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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

CHAPTER 5

THE FIVE GENERIC


COMPETITIVE STRATEGIES
WHICH ONE TO EMPLOY?
CHAPTER SUMMARY
Chapter 5 describes the five basic competitive strategy optionswhich of the five to employ is a companys first
and foremost choice in crafting overall strategy and beginning its quest for competitive advantage.

LECTURE OUTLINE
I. Introduction
1. There are several basic approaches to competing successfully and gaining a competitive advantage
over rivals, but they all involve delivering more value to the customer than rivals or delivering value
more efficiently than rivals (or both).
2. But whatever approach to delivering value the company takes, it nearly always requires performing
value chain activities differently than rivals and building competitively valuable resources and
capabilities that rivals cannot readily match or trump.
II. The Five Generic Competitive Strategies
1. A companys competitive strategy deals exclusively with the specifics of managements game plan
for competing successfully its specific efforts to please customers, strengthen its market position,
counter the maneuvers of rivals, respond to shifting market conditions, and achieve a particular kind
of competitive advantage.
2. The biggest and most important differences among competitive strategies boil down to:
a. Whether a companys market target is broad or narrow
b. Whether the company is pursuing a competitive advantage linked to low costs or product
differentiation
3. Five distinct competitive strategy approaches stand out:
a. A low-cost provider strategy: striving to achieve lower overall costs than rivals and appealing
to a broad spectrum of customers, usually by under pricing rivals.
b. A broad differentiation strategy: seeking to differentiate the companys product/service
offering from rivals in ways that will appeal to a broad spectrum of buyers
c. A focused low-cost strategy: concentrating on a narrow buyer segment and outcompeting
rivals by serving niche members at a lower cost than rivals

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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

d. A focused differentiation strategy: concentrating on a narrow buyer segment and outcompeting


rivals by offering niche members customized attributes that meet their tastes and requirements
better than rivals products
e. A best-cost provider strategy: giving customers more value for the money by incorporating
good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest
(best) costs and prices compared to rivals offering products with comparable attributes
4. Figure 5.1, The Five Generic Competitive StrategiesEach Stakes Out a Different Position in
the Marketplace, examines how each of the five strategies stake out a different market position.
III. Low-Cost Provider Strategies
1. A company achieves low-cost leadership when it becomes the industrys lowest-cost provider rather
than just being one of perhaps several competitors with comparatively low costs.
2. In striving for a cost advantage over rivals, managers must take care to include features that buyers
consider essential.
3. For maximum effectiveness, companies employing a low-cost provider strategy need to achieve
their cost advantage in ways difficult for rivals to copy or match.

CORE CONCEPT
A low-cost providers 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. The Two Major Avenues for Achieving a Cost Advantage
1. To achieve a low-cost advantage over rivals, a firms cumulative costs across its overall value chain
are lower than competitors cumulative costs. There are two ways to accomplish this:
a. Do a better job than rivals in performing value chain activities more cost effectively.
b. Revamp the firms overall value chain to eliminate or bypass some cost-producing activities
2. Cost-Efficient Management of Value Chain Activities: Managers must launch a concerted,
ongoing effort to ferret out cost-saving opportunities in every part of the value chain.
a. Striving to capture all available economies of sale
b. Taking full advantage of learning/experience curve effects
c. Trying to operate facilities at full capacity
d. Improving supply chain efficiency
e. Using lower cost inputs wherever doing so will not entail too great a sacrifice in quality
f. Using the companys bargaining power vis-a-vis suppliers to gain concessions
g. Using communications systems and information technology to achieve operating efficiencies
h. Employing advanced production technology and process design to improve overall efficiency

