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The Five Generic The Five Generic Competitive StrategiesCompetitive Strategies

The Five Generic The Five Generic Competitive StrategiesCompetitive Strategies

““Competitive strategy is about Competitive strategy is about

being different. It means being different. It means

deliberately choosing to deliberately choosing to

perform activities differently perform activities differently

or to perform different or to perform different

activities than rivals to deliver activities than rivals to deliver

a unique mix of value.”a unique mix of value.”Michael E. Porter

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Strategy andStrategy andCompetitive AdvantageCompetitive Advantage

Strategy andStrategy andCompetitive AdvantageCompetitive Advantage

Competitive advantage exists when a firm’s strategy gives it an edge in Attracting customers and

Defending against competitive forces

Convince customers firm’s product / service offers superior value A good product at a low price

A superior product worth paying more for

A best-value product

Key to Gaining a Competitive Advantage

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What IsWhat Is“Competitive Strategy”?“Competitive Strategy”?

What IsWhat Is“Competitive Strategy”?“Competitive Strategy”?

Deals exclusively with a company’sbusiness plans to compete successfully

Specific efforts to please customers

Offensive and defensive movesto counter maneuvers of rivals

Responses to prevailing market conditions

Initiatives to strengthen its market position

Narrower in scope than business strategy

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5 Generic Competitive 5 Generic Competitive StrategiesStrategies

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Low-cost leadership means Low overall costs,

not just low manufacturing or production costs!

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‘Lower costs than rivals’ the theme of firm’s strategy

Only those features and services in product offering that buyers consider essential

Such approaches to achieve a cost advantage that would be difficult for rivals to copy or match

Low-Cost - Low-Cost - Keys to Success

Low-Cost - Low-Cost - Keys to Success

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Nucor Corporation’sNucor Corporation’sLow-Cost Provider Low-Cost Provider

Strategy Strategy

Nucor Corporation’sNucor Corporation’sLow-Cost Provider Low-Cost Provider

Strategy Strategy Eliminate some production processes from value chain used by traditional integrated steel mills; cut investment in facilities and equipment

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

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 plant sites to minimize inbound and outbound shipping costs and to take advantage of low rates for electricity

Carefully select plant 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

Hire a nonunion workforce that uses team-based incentive compensation systems

Heavily emphasize consistent product quality and maintain rigorous quality 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

Minimize general and administrative expenses by maintaining a lean staff at corporate headquarters and allowing only 4 levels of management

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Do a better job than rivals of performing value chain activities efficiently and cost effectively

Revamp value chain to bypass cost-producing activities that add little value from the buyer’s

perspective

Approach 1

Approach 2

Control costs!

By-pass costs!

Approaches to Securing Approaches to Securing a Cost Advantagea Cost Advantage

Approaches to Securing Approaches to Securing a Cost Advantagea Cost Advantage

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Approach 1: ControllingApproach 1: Controllingthe Cost Driversthe Cost Drivers

Approach 1: ControllingApproach 1: Controllingthe Cost Driversthe 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: RevampingApproach 2: Revampingthe Value Chainthe Value Chain

Approach 2: RevampingApproach 2: Revampingthe Value Chainthe Value Chain

Make greater use of Internet technology applications Use direct-to-end-user sales/marketing methods Simplify product design Offer basic, no-frills product/service Shift to a simpler, less capital-intensive, or more flexible

technological process Find ways to bypass use of high-cost raw materials Relocate facilities closer to suppliers or customers Drop “something for everyone” approach and focus on a

limited product/service

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When Does a Low-CostWhen Does a Low-CostStrategy Work Best?Strategy Work Best?

When Does a Low-CostWhen Does a Low-CostStrategy Work Best?Strategy Work Best?

