The Five Generic

Com petitive Strategies

Chapter Learnlng Obiectives

LOl.

Gain an understanding of how each of the five generic competitive

strategies go about buitding competitive advantage and delivering

suoerior value to customers.

LO2.

Recognize why some of the five generic strategies work better in

certain kinds of industry and competitive conditions than in others.

LO3.

Learn the maior avenues for achieving a competltive advantage based

on lower costs,

LO4.

Learn the major avenues for developing a competitive advantage

based on differentiating a company's product or service offering from

the offerings of rivals.

Chapter

The Fve Generic Competitive Strategies

Thee are several basic approaches to competing successfully and gaining

a competitive advantage, but they all involvc giving buyers r'r'ha t they perceive as superior value compared to thc offcrings of rival sellers. Superior
value can mean offering a good product at a lorver price, a superior pr<lduct that is worth paying more for, or a best-value offering that represents an
attractivc combination of price, features, quality, service, and other appealing
attributes.
This chapter describes the five basic competitiue strate!/ options for building
competitive advantage and delivering superior value to customers-\4'hich of
the five to employ is a company's first and foremost choice in crafting an overall strategy and beginnir.rg its quest for competitive advantage.

il ,',iI

il
1l

Competitive Strategies and

Industry Positioning
A company's cornpetitive strategy deals exclusiaely zuith the specifics of mnnagenrent's gnnrc plnn for competing *ccessfully-its specific efforts Lo please custonters,
its offensiue nntl defensiae nnaes to counter the nnneuuers
of riuals, its responses to tuhoteaer market cottditions
A competitive strategy concerns the specifrcs
nt tlrc ntoment, nnd its opproach f.o securing a competitiae of managemenfs game plan for competing
ndaantnge uis-i uis riaals. There are countlcss
successfully and securing a competitive

preaail

variations
that companies employ,

in thc competitive strategies

advantage over rivals.
mainlv because each company's strategic approach
entails custom-designed actions to fit its own circumstances ancl industry
environment. The custom-tailored nature of each company's strategy is also
the result of management's efforts to uniquely position the company in its
inciustrv Companies are much more likely to achieve competitive advantagc
and earn above-average profits if they are ablc to find a unique way of delivering superior value to customers. For example, the iPod's attractive styling,
easy-to-use controls, attcntion-grabbing ads, and extensive collection of music
available at Apple's iTunes Store has given Apple a competitive advantage in
the digital music plaver industry. Microsoft has attempted to imitate Apple's
competitive strategv rvith its introduction of its Zune music player and musc
store, but Microsoft has fared no better in its attack on the iPod than any of the
other makers of MP3 players. By choosing a unique approach to providing
value to customcrs, Apple has achieved an enduring brand loyalty that makes
it difficult for others to triumph by merely copying its strate;ic approach. "Me
too" strategies can rarely be expected to deliver competitive advantage and
stellar performance unless the imitator possesses resources or competencies
that ailow it to provide greater value to customers than that offered by firms
with similar strategic approaches.
Competitive strategies that provide distinctive industry positioning and
competitive advantagc in thc marketplace involve choosing between (1) a
market target that is either broad or narrow, and (2) n'hether the company
should pursue a competitive advantage linked to low costs or product differentiation. Figr-rre 5.1 presents five proven competitive strategies keyecl to

,.,':i:'

Part

Irl(]UIlli l.l

One:

Section C: Crafting a Strategy

rhe five Generic Competitiye Strategies

Source: This is an authorexpanded vers on of

3.strategy (lasstication
dsrussed in lMichael
E PofteL Competitve
Slroegy (New York: Free
Press, 1980), pp 35-4o

(,

Presence in a Broad
Range of Market
Segments

(u

o
.)
Il'

Presence in a
Limited Number of
Market Segments

Vatue Creation Keyed

to Lower Cost

Value Creation Keyed to

0ifferentiating Features

Type of Competitive Advantage Pursued

industry positioning.r Thc gcncral approach to competing and operating the

business is notably different for each of the five competitive stratcgics. The
five generic strategies are:

|.

A lozu-cost prouider slrnfr:gy-stnving to achieve lolr-er overall costs than

rivals and appealing to a broad spectrum of customers, Lrslrally by r-rnderpricing rr'als.

2.

A brond tliffere nt int ion sf rnfe,qy-seeking to differentiate the company's

prociuct or service from rivals'in ways that rviil appeal to a broad spectrum of buyers.
Afttcuscd loto-cost sf rnf ecr/-concentrating on a narrow buyer segment (or
market niche) and or-rtcompeting rivals by having iower costs than rivais
and thus being able to serve niche members at a lower prrice.

3.

sf rn f e.gy-concentra tin! on a narrow buver segment

(or market niche) and outcompetin; rivals by offering niche members
custornizecl attributes that meet their tastes and reouirements better than
rivals' products.

Afocrtsetl differentiation

3. A best-cost

prottitler strntegV giving customers more value for the

money by satisfvin; buyers' expectations on key quaiity / featrres /
Performance / service attributes rvhile beating their price expectations.
This option is a hybrid strategy that blencls elements of low-cost provicler
and dfferentiation strategies; the aim is to have the lowest (best) costs
and prices among sellers offering products rvith comparable differentiat-

ing attribu tes.

' This classification scheme is an adaptation of a narrower three-strategy classiflcation presented
in Michael E. PotteL Competitive Strategy: Techniques far Analyzing lndustres ond Compettors
(New York: Free Press, 1980), Chapter z, especially pp. 35 40 and 44 46. For a dscussion of the
dfferent ways that companies can position themselves in the marketplace, see Michael E. Porter,
"What ls Strategy?" Harvord Business Review 74, no. 6 (Novem ber-Decem ber 1996), pp. 65 67.

Chapter

The Five Generic Competitive Strateges

Each of these five generic competitive approaches stakes out a different

market position. The follo'lr,.ing scctions explore the ins and outs of the five
generic competitive strategies and how they differ.