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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

i. Being alert to the cost advantages of outsourcing and vertical integration


j. Motivating employees through incentives and company culture

CORE CONCEPT
A cost driver is a factor that has a strong influence on a companys costs.
3. Illustration Capsule 5.1 describes how Wal-Mart managed its value chain to achieve a huge lowcost advantage over rival supermarket chains. This is its strategy for out-managing its rivals in
efficiently performing various value chain activities to gain a low-cost leadership.
4. Figure 5.2, Cost Drivers: The Keys to Driving Down Company Costs, provides an illustration
of each cost driver.
5. Revamping the Value Chain to Curb or Eliminate Unnecessary Activities: Dramatic costs
advantages can emerge from finding innovative ways to eliminate or bypass cost-producing value
chain activities. The primary ways companies can achieve a cost advantage by reconfiguring their
value chains include:
a. Selling direct to consumers and bypassing the activities and costs of distributors and dealers
b. Streamlining operations by eliminating low value-added or unnecessary work steps and
activities.
c. Reducing materials handling and shipping costs by having suppliers locate their plants or
warehouses close to the companys own facilities
6. Examples of Companies That Revamped Their Value Chains to Reduce Costs: Nucor
Corporation drastically revamped the value chain process for manufacturing steel products by using
relatively inexpensive electric arc furnaces
a. One example of accruing significant cost advantages from creating altogether new value chain
systems can be found in the beef-packing industry.
b. Southwest Airlines has reconfigured the traditional value chain of commercial airlines to lower
costs and thereby offer dramatically lower fares to passengers. Dell Computer has proved
a pioneer in redesigning its value chain architecture in assembling and marketing personal
computers.

ILLUSTRATION CAPSULE 5.1

How Wal-Mart Managed Its Value Chain to Achieve a Huge Low-Cost


Advantage over Rival Supermarket Chains
Discussion Question: Which parts of the value chain does Wal-Mart target in order to achieve a
low-cost advantage over its rivals?
Answer: Wal-Mart has an extensive real-time information sharing network with vendors to make the
supply chain much more efficient. It targets purchasing, store delivery, procurement practices that
leverage the companys relative buying power, investment in a large fleet of trucks for distribution of
inventory, optimization of the product mix, use of security systems, preferred real estate rental and
leasing rates, and lowering labor costs. Together, these initiatives give the company a 22 percent
advantage over rival supermarket chains.

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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

B. The Keys to Success in Achieving Low-Cost Leadership


1. While low-cost providers are champions of frugality, they seldom hesitate to spend aggressively on
resources and capabilities that promise to drive costs out of the business.
2. Having competitive assets of this type and ensuring that they remain competitively superior is
essential for achieving competitive advantage as a low-cost provider.
C. When a Low-Cost Provider Strategy Works Best
a. Price competition among rival sellers is especially vigorous
b. The products of rival sellers are essentially identical and suppliers are readily available from any of
several eager sellers
c. There are a few ways to achieve product differentiation that have value to buyers
d. Most buyers use the product in the same ways
e. Buyers incur low costs in switching their purchases from one seller to another
f. Buyers are large and have significant power to bargain down prices
g. Industry newcomers use introductory low prices to attract buyers and build a customer base
D. The Pitfalls of a Low-Cost Provider Strategy
1. Perhaps the biggest pitfall of a low-cost provider strategy is getting carried away with overly
aggressive price cutting and ending up with lower, rather than higher, profitability.
2. A second big pitfall is relying on an approach to reduce costs that can be easily copied by rivals.
3. A third pitfall is becoming too fixated on cost reduction.
4. Even if these mistakes are avoided, a low-cost provider strategy still entails risk.
IV. Broad Differentiation Strategies
A. Differentiation strategies are attractive whenever buyers needs and preferences are too diverse to be
fully satisfied by a standardized product or by sellers with identical capabilities.

