5 - The Five Generic Competitive Strategies

chap chapte terr 5 -Th Thee Five Five Ge Gene neri ricc Compe Com peti titi tive ve Stra St rate tegi gies es..  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 .!y competitive strategy we mean the specifics of management’s game plan for competing successfully – how it plans to position the co mpany in the mar"etplace# its specific efforts to please customers# and improve its competitive strength# and the type of competitive advantage it wants to establish. CORE CONCEPT $ competitive strategy concerns the specifics of management’s game plan for competing successfully and achieving a competitive edge over rivals.

%.$ company achieves competitive advantage whenever it has so me type of edge over rivals in attracting buyers and coping with competitive forces. &.'here are many routes to competitive advantage# but they all involve giving buyers what they perceive as superior value. (.)elivering superior value – whatever form it ta"es – nearly always requires performing value chain activities differently than rivals and building competencies and resource capabilities that are not readily matched. II.Five Competitive Strategies. .'here are countless variations in the competitive strategies that companies employ# mainly because each company’s strategic approach entails custom*designed actions to fit its own circumstances and industry environment.

%.'he biggest and most important differences among competitive strategies boil down to+ a.,hether a company’s mar"et target is broad or narrow.  b.,hether the company is pursuing a competitive advantage lin"ed to low costs or product differentiation. &.-ive distinct competitive strategy approaches stand out+ a.$ low*cost provider strategy+ strategy+ appealing to a broad b road spectrum of customers based by  being the overall low*cost provider of a product or service.  b.$ broad differentiation differentiation strategy+ see"ing to differentiate differentiate the company’s productservice offering from rivals’ in ways that will appeal to a broad spectrum of bu yers. c.$ best*cost provider strategy+ strategy+ giving customers more value for the money mon ey by incorporating good*to*e/cellent product attributes at a lower cost than rivals0 the target is to have the lowest 1best2 costs and prices compared to rivals offering products with

comparable attributes d.$ focused or mar"et niche strategy based on lower cost+ concentrating on a narrow  buyer segment and outcompeting rivals by serving niche members at a lower cost than rivals. e.$ focused or mar"et niche strategy based on differentiation+ concentrating on a narrow  buyer segment and outcompeting rivals by offering niche members customi3ed attributes that meet their tastes and requirements better than rivals products. (.-igure 5.# 'he -ive 4eneric Competitive Strategies  6ach Sta"es Out a )ifferent 7osition in the 8ar"etplace# e/amines how each of the five strategies sta"e out a different mar"et position .III.!o"-Cost Provider Strategies. .$ company achieves low*cost leadership when it becomes the industry’s lowest*cost  provider rather than 9ust being one of perhaps several competitors with comparatively low costs. %.:n striving for a cost advantage over rivals# managers must ta"e care to include features that buyers consider essential. &.-or ma/imum 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 $ low*cost leader’s basis for competitive advantage is lower overall costs than competitors. Successful low*cost leaders are e/ceptionally good at finding ways to drive costs out of their businesses.

(.$ company has two options for translating a low*cost advantage over rivals into attractive profit performance+ a.Option + use the lower*cost edge to underprice co mpetitors and attract price*sensitive  buyers in great numbers to increase total profits.  b.Option %+ maintain the present price# be content with the current mar"et share# and use the lower*cost edge to earn higher profit margin on each unit sold. 5.:llustration Capsule 5.# ;ucor Corporation’s Low*Cost 7rovider Strategy# describes  ;ucor Corporation’s strategy for gaining low*cost leadership in manufacturing a variety of steel products. :llustration Capsule 5.# ;ucor Corporation’s LowCost 7rovider Strategy. #.The T"o $a%or #venues &or #chieving a Cost #dvantage .'o achieve a cost advantage# a firm must ma"e sure that its cumulative costs across its overall value chain are lower than competitors’ cumulative costs. 'here are two ways to accomplish this +a.Outmanage rivals in efficiency with which value chain activities are performed an d in controlling the factors driving the costs of value chain activities.

 b.*vis suppliers. iii.Locational variables. iv.Supply chain management e/pertised.Lin"s with other activities in the company or industry value chain – ,hen the cost of one activity is affected by how other activities are performed# costs can be managed downward by ma"ing sure that lin"ed activities are  performed in cooperative and coordinated fashion. e.Sharing opportunities with other organi3ational or business units within the enterprise – )ifferent product lines or business units within an enterprise can often share the same order processing and customer billing systems# maintain a common sales force to call on customers# share the same warehouse and distribution facilities# or rely on a common customer service and technical support team. f.'he benefits of vertical integration versus outsourcing – ?ertical integration 1e/panding  bac"ward into sources of supply# forward to end*users# or both2 allows affirm to bypass suppliers or buyers with considerable bargaining power. 8ost often it is cheaper to outsource or hire outside specialists to perform certain functions and activities. CORE CONCEPT ?ertical integration is the bac"ward e/pansion into sources of supply# the forward e/pansion toward end users# or both. CORE CONCEPT + 'o outsource is to hire outside specialists to perform certain functions critical to the firm rather than performing them in*house.

g.-irst*mover advantages and disadvantages – Sometimes the first ma9or brand in the mar"et is able to establish and maintain its brand name at a lower cost than later brand arrivals. h.'he percentage of capacity utili3ation – Capacity utili3ation is a big cost driver for those value chain activities associated with substantial fi/ed costs. i.Strategic choices and operating decisions – $ company’s cost can be driven up or down  by a fairly wide assortment of managerial decisions+

i.$ddingcutting the services provided to buyers. ii.:ncorporating morefewer performance and quality features into the product. iii.:ncreasingdecreasing the number of different channels utili3ed in distributing the firm’s product. iv.Lengtheningshortening delivery times to customers. v.7utting moreless emphasis than rivals on the use of incentive co mpensation# wage increases# and fringe benefits to motivate employees and boost wor"er productivity. vi.