Strategic Management Module 5

The Five Generic Competitive Strategies

Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University-Florida Region

Chapter Title

Modified for VTU Syllabus - Vedavyas MG

16/e PPT
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Roadmap
The Five Competitive Strategies

Low-Cost Provider Strategies

Broad Differentiation Strategies

Best-Cost Provider Strategies

Focused (or Market Niche) Strategies

The Contrasting Features of the Five Generic Competitive Strategies: A Summary

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Strategy and Competitive Advantage

Competitive advantage exists when a firms strategy gives it an edge in
Attracting customers and Defending against competitive forces

Key to Gaining a Competitive Advantage Convince customers firms product / service offers superior value
A good product at a low price

A superior product worth paying more for A best-value product

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What Is

Competitive Strategy?

Deals exclusively with a companys business plans to compete successfully

Specific efforts to please customers Offensive and defensive moves to counter five competitive forces

Responses to prevailing market conditions

Initiatives to strengthen its market position Best strategy for a given firm depends on its circumstances

Narrower in scope than business strategy

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Generic Competitive Strategies

Three potentially successful strategic approaches to outperforming rivals
Overall cost leadership Differentiation Focus

Could follow more than one or a combination Structure, Value chain, market positioning and approach etc are all different in each case

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Generic Strategies
STRATEGIC ADVANTAGE Uniqueness perceived Low cost by customer position Industrywide

STRATEGIC TARGET

Differentiation

Overall Cost Leadership

Particular Segment Only

FOCUS

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Fig. 5.1: The Five Generic Competitive Strategies

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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 Strategic Management 9 manufacturing or production costs!

Translating a Low-Cost Advantage into Higher Profits: Two Options

Option 1: Use lower-cost edge to under-price 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
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Nucor Corporations Low-Cost Provider Strategy

Eliminate some production processes from value chain used by traditional integrated steel mills; cut investment in facilities and equipment Strive hard for continuous improvement in the efficiency of its plants and frequently invest in state-of-the art equipment to reduce unit costs

Carefully select plan sites to minimize inbound and outbound shipping costs and to take advantage of low rates for electricity
Hire a nonunion workforce that uses team-based incentive compensation systems

Heavily emphasize consistent product quality and maintain rigorous quality systems

Minimize general and administrative expenses by maintaining a lean staff at corporate headquarters and allowing only 4 levels of management
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Approaches to Securing a Cost Advantage

Approach 1

Do a better job than rivals of performing value chain activities efficiently and cost effectively
Approach 2

Revamp value chain to bypass cost-producing activities that add little value from the buyers perspective
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Approach 1: Controlling the Ten Cost Drivers

1. 2. 3. 4. Capture scale economies; avoid scale diseconomies Capture learning and experience curve effects Control percentage of capacity utilization Pursue efforts to boost sales and spread costs such as R&D and advertising over more units Improve supply chain efficiency Substitute use of low-cost for high-cost raw materials Use online systems and sophisticated software to achieve operating efficiencies Adopt labor-saving operating methods Use bargaining power to gain concessions from suppliers Compare vertical integration vs. outsourcing
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5. 6. 7.
8. 9. 10.

Approach 2: Revamping the Value Chain

1. Use direct-to-end-user sales/marketing methods

2. Make greater use of online technology applications

3. Streamline operations by eliminating low-value-added or unnecessary work steps 4. Relocate facilities closer to suppliers or customers 5. Offer basic, no-frills product/service

6. Offer a limited product/service as opposed to a full product/service line

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Wal-Marts Approach to Managing Its Value Chain

Institute extensive information sharing with vendors via online systems
Pursue global procurement of some items and centralize most purchasing activities Invest in state-of-the-art automation at its distribution centers Strive to optimize the product mix and achieve greater sales turnover Install security systems and store operating procedures that lower shrinkage rates Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites

Manage and compensate its workforce in a manner to yield lower labor costs
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Keys to Success in Achieving Low-Cost Leadership