Low-Cost Provider Strategies

Striving to be the indust4r's overall Low-cost provider is a powerful competitive approach in markets with many price-sensitivc buyers. A company
achieves low-cost Ieadership u'hen it becomes the industry's lowest-cttst provider rather than just being one of perhaps scrreral comPetitors with low costs.
providers boast mcaningfully krn'er costs than rivals-but
not necessarily the absolutcly lorvest possible cost. In striving for a cost advantage over rivals, managers must take care to include features and services that
buyers consider esscn tial-a prodtLct offerittg thnt is too fr ills-ft'ee con lte aierued by
cotlsuners ns offering little ulue e'oen if it is priced lozuer than contpeting products.
A company has trvo options for transiating a lou-cost advantage ovcr rivals
into attractive profit performance. Option 1 is to usc thc lon'er-cost edge to
underprice competitors and attract price-senstive buyers in great enough
numbers to increase total profits. Option 2 is to maintain the present price, be
content with the present markct share, and use the lower-cost edge to earn a
higher profit margin on each unit so1d, thereby raising the firm's total profits
and overall return on investment.
Successf ul low-cost

Achieving Low-Cost Leadership

A low-cost edge over rr'als is best accomplished in two r,r'ays: (l) performing
essential value chain activities more cost-cffcctively than rivals and (2) revamping the firm's overall valuc chain to eliminate or bypass some cost-Producing
activities altogcthcr.2 Southwest Airlines has reconfigured the traditional
"'alue
chain of commercial airlines to lower costs and thereby
offer dramaticallv lower fares to passengers. South- Success in achieving a lowcost edge over rivals
west does not offer in-flight meals, assigned seating, comes from outmanaging nvals rn performing
baggage transfer to connecting airlines, or first-class essential activities and eliminating or curbing
seating and service, thereby eliminating all thc cost- 'nonessential" activities.
producing activities associated with these feafures.
The company's superior performance of essential activities also contributes to
its cost advantagc in the airline industry. Its mastery of fast turnarounds at thc
gatcs (about 25 minutes versus 45 minutes for rivals) allows its plancs to fly
more hours per day. This translates into being able to schedule more flights
per day with fewer aircraft, allowing Southrt'est to generate more re\enue per
plane on average than ri"'als.
For a company to do a more cost-efficient job of managing its value chain
than rivals, managers must launch a concerted, ongoing effort to ferret out
cost-saving opportunities in every part of the value chain. No activity can
escape cost-saving scrutiny and all avenues for performing value chain activities at a low,er cost than rivals have to be explored- Normallv, low-cost producers work diligently to create cost-conscious corPorate cultures that feature
' furchael E. Porter, Competitive Advontoge (New York: Free Press, 198), p. 97.

Part

One:

Section C: Craftlng a Strategy

broad employee participation in contiruous cost improvement efforts and

Iimited perks and frills for executives. They strive to operate r+'ith exceptionally small corporate staffs to keep administrative costs to a minimum. Many
succcssful lor{'-cost leaders also use benchmarking to keep close tabs on how
their costs comparc with rivals and firms performing comparable activities in
other industries.
But while low-cost pror.iders are champions of frugality, they usually don't
scrimp on investing in resources that promisc to drive costs out of the business. Walmart, one of the foremost practitioners of low-cost leadership, has
invested in sta te-of-the-art technology throughout its operations-its distribution facilities are an aLltomated showcase, it uses online systems to order goods
from suppliers and manage inventories, it equips its stores with cutting-edgc
sales-tracking and checkout systems, and it sends dailv point-of-sale data to
4,000 vendors. Walmart's information and communications systems and capabilities are more sophisticated than thosc of virtually any other retail chain in
the world. Concepts & Corurections 5.1 describes Walmart's broad approach
to managing its value chain in the retail grocery portion of its business to
achieve a dramatic cost advantage over rival supermarket chains and become
the world's biggest grocery retailer.

Market Conditions Favoring a Low-Cost Provider Strategy

A competitive strategy preclicated on low-cost leadership is particularly powerful when:

"1. Price competition among riaal sellers is especinlly aigorous-Low-cost providers are in the best position to compete offensively on the basis of price
and to survive price wars.
2. The trodttcts of rianl sellers are essentially identical and are rendily auailable
from seaeral sel/ers-Commoditylike products and/or ample supplies set
the stage for livcly ptice competition; in such markets, it is the less efficient, higher-cost companics that are most vulnerable.

3.

Tlrcre nre ferl ways to achieue product dilferentiation that hape pahte to

buters-

When thc product or service differences between brands do not matter

much to buyers, buyers ncarly alr+'ays shop the market for the best price.

4.

inatr loio costs in sutitching their purchnses from one seller to another
Low switching costs give buyers the flexibility to shift purchases to lowepriced sellers having cqually good products. A iow-cost leader is well
positioned to use lon'price to induce its customers not to switch to r.ival
brands.

5.

The majority of industry snles are made to a feu, large aolume buyers-Low-cost
providers are in the best position among sellers in bargainin; with highvolume buyers because they are able to beat rivals' pricing to land a high
volume sale while maintaining an acceptable profit margin.
lndustry neTucomers use introcluctory low trices to attrnct buyers nntl build a
customer base-The low-cost lcader can use price cuts of its own to make it
harder fo a new rival to wln cusromers.

6.

Buyers

Chapter

The Five Gencr c Cornpetitive Strategies

HOW WALMART MANAGED ITS VALUE CHAIN TO ACHIEVE

ADVANTAGE OVER RIVAL SUPERMARKET CHAINS
Walmart has achieved a very substantiaL cost and prcing
advantage over rival supermarkt chains by both revamp'

ing portions of the grocery retaling value chain and by

outmanaging its rivals n efflciently performing various
value chain actvities. lts cost advantage stems from a
series of initiatives and practces:

Instituting extensive information sharing with

vendors vla online systems that relay sates at its
checkout counters directLy to suppliers of the items,
thereby providlng suppLiers with real-time informa
tion on customer demand and preferences (creating
an estmated 6 percent cost advantage).

Pursuing gLobal procurement of some items and centralizng most purchasing activties so as to leverage
the company's buying power (creating an estimated
2.5 pefcenl (ost d dvan lage ).
Jnvesting in state-of'the art automation at its ds-

lribution centers, efficiently operating a truck fleet

that makes daily deliveries to Walmart's stores, and
puttng assorted other cost-saving practices into
ptace at ts headquarters, distribution centers, and
5tores (resulting in an estmated percent cost
advantage).

LOW-COST

Striving to optimize the product mix and achieve

greater sales turnover (resultng ln about a 2 percent
cost advantage).

Instal[ing securty systems and store operatng procedures that lower shrinkage rates (producing a cost
advantage of about o.5 percent).

.
.

Negotiating preferred real estate rental and leasing

rates wlth real estate devetopers and owners of its
store sites (yietding a cost advantage of 2 percent).
f\4anagng and compensating its workforce n a man'
ner that produces Lower labor costs (yieldlng an esti-

mated 5 percent cost advantage)

ALtogethet these value chain initiatives give Watmart
an approximately 22 percent cost advantage over Kroger,
Safeway, and other leading supermarket chains. With
such a sizable cost advantage, WaLmart has been able
to underprice its rivals and become the world's leading
supermarket retaiLer in little more than a decade.
Source Devetoped by the authors from information at
www.walmart.com and in lvlarco lansiti and Roy Levien,
"Strategy as Ecology," HaNod Business Revew 82, no.
(lMarch zoo4), p. 7o.

As a rulc, the tnore price-sensitive Lttryers are, the more apPcalillt a lor'v-cost
strategv becomes. A lor,v-cost comPany's ability to sct the industry's price floor
ancl still earn.r rrofit el'ects Protective barricrs around its m.lrket Posrtiorl.

