Chapter

5
The Five Generic Competitive Strategies
Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy State University-Florida and Western Region
5-1 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved. 5-2 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

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. 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

5-4 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Strategy and Competitive Advantage

Competitive advantage exists when a firms strategy

What Is Competitive Strategy? Strategy Competitive Strategy?

Deals exclusively with a companys

gives it an edge in
Attracting Defending

business plans to compete successfully

Specific

customers and against competitive forces

efforts to please customers

Key to Gaining a Competitive Advantage

Convince customers firms product / service offers

Offensive

and defensive moves to counter maneuvers of rivals to prevailing market conditions to strengthen its market position

superior value
A A A

Responses Initiatives

good product at a low price superior product worth paying more for best-value product
2005 The McGraw-Hill Companies, Inc. All rights reserved.

Narrower in scope than business strategy

5-6 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

5-5 McGraw-Hill/Irwin

Fig. 5.1: The Five Generic Competitive Strategies

LowLow-Cost 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!
5-7 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved. 5-8 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Options: Achieving a Low-Cost LowLow-Cost Advantage

Option 1: Use lower-cost edge to

Nucor Corporation Corporations Corporations Low-Cost LowLow-Cost Provider Strategy

Eliminate Eliminatesome someproduction productionprocesses processesfrom fromvalue valuechain chainused usedby bytraditional traditional integrated integratedsteel steelmills; mills;cut cutinvestment investmentin infacilities facilitiesand andequipment equipment Strive Strivehard hardfor forcontinuous continuousimprovement improvementin inthe theefficiency efficiencyof ofits itsplants plantsand and frequently frequentlyinvest investin instate-of-the state-of-theart artequipment equipmentto toreduce reduceunit unitcosts costs Carefully Carefullyselect selectplan plansites sitesto tominimize minimizeinbound inboundand andoutbound outboundshipping shipping costs costsand andto totake takeadvantage advantageof oflow lowrates ratesfor forelectricity electricity Hire Hireaanonunion nonunionworkforce workforcethat thatuses usesteam-based team-basedincentive incentivecompensation compensation systems systems Heavily Heavilyemphasize emphasizeconsistent consistentproduct productquality qualityand andmaintain maintainrigorous rigorous quality qualitysystems systems Minimize Minimizegeneral generaland andadministrative administrativeexpenses expensesby bymaintaining maintainingaalean leanstaff staff at atcorporate corporateheadquarters headquartersand andallowing allowingonly only44levels levelsof ofmanagement management
5-10 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

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
2005 The McGraw-Hill Companies, Inc. All rights reserved.

5-9 McGraw-Hill/Irwin

Approaches to Securing a Cost Advantage

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

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

Approach 2
Revamp value chain to bypass costproducing activities that add little value from the buyers perspective
5-11 McGraw-Hill/Irwin

Control costs! By-pass costs!

Compare vertical integration vs. outsourcing Assess first-mover advantages vs. disadvantages Control percentage of capacity utilization Make prudent strategic choices related to operations
5-12 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

2005 The McGraw-Hill Companies, Inc. All rights reserved.

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

Keys to Success in Achieving Low-Cost LowLow-Cost Leadership

Scrutinize each cost-creating activity, identifying cost drivers Use knowledge about cost drivers to manage

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

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

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

Aggressively pursue investments in resources and capabilities

limited product/service
5-13 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

that promise to drive costs out of the business

5-14 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Characteristics of a LowLow-Cost 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

When Does a Low-Cost LowLow-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

Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !
5-15 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

significant bargaining power

Industry newcomers use introductory low prices to attract

buyers and build customer base

5-16 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Pitfalls of LowLow-Cost Low-Cost Strategies

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

Differentiation Strategies
Objective
Incorporate differentiating features that cause buyers to

prefer firms product or service over brands of rivals

and ignoring
Buyer

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

interest in additional features buyer sensitivity to price

Declining Changes

and are not easily matched or cheaply copied by rivals

Not spending more to achieve differentiation

in how the product is used

Technological breakthroughs open up cost reductions for

rivals
5-17 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

than the price premium that can be charged

5-18 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Benefits of Successful Differentiation

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

Types of Differentiation Themes

Unique taste -- Dr. Pepper Multiple features -- Microsoft Windows and Office Wide selection and one-stop shopping -- Home Depot and

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
5-20 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

a premium price and/or

Which hat is unique?

unit sales and/or

brand loyalty

= Competitive Advantage
5-19 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Sustaining Differentiation: Keys to Competitive Advantage

Most appealing approaches to differentiation
Those

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

hardest for rivals to match or imitate Those buyers will find most appealing
Best choices to gain a longer-lasting, more profitable

competitive edge
New

product innovation superiority quality and reliability customer service

Technical Product Unique

5-21 McGraw-Hill/Irwin

Comprehensive

competitive capabilities
2005 The McGraw-Hill Companies, Inc. All rights reserved.