CORE CONCEPT
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.
1. Successful differentiation allows a firm to:
a. Command a premium price for its product
b. Increase unit sales
c. Gain buyer loyalty to its brand
2. Differentiation enhances profitability whenever the extra price the product commands outweighs
the added costs of achieving the differentiation.
3. Companies can pursue differentiation from many angles including unique taste, multiple features,
wide selection, superior service, etc.
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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

B. Managing the Value Chain to Create the Differentiating Attributes


1. Differentiation opportunities can often be found in uniqueness drivers; possibilities include the
following:

CORE CONCEPT
A uniqueness driver is a factor that can have a strong differentiating effect.
a. Striving to create superior product features, design, and performance.
b. Improving customer service or adding additional service.
c. Pursuing production R&D activities
d. Striving for innovation and technological advances
e. Pursuing continuous quality improvement
f. Increasing emphasis on marketing and brand-building activities
g. Seeking out high-quality inputs
h. Emphasizing human resource management activities that improve the skills, expertise, and
knowledge of company personnel.
2. Figure 5.3, Uniqueness Drivers: The Keys to Creating Differentiation Advantage, provides an
illustration of each cost driver.
C. Revamping the Value Chain to Increase Differentiation
1. Differentiation opportunities can exist in activities all along an industrys value chain; possibilities
include the following:
a. Coordinating with channel allies to enhance customer perception of value
b. Coordinating with suppliers to better address customer needs
2. Strong relationships with suppliers can also mean that the companys supply requirements are
prioritized when industry supply is insufficient to meet overall demand.
D. Delivering Superior Value via a Broad Differentiation Strategy
1. While it is easy enough to grasp that a successful differentiation strategy must entail creating buyer
value in ways unmatched by rivals, the big question is which of four basic differentiating approaches
to take in delivering unique buyer value.
2. One route is to incorporate product attributes and user features that lower the buyers overall costs
of using the product.
3. A second route is to incorporate tangible features that raise product performance.
4. A third route is to incorporate intangible features that enhance buyer satisfaction in noneconomic or
intangible ways.
5. A fourth route is to signal the value of the companys product offering - high price, packaging, ad
content

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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

6. A differentiators basis for competitive advantage is either a product/service offering whose attributes
differ significantly from the offering of rivals or a set of capabilities for delivering customer value
that rivals do not have.
E. When a Differentiation Strategy Works Best
1. Differentiation strategies tend to work best in market circumstance where:
a. Buyer needs and uses of the product are diverse
b. There are many ways to differentiate the product or service and many buyers perceive these
differences as having value
c. Few rival firms are following a similar differentiation approach
d. Technological change is fast-paced and competition revolves around rapidly evolving product
features
F. The Pitfalls of a Differentiation Strategy
1. Differentiation strategies can fail for any of several reasons.
2. A differentiation strategy keyed to product or service attributes that are easily and quickly copied is
always doomed.
3. A second pitfall is that the companys differentiation strategy produces an unenthusiastic reception
because buyers see little value in the unique attributes of a companys product.
4. The third big pitfall of a differentiation strategy is overspending on efforts to differentiate the
companys product offering, thus eroding profitability
V. Focused (or Market Niche) Strategies
1. What sets focused strategies apart from low-cost leadership or broad differentiation strategies is
concentrated attention on a narrow piece of the total market.
2. The target segment or niche can be defined by:
a. Geographic uniqueness
b. Specialized requirements in using the product
c. Special product attributes that appeal only to niche members
A. A Focused Low-Cost Strategy
1. A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in
the target market niche at a lower cost and lower price than rival competitors.
2. This strategy has considerable attraction when a firm can lower costs significantly by limiting its
customer base to a well-defined buyer segment.
3. Focused low-cost strategies are fairly common.
B. A Focused Differentiation Strategy
1. Focused differentiation strategies are keyed to offering products or services designed to appeal to
the unique preferences and needs of a narrow, well-defined group of buyers.

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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

2. Successful use of a focused differentiation strategy depends on the existence of a buyer segment
that is looking for special product attributes or seller capabilities and on a firms ability to stand
apart from rivals competing in the same target market niche.
3. Illustration Capsule 5.2, Aravind Eye Care Systems Focused Low-Cost Strategy, provides details
about the companys focused differentiation strategy.