The Hazards of a Low-Cost Provider Strategy

Pcrhaps the biggest pitfall of a lon'-cost rrovider stratc'gv is getting carr-iec1
arvav n,ith orcr/, r,g,g/'essiv Ljrcc clttttii and ending up n'ith lovver; rather than
higher, prof itabiltt\,-. A lou'-cost / lort'-price advantage results jrl sr-Lperior frrofitabilitr only if (1) prices are cut by lcss than the size of the cost 111\antage oI
(2) the added volume is largc cnough kr bring in r Lrigger total profit despitc
lorver margins per unit sold. Thr.rs, a c()mPlrlv lvith a 5 Percent cost advantage
cannot cut priccs 20 percent, etrcl rt'r lvith .r voltttne gain of only l0 percent,
and still expect to earn higher profits!
A second big pitfall is rclr1itlt ()tt tltt nltprotch to rtrlucc cttsts tlutt cnn ltt msilll
cotied bry rirzls The vahte of a ccst advautage depends on rts sustainabil
ity. Sustainabilitri in tr-rrn, hinges on rvhether the company achieves its cost
advantage in r'vays difficult for rir'ls to reprlicate or r-natch lf riv'rls find it

Part

One:

Section C: Crafting a Strategy

relatively easy or inexpensive to imitate the leade's lor,v-cost methods, then

the leader's advantage rvill be too shorflived to yield a valuable edge in the
rnarketplace.
A tlrird pitfall is becomin; too fixnted on cost reductioil. Lorv costs cannot be
pursued so zealously that a firm's offering cnds up being too features-poor
to gain the interests of buyers. Furthermore, a company driving hard to push
its costs down has to guard against misreading or ignoring increased buyer
preferences for addcd features or declining br-ryer price sensitivity. Evcn if
these mistakes are avoidcd, a Low-cost competitive approach stiLl carries risk.
Cost-saving technological brcakthroughs or process improvements can nullify
a low-cost leader's hard-won Dosition.

Broad Differentiation Strategies

The essence of a broad dfferentiaton strategy
is to be unique in ways that are valuable to
wide range of

customers

Differentiation strategies are attractive whenever buyers' needs ancl preferences are too diverse to be fully
satisficd by a standarclized product or service. A com_
pany attempting to succeed through cliffeentiation

rcarnwhatr,.,ye,str.i,,il's';iiiJ"::Til;,ii"#,:i*ff

[ffi ;l'ix?li:

the company must include these desirable features to clearly set itsclf apart
from rivals lacking such product or service attributes.
Successful differentiation allows a firm to:

o
'
.

Command a premium price, and/or

Increase unit sales (because additional buyers are \1,on over bv the diffcrentiating featurcs), and/or
Cain buver lovalty to its brand (because some buvers arc strongly
attracted to the differentiatir-rg features and bond with the company and
its products).

Differentiation enhances profitability r,r'henever the extra price the product commands outl,r.eighs the added costs of achieving the differentiation.
Company differer-rtiation strategies fail when buycrs don't value the brand's
uniqucness and/or u4ren a company's approach to diffcrcntiation is easily
copicd or matched by its rivals.

Approaches to Differentiation
Companies can pursue differentiation from many angles: a unique taste
(Dr Pepper, Listerine); multiple featurcs (Microsoft Windows 7, Microsoft Office); w.rde selection and one-stop shopping (Horne Depe, dzon.com); superior service (FedEx); spare parts availability (Caterpiliar
guarantees 18-hour spare parts delivery to any customer anyrvhcrc in the
world or else thc pa rt is furnished free); engineering design and performance (Mercedes, BMW); prestige and distinctrveness (Rolex); product
reliability (Whirlpool and GE in large home appliances); qualitv manufacturrng (Michelin in tires, l>yota and Honda in automobiles); technological leadership (3M Corporation in bonding and coating products); a fuil

Chapter

The Five Generic Competitive Strategies

range of services (Charles Schwab in stock brokerage); a complete line of

products(Campbell'ssoups);and toP-of-the-lineimageand reputation (Ralph
Lauren and Starbucks).
The most appealing approaches to differentiation are those that are hard or
expensive fo rivals to duplicate. Indeed, resourceful comPetitors can, in time,
clone almost any product or feature or attribute. If Coca-Cola introduces a
vitamir-r-enhanced bottled water, so can Pepsi; if Canon
introduces 12 megapixel camera, so can Sony and Easy-tocopy differentiating features cannot
Nikon; if Research in Motion (the maker of the popular produce sustainable competitve advantage;
Blackberry models) introduces e-mail enabled mobile differentiation based on hard-to-copy competencies and capablities tends to be more
phones, so can Samsung, Apple, and LG. As a rule, differentiation yields a longer-lasting and more profitable sustainable.
competitive edge when it is based on product irrnovation, technical superiority, ptoduct quality and reliability, comprehensive customer service, and unique competitive capabilities. Such differentiating
attributes tend to be tough for rivals to copy or offset profitably and buyers
widely perceil,e them as having vah-re.

Creating Value for Customers through Differentiation

While it is easy enough to grasp that a successful differentiation strategy must
offcr value in ways unmatched by rivals, a big issue in crafting a differentiation strategy is deciding what is valuable to customers. Typically, r'aluc can be
delivered to customers i four basic tl'ays.

7.

lnclude product nttributes and user Jeatures that lower the buycr's cosfs. Commercial buyers value products that can reducc their cost of doin; business. For example, making a company's product more economical for a
buyer to use can be done by reducing the buyer's raw materiais ll'aste

(providing cut-to-size components), reducing a buyer's inventory requirements (providing just-in-time deliveries), increasing product reliability to
lower a buyer's repair and maintenance costs, and providing free technical support. Similarly, consumers find value in differentiating featurcs that
will reduce their expenses. Rising costs for gasoline prices have spurred
the efforts of motor vehicle manufacturers worldwide to introduce models
with better fuel economy.

2.

Incorporate features that irnprorte prodttct performanc.3 Commercial buyers

and consumers alike value higher levels of performance in many types

of products. Product reliability, output, durability, convenience, ancl ease
of use are aspects of product performance that different.iate products
offered to buyers. Mobile phone manufacturers are currently in a race to
improve the performance of their products through the introduction of
next-generation phones with a more appealing, trend-sctting set of user
featues and optrons.

3.

Incotporate features that enhance buyer satisfaction in noneconotic or intangible

wnrs. Ttlyota's Prius appeals to environmentally conscious motorists who

wish to help reduce global carbon dioxide emissions. Bentley, Ralph Lauren,
r

lbid., pp. 115-1j8.

Part

One:

Section C: Crafting a Strategy

4.

