A best cost provider strategy

HIS CHAPTER WILL HELP YOU UNDERSTAND:

What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others

The major avenues for achieving a competitive advantage based on lower costs

The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals

The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies

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WHY DO STRATEGIES DIFFER?

A firm’s competitive strategy deals exclusively with the specifics of its efforts to position itself in the market-place, please customers, ward off competitive threats, and achieve a particular kind of competitive advantage.

Is the competitive advantage pursued linked to low costs or product differentiation?

Is the firm’s market target broad or narrow?

Key factors that distinguish one strategy from another

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THE FIVE GENERIC COMPETITIVE STRATEGIES

Low-cost provider Striving to achieve lower overall costs than rivals on products that attract a broad spectrum of buyers
Broad differentiation Differentiating the firm’s product offering from rivals’ with attributes that appeal to a broad spectrum of buyers
Focused low-cost Concentrating on a narrow price-sensitive buyer segment and on costs to offer a lower-priced product
Focused differentiation Concentrating on a narrow buyer segment by meeting specific tastes and requirements of niche members
Best-cost provider Giving customers more value for the money by offering upscale product attributes at a lower cost than rivals
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FIGURE 5.1 The Five Generic Competitive Strategies

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LOW-COST PROVIDER STRATEGIES

Effective low-cost approaches

Pursue cost savings that are difficult to imitate

Avoid reducing product quality to unacceptable levels

Competitive advantages and risks

Greater total profits and increased market share gained from underpricing competitors

Larger profit margins when selling products at prices comparable to and competitive with rivals

Low pricing does not attract enough new buyers

Rival’s retaliatory price-cutting sets off a price war

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Core CONCEPTS (1 of 5)

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 cost driver is a factor that has a strong influence on a firm’s costs.

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STRATEGIC MANAGEMENT PRINCIPLE (1 of 7)

A low-cost advantage over rivals can translate into better profitability than rivals attain.

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MAJOR AVENUES FOR ACHIEVING A COST ADVANTAGE

Low-cost advantage

Cumulative costs across the overall value chain must be lower than competitors’ cumulative costs.

How to gain a low-cost advantage

Perform value-chain activities more cost-effectively than rivals

Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities

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Core Concept (2 of 5)

A cost driver is a factor that has a strong influence on a company’s costs.

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COST-EFFICIENT MANAGEMENT OF VALUE CHAIN ACTIVITIES

Cost driver

A factor with a strong influence on a firm’s costs

Can be asset-based or activity-based

Securing a cost advantage

Use lower-cost inputs and hold minimal assets

Offer only “essential” product features or services

Offer only limited product lines

Use low-cost distribution channels

Use the most economical delivery methods

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FIGURE 5.2 Cost Drivers: The Keys to Driving Down Company Costs

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COST-CUTTING METHODS (1 of 2)

Capturing all available economies of scale

Taking full advantage of experience and learning-curve effects

Operating facilities at full or near-full capacity

Improving supply chain efficiency

Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance

Using the firm’s bargaining power vis-à-vis suppliers or others in the value chain system to gain concessions

Using online systems and sophisticated software to achieve operating efficiencies

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COST-CUTTING METHODS (2 of 2)

Improving process design and employing advanced production technology

Being alert to the cost advantages of outsourcing or vertical integration

Motivating employees through incentives and company culture

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REVAMPING THE VALUE CHAIN SYSTEM TO LOWER COSTS

Selling direct to consumers and bypassing the activities and costs of distributors and dealers by using a direct sales force and a company website