CHAPTER 5

STRATEGY AND
COMPETITIVE
ADVANTAGE
Screen graphics created by:
Jana F. Kuzmicki, PhD, Indiana University Southeast

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 Chapter Outline
● Generic Competitive Strategies
✔ Low-Cost Leadership Strategy
✔ Broad Differentiation Strategies
✔ Best-Cost Provider Strategies
✔ Focused Low-Cost Strategies
✔ Focused Differentiation Strategies
● Vertical Integration Strategies
● Cooperative Strategies
● Offensive and Defensive Strategies
● First-Mover Advantages and Disadvantages 2
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Strategy and Competitive Advantage
● COMPETITIVE ADVANTAGE exists when a firm’s
strategy gives it an edge in
✔ Defending against competitive forces and
✔ Securing customers

Key to Success
● Convince customers firm’s product / service offers
SUPERIOR VALUE
✔ Offer buyers a good product at a lower price
✔ Use differentiation to provide a better product
buyers think is worth a premium price
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 What Is Competitive Strategy?
● Consists of business approaches to
✔ Attract customers, fulfilling their expectations
✔ Withstand competitive pressures
✔ Strengthen market position
● Includes offensive and defensive moves to
✔ Counter actions of key rivals
✔ Shift resources to improve long-term market
position
✔ Respond to prevailing market conditions
● Narrower in scope than business strategy
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 Objectives of Competitive Strategy
● Build a COMPETITIVE ADVANTAGE

● Cultivate clientele of LOYAL CUSTOMERS

● Knock the socks off rivals, ethically
and honorably

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 The Five Generic
Competitive Strategies
Type of Advantage Sought
Lower Cost Differentiation

Broad Range Overall Low-Cost Broad

of Buyers Leadership Differentiation
Market Target

Strategy Strategy
Best-Cost
Provider
Strategy
Narrow Focused Focused
Buyer Low-Cost Differentiation
Segment
or Niche Strategy Strategy

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 A Low-Cost Leadership Strategy

Objective
● Open up a sustainable cost advantage over
rivals, using lower-cost edge as a basis
either to
✔ Under-price rivals and reap market share
gains OR
✔ Earn higher profit margin selling at going
price
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 Approach 1: Controlling the Cost
Drivers
● Capture scale economies; avoid scale diseconomies
● Capture learning and experience curve effects
● Manage costs of key resource inputs
● Consider linkages with other activities in value chain
● Find sharing opportunities with other business units
● Compare vertical integration vs. outsourcing
● Assess first-mover advantages vs. disadvantages
● Control percentage of capacity utilization
● Make prudent strategic choices related to operations
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 Approach 2: Revamping the Value
Chain
● Simplify product design
● Offer basic, no-frills product/service
● Shift to a simpler, less capital-intensive, or more
streamlined technological process
● Find ways to bypass use of high-cost raw materials
● Use direct-to-end user sales/marketing approaches
● Relocate facilities closer to suppliers or customers
● Reengineer core business processes---be creative
in finding ways to eliminate value chain activities
● Use PC technology to delete works steps, modify
processes, cut out cost-producing activities
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 Differentiation Strategies

Objective
● Incorporate differentiating features that cause
buyers to prefer firm’s product or service over the
brands of rivals

Keys to Success
● Find ways to differentiate that CREATE VALUE for
buyers and that are NOT EASILY MATCHED or
CHEAPLY COPIED by rivals
● Not spending more to achieve differentiation than
the price premium that can be charged
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Sustaining Differentiation: The Key to
Competitive Advantage
● Most appealing approaches to differentiation:
✔ Those hardest for rivals to match or imitate
✔ Those buyers will find most appealing
● Best choices for gaining a longer-lasting, more
profitable competitive edge:
✔ New product innovation
✔ Technical superiority
✔ Product quality and reliability
✔ Comprehensive customer service
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 Where to Find Differentiation
Opportunities in the Value Chain
● Purchasing and procurement activities
● Product R&D activities
● Production R&D; technology-related activities
● Manufacturing activities
● Outbound logistics and distribution activities
● Marketing, sales, and customer service
activities
Internally
Activities, Activities, Costs,
Performed Buyer/User
Costs, & & Margins of
Activities, Value
Margins of Forward Channel
Costs, & Chains
Suppliers Allies &
Margins
Strategic Partners

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 Signaling Value as Well as Delivering
Value
● Buyers seldom pay for value that is not
perceived
● Signals of value may be as important
as actual value when
✔ Nature of differentiation is hard to
quantify
✔ Buyers are making first-time
purchases
✔ Repurchase is infrequent
✔ Buyers are unsophisticated
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 Best Cost Provider Strategies
● Combine a strategic emphasis on low-cost with a
strategic emphasis on differentiation
✔ Make an upscale product at a lower cost
✔ Give customers more value for the money