Price competition is vigorous

Limited Scope to achieve differentiation

Low switching costs

Buyers have significant bargaining power

For newcomers to use introductory low prices & build customer base

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Differentiation Differentiation StrategiesStrategies

Differentiation Differentiation StrategiesStrategies

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

Objective

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Benefits of Successful Benefits of Successful DifferentiationDifferentiation

Benefits of Successful Benefits of Successful DifferentiationDifferentiation

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

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Types of Differentiation Types of Differentiation ThemesThemes

Types of Differentiation Types of Differentiation ThemesThemes

Multiple features -- MS Windows and OfficeWide selection and one-stop shopping --

Home Depot and Amazon.comSpare parts availability -- CaterpillarMore for your money -- McDonald’s, Wal-

MartPrestige -- RolexQuality manufacture -- Honda, ToyotaTechnological leadership -- 3M Corporation

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Importance of Perceived Importance of Perceived ValueValue

Buyers seldom pay for value that is not perceived

Price premium of a differentiation strategy reflects

Value actually delivered to buyer &

Value perceived by the buyer

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When Does a When Does a DifferentiationDifferentiation

Strategy Work Best?Strategy Work Best?

When Does a When Does a DifferentiationDifferentiation

Strategy Work Best?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 similardifferentiation approach

Technological change andproduct innovation are fast-paced

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When Does a When Does a DifferentiationDifferentiation

Strategy Work Best?Strategy Work Best?

When Does a When Does a DifferentiationDifferentiation

Strategy Work Best?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 fast-paced

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Best-Cost Provider Best-Cost Provider StrategiesStrategies

Best-Cost Provider Best-Cost Provider StrategiesStrategies

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

Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations

Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands

Objectives

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Focus / Niche Focus / Niche StrategiesStrategies

Focus / Niche Focus / Niche StrategiesStrategies

Involve concentrated attention on a narrow piece of the total market

Serve niche buyers better than rivals

Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs

Develop unique capabilities to serve needs of target buyer segment

Objective

Keys to Success

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Beyond Competitive Beyond Competitive

StrategyStrategyOther Important Strategy ChoicesOther Important Strategy Choices

Beyond Competitive Beyond Competitive

StrategyStrategyOther Important Strategy ChoicesOther Important Strategy Choices

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““Successful business Successful business

strategy is about strategy is about

actively shaping the actively shaping the

game you play, not game you play, not

just playing the game just playing the game

you find.”you find.”The Koran

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Strategic Alliances and Strategic Alliances and Collaborative Partnerships Collaborative Partnerships Strategic Alliances and Strategic Alliances and

Collaborative Partnerships Collaborative Partnerships

Companies sometimes use strategic alliances

or collaborative partnerships to

complement their own strategic initiatives and

strengthen their competitiveness.

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Why Are Strategic Why Are Strategic Alliances Formed? Alliances Formed? Why Are Strategic Why Are Strategic Alliances Formed? Alliances Formed?

To collaborate on technology development or new product development

To fill gaps in technical or manufacturing expertise

To acquire new competencies

To improve supply chain efficiency

To gain economies of scale inproduction and/or marketing

To acquire or improve market access via joint marketing agreements

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Why Alliances FailWhy Alliances FailWhy Alliances FailWhy Alliances FailAbility of an alliance to endure depends on

How well partners work togetherSuccess of partners in adapting to changing conditionsWillingness of partners to renegotiate the bargain

Reasons for alliance failureDiverging objectives and prioritiesChanging conditions rendering purpose of alliance

obsoleteEmergence of more attractive technological pathsMarketplace rivalry between one or more allies

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Merger and Acquisition Merger and Acquisition Strategies Strategies

Merger and Acquisition Merger and Acquisition Strategies Strategies

Merger – Combination and pooling of equals, with newly created firm often taking on a new name

Acquisition – One firm, the acquirer, purchases and absorbs operations of another, the acquired

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Objectives of MergersObjectives of Mergersand Acquisitionsand Acquisitions

Objectives of MergersObjectives of Mergersand Acquisitionsand Acquisitions

To pave way for acquiring firm to gain more market share and create a more efficient operation

To expand a firm’s geographic coverage

To extend a firm’s business into new productcategories or international markets

To gain quick access to new technologies

To invent a new industry by convergence of industries whose boundaries are blurred

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Vertical Integration Vertical Integration StrategiesStrategies

Vertical Integration Vertical Integration StrategiesStrategies

Extend a firm’s competitive scope withinsame industry Backward into sources of supply Forward toward end-users of final product

