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BUSINESS POLICY & STRATEGY

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STRATEGY AND

COMPETITIVE

ADVANTAGE

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Objectives of Competitive

StrategyBuild a competitive advantage

Cultivate clientele ofloyal customers

Knock the socks off rivals, ethically andhonorably

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Competitive Strategies

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MarketTarget

Type of Advantage Sought

Overall Low-Cost

ProviderStrategy

Broad

DifferentiationStrategy

Focused

Low-Cost

Strategy

Focused

Differentiation

Strategy

Best-Cost

Provider

Strategy

Lower Cost Differentiation

Broad

Range ofBuyers

Narrow

Buyer

Segment

or Niche

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Distinctive Features of

the Five GenericCompetitive Strategies

Which hat

is unique?

McGraw-Hill/Irwin 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 8

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Low-Cost Leadership

Make achievement oflow-cost relative torivals the themeof firms business strategy

Find ways to drive costs outof business year-after-year

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Low-cost leadership means lowOVERALL costs, not just low

manufacturing or production costs!

Low-cost leadership means lowoveral lcosts, not just low

manufacturing or production costs!

Keys to Success

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Options: Achieving a Low-Cost Strategy

Open up a sustainable cost advantage overrivals, using lower-cost edge to either

Under-price rivals and reap market sharegains

or

Earn higher profit margin selling at goingprice

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Approaches to Securing

a Cost Advantage

Do a better job than rivals of

performing value chain activities

efficiently and cost effectively

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Approach 1

Revamp value chain to bypass cost-

producing activities that add little

value from the buyers perspective

Approach 2Control

costs!

By-passcosts!

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Keys to Success in Achieving

Low-Cost Leadership

Scrutinize each cost-creating activity, identifyingcost drivers

Use knowledge about cost drivers to manage

costs of each activity down year after year

Find ways to reengineer how activities are

performed and coordinatedeliminate the

costs of unnecessary work steps

Be creative in cutting low value-added activities

out of value chain systemre-invent the

industry value chain 9

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Characteristics of a

Low-Cost Provider

Cost conscious corporate cultureEmployee participation in cost-control efforts

Ongoing efforts to benchmark costs

Intensive scrutiny of budget requestsPrograms promoting continuous cost improvement

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Low-cost producers championFRUGALITYwhile aggressively

INVESTINGin cost-saving improvements!

Successful low-cost producerschampion

frugal i tybut wisely and aggressively

invest in cos t-saving improvements!

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When Does a Low-Cost

Strategy Work Best?

Price competition is vigorousProduct is standardized or readily available from many

suppliers

There are few ways to achieve differentiation thathave 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 base11

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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 costsand 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

Incorporate differentiating features that cause buyersto prefer firms product or service over brands ofrivals

Find ways to differentiate that create valuefor buyersand that are not easily matchedorcheaply copiedby

rivals

Not spending more to achieve differentiation than theprice premium that can be charged

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Objective

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Appeal of Differentiation Strategies

A powerful competitive approach whenuniqueness can be achieved in ways that

Buyers perceive as valuable and are willing to

pay forRivals find hard to match or copy

Can be incorporated

at a cost well belowtheprice premiumthat buyers will pay

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Which hat

is unique?

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Benefits of Successful Differentiation

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A product / service with unique and

appealing attributes allows a firm to

Command a premium priceand/or

Increase unit salesand/or

Build brand loyalty

= Competitive Advantage

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Types of Differentiation Themes

Multiple features-- Microsoft Windows andOffice

Wide selection and one-stop shopping -- Home

Depot and

Superior service- Ritz-Carlton

Spare parts availability-- Caterpillar

More for your money-- McDonalds, Wal-Mart

Prestige -- Rolex

Quality manufacture-- Honda, Toyota

Technological leadership-- 3M Corporation, Intel16

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Where to Find Differentiation

Opportunities in the Value Chain

Purchasing and procurement activities

Product R&D and product design activities

Production process / technology-relatedactivities

Manufacturing / production activities

Distribution-related activities

Marketing, sales, and customer serviceactivities

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Pitfalls of Differentiation StrategiesTrying to differentiate on a feature buyers do not

perceive as lowering their cost or enhancing theirwell-being

Over-differentiating such that product

features exceed buyers needsCharging a price premium that

buyers perceive is too high

Failing to signal value

Not understanding what buyers want or prefer anddifferentiating on the wrong things

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Best Cost Provider Strategies Combine a strategic emphasis on low-costwith a

strategic emphasis on differentiation Make an upscale product at a lower cost Give customers more value for the money

Deliver superior value by meeting or exceedingbuyer expectations on product attributes andbeating their price expectations

Be the low-cost provider of a product with good-to-excellentproduct attributes, then use cost advantageto underpricecomparable brands

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Objectives

C i i S h f

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Competitive Strength of a

Best-Cost Provider Strategy

A best-cost providers competitive advantage comesfrom matchingclose rivals on key product attributesandbeatingthem on price

Success depends on having the skills and capabilities

toprovide attractive performance and features at alower cost than rivals

A best-cost producer can often out-compete both alow-cost provider and a differentiator when

Standardized features/attributes wont meet the diverseneeds of buyers

Many buyers are price and value sensitive

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Risk of a Best-Cost Provider Strategy

Risk A best-cost providermay get

squeezedbetween strategies of firms using

low-costand 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 StrategiesInvolve concentratedattention on a narrow

piece of the total market

Serve niche buyers betterthan rivals

Choose a market niche where buyers havedistinctive preferences, special requirements,

or unique needs

Develop unique capabilities to serve needs oftarget buyer segment

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Objective

Keys to Success

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Focus/Niche Strategies

and Competitive Advantage

Achieve lower coststhan

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

Offer niche buyers somethingdifferentfrom rivals --

A differentiation strategy

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Approach 1

Approach 2 Which hatis unique?

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Competitive Strategy Principle

Any competitive advantage

currently held will eventually be

erodedby the actions of

competent, resourcefulcompetitors !

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Timing and Competitive Advantage

Being a first-mover holds potential for competitive

advantage in some cases but not in others

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Principle 1

Being a fast follower can sometimes yield

as good a result as being a first mover

Principle 2

Being a late-mover may or may not be fatal --

it varies with the situation

Principle 3