McGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved.

Chapter 5

The Five Generic Competitive Strategies

5-2

Competitive Strategy

Deals exclusively with management’sgame plan for competing successfully and securing a competitive advantage over rivalsSpecific 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

5-3

Competitive Strategies and Industry Positioning

4© 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin Copyright

Figure 5.1: The Five GenericCompetitive Strategies

Mar

ket T

arge

t

Type of Advantage Sought

Overall Low-CostProviderStrategy

BroadDifferentiation

Strategy

FocusedLow-CostStrategy

FocusedDifferentiation

Strategy

Stuck inthe

middle

Lower Cost Differentiation

BroadRange of Buyers

Narrow Buyer

Segmentor Niche

5-5

Perils of “Stuck in the Middle” Strategy

Compromise strategies end up with a middle-of-the-pack industry rankings and provide for average performance 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

5-6

Low Cost Provider Strategies

Powerful competitive approach with price-sensitive buyers Have lower costs than rivals—but not

necessarily the absolutely lowest possible cost

Must include features and services that buyers consider essential

Must not be viewed by consumers as offering little value even if priced lower than competing products.

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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

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Approaches to Achieving Low Costs

1. Perform essential value chain activities more cost-effectively than rivals

2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities altogether

5-9

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

5-10

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 ignoringBuyer interest in additional featuresDeclining buyer sensitivity to price

Technological breakthroughs open up cost reductions for rivals

5-11

Differentiation Strategies

Powerful competitive approach whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product or service

5-12

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

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Benefits of Successful Differentiation

Successfully executed differentiation strategiesallow a company to:

Command a premium price, and/or

Increase unit sales, and/or

Gain buyer loyalty to its brand

5-14

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

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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 non-economic or intangible ways

Exploit competencies and competitive capabilities that rivals don’t have or can’t match

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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

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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 for value that is not perceived

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Perceived Value and Signaling

Important to signal value when:Nature of differentiation is

subjectiveWhen buyers are making

first-time purchasesWhen repurchase is

infrequentWhen buyers are

unsophisticated

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Market Conditions Favoring a Differentiation Strategy

There are many ways to differentiate aproduct 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

5-20

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

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Hazards of a Differentiation Strategy

Overdifferentiating such that productfeatures exceed buyers’ needs

Charging a price premiumbuyers perceive is too high

Failing to open up meaningful gaps in product or service attributes

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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 low-cost leadership—outmanage rivals in keeping costs low and bypassing or reducing nonessential activities

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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

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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

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Hazards of a Focused Strategy

Competitors find effective ways to matcha 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

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Successful Strategies Must Be Well-Matched to Resources and Capabilities

Low-Cost ProvidersMust have the resources and capabilities to

keep its costs below those of its competitorsMust have expertise to cost-effectively

manage value chain activities better than rivals

DifferentiatorsMust have the resources and capabilities to

incorporate unique attributes that a broad range of buyers will find appealing and worth paying for

5-27

Successful Strategies Must Be Well-Matched to Resources and Capabilities

Narrow Segment FocusersMust have the capability to do an

outstanding job of satisfying the needs and expectations of niche buyers