1. Scrutinize each cost-creating activity, identifying cost drivers

2. Use knowledge about cost drivers to manage costs of each activity down year after year
3. Find ways to restructure value chain to eliminate nonessential work steps and low-value activities

4. Work diligently to create cost-conscious corporate cultures

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

5. Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business
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Characteristics of a Low-Cost Provider

1. Cost conscious corporate culture

2. Employee participation in cost-control efforts

3. Ongoing efforts to benchmark costs 4. Intensive scrutiny of budget requests 5. Programs promoting continuous cost improvement

Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !
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When Does a Low-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 significant bargaining power Industry newcomers use introductory low prices to attract buyers and build customer base
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Pitfalls (risks) of Low-Cost Strategies

Being overly aggressive in cutting price

Low cost methods are easily imitated by rivals

Becoming too fixated on reducing costs and 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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Why does Cost Leadership work?

Analyze with respect to the forces in Michael Porters five forces model

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Test Your Knowledge

Striving to be the industrys low-cost provider and achieving lower costs than rivals entails
A. doing a better job than rivals of performing value chain activities more cost-effectively. B. having a smaller labor force than rivals, paying lower wages than rivals, locating all facilities in countries where labor costs are low, and outsourcing many value chain activities to suppliers with world-class technological capabilities. C. revamping the firms overall value chain to eliminate or bypass costproducing activities that produce little value added insofar as customers are concerned. D. adopting activity-based costing, utilizing more best practices than rivals, and having a narrower product line than rivals. E. Both A and C.
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Differentiation Strategies
Objective

Incorporate differentiating features that cause buyers to prefer firms product or service over brands of rivals
Keys to Success

Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals Not spending more to achieve differentiation than the price premium that can be charged
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Benefits of Successful Differentiation

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

Command a premium price and/or

Increase unit sales and/or

Build brand loyalty

= Competitive Advantage
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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-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
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Buyer/User Value Chains

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How to Achieve a Differentiation-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
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When Does a Differentiation Strategy Work Best?

There are many ways to differentiate a product 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
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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 product features exceed buyers needs Charging a price premium buyers perceive is too high Not striving to open up meaningful gaps in quality, service, or performance features vis--vis rivals products
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Focus / Niche Strategies

Involve concentrated attention on a narrow piece of the total market Specialized but profitable corner of the market

Objective
Serve niche buyers better than rivals

Keys to Success
Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs Develop unique capabilities to serve needs of target buyer segment

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Approaches to Defining a Market Niche

Geographic uniqueness Specialized requirements in using product/service Special product attributes appealing only to niche buyers
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Examples of Focus Strategies

Animal Planet and History Channel Cable TV Google Internet search engines Porsche Sports cars Cannondale Top-of-the line mountain bikes Enterprise Rent-a-Car Provides rental cars to repair garage customers Bandag Specialist in truck tire recapping

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Focus / Niche Strategies and Competitive Advantage

Approach 1 Achieve lower costs than rivals in serving a well-defined buyer segment Focused low-cost strategy

Approach 2 Offer a product appealing to unique preferences of a well-defined buyer segment Focused differentiation strategy

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 to meet specialized needs of niche members Focuser has resources and capabilities to 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
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Risks of a Focus Strategy

Competitors find effective ways to match a focusers capabilities in serving niche

Niche buyers preferences shift towards product attributes desired by majority of buyers niche becomes part of overall market
Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered
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Best-Cost Provider Strategies

Combine a 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

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-toexcellent product attributes, then use cost advantage to underprice comparable brands
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Competitive Strength of a Best-Cost Provider Strategy

A best-cost providers competitive advantage is based on its capability to include upscale attributes at a lower cost than rivals comparable products To achieve competitive advantage, a company must be able to
Incorporate attractive features at a lower cost than rivals Manufacture a good-to-excellent quality product at a lower cost than rivals Develop a product that delivers good-to-excellent performance at a lower cost than rivals Provide attractive customer service at a lower cost than rivals
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When Does a Best-Cost Provider Strategy Work Best?