Lous Vuitton, Tiffany, Cartier, and Rolex have differentiation-based

competitive advantages linked to buyer desires for status, image, prestige, upscale fashion, superior craftsmanship, and the finer things in life.
L.L. Bean makes its mail-order customers feel secure in their purchases
by providing an unconditional guarantee with no time limit.
Delioer aalue to customers by exploiting competencies and competitiae capabilities that riaals don't hate or can't afford to match.a Core and/or distinctive competencies that are unique in the industry can be used to help
set a company apart from its rivals. There are numerous examples of
companies that have differentiated themselves on the basis of capabilities. Nintendo is able to offer Wii owners a large selection of fun-for-allages games because of the strength of its internal game development
operations and its extensive network of third-party game developers.
Japanese automakers can adapt faster to changing consumer preferences
for one vehicle style versus anothe because they have the capabilities
to bring new models to market faster than American and European
automakers,

Where to Look for Opportunities to Differentiate

Differentiation is not necessarily something hatched in marketing and advertising departments, nor is it limited to quality and service. Differentiation
opportunities can exist in all activities that affect the value of a product or
service; possibilities include the following:

Sttpply chain actizities that ultimately spill over to affect the performance
or quality of the company's end product. Starbucks gets high ratings on
its coffees partly because it has very strict specifications on the coffee
beans purchased from suppliers.
Product RtD actiuities that aim at improved product designs and performance/ expanded end uses and applications, mote frequent first-to-market
victories, added user safety, greater rcrycling capabiliry or enhanced envi-

ronmental protection.

Production R&D and technology-related actitities that permit the manufacture of customized products at an efficient cost; make production methods safer for the environment; or improve product quality, reliability, and
appearance. Many manufacturers have developed flexible rnanufacturing
systems that allow different modeis and product versions to be made on
the same assembly line. Being able to provide buyers with made-to-order
products can be a potent differentiating capability.

Manufacturing actiuities that reduce product defects, extend product life,

allow better warranty coverages, or enhance product appearance. The
quality edge enjoyed by lapanese automakers stems partly from their
distinctive competence in performing assembly line activities.

For a more detailed discussion, see George Stalk, Phitip Evans, and Lawrence E. Schulman,
"Competng on Capabiltes: The New Rules of Corporate Strategy," Harvard Busness Revew 70,
no. z (March April 992), pp.57-9-

Chapter

The Five Generic Competitive Strateges

Distribution antl shippittg actioities that allow for fewer warehouse and
on-the-shelf stockouts, quicker delivery to customers, more accurate
order filling, and/or lower shipping costs.
Marketing, sales, and cLtstom seraice actiaities that result in superior technical
assistance to buyers, faster maintenance and repair services, better credit
terms, quicker order processing, or Eireater customer convemence.

Perceived Value and the lmportance of Signaling Value

The price premium commanded by a differentiation strategy reflects the ttalue
actually deliueretl to the buyer and the aalue percei-oed by the buyet. The value of
certain differentiating features is rather easy for buyers to detect, but in some
instances buyers may have trouble assessing what their experience with the
product n ill be.s Successful differentiators go to great lengths to make buyers
knowledgeable about a product's value and incorporate signals of value such
as attractive packaging, extensive ad campaigns, the quality of brochures and
sales presentations, the seller's list of customers, the length of time the firm
has been in business, and the professionalism, appearance, and personality
of the sellcr's employees. Such signals of value may be as important as actual
value (1) when the nature of differentiation is subjective or hard to quantify,
(2) when buyers are making a firsttime purchase, (3) when rcpurchase is infrequent, and (4) when buyers are unsophisticated.

Market Conditions Favoring a Differentiaton Strategy

Dif ferentiation strategies tencl to work best in market circumstances where:

1.. Buyer needs and uses of the product are diaerse-Divcrse buyer preferences
allow industry rivals to set themselves apart r,r,ith product attributes that
appeal to particular buyers. For instance, the diversity of consumer preferences for menu selection, ambience, pricing, and customer service gives
restaurants exceptionally r,ide latitude in creating differentiated concepts.
Other industries offering opportunities for differentiation based upon
diverse buyer needs and uses include magazine publishing, automobile
manufacturing, footwear, kitchen appliances, and computers.
2. Tlrcre arc many wflys to dffirentiate the product or seraice that hnzte ualue to
buyers-lndusiries that allow competitors to add features to product
attributes are well suited to differentiation strategies. For example, hotel
chains can differentiate on such features as location, size of room, range
of guest services, in-hotel dining, and the quality and luxuiousness of
beddng and furnishings. Similarly, cosmetics producers ae able to
differentiate based upon prestige and image, formulations that fiSht the
signs of aging, UV light protection, exclusivity of retail iocations, the
inclusion of antioxidants and natural ingredients, or prohibitions against
animal testing.
5 The relevance of perceived value and signaLing is discussed in more detail in Porte\ Compettve
Advantoge: Creoting and Sustaining Superior Performonce, (New York: Simon & Schuster, 1996),

pp.88-142.

Part

One:

Section C: Crafting a Strategy

.f.

firms nre followttg a similnr differentiation appronch-The besi

differentiation approaches involve trying to appeal to buyers on the
basis of attributes that rivals are not emphasizing. A differentiator
encounters less head-to-head rivalry when it goes its own separate
way to create uniqueness and does not try to outdifferentiate rivals
on the vcry same attributes. When many rivals are all claiming "ours
tastes better than thcirs" or "ours gets your clothes cleaner than theirs,"
competitors tend to end up chasing the same buyers n'ith very similar
product offerings.

1.

Te.chnological clnnge is fast-paced and cornpetition reaolL)es nround rapidly

eooluing product features-Rapid product innovation and frequent intro-

Fezu riunl

ductions of next-version products heighten buyer interest and provide

space for companies to pursue disiinct differentiating paths. hr video
game hardware and video games, golf equipment, PCs, mobile phones,
and automobile navigation systems, cornpetitors are locked into an
ongoing battle to set themselves apart by introducing the best nextgcncration products-companies that fail to come up with nen' and
improvcd products and distinctive performance features quickly lose out
in the marketolace.

The Hazards of a Differentiation Strategy

Differentiation strategies can fail for any of several reasons. A drfferentiation
strntegy keyed to product or seroice attribules tlffit are easily nnd quickly copied is
nluoys suspect. Rapid imitation means thai no rival achieves meaningful differcntiation, because whateve new feature one firm introduces that strikes
the fancy of buyers is almost imrnediately added by rivals. This is why a firm
must search out sources of uniqueness that are time-consuming or burdensome for rivals to match if it hopes to use differentiation to u.in a sustainable
competitive edge over rivals.
Differentintion strntegies cnn nlso falter uhen buyers see little aalue in the unique
attributes of o cornpany's prodLtct. Thus even if a company sets the attributes of
its brand apart from its ivals'brands, its strategy can fail bccause of trying to
diffcrcntiate on the basis of something that does not deliver adequate valuc
to buyers. Any timc many potential buyers look at a company's differentiated
product offering and conclude "so u'hat," the company's differentiation strategy .is in deep trouble-buyers will likely decide the product is not worth the
extra price and sales will be disappointingly lonr
Otterspending on efforts to dilferentinte is a strotegy flazu thnt can end up eroding profitobility. Company efforts to achieve diffeentiation nearly always raise
costs. The trick to profitable differentiation is either to keep the costs of achieving differentiation below the price premium the differentiating attributcs can

command in the marketplace or to offset thinner profit margins by selling

enough additional units to increase total profits. If a company goes overboard
in pursuing costly differentiation, it could be saddled with unacceptably thin
profit margins or even losses. The need to contain differentiation costs is rr,'hy
many companies add little touches of diffeentiation that add to buyer satisfaction but are inexpensive to institute.

