The Five Generic Competitive Strategies

1. The Five Generic Competitive Strategies Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University-Florida Region

2. Strategy and Competitive Advantage • Competitive advantage exists when a firm’s strategy gives it an edge in • Attracting customers and • Defending against competitive forces • Convince customers firm’s product / service offers superior value • A good product at a low price • A superior product worth paying more for • A best-value product Key to Gaining a Competitive Advantage

3. Fig. 5.1: The Five Generic Competitive Strategies

4. Low-Cost Provider Strategies Keys to Success • Make achievement of meaningful lower coststhan rivals the theme of firm’s strategy • Include features and services in productoffering that buyers consider essential • Find approaches to achieve a cost advantagein ways difficultfor rivals to copy or match Low-cost leadership means low overall costs, not just low manufacturing or production costs!

5. Do a better job than rivals ofperforming value chain activitiesefficiently and cost effectively Revamp value chain to bypasscost-producing activities that add littlevalue from the buyer’s perspective Control costs! By-pass costs! Approaches to Securing a Cost Advantage Approach 1 Approach 2

6. Keys to Success in AchievingLow-Cost Leadership • Scrutinize each cost-creating activity, identifying cost drivers • Use knowledge about cost drivers to managecosts of each activity down year after year • Find ways to restructure value chain to eliminatenonessential 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

7. Cost-Efficient Management of Value Chain Activities • Attempts to outmanage rivals on cost commonly involves such actions as: • Striving to capture all available economies of scale • Large plant is more economical to operate than small size plants • Large distribution warehouse is more cost-efficient than a small warehouse • Manufacturing economies could be achieved by using common parts and components different models • Cutting back on the number of models • In global industries, making separate products for each market instead of selling standard worldwide tends to boost unit cost because of: - lost time in model changeover - production runs - inability to reach the most economic scale of production for ach country model

8. Cost-Efficient Management of Value Chain Activities 2. Taking full advantage of learning/experience curve effects • Learning/experience curve economies can result from: - debugging and mastering newly introduced technologies - using the experiences and suggestions of workers to install more efficient plant layouts and procedures - the added speed and effectiveness that accrues from repeatedly picking sites for and building new plants, retail outlets, or distribution centers • Aggressively managed low cost providers pay diligent attention to capturing the benefits of learning/experience and keeping these benefits proprietary to what ever extent

9. Cost-Efficient Management of Value Chain Activities 3. Trying to operate at full capacity • Higher rates of capacity utilization allows depreciation and other fixed costs to be spread over large unit volume, thereby lowering fixed cost per nit • The more the capital intensive the business, or higher the fixed costs as a percentage of total costs, the more important the full capacity operations 4. Pursuing efforts to boost sales volumes and thus spread such costs R&D, and selling and administrative costs out over more nits

10. Cost-Efficient Management of Value Chain Activities 5. Improving supply chain efficiency • partnering with suppliers, • reduce inventory carrying costs via JIT inventory systems 6. Substituting the use of low cost for high cost raw materials or component parts 7. Using online systems and sophisticated software to achieve operating efficiencies • Enterprise resource planning (ERP), • Manufacturing execution system (MES)

11. Cost-Efficient Management of Value Chain Activities 8. Adapting labor-saving operating methods • Applying labor saving technology • Shifting production from geographic areas where labor costs are high • Avoiding use of union labor where possible • Using incentive compensation systems that promote high productivity 9. Using company’s bargaining power vis-à-vis suppliers to gain concessions 10. Being alert to the cost advantages of outsourcing and vertical integration

12. Revamping the Value Chain to Curb or Eliminate Unnecessary activities • Cutting out distributors and dealers by selling directly to consumers i. Having the company’s own direct sales force (which adds the cost of maintaining and supporting a sales force but may well be cheaper than assessing customers through distributors) ii. Conducting sales operations at the company’s web site 2. Replacing certain value chain activities with faster and cheaper on line technology • Internet technology has revolutionized supply chain management • Procurement software packages • Retailers can install on-line systems that relay data from cash register at the check-out counter back to manufacturers and their suppliers • Manufacturers can use on-line systems to collaborate closely with parts and component suppliers in designing new products and shortening the time it takes to get them to reduction

13. Revamping the Value Chain to Curb or Eliminate Unnecessary activities • Streamlining operations by eliminating low-value-added or unnecessary work steps and activities • Computer assisted design techniques • Standardizing parts and components across models • Relocating facilities so as to curb the need for hipping and handling activities • Offering a frills free product • Offering a limited product line as opposed to a full product line

14. 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 producerschampion frugalitybut wisely and aggressively invest in cost-saving improvements !