Can aim at either full or partial integration

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners

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Whether vertical integration is a viablestrategic option depends on its Ability to lower cost, build expertise,

increase differentiation, or enhanceperformance of strategy-critical activities

Impact on investment cost, flexibility, and administrative overhead

Contribution to enhancing a firm’s competitiveness

Pros and Cons ofPros and Cons ofIntegration vs. De-Integration vs. De-

IntegrationIntegration

Pros and Cons ofPros and Cons ofIntegration vs. De-Integration vs. De-

IntegrationIntegration

Many companies are finding thatde-integrating value chain activities is amore flexible, economic strategic option!

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Outsourcing StrategiesOutsourcing StrategiesOutsourcing StrategiesOutsourcing Strategies

Outsourcing involves withdrawing from certain valuechain activities and relying on outsiders

to supply needed products, supportservices, or functional activities

Concept

InternallyPerformedActivities

Suppliers

Support Services

Functional Activities

Distributors or Retailers

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Pitfalls of OutsourcingPitfalls of OutsourcingPitfalls of OutsourcingPitfalls of Outsourcing

Farming out too many or the wrong activities, thus

Hollowing out capabilities

Losing touch with activities and expertise that determine overall long-term success

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Offensive and Defensive Offensive and Defensive StrategiesStrategies

Offensive and Defensive Offensive and Defensive StrategiesStrategies

Used to build new or stronger market position and/or create

competitive advantage

Used to protect competitive advantage (rarely used to

create advantage)

Offensive Strategies Defensive Strategies

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Defensive StrategyDefensive StrategyDefensive StrategyDefensive StrategyObjectives

Lessen risk of being attacked

Blunt impact of any attack that occurs

Influence challengers to aim attacks at other rivals

Approaches

Block avenues open to challengers

Signal challengers vigorousretaliation is likely

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Strategies forStrategies forUsing the InternetUsing the Internet

Strategies forStrategies forUsing the InternetUsing the Internet

Strategic Challenge – What use of the Internet should a company make in staking out its position in the marketplace?

Five Approaches

Use company web site solely to disseminate product information

Use company web site as a minor distributionchannel for accessing customers and generating sales

Use company web site as one of several importantdistribution channels for accessing customers

Use company web site as primary distributionchannel for accessing buyers and making sales

Use company web site as the exclusive channelfor accessing buyers and conducting sales transactions

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Using the Internet toUsing the Internet toDisseminate Product Disseminate Product

InformationInformation

Using the Internet toUsing the Internet toDisseminate Product Disseminate Product

InformationInformation Approach – Website used to provide product information of

manufacturers or wholesalers Relies on click-throughs to websites of

dealers for sales transactions Informs end-users of location of retail stores

Issues – Pursuing online sales may Signal weak strategic commitment to dealers Signal willingness to cannibalize dealers’ sales Prompt dealers to aggressively market rivals’ brands

Avoids channel conflict with dealers – Important where strong support of dealer networks is essential

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Choosing AppropriateChoosing AppropriateFunctional-Area StrategiesFunctional-Area Strategies

Choosing AppropriateChoosing AppropriateFunctional-Area StrategiesFunctional-Area Strategies

Involves strategic choices about how functional areas are managed to support competitive strategy and other strategic moves

Functional strategies includeResearch and developmentProductionHuman resourcesSales and marketingFinance

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First-Mover AdvantagesFirst-Mover AdvantagesFirst-Mover AdvantagesFirst-Mover Advantages

When to make a strategic move is often as crucial as what move to make

First-mover advantages arise when

Pioneering helps build firm’s image and reputation

Early commitments to new technologies,new-style components, and distributionchannels can produce cost advantage

Loyalty of first time buyers is high

Moving first can be a preemptive strike

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First-Mover First-Mover DisadvantagesDisadvantages

First-Mover First-Mover DisadvantagesDisadvantages

Moving early can be a disadvantage (or fail to produce an advantage) when

Costs of pioneering are sizable andloyalty of first time buyers is weak

Innovator’s products are primitive,not living up to buyer expectations

Rapid technological change allowsfollowers to leapfrog pioneers