Chapter

The Five Generic Competitive Strategies

Other common pitfalls and mistakes in crafting a differentiation strateBy

include:6

Oaerdifferentiating so that product qualitq or seraice leaels exceed buvers' needs.

Buyers are unlikcly to pay extra for features and attributes that will go
unused. For example, video game users are unlikely to purchase game
consoles featuring high-rcsolution graphics and broadband connectivity
they don't own an HDTV and subscribe to an Internet service.

if

Trying to charge too high a price Premiutn. Even if buyers view certain extras
o deluxe features as "nice to have," they may still conclude that thc
added benefit or luxury is not worth the price differential over that of
lesser differentiated produc ts.
Being timid and not stritsing to open up meaningful gaps in quality or seraice or
performance features uis-it-ois the products of

riuals-tiny differences between

rivals' product offerings may not be visible or important to buyers.

A lon'-cost provider strategy can always defeat a differentiation strategy when
buyers are satisfied with a basic product and don't think "extra" attributes are
worth a higher price.

Focused (or Market Niche) Strategies

What sets focused strategies apart from low-cost leadership or broad differentiation strategies is a concentration on a narrow piece of the total market. The
targeted segment, or niche, can be defined by geographic uniqueness or by
special product attributes that appeal only to niche members. The advaniages
of focusing a company's entire competitive effort on a single market nichc
are considerable, especiaily for smaller and medium-sized companies that
may lack the breadth and depth of resources to tackle going after a national
customer base with a "something for everyone" lineup of models, styles, and
product selection. Communify Coffee, the largest family-owned specialty
coffee retailcr in the United States, has a geographic focus on the state of Louisiana and communities across the Gulf of Mexico. Cornmunity holds only
a 1.1 percent share of the national coffee market, but has recorded sales in
excess of $100 million and has won a 50 percent share of the coffee business in
the 11-state region where it is clistributed. Examples of firms that concentrate
on a well-defined market niche keyed to a particular product or buyer segment include Animal Planet and the History Channel (in cable TV); Googie
(in Internet search engines); Porsche (in sports cars); and Bandag (a specialist
in truck tire recapping that promotes its recaps aggressively at over 1,000
truck stops). Microbreweries, local bakeries, bed-and-breakfast inns, and
local owner-managed retail boutiques are all good examples of cntcrprises
that have scaled their operatons to serve narrow or local customer segments.

A Focused Low-Cost Strategy

A focused sategy bascd on low cost aims at securin; a competitive advantage by serving buyers in the target market niche at a lower cost and a lower
6

Pofter, Compettve Advontage, pp. 160-162.

Part

One:

Section C: Craftng a Strategy

prlce than rival competitors. This strategy has considerable attraction when
a firm can lower costs significantly by limiting its customer base to a welldefined buyer segment. The avenues to achieving a cost advantage over rivals
also serwing the targei market niche are the same as for low-cost leadershipoutmanage rivals in keeping the costs to a bare minimum and searching for
innovative ways to bypass or reduce nonessential activities. The only real difference between a low-cost provider strategy and a focused low-cost strategy
is the size of the buyer group to which a company is appealing.
Focused low-cost strategies are fairly common. Produccrs of private-label
goods are able to achieve low costs in product development, marketing, distribution, and advertising by concenhating on making generic items similar to namebrand merchandise and selLing directly to retail chains wanting a low-priced
store brand. The Perrigo Company has become a leading manufacturer of overthe-counter health care products with 2008 sales of more than $1.8 billion by
focusing on producing privateJabel brands for retailers such as Walmart, CVS,
Walgreens, Rite Aid, and Safeway. Even though Perrigo doesn't make branded
products, a focused low-cost strategy is appropriate for the makers of branded
products as well. Concepts & Connections 5.2 describes how Vizio's low costs
and focus on big box retailers has allowed it to become the largest seller of flat
panel HDTVs in the United States within six years of its start-up.

A Focused Differentiation Strategy

Focused differentiation strategies are keyed to offering carefullv dcsigned
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). Companies like Four Seasons Hotels and Resorts, Chanel, Cucci, and Louis Vuitton employ successful
differentiation-based focuscd strategies targeted at affluent buyers wanting
products and services with worldclass attributes. Indeed, most markets contain a buyer segment willing to pay a price premium for the vcry finest items
available, thus opening the strategic window fo some competitors to pursue
differentiation-based focused strategies aimed at the very top of the market
pvramid. Ferrari makets its 1.500 cars sold in North Ameica each year to
a list of just 20,000 highly affluent car enthusiasts. Only the highest echelon
of this exclusive group were contacted by Ferrari for a chance to put their
names on the waiting list for one of the 20 $1.1 million FXX models planned
for sale in North America. Concepts & Connections 5.3 describes Progrcssivc
Insurance's focused differentiation strategy.

Conditions Making a Focused Low-Cost or

Focused Differentiation Strategy Viable
A focused strategy aimed at securing a competitive edge based either on low
cost or diffcrentiation becomes increasingly attractive as more of the following
conditions are met:

The target market niche is big enough to be profitable and offers good

growth potential.

rlc

Co rn

petitive

Strateges

rog

VIZIO'5 FOCUSED LOW-COST STRATEGY

California-based Vizio, Inc., designs flat panel LCD and
Plasma TVs ranging in size from zo inches to 55 inches,
which are sold onty by big box discount retailers such as
Walmart, Sam's Club, Costco Wholesale, and Best Buy. lf
you've shopped [or a flat panel TV recently, you've probably noticed that Vizo is among the lowest-priced brands
and that its picture quaLity is surprlsingly good consider
ing the price. The company is able to keep ts cost low
by only designing TVs and then sourcing production to
a limited number of contract manutacturers in Taiwan. In
fact, 80 percent of its production s handied by AmTran
Technology. Such a dependence on a supplier can place
a buyer in a precarious situalion by making it vulnerable
to price Increases or product shortages, but Vizio has
countered this possibte threat by making Amlran a major
stockholder. Amlran Technology owns a 2J percent stake
in Vizio and earns about 80 percent of its revenues [rom
its sales of tetevsons to Viz0. This close relationship
with ts major supplier and its focus on a single prod'

uct category sold through limited distribution channels

aLlows Vizio

Vizio's first major account was landed in zoo3 when

it approached Costco buyers with a 46-nch plasma TV

with a whotesale price that was half the price of the
n ext-Lowest-p rice competitor. Within two months, Costco
was carrying Vizio flat screen TVs in 3zo of its warehouse stores in the United States. In October zoo7, Vizio
aooroached buvers for Sam's Club with a zo'inch LCD
TV that could be soLd at retail for under $35o. The price
and quality of the zo-inch TV led Sam's Club buyers to
place an order for zo,ooo TVs for a March zooS delivery.
In 2oo9, Viz o was the largest selter of flat paneL HDTVs
in the United States with a market share of zr.6 percent.
Vizio recorded revenues of $z billion in 2ooZ and it was
the industrv's most Drofltable seller of TVs.