15. When Does a Low-CostStrategy Work Best? • Price competition is vigorous • Product is standardized or readily availablefrom many suppliers • There are few ways to achievedifferentiation that have value to buyers • Most buyers use product in same ways • Buyers incur low switching costs • Buyers are large and havesignificant bargaining power • Industry newcomers use introductory low prices to attract buyers and build customer base

16. 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

17. Differentiation Strategies Objective • Incorporate differentiating features that cause buyers to preferfirm’s product or service over brands of rivals • Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals • Not spending more to achieve differentiationthan the price premium that can be charged Keys to Success

18. Whichhat is unique? Benefits of Successful Differentiation • A product / service with unique, appealing attributes allows a firm to • Command a premium priceand/or • Increase unit sales and/or • Buildbrand loyalty = Competitive Advantage

19. Types of Differentiation Themes • Unique taste – Dr. Pepper • Multiple features – Microsoft Windows and Office • Wide selection and one-stop shopping – Home Depot, Amazon.com • Superior service -- FedEx, Ritz-Carlton • Spare parts availability – Caterpillar • Engineering design and performance – Mercedes, BMW • Prestige – Rolex • Product reliability – Johnson & Johnson • Quality manufacture – Karastan, Michelin, Toyota • Technological leadership – 3M Corporation • Top-of-line image – Ralph Lauren, Starbucks, Chanel

20. Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Where to Find DifferentiationOpportunities 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

21. How to Achieve aDifferentiation-Based Advantage Approach 1 • Incorporate product features/attributes thatlower buyer’s overall costsof using product • Making a company’s product more economical to use • Reducing a buyer’s inventory requirements ( JIT deliveries) • Increasing maintenance intervals and product reliability to lower buyers procurement and order processing cost • Providing free technical support

22. How to Achieve aDifferentiation-Based Advantage Approach 2 • Incorporate product features/attributes that raise product performance • Attributes that provide buyer greater reliability, ease of use, convenience or durability • Making the company’s product cleaner, safer, quitter, or more service maintenance free than rival bands

23. How to Achieve aDifferentiation-Based Advantage Approach 3 • Incorporate features/attributes thatenhance buyer satisfactionin non-economic or intangible ways • Goodyear’s Aquatread tire design appeals to safety conscious motorist • Rolls Royce, Gucci, Rolex have differentiation based competitive advantage linked to buyer desires for status, image, prestige, upscale fashion, etc.

24. How to Achieve aDifferentiation-Based Advantage Approach 4 • Compete on the basis ofsuperior capabilities • CNN for breaking news • Microsoft has stronger capabilities to design, create, distribute, and advertise an array of software products for PC • Avon and Mary Kay cosmetics have differentiated themselves from other cosmetics and personal care products by having direct sales capability through its sales force

25. The Importance of Perceived Value and Signaling Value • The price premium commanded by a differentiation strategy reflects the value actually delivered to the buyer and the value perceived by the buyer • Actual and perceived value can differ whenever buyers trouble assessing what their experience with the product will be • Incomplete knowledge on the part of buyer to judge value based on such signals as: • Price ( where price connotes quality) • Attractive packaging • extensive ad campaign • ad content, and image • The firm’s market share

26. The Importance of Perceived Value and Signaling Value • The seller’s facilities • The seller’s list of customers • Professionalism, appearance, and personality of the seller’s facilities • Such signals of value may be as important as actual value • When the nature of differentiation is subjective or hard to quantify • When buyers are making first-time purchase • When repurchase is infrequent • When buyers are unsophisticated

27. When Does a DifferentiationStrategy Work Best? • There are many ways to differentiate a productthat have value and please customers • Buyer needs and uses are diverse • Few rivals are following a similardifferentiation approach • Technological change andproduct innovation are fast-paced

28. Pitfalls of Differentiation Strategies • Appealing product features are easily copied by rivals • Buyers see little value in unique attributes of product • Overspending on efforts to differentiate the product offering, thus eroding profitability • Over-differentiating such that productfeatures exceed buyers’ needs • Charging a price premiumbuyers perceive is too high • Not striving to open up meaningful gaps in quality, service, or performance features vis-à-vis rivals’ products

29. Best-Cost Provider Strategies • Combinea 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 • 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 under price comparable brands Objectives

30. When Does a Best-CostProvider Strategy Work Best? • Where buyer diversity makesproduct differentiation the norm and • Where many buyers are alsosensitive to price and value

31. Risk of a Best-Cost Provider Strategy • A best-cost provider may get squeezedbetween strategies of firms using low-cost and differentiation strategies • Low-cost leaders may be able to siphoncustomers away with a lower price • High-end differentiators may be able tosteal customers away with better product attributes

32. Focus / Niche Strategies • Involve concentrated attention on a narrow piece of the total market Serve niche buyers better than rivals • Choose a market niche where buyershave distinctive preferences, specialrequirements, or unique needs • Develop unique capabilities to serveneeds of target buyer segment Objective Keys to Success

33. A Focused Low- Cost strategy • Aims at securing a competitive advantage by serving buyers in the target market at a lower cost and lower price than rivals • It has considerable attraction when a firm can lower cost significantly by limiting its customer base to a well defined buyer segment • The only real difference between low-cost provider strategy and a focused low cost strategy the size of the buyer group that a company is trying to appeal to

34. Approaches to Defining a Market Niche • Geographic uniqueness • Specialized requirements inusing product/service • Special product attributesappealing only to niche buyers

35. What Makes a NicheAttractive 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 competitorsto meet specialized needs of niche members • Focuser has resources and capabilitiesto 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

36. Risks of a Focus 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 – nichebecomes part of overall market • Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

37. Deciding Which GenericCompetitive Strategy to Use • Each positions a company differently in its market and competitive environment • Each establishes a central theme for how a company will endeavor to out-compete 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 competitiveadvantage or a distinctive competitive position!