Buyer/User Value Chains

5-22 McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc. All rights reserved.

How to Achieve a Differentiation-Based DifferentiationDifferentiation-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
5-23 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Importance of Perceived Value

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

actually delivered to the buyer and perceived by the buyer

Actual and perceived value can differ when buyers are

unable to assess their experience with a product

5-24 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Signaling Value as Well as Delivering Value

Incomplete knowledge of buyers causes them to

When Does a Differentiation Strategy Work Best?

There are many ways to differentiate a product

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

that have value and please customers

Buyer needs and uses are diverse Few rivals are following a similar

differentiation approach
Technological change and

Signals of value may be as important as actual value when

Nature of differentiation is hard to quantify Buyers are making first-time purchases Repurchase is infrequent Buyers are unsophisticated
5-25 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

product innovation are fast-paced

5-26 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

When Does a Differentiation Strategy Work Best?

There are many ways to differentiate a product that have

Pitfalls of Differentiation Strategies

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

value and please customers

Buyer needs and uses are diverse Few rivals are following a similar

lowering their cost or enhancing their well-being

Over-differentiating such that product

differentiation approach
Technological change and

features exceed buyers needs

Charging a price premium

buyers perceive is too high

Not striving to open up meaningful gaps in quality,

product innovation are fast-paced

5-27 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

service, or performance features vis--vis rivals products

5-28 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

BestBest-Cost Best-Cost Provider Strategies

Combine a strategic emphasis on low-cost with a

Competitive Strength of a Best-Cost BestBest-Cost Provider Strategy

A best-cost providers competitive advantage comes

strategic emphasis on differentiation

Make Give

an upscale product at a lower cost

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-

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

excellent product attributes, then use cost advantage to underprice comparable brands
5-29 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

features/attributes wont meet diverse needs of buyers Many buyers are price and value sensitive
5-30 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Risk of a BestBest-Cost Best-Cost Provider Strategy

A best-cost provider may get squeezed between

Focus / Niche Strategies

Involve concentrated attention on a narrow piece of the

strategies of firms using low-cost and differentiation strategies

Low-cost

total market

Objective
Serve niche buyers better than rivals

leaders may be able to siphon customers away with a lower price differentiators may be able to steal customers away with better product attributes

Keys to Success
Choose a market niche where buyers have distinctive

High-end

preferences, special requirements, or unique needs

Develop unique capabilities to serve needs of target

buyer segment
5-31 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved. 5-32 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Approaches to Defining a Market Niche

eBay Geographic uniqueness

Examples of Focus Strategies

Online

auctions cars for motor vehicles

Porsche
Sports

Specialized requirements in

Jiffy Lube International

Maintenance

using product/service

Pottery Barn Kids Special product attributes

Childrens

furniture and accessories

appealing only to niche buyers

5-33 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Bandag
Specialist
5-34 McGraw-Hill/Irwin

in truck tire recapping

2005 The McGraw-Hill Companies, Inc. All rights reserved.

Focus / Niche Strategies and Competitive Advantage

Approach 1
Achieve lower costs than

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

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

to meet specialized needs of niche members

Focuser has resources and capabilities

Approach 2
Offer niche buyers something

Which hat is unique?

to effectively serve an attractive niche

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

different from rivals -A focused differentiation strategy

5-35 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

ability to serve niche members

5-36 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Risks of a Focus Strategy

Competitors find effective ways to match

Deciding Which Generic Competitive Strategy to Use

Each positions a company differently in its market and

competitive environment
Each establishes a central theme for how a company will

a focusers capabilities in serving niche

Niche buyers preferences shift towards product

endeavor to outcompete rivals

Each creates some boundaries for maneuvering as market

attributes desired by majority of buyers niche becomes part of overall market

Segment becomes so attractive it becomes crowded with

circumstances unfold
Each points to different ways of experimenting with the

basics of the strategy

Each entails differences in product line, production

rivals, causing segment profits to be splintered

5-37 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

emphasis, marketing emphasis, and means to sustainthe strategy

5-38 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Deciding Which Generic Competitive Strategy to Use

Each positions a company differently in its market 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 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.
5-39 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved. 5-40 McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.