Sour[: Vizio's rapid success was highlighted n "Picture 5hift: U.S Upstart Takes On TV Giants in Price Wat"
The Wall Street lout ol, April 15, 2008, p. Ar; and "Vizio
Achieves #1 LCD HDTV Ranking in North Arerica and #1
Ranking in U.5. Flat Panet HDTV Shipments," Vizio Press
Release, May 11,2oo9.

to offer ts customers deeo orice discounts.

Tndustrv leaders have chosen not to compete in the niche-in which case
focusers can avoicl battling heacl-to-he.rd against the indtrstrr"s biggcst
.l nrl str()n$est r r rr t I'et iIors.
r

It is costlv or rlifficrlt for mr:ltisegment competitors to meet the sreci.rlizc.d nc.cds of niche buyers and at the same time satisfy the expectations
of mainstream custtlmers.
The indr.rstry has man1, different niches and segmelrts, therclrv allolving a
focuser kr pick a niche suited to its resource strengths antl capabilities.
Ferri if any, rivals are attcmpting to specialize in the same target segmenr.

The Hazards of a Focused Low-Cost or

Focused Differentiation Strategy
Focrrsing carries ser.cral risks. Thc _lirst trrtriLtr risk is the chance that comPetitors n'ill find cffcctive wavs to match the foctisecl finn's c"rLrabilities in sen'ing
the target niche. ln the loclging busrness, l.-rrge chains like Marriott and Hilton
have launchecl mnltibrand strategies that allor.r'them to comPctc cffectivelv in
sel.eral lodging segrnents sirnttltaneo trslv. Marriott has flagship hotels 'uvith a
fr,rl1 complement of services and amenitics that allor,r'it to aitract travelers and

lo

Part

()nc:

Section C: Crafting a Strategy

PROGRESSIVE INSURANCE's FOCUSED DIFFERENT]ATION STRATEGY IN

AUTO NSURANCE
Progressive Insurance has fashioned a strategy in auto
insurance focused on oeoole wth a record of traffic vo
lations who drive high-performa nce cars, drivers wth

Leader in the market for luxury.car insurance for customers who appreciated Progressive's strearnLined approach
to doin g business.

accident histories, motorcyclists, teenagers, and other

ln further differentiating and promoting Progressive

poticies, management created teams of roving c[aims
adlusters who would anive at accident scenes to assess
ctaims and issue checks for repairs on the spot. Progres
sive introduced z4-hour claims reportlng, now an indus
try standard. ln addition, it developed a sophistcated
pricing syslem so that t couLd quickly and accurateli/
asses each customer's risk and weed out unprofitabLe

so-calLed high-risk categores of drivers that most auto

insurance companies steer away from. Progressive discovered that some of these high-risk drivers are affluent
and pressed for time, making them less sensitve to pay.
ing premium rates for ther car insurance. Management
learned that it could charge such drivers high enough
premums to cover the added rsks, plus it differentiated
Progressive from other insurers by expediting the process
of obtaning insurance and decreasing the annoyance
that such drivers fared in obtaining insurance cove-age.
Progressve pioneered the [ow-cost direct sales model
of alLowing customers to purchase insurance online and
over the phone.

customers.

By being creative and excelLing at the nuts and bolts

of its busrness, Progressive has won a 2.6 percent share
of the $l5o biltion market for auto insurance and has
the highest underwriting margins in the auto-insurance
ndustry.

Progressive also studied the market segrnents for

insurance carefully enough to discover that some motor.
cycle owners were not especially risky (middle-aged sub.
urbantes who sometimes commuted to work or used
ther motorcycles mainly for recreational trps wth their
friends). Progressive's strategy allowed it to become a

Sourcesi wwwprogTessivensurance..om; lan C. McNli[a,

ALexander van Putten, and Rita Gunther l\4ccral, "Clobal
Gamesmanship," Horvard BLtsness Revicw 81, no. 5 (May
2ool), p. 68i FarLune, May 16, 2oo5, p 34; ard "[4otorcyctists Age, Affluence lfending llpward," 8es!Vir"e, july 24,
2OA7,

vacationers going to major resorts; it has J.lV. l\4arriott and Ritz-Carltol1 hotels
that -rror,ic-le c'leluxe comfort rnd service to busincss atrd lcisurc. travelers; it
has Courtvard by N{arriott ancl SpringHill Suites brands for business travclcrs boking for rloderately pricecl loclging; it has I\4arriott l{esidence lnns and
Torvnc.l)lace Suites clesigned as a "horne an rv from lrrme" for travelers staying fivc or more nights; ar-rcl rt has more than 590 Fairfielcl lnn krcitions that
cater to travelerrs looking for quality lodgrng at an "affoldable" pricc, Sirnilarl1,,
Hilton has a lineup of brands (I\hldorf Astoria, Corrracl Hotels, Dor-rlrletree
Hotels, Ernbassl, Sr,rites Hotels, Hampton Inns, Hilton Hotels, Hilton Carden
Imrs, rrncl Homelvoocl Sr-rites) ihat enable it to compctc in nrrr ltiple segmerlts
and comFrete head-l.o-hcac1 against lodging chains that op()ratc onlv irr a singlc.
segment. \{ultibrand str:rtegtes tre attractive to large compallies likc l\4arriott
and Flilton precisely because they enalrle a companv to enter a market niche
and siphon busincss a r'r,,r v from companies that emplov a focus strrtegv.
A sccorrrT r-lsk oi empkiying a focrrs strategy is the potential for the rrefererrces
and neeLls of niche lnembers to shift ovcr time. tor,r'ard the oroduct attnbutes

Chapter

The Five Generc Competitive Strategies

desired by the majority of bLlyers. An enrsion of the ciifferences across buyer

segments lor+'ers entry barriers into a focuser's market niche and provides
all open invitation for rivals in adjacent segments to begin competing for thc
focuser's customers. A third risk is that the segment may become so attractivc

it is soon inundated with

competitors, intensifying rivalry and splintering

segment profits.