Objectives
● Create superior value by MEETING OR EXCEEDING
buyer expectations on product attributes and
BEATING their price expectations
● Be the low-cost producer of a product with GOOD-TO-
EXCELLENT product attributes, then use cost
advantage to UNDERPRICE comparable brands
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 What Makes a Niche
Attractive for Focusing?
● Big enough to be profitable
● Good growth potential
● Not crucial to success of major competitors
(making it unlikely they will compete hard in niche)
● Focuser has resources to effectively serve
segment
● Focuser can defend against challengers via
superior ability to serve buyers in segment and
customer goodwill
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 The Competitive Strength of
Focus / Niche Strategies
● RIVAL COMPETITORS do not have matching
capabilities to meet specialized needs of niche
members
● Focuser’s competencies/capabilities act as a
barrier to POTENTIAL ENTRANTS
● Focuser’s competencies/capabilities pose
obstacle to sellers of SUBSTITUTES
● Focuser’s unique ability to meet niche buyers’
needs can blunt bargaining leverage of
powerful BUYERS
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 Vertical Integration Strategies
● Vertical integration extends a firm’s
competitive scope within same industry
✔ Backward into sources of supply
✔ Forward toward end-users of final product
● Can aim at either full or partial integration

Internally Activities, Costs,

Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins Strategic Partners

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 Unbundling and
Outsourcing Strategies
Concept
Involves not performing certain value
chain activities internally and relying on
outside vendors to perform needed
activities and services

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Pros and Cons of Vertical Integration
● The appeal of a vertical integration strategy
depends on
✔ Its ability to enhance performance of strategy-
critical activities by
✤ Lowering costs or
✤ Increasing differentiation
✔ Its impact on
✤ Resource requirements
✤ Flexibility and response times
✤ Administrative overhead of coordination
✔ Its ability to create a competitive advantage
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 Cooperative Strategies
Companies sometimes use strategic alliances or
strategic partnerships or collaborative agreements to
complement their own strategic initiatives and strengthen
their competitiveness. Such cooperative strategies go
beyond normal company-to-company dealings but fall
short of merger or formal joint venture

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 The Building and Eroding of
Competitive Advantage
Size of Competitive Advantage

Buildup Period Benefit Period Erosion Period

Size of
Competitive
Strategic Advantage Moves by
Moves Achieved Rivals
Produce Reduce
Competitive Competitive
Advantage Advantage

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 Attacking Competitor Strengths

Appeal
● Gain market share by
out-matching strengths of
weaker rivals
● Whittle away at a rival’s competitive advantage
Challenging strong competitors with a lower price
is foolhardy unless the aggressor has a COST
ADVANTAGE or advantage of GREATER
FINANCIAL STRENGTH!
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 Options for Attacking
a Competitor’s Strengths
● Offer equally good product at a lower price
● Offer a better product at the same price
● Leapfrog into next-generation technologies
● Add appealing new features
● Run comparison ads
● Construct new plant capacity
● Offer a wider product line
● Develop better customer service capabilities
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 Attacking Competitor Weaknesses

Basic Approach
Concentrate company strengths and resources directly
against a rival’s weaknesses
Weaknesses to Attack
● Geographic regions where rival is weak
● Segments rival is neglecting
● Go after those customers a rival
is least equipped to serve
● Rivals with weaker marketing skills
● Introduce new models exploiting gaps in rivals’
product lines
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 Preemptive Strikes

Approach

Involves moving first to secure an advantageous

position that rivals
are foreclosed or discouraged
from duplicating!

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 Preemptive Strike Options
● Expand capacity ahead of demand in hopes of
discouraging rivals from following suit
● Tie up best or cheapest sources of essential raw
materials
● Move to secure best geographic locations
● Obtain business of prestigious customers
● Build an image in buyers’ minds that is unique &
hard to copy
● Secure exclusive or dominant access to best
distributors
● Acquire desirable, but struggling, competitor
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 Choosing Whom to Attack
● Four types of firms can be the target of an
offensive:
✔ Market leaders
✔ Runner-up firms
✔ Struggling rivals on verge
of going under
✔ Small local or regional
firms not doing a good job
for their customers

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 Offensive Strategy and
Competitive Advantage
● STRATEGIC OFFENSIVE options offering
strongest basis for COMPETITIVE ADVANTAGE
✔ Develop lower-cost product design
✔ Make changes in production operations that
lower costs or enhance differentiation
✔ Develop product features that deliver superior
performance or lower users’ costs
✔ Give more responsive customer service
✔ Escalate marketing effort
✔ Pioneer new distribution channel
✔ Sell direct to end-users
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 Offensive Strategy Principle

The chances for a successful

offensive initiative are improved
when it is based on a company’s
resource strengths and strongest
competencies and capabilities.

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 Defensive Strategy

Objectives
● Fortify firm’s present position
● Help sustain any competitive advantage held
● Lessen risk of being attacked
● Blunt impact of any attack that occurs
● Influence challengers to aim attacks at other rivals

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 Defensive Strategies: Approaches

Approach 1
Block avenues challengers can take in
mounting offensive attacks

Approach 2
Make it clear any
challenge will
be met with strong counterattack
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