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Achieving a cost advantage over rivals entails

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CHAPTER 5 The Five Generic Competitive Strategies


Copyright © McGraw-Hill Education. Permission required for reproduction or display.


LEARNING OBJECTIVES


THIS 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


© McGraw-Hill Education.


2


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


Jump to Appendix 1 long image description


© McGraw-Hill Education.


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

© McGraw-Hill Education.


FIGURE 5.1 The Five Generic Competitive Strategies


Jump to Appendix 2 long image description


© McGraw-Hill Education.


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


© McGraw-Hill Education.


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.


© McGraw-Hill Education.


STRATEGIC MANAGEMENT PRINCIPLE (1 of 7)


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


© McGraw-Hill Education.


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


© McGraw-Hill Education.


Core Concept (2 of 5)


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


© McGraw-Hill Education.


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


© McGraw-Hill Education.


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


Jump to Appendix 3 long image description


© McGraw-Hill Education.


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


© McGraw-Hill Education.


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


© McGraw-Hill Education.


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


Streamlining operations to eliminate low value-added or unnecessary work steps and activities


Reduce materials handling and shipping costs by having suppliers locate their plants or warehouses close to the firm’s own facilities


© McGraw-Hill Education.


How Walmart Managed Its Value Chain to Achieve a Huge Low-Cost Advantage over Rival Supermarket Chains


Which Walmart value chain activity would be most easily overcome by rival supermarket chains?


Which Walmart value chain activities would be the most difficult to overcome by rival supermarket chains?


Assume you have been tasked to revamp a rival supermarket’s value chain activities to better compete with Walmart. In what order of expected payoff should you attempt to revamp its value chain activities?


© McGraw-Hill Education.


Amazon’s Path to Becoming the Low-Cost Provider in E-Commerce


Describe the business segment in which Amazon competes.


How well are Amazon’s competitive strengths matched to the five forces in its competitive environment?


Which of Amazon’s value chain activities would be most easily overcome by rivals?


Which Amazon value chain activity would be the most difficult to overcome by rivals?


Assume you have been tasked to revamp a rival’s value chain activities to better compete with Amazon. In what order of expected payoff should you attempt to revamp its value chain activities?


© McGraw-Hill Education.


THE KEYS TO BEING A SUCCESSFUL LOW-COST PROVIDER


Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively by:


Spending aggressively on resources and capabilities that promise to drive costs out of the business


Carefully estimating the cost savings of new technologies before investing in them


Constantly reviewing cost-saving resources to ensure they remain competitively superior


© McGraw-Hill Education.


Strategic Management Principle (2 of 7)


Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively.


© McGraw-Hill Education.


WHEN A LOW-COST PROVIDER STRATEGY WORKS BEST


Price competition among rival sellers is vigorous.


Identical products are available from many sellers.


There are few ways to differentiate industry products.


Most buyers use the product in the same ways.


Buyers incur low costs in switching among sellers.


© McGraw-Hill Education.


PITFALLS TO AVOID IN PURSUING A LOW-COST PROVIDER STRATEGY


Engaging in overly aggressive price cutting that does not result in unit sales gains large enough to recoup forgone profits


Relying on a cost advantage that is not sustainable because rival firms can easily copy or overcome it


Becoming too fixated on cost reduction such that the firm’s offering is too features-poor to gain the interest of buyers


Having a rival discover a new lower-cost value chain approach or develop a cost-saving technological breakthrough


© McGraw-Hill Education.


STRATEGIC MANAGEMENT PRINCIPLE (3 of 7)


A low-cost provider is in the best position to win the business of price-sensitive buyers, set the floor on market price, and still earn a profit.


© McGraw-Hill Education.


Strategic Management Principle (4 of 7)


Reducing price does not lead to higher total profits unless the added gains in unit sales are large enough to bring in a bigger total profit despite lower margins per unit sold.


© McGraw-Hill Education.


Strategic Management Principle (5 of 7)


A low-cost provider’s product offering must always contain enough attributes to be attractive to prospective buyers. Low price, by itself, is not always appealing to buyers.


© McGraw-Hill Education.


BROAD DIFFERENTIATION STRATEGIES


Effective Differentiation Approaches


Carefully study buyer needs and behaviors, values, and willingness to pay for a unique product or service


Incorporate features that both appeal to buyers and create a sustainably distinctive product offering


Use higher prices to recoup differentiation costs


Advantages of Differentiation


Command premium prices for the firm’s products


Increased unit sales due to attractive differentiation


Brand loyalty that bonds buyers to the differentiating features of the firm’s products


© McGraw-Hill Education.


Core Concept (3 of 5)


Differentiation enhances profitability whenever a company’s product can command a sufficiently higher price or produce sufficiently greater unit sales to more than cover the added costs of achieving the differentiation.


© McGraw-Hill Education.


Core Concepts (4 of 5)


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.


A uniqueness driver is a factor that can have a strong differentiating effect.


© McGraw-Hill Education.


COST-EFFICIENT MANAGEMENT OF VALUE CHAIN ACTIVITIES


A uniqueness driver can


Have a strong differentiating effect


Be based on physical as well as functional attributes of a firm’s products


Be the result of superior performance capabilities of the firm’s human capital


Have an effect on more than one of the firm’s value chain activities


Create a perception of value (brand loyalty) in buyers where there is little reason for it to exist


© McGraw-Hill Education.


FIGURE 5.3 Value Drivers: The Keys to Creating a Differentiation Advantage


Jump to Appendix 4 long image description


© McGraw-Hill Education.


MANAGING THE VALUE CHAIN TO CREATE THE DIFFERENTIATING ATTRIBUTES


Create product features and performance attributes that appeal to a wide range of buyers.


Improve customer service or add extra services.


Invest in production-related R&D activities.


Strive for innovation and technological advances.


Pursue continuous quality improvement.


Increase marketing and brand-building activities.


Seek out high-quality inputs.


Emphasize human resource management activities that improve the skills, expertise, and knowledge of company personnel.


© McGraw-Hill Education.


REVAMPING THE VALUE CHAIN SYSTEM TO INCREASE DIFFERENTIATION


Coordinating with suppliers to better address customer needs


Coordinating with channel allies to enhance customer perceptions of value


Approaches to enhancing differentiation through changes in the value chain system


Jump to Appendix 5 long image description


© McGraw-Hill Education.


DELIVERING SUPERIOR VALUE VIA A BROAD DIFFERENTIATION STRATEGY


Broad Differentiation: Offering Customers Something That Rivals Cannot

1. Incorporate product attributes and user features that lower the buyer’s overall costs of using the firm’s product

2. Incorporate tangible features (e.g., styling) that increase customer satisfaction with the product

3. Incorporate intangible features (e.g., buyer image) that enhance buyer satisfaction in noneconomic ways

4. Signal the value of the firm’s product offering to buyers (e.g., price, packaging, placement, advertising)

© McGraw-Hill Education.


DIFFERENTIATION: SIGNALING VALUE


Signaling value is important when:


The nature of differentiation is based on intangible features and is therefore subjective or hard to quantify by the buyer.


Buyers are making a first-time purchase and are unsure what their experience will be with the product.

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