Best-Cost Provider Strategies

As Figure 5.1 indicates, best-cost provider strategies stake out a middle
ground between pursuing a low-cost advantage and a differentiation advanta;e and between appealing to the broad market as a rvhole and a narron'
market niche. Such a middle ground allorn's a companv to aim squarely at the sometimes great mass of
Best-cost provder strategies are a hybrid o'f
value-consciotts buyers Looking for a good-to-vervlowcost provider and differentiation strategies
good product or service at an economical price. Valuethat aim at satisfying buyer expectations on key
quality/eatures,/perf orma ncelservice attri butes
conscious buyers frequcntly shy awav from both cheap
and beating customer expectatrons on price.
low-end products and very expensive high-end prodfor
"fair"
price
pay
a
ucts, but thcy are quite n,illing to
extra features and functionality they find appealing and useful. The essence of
a bcst-cost provider strategy is git ing customers morc anluc lr the noney bv
satisfying buyer desires for appealing features /pcrformance/ quality / service
and charging a lower price for these attributcs compared to rivals rt'ith similar
caliber product offerings./
To profitably employ a bcst-cost provider strategy, a comPany mttst Jnxe tlrc
cnpnbility to incortornte nttractiuie or upscale nttributes nt n louer cost tlwt riznls.This
capability is contingent on (1) a superior value chain configuration that eliminates or minimizes aciivities that do not add value, (2) unmatched cfficiency in
managing essential value chain activities, and (3) resourcc strengths and core
competencies that allow differenhating attributes to be incorporated at a low
cost. When a company can hrcorporate appealing features, good-to-excellent
product performance or quality, or more satisfying customer sen'ice into its
prodr-rct offerir-rg nf n lower cost tlnn riaals, then it enjoys "best cost" status-it is
the lorv-cost provider of a product or service with trpscnle atributcs A best-cost
provider can use its lorv-cost advantage to underprice rivals whose products or
sen ices have similar upscale attributes and still earn attractive profits.
Concepts & Connections 5.4 describes how Toyota has applied the principles
of a best-cost provider strategv in producing and marketing its Lexus brand.

The Danger of an Unsound Best-Cost Provider Strategy

A company's biggest vulnerability in employing a best-cost provider strategy is not having the requisite core comPetencies and cfficiencies in managing value chain activities to sLrPPort the addition of differentiating featr.Lres

/ For an excetlent discussion of best cost provder Strateges, see Peter Williamson and Ming
Zeng, "Value-for-Money Strategies for Recessonary Times," Horvard Business Review 87, no. 3
(March 2oo9), pp. 66-74.

l9

Part

()ne:

Section C: Crafting a Strategy

TOYOTA'S BEST.COST PRODUCER STRATEGY FOR ITS TEXUS IINE

Toyota Motor Company is widety regarded as a low.cost
producer among the wortd's motor vehicle manufacturers. Despite its emphasis on product quality, Toyota has
acheved low'cost leadership because it has developed

considerable skllts in efficient supply chain management and low-cost assembly capabilities, and because
its models are positoned in the low-to.medium end of
the prce spectrum, where high production volumes are
conducive to low unt costs. But when Toyota decided to
ntroduce its new Lexus models to comoete in the luxurvcar market, it employed a ctassic best-cost provider strat
egy. Toyota took the folLowing four steps in crafting and
implementing its Lexus strategy:

Designing an array of h igh -performa nce characterstics and upscale featui.es into the Lexus models so as
to make them comparable in performance and luxury
to other hgh-end models and attractive to Mercedes,
BMW, Audi, Jaguar, Cadillac, and Lincoln buyers.
Transferring ts capabilites in making high-quality
Toyota models at low cost to making premium-quality
Lexus models at costs below other luxury-car makers. Toyota's suppLy chain capabilities and low-cost
assembly know how allowed it to incorporate hgh.
tech perforrnance features and upscale quality into
Lexus models at substantially less cost than compa
rable Mercedes and BMW modets.

Usng its relativeLy Lower manufacturng costs to

underprice comparable Mercedes and BMW models.
Toyota believed that with its cost advantage it could
price attractiveLy equipped Lexus cars Low enough
to draw price-conscious buyers away from Mercedes
and BMW. Toyota's pricing polcy also allowed it to
induce Toyota, Honda, Ford, or GIM owners desiring
more luxury to switch to a Lexus. Lexus's pricing
advantage over Mercedes and BMW was somet mes
quite significant. For example, in 2oo9 the Lexus RX
35o, a mid-sized SUV carred a sticker price in the
$36,ooo $48,ooo range (depending on how it was
equipped), whereas variously equipped N4ercedes
ML 35o SUVs had price tags in the $44,ooo $9o,ooo
range and a BMW X5 SUV could range anywhere

from $47,5oo to $86,000, depending on the optional

equipment ch osen.

Establishing a new network of Lexus dealers, separate from Toyota dealers, dedicated to providing
a level of personalized, attentve customer servce
unmatched in the industry.

Lexus' best-cost strategy allowed t to become the

number-one.selling luxury car brand worldwide in zooo
a dstinction it has hetd through zoo8.

n'ithout significantlv increasing costs. A coltrparlv r.r'ith a moc'lest degree of

lion .r ucl no rea I cos t lcl\'antagc rvt ll nt c]st likeL\ find i tsclf squeezed
betr,r'een the firnrs Lrstng l(r\ /-c()st strategics arrcl those using diife.r.entiation strategies Low-cost providers mtv be able to sirhon crstotlters a!\'ay
r.r,ith thc appcal of a lorver price (des:ite having marginallv less irprc.aling
product attribrrtcs). l{igh-end drffererr t ia tors rnav be able to steal customcrs
aw'rv rvith the appcal of appreciably better proclr-rct.rttributes (even thor-rgh
their proclucts crrry a some\\'hat higJrc.r price tag). Thtrs, a successfr.rl bestcost Lr1'o\iLler rnust offer br-ryers slgrrllicnnlhT better prodLtct attrilrtrles in
orrler tc justifv a rricc above lvhat low-cost lcadcrs arc charging. Likewise,
it has tc achie\.e signifrcantly 1or,r,'er costs in providirrg Llpscalc fcatures scr
tlrat it carr outcompctc high-end differentiators on the basis cti a sigtti.fittt ttt lry
r--lifferen tia

lor'r er orice.

Chapter

The Five Generc Competitive Strategies

The Peril of Adopting a "Stuck in the Middle" Strategy

of the five gencric competitive strategies positions the company differently in its market and competitive ent ironment. Each establishes a central
theme for how the company will endeavor to otltcomPete rivals. Each creates some boundaries or guidelines for maneuvering as market circumstances
unfold and as ideas for improving the strategy are debated. Thus, settling
on which generic strategy to employ is perhaps the most imPortant sttategic
commitment a company makes-rt tends to drive the rcst of a comPanv's straEach

'-il
r* Il
:.r.

--
-,^r
"1i

ll
1l
lL

ri

tegrc actrons.

One of the big dangers in crafting a compctitive strategy is that managers, torn between the pros and cons of the -",arious generic strategies, will
opt for "stuck in the nddle" strategies that represent compromises between
lower costs and grcater differentiation and between broad and narrow market
appcal. Compromise or middle-ground strategies rarely produce sustainable
competitive advantage or a distinctive competitive position. Usuallv comPanies n'ith compromise strategies end up with a middle-of-the-pack industry
ranking-thev have average costs, some but not a lot of product differentiation elative to rivals, an average image and rcputation, and little prospect of
industrv leadership.