ILLUSTRATION CAPSULE 5.2

Aravind Eye Care Systems Focused Low-Cost Strategy


Discussion Question: Discuss the advantages this organization achieves from its focused low-cost
provider strategy.
Answer: Through utilization of this type of strategy, Aravind is able to capitalize on the market
segment that is comprised of the poorest residents of India with cataracts. The company has taken
this well-known process and streamlined it by removing most discretionary elements in order to
develop a high volume and highly efficient process. Aravinds low cost approach allows them to
provide their surgical service for close to $10.00 compared to an average of $1500.00 in the U.S.
Further, the company is able to provide free eye care to 60% of its patient base out of the revenue
and profit generated from only 40% of its clients.

ILLUSTRATION CAPSULE 5.3

Popchipss Focused Differentiation Strategy


Discussion Question: 1. How does Popchips choice of strategy differentiate it from other snack food
companies in the marketplace?
Answer: Popchip has focused on high income consumers that are interested in a tasty low-fat snack
alternative. This focused differentiation strategy allows them to target a market segment with
significant discretionary income with a product that the leaders in the snack food industry are less
likely to pursue. They have also invested significant effort into their distribution channel though
agreements with Whole Foods, Target, and Costco; all chains that appeal to the same demographic.
C. When a Focused Low-Cost or Focused Differentiation Strategy is Attractive
1. A focused strategy aimed at securing a competitive edge based either on low cost or differentiation
becomes increasingly attractive as more of the following conditions are met:
a. The target niche is big enough to be profitable and offers good growth potential
b. Industry leaders do not see that having a presence in the niche is crucial to their own success
c. It is costly or difficult for multi-segment competitors to put capabilities in place to meet
specialized needs of the target market niche and at the same time satisfy the expectations of
their mainstream customers
d. The industry has many different niches and segments
e. Few, if any, other rivals are attempting to specialize in the same target segment

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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

D. The Risks of a Focused Low-Cost or Focused Differentiation Strategy


1. Focusing carries several risks such as:
a. The chance that competitors will find effective ways to match the focused firms capabilities in
serving the target niche
b. The potential for the preferences and needs of niche members to shift over time toward the
product attributes desired by the majority of buyers
c. The segment may become so attractive it is soon inundated with competitors, intensifying
rivalry and splintering segment profits
VI. Best-Cost Provider Strategies

CORE CONCEPT
Best-cost strategies are a hybrid of low-cost provider and differentiation strategies
that aim at providing desired quality/features/performance/service attributes while
beating rivals on price.
1. Best-cost provider strategies aim at giving customers more value for the money. The objective is
to deliver superior value to buyers by satisfying their expectations on key quality/service/features/
performance attributes and beating their expectations on price.
2. A company achieves best-cost status from an ability to incorporate attractive attributes at a lower
cost than rivals.
3. Best-cost provider strategies stake out a middle ground between pursuing a low-cost advantage and
a differentiation advantage and between appealing to the broader market as a whole and a narrow
market niche.
4. From a competitive positioning standpoint, best-cost strategies are a hybrid, balancing a strategic
emphasis on low cost against a strategic emphasis on differentiation.
5. The competitive advantage of a best-cost provider is lower costs than rivals in incorporating goodto-excellent attributes, putting the company in a position to underprice rivals whose products have
similar appealing attributes.
A. When a Best-Cost Provider Strategy Works Best
1. A best-cost provider strategy is very appealing in markets where product differentiation is the norm
and there is an attractively large number of value-conscious buyers who prefer midrange products
to cheap, basic products or expensive top-of-the-line products.
2. Illustration Capsule 5.3, Toyotas Best-Cost Producer Strategy for Its Lexus Line, describes
how Toyota has used a best-cost approach with its Lexus models.

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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

ILLUSTRATION CAPSULE 5.4

Toyotas Best-Cost Producer Strategy for Its Lexus Line


Discussion Question: Discuss how Toyota has been able to achieve its low-cost leadership status in
the industry.
Answer: Toyota has achieved low-cost leadership status because it has developed considerable
skills in efficient supply chain management and low-cost assembly capabilities and because its
models are so well-positioned in the low-to-medium end of the price spectrum. These are enhanced
by Toyotas strong emphasis in quality.

