Five Generic Competitive Strategies

Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value. -Michael E. Porter

Business-Level (BL) Strategies

Purpose: To create differences between position of a firm and its competitors Firm must make a deliberate choice to Perform activities differently Perform different activities Two types of competitive advantage firms must choose between Cost (Are we LOWER than others?) Uniqueness (Are we DIFFERENT? How?)

Business-Level (BL) Strategies

Two types of competitive scope firms must choose between
Broad target Narrow target

These combine to yield 5 different BL strategies

Business-Level (BL) Strategies

Low-Cost Provider Strategies

Make achievement of meaningful lower costs than rivals the theme of firms strategy Include features and services in product offering that buyers consider essential Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match Low-cost leadership means low overall costs, not just low manufacturing or production costs!

Approaches to Securing a Cost Advantage

Do a better job than rivals of performing value chain activities efficiently and cost effectively (control costs) Revamp value chain to bypass cost producing activities that add little value from the buyers perspective. (By passcosts).

Option-1(cost drivers)
Capture scale economies; avoid scale diseconomies Capture learning and experience curve effects Control percentage of capacity utilization Pursue efforts to boost sales and spread costs such as R&D and advertising over more units Improve supply chain efficiency Substitute use of low-cost for high-cost raw materials Use online systems and sophisticated software to achieve operating efficiencies Adopt labor-saving operating methods Use bargaining power to gain concessions from suppliers Compare vertical integration vs. outsourcing

Scale Economies in Advertising: U.S. Soft Drinks

Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main brands incur lower advertising costs per unit of sales than their smaller rivals.
Advertising Expenditure ($ per case) 0.20 0.15 0.10 0.05 0.02

Schweppes SF Dr. Pepper Diet 7-Up

Tab Diet Pepsi

Diet Rite Fresca Seven Up

Sprite

Dr. Pepper Pepsi

Coke
1,000

10

20

50

100

200

500

Annual sales volume (millions of cases)

Option-2
Use direct-to-end-user sales/marketing methods Make greater use of online technology applications

Streamline operations by eliminating low-value-added or unnecessary work steps

Relocate facilities closer to suppliers or customers Offer basic, no-frills product/service Offer a limited product/service as opposed to a full product/service line

Wal-Marts Approach to Managing Its Value Chain

Institute extensive information sharing with vendors via online systems Pursue global procurement of some items and centralize most purchasing activities Invest in state-of-the-art automation at its distribution centers Strive to optimize the product mix and achieve greater sales turnover Install security systems and store operating procedures that lower shrinkage rates Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites

Cost Leadership (CL)

Competitive advantage: THE low-cost leader and operates with margins greater than competitors Competitive scope: Broad Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors No-frill, standardized goods Continuously reduce costs of value chain activities Inbound/outbound logistics account for significant cost Low-cost position is a valuable defense against rivals Powerful customers can demand reduced prices

When Does a Low-Cost Strategy Work Best?

Price competition is vigorous Product is standardized or readily available from many suppliers There are few ways to achieve differentiation that have value to buyers Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant bargaining power Industry newcomers use introductory low prices to attract buyers and build customer base

Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price Low cost methods are easily imitated by rivals Becoming too fixated on reducing costs and ignoring Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used Technological breakthroughs open up cost reductions for rivals

Cost Leadership (CL) (Contd)

Cost leaders are in a position to Absorb supplier price increases and relationship demands Force suppliers to hold down their prices Continuously improving levels of efficiency and cost reduction Can be difficult to replicate and serve as significant entry barriers to potential competitors Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers Examples: Wal-Mart

Cost Leadership (CL) (Contd)

Cost Leadership (CL)
In relationship to the 5 Forces:
Rivalry against existing competitors: Rivals hesitate to compete on the basis of price Bargaining Power of Buyers (Customers) Bargaining Power of Suppliers Potential Entrants Product Substitutes

Competitive Advantage Based on Low-Cost Leadership

SUPPORT ACTIVITIES
Infrastructure Human Resource Management Technology Development Centralized cost controls Intensive training to emphasize cost savings means; encourage employees to look for new ways to improve methods Economies of scale of R&D and technology development; learning and experience amortized over large volume Purchasing from numerous sources; strong bargaining power with suppliers Large shipments; massive warehouses Inbound Logistics Economies of Bulk or scale in plants; large order experience shipment effects Operations Outbound Logistics
Mass marketing; mass distribution; national ad campaigns

Procurement

PRIMARY ACTIVITIES

Centralized service facilities in region Service

Marketing / Sales

Nucor Corporations Low-Cost Provider Strategy

Eliminate some production processes from value chain used by traditional integrated steel mills; cut investment in facilities and equipment Strive hard for continuous improvement in the efficiency of its plants and frequently invest in state-of-the art equipment to reduce unit costs Carefully select plan sites to minimize inbound and outbound shipping costs and to take advantage of low rates for electricity Hire a nonunion workforce that uses team-based incentive compensation systems Heavily emphasize consistent product quality and maintain rigorous quality systems Minimize general and administrative expenses by maintaining a lean staff at corporate headquarters and allowing only 4 levels of management

Differentiation
Competitive advantage: Differentiation Competitive scope: Broad
Integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