Where buyer diversity makes product differentiation the norm and

Where many buyers are also sensitive to price and value

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Risk of a Best-Cost Provider Strategy

A best-cost provider may get squeezed between strategies of firms using low-cost and 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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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 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!
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5
Supplementing Chapter Title the Chosen Competitive Strategy
16/e PPT
McGraw-Hill/Irwin

Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University-Florida Region
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Roadmap
Collaborative Strategies: Alliances and Partnerships Merger and Acquisition Strategies Vertical Integration Strategies: Operating Across More Stages of the Industry Value Chain Outsourcing Strategies: Narrowing the Boundaries of the Business First-Mover Advantages and Disadvantages

Fig. 6.1: A Companys Menu of Strategy Options

Collaborative Strategies: Alliances and Partnerships

Companies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-tocompany dealings but fall short of merger or full joint venture partnership.

Alliances Can Enhance a Firms Competitiveness

Alliances and partnerships can help companies cope with two demanding competitive challenges
Racing against rivals to build a market presence in many different national markets

Racing against rivals to seize opportunities on the frontiers of advancing technology

Collaborative arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities

Characteristics of a Strategic Alliance

Strategic alliance A formal agreement between two or more separate companies where there is
Strategically relevant collaboration of some sort Joint contribution of resources Shared risk Shared control Mutual dependence Joint marketing Joint sales or distribution Joint production Design collaboration Joint research Projects to jointly develop new technologies or products

Alliances often involve

What Factors Make an Alliance Strategic?

It is critical to a companys achievement of an important objective It helps build, sustain, or enhance a core competence or competitive advantage

It helps block a competitive threat

It helps open up important market opportunities It mitigates a significant risk to a companys business

Why Are Strategic Alliances Formed?

To collaborate on technology development or new product development To fill gaps in technical or manufacturing expertise To create new skill sets and capabilities

To improve supply chain efficiency

To gain economies of scale in production and/or marketing

To acquire or improve market access via joint marketing agreements

Potential Benefits of Alliances to Achieve Global and Industry Leadership

Get into critical country markets quickly to accelerate process of building a global presence Gain inside knowledge about unfamiliar markets and cultures Access valuable skills and competencies concentrated in particular geographic locations Establish a beachhead to participate in target industry Master new technologies and build new expertise faster than would be possible internally Open up expanded opportunities in target industry by combining firms capabilities with resources of partners

Capturing the Benefits of Strategic Alliances

Benefits from forming partnerships are a function of
Picking a good partner Being sensitive to cultural differences Recognizing an alliance must benefit both parties Ensuring both parties live up to their commitments Structuring the decision-making process so actions can be taken swiftly when needed Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances

Why Alliances Fail

Ability of an alliance to endure depends on
How well partners work together Success of partners in responding and adapting to changing conditions Willingness of partners to renegotiate the bargain

Reasons for alliance failure

Diverging objectives and priorities of partners Inability of partners to work well together Changing conditions rendering purpose of alliance obsolete Emergence of more attractive technological paths Marketplace rivalry between one or more allies

Test Your Knowledge

Which one of the following is not a factor that makes an alliance strategic as opposed to just a convenient business arrangement?
A. The alliance involves joint contribution of resources, shared risk, and is mutually beneficial. B. The alliance helps block a competitive threat or open up new market opportunities. C. The alliance helps mitigate a significant risk to a companys business. D. The alliance helps build, enhance, or sustain a core competence or competitive advantage. E. The alliance is critical to the companys achievement of an important objective.

Merger and Acquisition Strategies

Merger Combination and pooling of equals, with newly created firm often taking on a new name Acquisition One firm, the acquirer, purchases and absorbs operations of another, the acquired Merger-acquisition strategy
Much-used strategic option Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunities Ownership allows for tightly integrated operations, creating more control and autonomy than alliances

Objectives of Mergers and Acquisitions (Benefits)

To create a more cost-efficient operation

To expand a firms geographic coverage To extend a firms business into new product categories or international markets To gain quick access to new technologies or competitive capabilities To invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities

Pitfalls of Mergers and Acquisitions (Risks)

