LO1 Understand what distinguishes each of the five generic

strategies and why some of these strategies work better in

certain kinds of industry and competitive conditions than in
others.
LO2 Learn the major avenues for achieving a competitive advantage
based on lower costs.
LO3 Gain command of the major avenues for developing a
competitive advantage based on differentiating a companys
product or service offering from the offerings of rivals.
LO4 Recognize the required conditions for delivering superior value
to customers through the use of a hybrid of low-cost provider
and differentiation strategies.

5-2

Competitive Strategies
and Market Positioning
Competitive Strategy
Deals exclusively with managements game

plan for competing successfully and securing

a competitive advantage over rivals
Represents the firms specific efforts to provide

superior value to customers by offering:

An equally good product at a lower price

A superior product with unique features perceived

as worth paying more for

An attractive overall mix of price, features, quality,

service, and other appealing attributes
5-3

CORE CONCEPT
A competitive
competitive strategy
strategy concerns the specifics of
managements
managements game
game plan for competing
successfully
successfully and securing a competitive
advantage
advantage over
over rivals
rivals in
in the
the marketplace.
marketplace.

5-4

The Five Generic Competitive Strategies

Low-cost
Low-cost
provider
provider
Broad
Broad
differentiation
differentiation

Striving
Strivingto
toachieve
achievelower
loweroverall
overallcosts
coststhan
thanrivals
rivalsand
andappealing
appealingto
toaa
broad
broadspectrum
spectrumof
ofcustomers,
customers,usually
usuallyby
byunderpricing
underpricingrivals
rivals

Seeking
Seekingto
todifferentiate
differentiatethe
thefirms
firmsproduct
productor
orservice
servicefrom
fromrivals
rivalsinin
ways
waysthat
thatwill
willappeal
appealto
toaabroad
broadspectrum
spectrumof
ofbuyers
buyers

Focused
Focused
low-cost
low-cost

Concentrating
Concentratingon
onaanarrow
narrowbuyer
buyersegment
segment(or
(ormarket
marketniche)
niche)and
and
outcompeting
rivals
by
having
lower
costs
than
rivals
and
thus
outcompeting rivals by having lower costs than rivals and thusbeing
being
able
to
serve
niche
members
at
a
lower
price
able to serve niche members at a lower price

Focused
Focused
differentiation
differentiation

Concentrating
Concentratingon
onaanarrow
narrowbuyer
buyersegment
segment(or
(ormarket
marketniche)
niche)and
and
outcompeting
rivals
by
offering
niche
members
customized
attributes
outcompeting rivals by offering niche members customized attributes
that
thatmeet
meettheir
theirtastes
tastesand
andrequirements
requirementsbetter
betterthan
thanrivals
rivalsproducts
products

Best-cost
Best-cost
provider
provider

Giving
Givingcustomers
customersmore
morevalue
valuefor
forthe
themoney
moneyby
bysatisfying
satisfyingbuyers
buyers
expectations
on
key
quality/features/performance/service
attributes
expectations on key quality/features/performance/service attributes
while
whilebeating
beatingtheir
theirprice
priceexpectations
expectations
5-5

FIGURE 5.1

The Five Generic Competitive Strategies

5-6

Low-Cost Provider Strategies

A powerful competitive approach with pricesensitive buyers when a firms offering:
Has a lower cost than rivalsbut not necessarily

the absolutely lowest possible cost.

Includes features and services that buyers consider

essential.
Is viewed by buyers as offering equivalent or higher

value even if priced lower than competing products.

5-7

CORE CONCEPT
A low-cost
low-cost leaders
leaders basis
basis for
for competitive
competitive
advantage
advantage is
is lower
lower overall costs
costs than
than
competitors. Success in achieving a low-cost
edge over
over rivals
rivals comes
comes from
from eliminating
eliminating and/or
and/or
curbing
curbing nonessential
nonessential activities and/or
outmanaging
outmanaging rivals
rivals in performing
performing essential
essential
activities.
activities.

5-8

Translating a Low Cost Strategy Into

Attractive Profit Performance

Option
Option 11

Use
Use aa lower-cost
lower-cost edge
edge to
to underprice
underprice competitors
competitors
and
and attract
attract price-sensitive
price-sensitive buyers
buyers in
in great
great enough
enough
numbers
numbers to
to increase
increase total
total profits
profits

Option
Option 22

Maintain
Maintain present
present price,
price, be
be content
content with
with present
present
market
market share,
share, and
and use
use lower-cost
lower-cost edge
edge to
to earn
earn
aa higher
higher profit
profit margin
margin on
on each
each unit
unit sold
sold

5-9

The Two Major Avenues for Achieving

Low-Cost Leadership
1. Perform essential value chain activities
more cost-effectively than rivals.
2. Revamp the firms overall value chain to
eliminate or bypass some cost-producing
activities altogether.

5-10

Cost-Efficient Management
of Value Chain Activities
Striving to capture all available
economies of scale
Taking full advantage of
experience and learning curve
effects
Trying to operate facilities at full
capacity
Substituting lower cost inputs
whenever theres little or no
sacrifice in product quality or
product performance.
Employing advanced production
technology and process design
to improve overall efficiency.

