Upload
alistercrowe
View
17
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Citation preview
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5: The Five Generic Chapter 5: The Five Generic
Competitive Strategies: Which Competitive Strategies: Which
One to Employ? One to Employ?
Screen graphics created by:Jana F. Kuzmicki, Ph.D.
Troy University
““Competitive strategy is about being Competitive strategy is about being different. It means deliberately choosing to different. It means deliberately choosing to perform activities differently or to perform perform activities differently or to perform different activities than rivals to deliver a different activities than rivals to deliver a
unique mix of value.”unique mix of value.”
Michael PorterMichael Porter
““Winners in business playWinners in business playrough and don’t apologize forrough and don’t apologize forit. The nicest part of playing it. The nicest part of playing
hardball is watching your hardball is watching your competitors squirm.”competitors squirm.”
George Stalk Jr. and Rob LachenauerGeorge Stalk Jr. and Rob Lachenauer
5-4
Chapter Learning Objectives
1. Gain command of how each of the five generic competitive strategies lead to competitive advantage and deliver superior value to customers.
2. Learn why some of the five generic strategies work better in certain kinds of industry and competitive conditions than in others.
3. Learn the major avenues for achieving a competitive advantage based on lower costs.
4. Learn the major avenues for developing a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals in ways that better satisfy buyer needs and preferences.
5-5
Chapter Roadmap
The Five Competitive Strategies
Low-Cost Provider Strategies
Broad Differentiation Strategies
Best-Cost Provider Strategies
Focused (or Market Niche) Strategies
The Contrasting Features of the Five Generic Competitive Strategies: A Summary
5-6
Strategy and Competitive 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
5-7
What Is Competitive Strategy?
Deals exclusively with acompany’s business plansto 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
5-8
Figure 5.1: The Five Generic Competitive Strategies
5-9
Low-Cost Provider Strategies
Make achievement of meaningfullower costs than rivals the themeof firm’s strategy
Include features and services in productoffering that buyers consider essential
Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match
Keys to SuccessKeys to Success
Low-cost leadership means low overall costs, not
just low manufacturing or production costs!
5-10
Option 1: Use lower-cost edge to under-price competitors and attract price-sensitive buyers in enough numbers to increase total profits
Option 2: Maintain present price, be content with present market share, and use lower-cost edge to earn a higher profit margin on each unit sold,thereby increasing total profits
Translating a Low-Cost Advantage into Higher Profits: Two Options
5-11
Approaches to Securing a Cost Advantage
Do a better job than rivals ofperforming value chain activities
efficiently and cost effectively
Revamp value chain to bypasscost-producing activities that add
little value from the buyer’s perspective
Control costs!
By-pass costs!
Approach 1
Approach 2
5-12
Approach 1: Controlling the 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
5-13
Use direct-to-end-usersales/marketing methods
Make greater use of onlinetechnology 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
Approach 2: Revamping the Value Chain
5-14
Wal-Mart’s Approach toManaging Its Value Chain
Institute extensive information sharing with vendors via online systems
Institute extensive information sharing with vendors via online systems
Pursue global procurement of some items and centralize most purchasing activities
Pursue global procurement of some items and centralize most purchasing activities
Invest in state-of-the-art automation at its distribution centers
Invest in state-of-the-art automation at its distribution centers
Strive to optimize the product mix and achieve greater sales turnover
Strive to optimize the product mix and achieve greater sales turnover
Install security systems and store operating procedures that lower shrinkage rates
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
Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites
Manage and compensate its workforce in a manner to yield lower labor costs
Manage and compensate its workforce in a manner to yield lower labor costs
5-15
Nucor Corporation’sLow-Cost Provider Strategy
Key elements of Nucor’s strategy Use of electric arc furnace technology allows for
lower investment costs for facilities and equipment and eliminates many expensive steps in making steel products from scratch
Use incentive compensation to achieve high productivity and low labor costs per ton produced
Locate plants close to customers to keep shipping costs down
Cost advantages and bottom-line results Lower capital investment and operating costs Ability to charge lower prices than traditional steel
companies using make-it-from scratch technology Earned attractive profits for shareholders since 1966
5-16
Key Characteristics of Southwest Airlines’ Low-Cost Provider Strategy
Mastery of fast turnarounds at gates (25 minutes vs. 45 minutes for rivals) allows
Planes to fly more hours per day More flights to be scheduled per day with fewer aircraft More revenue generated per plane on average than rivals
Elimination of several servicesresults in cost savings
In-flight meals Assigned seating Baggage transfer to connecting airlines First-class seating and service
Fast, user-friendly online reservation system Facilitates e-ticketing Reduces staffing requirements at telephone
reservation centers and airport counters
5-17
Keys to Success in AchievingLow-Cost Leadership
Scrutinize each cost-creating activity,identifying cost drivers
Use knowledge about cost drivers to managecosts of each activity down year after year
Find ways to restructure value chain to eliminatenonessential work steps and low-value activities
Work diligently to create cost-conscious corporate cultures
Feature broad employee participation in continuous cost-improvement efforts and limited perks for executives
Strive to operate with exceptionally small corporate staffs
Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business
5-18
Cost conscious corporate culture
Employee participation in cost-control efforts
Ongoing efforts to benchmark costs
Intensive scrutiny of budget requests
Strong commitment to continuous cost improvement
Characteristics of a Low-Cost Provider
Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !
5-19
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 attractbuyers and build customer base
When Does a Low-CostStrategy Work Best?