Target customers perceive product value

Customized products differentiating on as many features as possible

Examples: Apples iPod

Keys to Success
Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals Not spending more to achieve differentiation than the price premium that can be charged

Differentiation
In relationship to the 5 Forces:
Rivalry against existing competitors Bargaining Power of Buyers (Customers)

(Contd)

Customers are loyal purchasers of differentiated products I.e., Bose

Inverse relationship between loyalty/product: As loyalty increases, price sensitivity decreases I.e., Callaway golf clubs

Bargaining Power of Suppliers

Provide high quality components, driving up firms costs Cost may be passed on to customer

Potential Entrants
Substantial barriers (see above) and would require significant resource investment

Product Substitutes
Customer loyalty effectively positions firm against product substitutes

Benefits of Successful Differentiation

A product / service with unique, appealing attributes allows a firm to

Command a premium price and/or Increase unit sales and/or Build brand loyalty = Competitive Advantage

Types of Differentiation Themes

Unique taste Dr. Pepper Multiple features Microsoft Windows and Office Wide selection and one-stop shopping Home Depot, Amazon.com Superior service -- FedEx, Ritz-Carlton Spare parts availability Caterpillar Engineering design and performance Mercedes, BMW Prestige Rolex Product reliability Johnson & Johnson Quality manufacture Karastan, Michelin, Toyota Technological leadership 3M Corporation

 Best choices to gain a longer-lasting, more profitable competitive edge

New product innovation

Technical superiority Product quality and reliability Comprehensive customer service Unique competitive capabilities

Competitive Advantage Based on Differentiation

SUPPORT ACTIVITIES
Infrastructure Human Resource Management Technology Development Try to coordinate activities tightly among functions; build quality into organizational practices Treat employees as special team members; emphasize design incentives to promote quality Heavy R&D expenditures to make distinctive or even unique products; refinement of high quality manufacturing and technology processes; emphasis on excellence, world class quality Selective purchasing from best or world-class suppliers. Use of best materials, parts and components Inbound Logistics Extremely fine quality manufactured workmanship emphasized Operations Fast delivery to distributors; extra care in packaging and transport Outbound Logistics Special, High emphasis on distinctive ads; treating customer Technical as special sales and individual; fast, special service know-how Marketing / Sales Service

Procurement

PRIMARY ACTIVITIES

Nordstroms Differentiation from Department Store Chains

SUPPORT ACTIVITIES
Infrastructure Human Resource Management Faster Technology inventory Development turnaround Procurement Purchasing in bulk
Smaller stores; higher store density; narrower product line Higher prices; new ad campaign Open longer hours

Franchising

Franchising

PRIMARY ACTIVITIES
Inbound Logistics

Operations

Outbound Logistics

Marketing / Sales

Service

When Does a Differentiation Strategy Work Best?

There are many ways to differentiate a product that have value and please customers

Buyer needs and uses are diverse

Few rivals are following a similar differentiation approach Technological change and product innovation are fastpaced

Pitfalls of Differentiation Strategies

Appealing product features are easily copied by rivals Buyers see little value in unique attributes of product Overspending on efforts to differentiate the product offering, thus eroding profitability Over-differentiating such that product features exceed buyers needs Charging a price premium buyers perceive is too high Not striving to open up meaningful gaps in quality, service, or performance features vis--vis rivals products

Focus strategies
In general, the firms core competencies used to serve the need of a particular industry segment or niche to the exclusion of others. May lack resources to compete in the broader market May be able to more effectively serve a narrow market segment than larger industry-wide competitors Firms may direct resources to certain value chain activities to build competitive advantage Large firms may overlook small niches

 Focus strategy examples

Buyer groups
Youths/senior citizens

Product line segments

Professional painter groups

Geographic markets
West vs. East coast

 Focused Cost Leadership

Competitive advantage: Low-cost Competitive scope: Narrow industry segment
I.e., IKEA: Good design (furniture) at low prices NOTE: Also has some differentiated features (I.e., furniture design) with its low-cost products

 Focused Differentiation
Competitive advantage: Differentiation Competitive scope: Narrow industry segment
I.e., IKEA: Good design (furniture) at low prices NOTE: Also has some differentiated features (I.e., Furniture design) with its low-cost products

I.e., Casket furniture (products that can also be converted into caskets)

Examples of Focus Strategies

Animal Planet and History Channel Cable TV Google Internet search engines Porsche Sports cars Cannondale Top-of-the line mountain bikes Enterprise Rent-a-Car Provides rental cars to repair garage customers Bandag Specialist in truck tire recapping

 Risk of using Focus strategies

A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus the focuser A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit Customer needs within a narrow competitive segment may become more similar to those of industry-wide customers as a whole

Integrated CL/Differentiation
Efficiently produce products with differentiated attributes
Efficiency: Sources of low cost Differentiation: Source of unique value

Can adapt to new technology and rapid changes in external environment Simultaneously concentrate on TWO sources of competitive advantage: cost and differentiation consequently must be competent in many of the primary and support activities Three sources of flexibility useful for this strategy

 Competitive Risks of Integrated Strategies

Although becoming more popular the RISK is getting stuck in the middle
Cost structure is not low enough for attractive pricing of products and products not sufficiently differentiated to create value for target customer therefore, fail to successfully implement either low cost or differentiation strategy Result: Dont earn above-average returns