B. The Big Risk of a Best-Cost Provider Strategy


1. The danger of a best-cost provider strategy is that a company using it will get squeezed between the
strategies of firms using low-cost and differentiation strategies.
2. To be successful, a best-cost provider must offer buyers significantly better product attributes in
order to justify a price above what low-cost leaders are charging.
VII. The Contrasting Features of the Five Generic Competitive Strategies: A Summary
1. Deciding which generic competitive strategy should serve as the framework for hanging the rest of
the companys strategy is not a trivial matter.
2. Each of the five generic competitive strategies positions the company differently in its market and
competitive environment.
3. Each establishes a central theme for how the company will endeavor to outcompete rivals.
4. Each creates some boundaries or guidelines for maneuvering as market circumstances unfold and
as ideas for improving the strategy are debated.
5. Each entails differences in terms of product line, production emphasis, marketing emphasis,
and means for sustaining the strategy. Table 5.1, Distinguishing Features of the Five Generic
Strategies, examines the distinguishing features of each of the five generic strategies.
VIII. Successful Competitive Strategies are Resource Based - For a companys competitive strategy to succeed
in delivering good performance and the intended competitive edge over rivals, it has to be:
1. Well-matched to a companys internal situation
2. Supported by an appropriate set of resources
3. Powered by know-how and competitive capabilities.

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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

ASSURANCE OF LEARNING EXERCISES


1. Best Buy is the largest consumer electronics retailer in the United States with 2011 sales of more than
$50 billion. The company competes aggressively on price with rivals such as Costco Wholesale, Sams
Club, Walmart, and Target, but is also known by consumers for its first-rate customer service. Best Buy
customers have commented that the retailers sales staff is exceptionally knowledgeable about products and
can direct the customer to the exact location of difficult to find items. Best Buy customers also appreciate
that demonstration models of PC monitors, digital media players, and other electronics are fully powered
and ready for in-store use. Best Buys Geek Squad tech support and installation services are additional
customer service features valued by many customers.
How would you characterize Best Buys competitive strategy? Should it be classified as a low-cost provider
strategy? a differentiation strategy? a best-cost strategy? Explain your answer.
Answer: Students are likely to conduct research regarding Best Buy (www.bestbuy.com) and may provide
information such as the following. Best Buy is a specialty retailer offering a wide variety of consumer
electronics, home office products, entertainment software, appliances and related services. Students are
most likely to conclude Best Buys competitive strategy should be classified as a differentiation strategy
based on serving the unique needs of their customers. According to the Web site, the company states its
strategy is based on customer centricity. This strategic approach centers on three core philosophies:
inviting our employees to contribute their unique ideas and experiences in service of customers; treating
customers uniquely and honoring their differences; and meeting customers unique needs, end-to-end. The
company strives to inspire their employees to have richer interactions with customers and to understand
them better than their competitors so the company can compete more effectively for customers loyalty
than either mass merchants or purely online players. Examples of this include providing: a wide variety of
products and services; a unique arrangement of products and services in the stores (demonstration models
of PC monitors, MP3 players, and other electronics are fully powered and ready for in-store use); multichannel shopping (Web site); and the Geek Squad (provides residential and commercial repair, support and
installation services.
2. Illustration Capsule 5.1 discusses Walmarts low-cost position in the supermarket industry. Based on
information provided in the capsule, explain how Walmart has built its low-cost advantage in the industry
and why a low-cost provider strategy is well-suited to the industry.
Answer: Students should consider how Walmart has optimized their companys logistics and supply chain
management in order to gain competitive advantage through low cost. By achieving a lower cost than other
industry competitors, Walmart is able to choose a pricing strategy that either allows them to gain market
share through lower prices than industry rivals or higher profits through matching industry rivals prices. A
low-cost strategy is well suited to this industry due to the cost conscious nature of the industrys customer
base.
3. Stihl is the worlds leading manufacturer and marketer of chain saws with annual sales exceeding $2 billion.
With innovations dating to its 1929 invention of the gasoline-powered chain saw, the company holds more
than 1,000 patents related to chain saws and outdoor power tools. The companys chain saws, leaf blowers,
and hedge trimmers sell at price points well above competing brands and are sold only by its network of
some 8,000 independent dealers.
How would you characterize Stihls competitive strategy? Should it be classified as a low-cost provider
strategy? a differentiation strategy? a best-cost strategy? Also, has the company chosen to focus on a narrow
piece of the market or does it appear to pursue a broad market approach? Explain your answer.
Answer: Students should first recognize that Stihl has selected two areas of the value chain distribution and
marketing, sales, and customer service activities as key drivers of its differentiation strategy. In reviewing
the opening page of its Web site, the first link on the site is Dealer Locator. In responding to a FAQ Can
I buy Stihl products on your Web Site, the answer is: Genuine STIHL products, parts and accessories are