Combining operations may result in
Resistance from rank-and-file employees
Hard-to-resolve conflicts in management styles and corporate cultures

Tough problems of integration

Greater-than-anticipated difficulties in
Achieving expected cost-savings

Sharing of expertise
Achieving enhanced competitive capabilities

Vertical Integration Strategies

Extend a firms competitive scope within same industry Backward into sources of supply Forward toward end-users of final product

Can aim at either full or partial integration

Activities, Costs, & Margins of Suppliers

Internally Performed Activities, Costs, & Margins

Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Buyer/User Value Chains

Strategic Advantages of Backward Integration

Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers Potential to reduce costs exists when
Suppliers have sizable profit margins Item supplied is a major cost component Resource requirements are easily met

Can produce a differentiation-based competitive advantage when it results in a better quality part Reduces risk of depending on suppliers of crucial raw materials / parts / components

Strategic Advantages of Forward Integration

To gain better access to end users and better market visibility To compensate for undependable distribution channels which undermine steady operations To offset the lack of a broad product line, a firm may sell directly to end users To bypass regular distribution channels in favor of direct sales and Internet retailing which may
Lower distribution costs Produce a relative cost advantage over rivals Enable lower selling prices to end users

Strategic Disadvantages of Vertical Integration

Boosts resource requirements

Locks firm deeper into same industry

Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety Poses all types of capacity-matching problems May require radically different skills / capabilities

Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

Pros and Cons of Integration vs. De-Integration

Whether vertical integration is a viable strategic option depends on its Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activities

Impact on investment cost, flexibility, and administrative overhead

Contribution to enhancing a firms competitiveness

Many companies are finding that de-integrating value chain activities is a more flexible, economic strategic option!

Outsourcing Strategies
Concept
Outsourcing involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities
Internally Performed Activities

Suppliers

Functional Activities

Support Services

Distributors or Retailers

Outsourcing
Outsourcing involves a conscious decision to abandon or forgo attempts to perform certain value chain activities internally and instead farm them out to outside specialists and strategic allies The two main reasons for outsourcing are
outsiders can often perform certain activities better or cheaper outsourcing allows a firm to focus its energies on improving its core competencies

Outsourcing
World is moving away from price-based short-term oriented
customer-vendor relationship to capability based long term key supplier relationships

When Does Outsourcing Strategy Make Sense?

Activity can be performed better or cheaper by outside specialists Activity is not crucial to achieve a sustainable competitive advantage Risk exposure to changing technology and/or changing buyer preferences is reduced It improves firms ability to innovate Operations are streamlined to It increases firms ability to assemble diverse kinds of expertise speedily and efficiently Firm can concentrate on core value chain activities that best suit its resource strengths
Improve flexibility Cut time to get new products into the market

Risk of an Outsourcing Strategy

Farming out too many or the wrong activities, thus
Hollowing out capabilities

Losing touch with activities and expertise that determine overall long-term success

First-Mover Advantages
When to make a strategic move is often as crucial as what move to make First-mover advantages arise when
Pioneering helps build firms image and reputation Early commitments to new technologies, new-style components, and distribution channels can produce cost advantage

Loyalty of first time buyers is high

Moving first can be a preemptive strike

First-Mover Disadvantages
Moving early can be a disadvantage (or fail to produce an advantage) when
When costs of pioneering are more than being an imitative follower and only negligible learning/experience curve benefits accrue to the leader

Innovators products are primitive, not living up to buyer expectations

Demand side of the market is skeptical about the benefits of new technology/product of a first-mover

Rapid technological change allows followers to leapfrog pioneers

Strategic Issues: To Be a First-Mover or Not

Key issue Is the race to market leadership in an industry a marathon or a sprint? Seeking a competitive advantage by being a first-mover involves addressing several questions
Does market takeoff depend on development of complementary products or services not currently available? Is new infrastructure required before buyer demand can surge? Will buyers need to learn new skills or adopt new behaviors? Will buyers encounter high switching costs? Are there influential competitors in a position to delay or derail the efforts of a first-mover?