Using communication systems

and information technology to
achieve operating efficiencies
Using the companys bargaining
power vis--vis suppliers to gain
concessions
Being alert to the cost
advantages of outsourcing and
vertical integration
Pursuing ways to boost labor
productivity and lower overall
compensation costs.

5-11

FIGURE 5.2

Important Cost Drivers in a Companys Value Chain

5-12

Revamping the Value Chain

Reengineering the
firms value chain

Sell directly to
consumers and cut
out the activities and
costs of distributors
and dealers

Streamline operations
by eliminating low
value-added or
unnecessary work
steps and activities

Collaborate with
suppliers to improve
supply chain efficiency
by reducing materials
handling, shipping and
inventory costs

5-13

Concepts &
Connections 5.1

How Walmart Managed Its Value Chain to Achieve

a Low-cost Advantage Over Rival Supermarket Chains

5-14

When a Low Cost Strategy Works Best

1. Price competition among rival sellers is especially vigorous.
2. The products of rival sellers are essentially identical and are
readily available from several sellers.
3. There are few ways to achieve product differentiation that
have value to buyers.
4. Buyers incur low costs in switching their purchases from one
seller to another.
5. The majority of industry sales are made to a few, largevolume buyers.
6. Industry newcomers use introductory low prices to attract
buyers and build a customer base.

5-15

Pitfalls to Avoid in Pursuing

a Low-Cost Provider Strategy
1. Overly Aggressive Price Cutting
Price cutting results in lower margins, no increase

in sales volume and lower profitability

2. Relying on easily imitated cost reductions

3. Becoming too fixated on cost reduction
Ignoring buyer interest in additional features
Overlooking declining buyer sensitivity to price
Technological breakthroughs nullify cost

advantages
5-16

Broad Differentiation Strategies

Attractive competitive approaches to use
whenever buyers needs and preferences
are too diverse to be fully satisfied by a
standardized product or service.
Involves offering differentiating features that clearly

set the firms products or services apart from rivals.

Enhances profitability whenever the extra price the
product commands outweighs the added costs of
achieving the differentiation that is not easily copied
or matched by rivals.

5-17

CORE CONCEPT
The essence
essence of
of aa broad
broad differentiation strategy
is to offer unique product or service
service attributes that
a wide
wide range of buyers find appealing
appealing and
and worth
paying
paying for.
for.

5-18

Benefits of Successful Differentiation

Successful execution of a
differentiation strategy
allows a firm to:

Command a
premium price

Increase its
unit sales

Gain buyer loyalty

to its brand

5-19

Approaches to Differentiation
Unique taste: Red Bull, Listerine
Multiple features: Microsoft Office, Apple iPad
Wide selection and one-stop shopping: Home Depot, Amazon.com
Superior service: Ritz-Carlton, Nordstrom
Spare parts availability: Caterpillar
Engineering design and performance: Mercedes-Benz, BMW
Luxury and prestige: Rolex, Gucci, Chanel
Product reliability: Whirlpool and Bosch
Quality manufacture: Michelin in tires, Toyota and Honda in autos
Technological leadership: 3M Corporation
Full range of services: Charles Schwab in stock brokerage
Complete line of products: Campbell soups, Frito-Lay snack foods
5-20

CORE CONCEPT
A uniqueness driver
driver is
is aa value
value chain
chain activity or
factor that can have
have aa strong
strong effect
effect on customer
value
value and
and creating
creating differentiation.
differentiation.

5-21

FIGURE 5.3

Important Uniqueness Drivers in a Companys Value Chain

5-22

Revamping the Value Chain

to Increase Differentiation
Approaches to enhancing
differentiation through changes
in the value chain system

Coordinating with
downstream channel
allies to enhance
customer value

Coordinating with
upstream suppliers to
better address
customer needs

5-23

Delivering Superior Value via

a Differentiation Strategy
1. Include product attributes and user features
that lower the buyers costs.
2. Incorporate tangible features that improve
product performance
3. Incorporate intangible features that
enhance buyer satisfaction in noneconomic
ways.

5-24

Perceived Value and the Importance

of Signaling Value
A differentiation strategys price premium
reflects value actually delivered to the buyer
and value perceived by the buyer.
It is important to signal value when:
The nature of differentiation is subjective
When buyers are making first-time purchases
When repurchase is infrequent
When buyers are unsophisticated

5-25

Value Chain Activities That

Enhance Differentiation
Manufacturing
activities

Supply chain
activities

Product
R&D

Production R&D
and technologyrelated activities

Activities
that Enhance
Differentiation

Distribution and
shipping activities

Marketing, sales,
and customer
service activities

5-26

When a Differentiation Strategy

Works Best
1. Buyer needs and uses of the product are diverse.
2. There are many ways to differentiate the product
or service that have value to buyers.
3. Few rival firms are following a similar
differentiation approach.
4. Technological change is fast-paced and
competition revolves around rapidly evolving
product features.