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Chapter 5 The Five Generic Competitive Strategies Which One to Employ?

only sold through authorized STIHL Dealers. Now you can reserve items at your local STIHL Dealer, right
from your computer! STIHL has a large selection of equipment and accessories to choose from, and with
STIHL Express, you can ensure all the items you want are in stock, assembled and ready to run when you
arrive. To find out if your local Dealer is participating in STIHL Express, use the Dealer locator on our Web
site. This clearly emphasizes the unique distribution approach of Stihl.
Students should next suggest that of the four routes to deliver unique buyer value, Stihl most likely achieves
this by differentiating on the basis of competencies and competitive capabilities that rivals cannot afford to
match. In an interview with Mr. Hans Peter Stihl, Chairman of the Advisory Board, he stated that four factors
played a key role in the success of the company. In addition to giving priority to the quality of the products,
another factor that contributed to the companys success was to assume direct responsibility for distribution
and sales. Mr. Stihl stated that focusing on a distribution philosophy of selling exclusively through servicing
dealers was essential since mass merchandisers were not in a position to provide optimal advice and handle
technical service and parts support. The company supports this by indicating that all Stihl dealers service
their equipment. The Web site also indicates dealer locations that have at least one service technician on-site
who is factory certified with the highest level of training to service Stihl equipment.
4. Explore BMWs website at www.bmwgroup.com and see if you can identify at least three ways in which
the company seeks to differentiate itself from rival automakers. Is there reason to believe that BMWs
differentiation strategy has been successful in producing a competitive advantage? Why or why not?
Answer:
Innovation and Technology The student should be able to identify a strong capability in new technology
development as a core component in BMWs strategy. They focus on their connected people as a driver for
technology development and support them with various IT based collaboration and innovation tools.
The following phrase taken from their website highlights BMWs commitment to innovation and customer
perception:

The BMW Group is the most successful premium manufacturer in the automobile industry. One of the key
prerequisites for this success was and is the permanent technological innovation leadership in automobile
construction, as perceived by the customer (BMW Group, 2011).
Production The student should next be able to identify a strong capability in flexible and efficient product
as a core component of BMWs strategy. The production pages highlight intelligent cooperation among
production sites providing the company with agility and economy.
The following phrase taken from their website highlights BMWs commitment to product excellence and
customer satisfaction:

70,000 employees in the BMW Group production ensure that every customer receives his tailor- made
vehicle on time and with the high quality expected. Employees in our plants use the most modern technology
to create customized automobiles and motorcycles from thousands of parts (BMW Group, 2011).
Once again a focus on people as the source of production excellent exceptional people supported by state
of the art production facilities and flexible work schedules producing exceptional automobiles.
Differentiation Strategy Taken together, the focus on product innovation and production excellence
help BMW achieve their differentiation strategy of providing Premium products and premium services for
individual mobility (BMW Group, 2011). Critically, BMW clearly recognizes that the source of innovation
and excellence within their organization is their people.

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