19e Section6 LN Chapter05

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 options—which of the five to employ is a company’s 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 company’s competitive strategy deals exclusively with the specifics of management’s 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 company’s 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 company’s 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 Strategies—Each 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 industry’s 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 provider’s 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 firm’s 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 firm’s 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 company’s 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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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 company’s 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 company’s 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 company’s 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. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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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 industry’s 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 company’s 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 buyer’s 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 company’s product offering - high price, packaging, ad content

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

6. A differentiator’s 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 company’s differentiation strategy produces an unenthusiastic reception because buyers see little value in the unique attributes of a company’s product. 4. The third big pitfall of a differentiation strategy is overspending on efforts to differentiate the company’s 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 firm’s ability to stand apart from rivals competing in the same target market niche. 3. Illustration Capsule 5.2, Aravind Eye Care System’s Focused Low-Cost Strategy, provides details about the company’s focused differentiation strategy.

ILLUSTRATION CAPSULE 5.2

Aravind Eye Care System’s 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. Aravind’s 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

Popchips’s Focused Differentiation Strategy Discussion Question: 1. How does Popchip’s 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 firm’s 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, Toyota’s 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

Toyota’s 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 Toyota’s 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 company’s 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 company’s competitive strategy to succeed in delivering good performance and the intended competitive edge over rivals, it has to be: 1. Well-matched to a company’s 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, Sam’s Club, Walmart, and Target, but is also known by consumers for its first-rate customer service. Best Buy customers have commented that the retailer’s 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 Buy’s Geek Squad tech support and installation services are additional customer service features valued by many customers. How would you characterize Best Buy’s 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 Buy’s 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 Walmart’s 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 company’s 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 rival’s prices. A low-cost strategy is well suited to this industry due to the cost conscious nature of the industry’s customer base. 3. Stihl is the world’s 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 company’s 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 Stihl’s 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 company’s 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 BMW’s 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 BMW’s 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 BMW’s 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 BMW’s 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 BMW’s 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 BMW’s 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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