5-27

Pitfalls to Avoid in Pursuing

a Differentiation Strategy
Pursuing a differentiation strategy keyed to product or service
attributes that are easily and quickly copied.
Incorporating product features or attributes in which buyers
see little value or are easily copied by rivals.
Overspending on efforts to differentiate that erode profitability.
Over-differentiating so that product quality or service levels
exceed buyers needs.
Trying to charge too high a price premium.
Not establishing meaningful gaps in quality or service or
performance features over the products of rivals.

5-28

Focused (or Market Niche) Strategies

Are strategies developed especially for competing in
a narrow piece of the total market as defined by
geographic uniqueness or special product
attributes.
Are appealing to smaller and medium-sized firms
that may lack the breadth and depth of resources to
tackle going after a whole market customer base.

5-29

A Focused Low-Cost Strategy

Aims at securing a competitive advantage by
serving buyers in the target market niche at a
lower cost and a lower price than rival
competitors.
Achieves its cost advantage in the same way
as for low-cost leadershipby outmanaging
rivals in keeping costs low and bypassing or
reducing nonessential activities.

5-30

Concepts &
Connections 5.2

ARAVIND EYE CARE SYSTEMS FOCUSED LOW-COST STRATEGY

5-31

Focused Differentiation Strategy

Keyed to offering carefully designed products or
services to appeal to the unique preferences and
needs of a narrow, well-defined group of buyers (as
opposed to a broad differentiation strategy aimed at
many buyer groups and market segments).

5-32

Concepts &
Connections 5.3

POPCHIPSS FOCUSED DIFFERENTIATION STRATEGY

5-33

When a Focused Low-Cost or Focused

Differentiation Strategy Is Viable
The target market niche is big enough to be profitable and
offers good growth potential.
Industry leaders have chosen not to compete in the niche
focusers can avoid battling head-to-head against the industrys
biggest and strongest competitors.
It is costly or difficult for multisegment competitors to meet the
specialized needs of niche buyers and at the same time satisfy
the expectations of mainstream customers.
The industry has many different niches and segments, thereby
allowing a focuser to pick a niche suited to its resource
strengths and capabilities.
Few, if any, rivals are attempting to specialize in the same
target segment.
5-34

The Risks of a Focused Low-Cost or

Focused Differentiation Strategy
1. Competitors will find effective ways to match a
focusers capabilities in serving the target niche.
2. The preferences and needs of niche members to
shift over time toward the product attributes
desired by the majority of buyers.
3. The segment may become so attractive it is soon
inundated with competitors, intensifying rivalry and
splintering segment profits.

5-35

Best-Cost Provider Strategies

Are a hybrid of low cost provider and
differentiation strategies that:
Involves giving customers more value for money by

satisfying buyer expectations on key quality/features/

performance/service attributes while exceeding
customer expectations on price.
Is a powerful competitive approach with value-

conscious buyers looking for a good-to-very-good

product or service at an economical price.
Create a best-cost status as the low-cost provider of

a product or service with upscale attributes.

5-36

CORE CONCEPT
Best-cost
Best-cost provider
provider strategies
strategies are
are aa hybrid
hybrid of
low-cost
low-cost provider
provider and
and differentiation
differentiation strategies
that aim
aim at
at satisfying
satisfying buyer expectations on key
quality/features/performance/ service
service attributes
and beating
beating customer
customer expectations
expectations on
on price.
price.

5-37

Concepts &
Connections 5.4

TOYOTAS BEST-COST PRODUCER STRATEGY

FOR ITS LEXUS LINE

5-38

Employing Best-Cost Strategies

Profitable best-cost strategies are contingent
on:
1. A superior value chain configuration that eliminates or

minimizes activities that do not add value.

2. Unmatched efficiency in managing essential value

chain activities.
3. Core competencies that allow differentiating attributes

to be incorporated at a low cost.

5-39

When a Best-Cost Provider Strategy

Works Best
A best-cost provider strategy works best in
markets where:
Product differentiation is the norm.
Large numbers of value-conscious buyers can be

induced to purchase economically-priced mid-range

products and services, especially during recessionary
times.
A provider can offer either a medium-quality product
at a below-average price or a high-quality product at
an average or slightly higher-than-average price.

5-40

The Danger of an Unsound

Best-Cost Provider Strategy
Losing at both ends of the market:
Dual vulnerability to both low-cost providers and high-

end differentiators in not having the requisite core

competencies and efficiencies in managing value
chain activities to offer significantly differentiating
product attributes or features at attractive lower prices
without significantly increasing costs.

5-41

Successful Competitive Strategies

Are Resource Based
Low-Cost Providers
Must have the resources and capabilities to keep

their costs below those of their competitors.

Must have expertise to cost-effectively manage
value chain activities better than rivals.

Differentiators
Must have the resources and capabilities to

incorporate unique attributes that a broad range of

buyers will find appealing and worth paying for.

5-42

Successful Competitive Strategies

Are Resource Based (contd)
Narrow Segment Focusers
Must have the capability to do an outstanding job

of satisfying the needs and expectations of niche

buyers.

Best Cost Providers

Must have the resources and capabilities to

incorporate upscale product or service attributes

at a lower cost than rivals.

5-43