SIDES

Best-Cost
Low-Cost High-End
Providers
Provider Differentiators
Strategy

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 American Giant’s Best-Cost
Provider Strategy

♦ How can product quality lower product costs?

♦ In which stages of an industry life cycle are low-cost
leadership, differentiation, focused niche, and best-cost
provider strategies most appropriate?
♦ Could the higher-selling prices of American Giant’s
clothing versus its competitors be used as a proxy for
measuring the strength of its best-cost strategy?

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 THE CONTRASTING FEATURES OF THE
FIVE GENERIC COMPETITIVE STRATEGIES:
A SUMMARY
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 for strategic
change as market circumstances unfold
● Entails different ways and means of
maintaining the basic strategy

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 Table 5.1 Distinguishing Features of the Five Generic
Competitive Strategies (1 of 2)
Low-Cost Broad Focused low-cost Focused
Provider Differentiation provider differentiation Best-Cost Provider
Strategic A broad cross- A broad cross- A narrow market niche A narrow market Value-conscious
target section of the section of the where buyer needs niche where buyer buyers. Or, a middle-
market market and preferences are needs and market range
distinctively different preferences are
distinctively
different
Basis of Lower overall Ability to offer Lower overall cost Attributes that Ability to offer better
competitive costs than buyers something than rivals in serving appeal specifically goods at attractive
strategy competitors attractively different niche members to niche members prices
from competitors’
offerings
Product A good basic Many product Features and Features and Items with appealing
line product with few variations, wide attributes tailored to attributes tailored to attributes and
frills (acceptable selection, emphasis the tastes and the tastes and assorted features;
quality and limited on differentiating requirements of niche requirements of better quality, not
selection) features members niche members best
Production A continuous Build in whatever A continuous search Small-scale Build in appealing
emphasis search for cost differentiating for cost reduction for production or features and better
reduction without features buyers are products that meet custom-made quality at lower cost
sacrificing willing to pay for; basic needs of niche products that match than rivals
acceptable quality strive for product members the tastes and
and essential superiority requirements of
features niche members

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 Table 5.1 Distinguishing Features of the Five Generic
Competitive Strategies (2 of 2)
Broad Focused low-cost Focused Best-Cost
Low-Cost Provider Differentiation provider differentiation Provider
Marketing Low prices, good Tout differentiating Communicate attractive Communicate how Emphasize delivery
emphasis value features. features of a budget- product offering does of best value for
Also, try to make a Also, charge a priced product offering the best job of the money
virtue out of product premium price to that fits niche buyers’ meeting niche buyers’
features that lead to cover the extra costs expectations expectations
low cost of differentiating
features
Keys to Economical prices, Stress constant Stay committed to Stay committed to Unique expertise in
maintaining good value innovation to stay serving the niche at the serving the niche simultaneously
the strategy Also, strive to manage ahead of imitative lowest overall cost; better than rivals; managing costs
costs down, year after competitors don’t blur the firm’s don’t blur the firm’s down while
year, in every area of Also, concentrate on image by entering other image by entering incorporating
the business a few key market segments or other market upscale features
differentiating adding other products segments or adding and attributes
features. to widen market appeal other products to
widen market appeal.
Resources Capabilities for driving Capabilities Capabilities to lower Capabilities to meet Capabilities to
and costs out of the value concerning quality, costs on niche goods the highly specific simultaneously
capabilities chain syste. design, intangibles, Examples: Lower input needs of niche deliver lower cost
required Examples: large-scale and innovation costs for the specific members and higher-quality
automated plants, an Examples: marketing product desired by the Examples: custom or differentiated
efficiency-oriented capabilities, R&D niche, batch production production, close feature
culture, bargaining teams, technology capabilities customer relations. Examples: TQM
power practices, mass
customization

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 SUCCESSFUL COMPETITIVE
STRATEGIES ARE RESOURCE-BASED
♦ A firm’s competitive strategy is most likely to
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 and have no good substitutes.

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 STRATEGIC MANAGEMENT PRINCIPLE (7 of 7)

A company’s competitive strategy should be well-

matched to its internal situation and predicated on
leveraging its collection of competitively valuable
resources and capabilities.

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