Successful Com petitive Strategies

Are Well-Matched to a Company's
Resources and Capabilities
For a positioning-based competitive stategy to succeed in delivering good
performance and thc intended competitive edge over rivals, it has to be wellmatched to a company's internal situation and underpinned by an appropriate set of resources, know-how, and competitive capabilites. To succccd in
employing a low-cost provider strategy, a comPany
has to have the resource strengths and capabilities to
A company's positioning-based competitive
keep its costs below those of its competitors; this means strategy should be well-matched to its internal
having the expertise to cost-effectively manage value sifuation and predicated on leveraging competichain aciivities better than rivals and/or the innova- tively valuable resource strengths and core
tive capability to bVpass certain value chain activities competences.
being performed by rivals. To succeecl in strongLy differentiating its product in wavs that are appealirg to buyers, a comPany must
have the resource capabilities (like better technology, strong skills in product
innovation, expertise il customer service) to incorporate unique attributes
into its product offering that a broad range of buyers will find appealing and
worth paying for. Stratcgies focusing on a narrow segment of the market
rcquire the capability to do an outstanding job of satisfying the needs and
expectations of niche buyers. Success in employing a strategy keycd to a
best-value offering requires the resource capabilities to incorporate upscale
oroduct or sevice attributes at a lor+'er cost than rivals.

,:

i '-:

ll cr..i
I ,q
I

---:

I
,

il

ii

Kev Points
Early in the process of crafting a strategy, company managers have to decide
which of the five basic competitive strategies to employ---overall low-cost, broad
differentiation, focused low-cost, focused differentiation, or best-cost provider.
In employing a low-cost provider strategy, a company must do a better iob than
rivals of cost-effectively managing internal activities and/or it must find inovative ways to eliminate or bypass cost-producing activities. Low-cost provider
shategies work particularly well when price competition is strong and the products of rival sellers are very weakly differenfiated. Other conditioru favoring a
low-cost provider strategy are when supplies are readily available from eager
sellers, when there are not many ways to differentiate that have value to buyers,
when the majority of industry sales are made to a few large buyers, when buyer
switching costs are low, and when industry newcomers are likely to use a low
introductory price to build market share.
J.

Boad differentiation shategies seek to produce a competitive edge by incorporating attributes and features that set a company's product/service offering apart
from rivals in ways that buyers consider valuable and worth paying for. Successful differentiation allows a firm to (l) comnand a premium price for its product,
(2) increase unit sales (because addional buyers are won over by the differentiating features), and/or (3) gain buyer loyalty to its brand (because some buyers
are strongly attracted to the differentiating features and bond with the company
and its products). Differentiation strategies work best in markets with diverse
buyer preferences where thee are big windows of opportunity to strongly differentiate a company's product offering from those of rival brands, in situations
where few other rivals are pursuing a similar differentiation approach, and in
circumstances where technological change is fast-paced and competition centers
on rapidly evolving product features. A differentiation strategy is doomed when
competitors are able to quickly copy most or all of the appealing product attributes a company comes up with, when a company's differentiation efforts meet
with a ho-hum or so-what market reception, or when a company erodes profitability by overspending on efforts to differentiate its product offering.
A focus strategy delivers competitive advantage either by achieving lower costs
than rivals in serving buyers comprising the target market niche or by offering
niche buyers an appealingly differentiated product or service that meets their
needs better than rival brands. A focused strategy becomes increasingly attractive when the target market niche is big enough to be profitable and offers good
growth potential, when it is costly or difficult for multisegment competitors to
put capabilities in place to meet the specialized needs of the target market niche
and at the same time satisfy the expectations of their mainstream customers,
when thee are one or more niches that present a good match with a focuser's
resource strengths and capabilities, and when few other rivals are attempting to
specialize in the same target segment.

5.

Best-cost provider strategies stake out a middle ground between pursuing a lowcost advantage and a differentiation-based advantage and between appealing
to the broad market as a whole and a narrow market niche. The aim is to create
competitive advantage by giving buyers more value for the money-satisfying
buyer expec tations on key qua I ity / features / performance,/ service attributes

while beating customer expectations on price. To profitably employ

best-cost

lnir tllrr cnpnltility to ittcorporntt rttroctitte or

nttrilwtas tt lottr cosl lltntt rr,rtl.s. This carability is contingent on (1) a
superior value chain configuratiorr, (2) Lrnrriatchet-l efficit'nc1 in nranagrng essential valuc chain actir.ities, ancl (3) resource strengths altcl c-te conlpetencics that
allor.," diffcrcntiating attributes to be incorporutecl rt r lor'ctlst- A best-cost provider stratcgy rvorks best in markets where oprttrtunities to tlifferentiate exist
and rvhere many buycrs are sensitive kr price ancl value.
provicler strateg\', a cornpanv tlutst
Lttscnlc

LOl

6.

Dcciding which ger-reric straiegv to emplov is rerhaps tlre most ir-uportant stra
tcgrc commitment a c()mpany makes-it tends to tlrive the rest of thc strategic
ctions a compan)' decicles to ttndertake ncl it sets the rvhole lol.re for thc pursuit
of a compctrtive advantauc over rivals

l.

Best Br-ry is the largest consumer electonics retailer in thc United States

with

2009 sales of more than $45 billion. The cornpany competcs aggressively on Price
rvith rivals such as Costc() Wholesale, Sam's Club, Walmart, and Target, but is
also known by consumes for its first-rate customer service. Bcst Buy customets
have commented that the retailer's sales staff is exceptionally knorvledgeable
about thc products they sell and can direct them to the exact location of difficult
to find iiems. Best Buy customers also appreciate that demonstration modcls of
PC monitors, MP3 players, and other electronics are fully powered and ready
for rn store use. Best Bur's Geek Squad tech support and installation scrvices are
additional customer service featlrres that are valued by many customers.

LO3

LO4

Assurance
of Learning
Exercises

Horv rvoulcl vou characterize Best Buy's comPetitive strategy? Should it be

classified as a low-cost .trovider str.r tegy? a differentiation strategy? a best-cost
strategy? Explain your answer.

LOl

2.

see if you can identify

at least three n'ays in r,vhich thc company seeks to differentiate itself from rival
automakers. Is lhere reason to bchcve that BMW's differentiation strategy has
been successful in prot-luciug a competitivc advantage? Why or why not?

1.

tVhich onc of the five generic competitive strategies best characterize your
c(nnpanv's stratcglc approach to competing successfullv?

2.

Which rir,l companies appear to be employing a low-cost provider strategy?

3.

Which rival companies appear to be employing

LO4

LOl

txplore BMW's Web sitc at wn'rv.bmwgrouP.com and

broad differentiation strategy?

Exercises for
Simulation
Participants

companies appear to be emploving a best-cost provider strategy?

1.

Whrch rival

5.

Which rival companies appear to be emp)oying some type of focus strategy?

115