5-20
Pitfalls of Low-Cost Strategies
Being overly aggressive in cutting price
Low cost methods are easilyimitated by rivals
Becoming too fixated onreducing 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
5-21
Test Your Knowledge
Striving to be the industry’s low-cost provider and achieving lower costs than rivals entails
A. doing a better job than rivals of performing value chain activities more cost-effectively.
B. having a smaller labor force than rivals, paying lower wages than rivals, locating all facilities in countries where labor costs are low, and outsourcing many value chain activities to suppliers with world-class technological capabilities.
C. revamping the firm’s overall value chain to eliminate or bypass cost-producing activities that produce little value added insofar as customers are concerned.
D. adopting activity-based costing, utilizing more best practices than rivals, and having a narrower product line than rivals.
E. Both A and C.
5-22
Differentiation Strategies
Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals
Find ways to differentiate that createvalue for buyers and are not easilymatched or cheaply copied by rivals
Keeping the cost of achieving differentiation below the higher price that can be charged
Objective
Keys to Success
5-23
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
Whichhat is
unique?
5-24
Unique taste – Dr. Pepper Multiple features – Microsoft Vista and Office, iPhone Wide selection and one-stop shopping – Home Depot,
Amazon.com Superior service – FedEx Spare parts availability – Caterpillar Engineering design and performance – Mercedes,
BMW Prestige and distinctiveness – Rolex Product reliability – Johnson & Johnson Quality manufacture – Karastan, Michelin, Toyota Technological leadership – 3M Corporation Top-of-line image – Ralph Lauren and Starbucks
Types of Differentiation Themes
5-25
Sustaining Differentiation:Keys to Competitive Advantage
Most appealing approaches to differentiation are thoseHardest for rivals to match or imitate
Buyers will find most appealing
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
5-26
Where to Find DifferentiationOpportunities in the Value Chain
Purchasing and procurement activities Product R&D and product design activities Production process / technology-related
activities Manufacturing / production activities Distribution-related activities Marketing, sales, and customer service
activitiesActivities, Costs, &
Margins ofForward
Channel Allies
InternallyPerformedActivities, Costs, &Margins
Activities, Costs, &
Margins ofSuppliers
Buyer/UserValue
Chains
5-27
How to Achieve aDifferentiation-Based Advantage
Incorporate features that raiseperformance a buyer gets out of the product
Incorporate features that enhance buyer satisfaction in non-economic or intangible ways
Outcompete rivals via superior capabilities
Incorporate product features/attributes thatlower buyer’s overall costs of using product
Approach 1Approach 1
Approach 2Approach 2
Approach 3Approach 3
Approach 4Approach 4
5-28
Test Your Knowledge
Which of the following is not one of the four basic routes to achieving a differentiation-based competitive advantage?
A. Appealing to high-income buyers who are willing and able to pay a premium price for a high-performing, multi-featured product
B. Incorporating features that raise product performance
C. Incorporating product attributes and user features that lower the buyer’s overall costs of using the company’s product
D. Delivering value to customers via competencies and competitive capabilities that rivals don’t have or can’t afford to match
E. Incorporating features that enhance buyer satisfaction in intangible or non-economic ways
5-29
Importance of Perceived Value
Buyers seldom pay forvalue that is not perceived
Price premium of adifferentiation strategy reflects
Value actually delivered to the buyer
and
Value perceived by the buyer
Actual and perceived value can differ when buyers are unable to assess their experience with a product
5-30
Signaling Value asWell as Delivering Value
Incomplete knowledge of buyers causes them tojudge value based on such signals asPriceAttractive packagingExtensive ad campaignsAd content and imageSeller facilities or professionalism and
personality of employeesHaving a list of prestigious customers
Signals of value may be as important as actual value whenNature of differentiation is hard to quantifyBuyers are making first-time purchasesRepurchase is infrequentBuyers are unsophisticated
5-31
When Does a DifferentiationStrategy 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
5-32
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 premiumbuyers perceive is too high
Not striving to open up meaningfulgaps in quality, service, or performancefeatures vis-à-vis rivals’ products
5-33
For Discussion: Your Opinion
A low-cost provider strategy can defeat a
differentiation strategy when buyers are
satisfied with a basic product and don’t think
“extra” attributes are worth a higher price.
True or false? Explain.
5-34
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
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
5-35
Competitive Strength of a Best-Cost Provider Strategy
Competitive advantage is based on the capability to include upscale attributes at a lower cost than rivals’ comparable products
To achieve competitive advantage,a company must be able toIncorporate attractive features
at a lower cost than rivalsManufacture a good-to-excellent quality
product at a lower cost than rivalsDevelop a product that delivers good-to-excellent
performance at a lower cost than rivalsProvide attractive customer service at a lower
cost than rivals
5-36
When Is a Best-CostProvider Strategy Appealing?
When buyer diversity makes product differentiation the norm
When many buyers are also sensitive to price and value
5-37
Key Characteristics of Toyota’sBest-Cost Provider Strategy for the Lexus
Design an array of high-performance characteristics and upscale features into Lexus models to make them comparable in performance/luxury to other high-end models, i.e. Mercedes, BMW
Design an array of high-performance characteristics and upscale features into Lexus models to make them comparable in performance/luxury to other high-end models, i.e. Mercedes, BMW
Transfer its capabilities in making high-quality Toyota models at low cost to making premium-quality Lexus models at costs below other luxury-car makers
Transfer its capabilities in making high-quality Toyota models at low cost to making premium-quality Lexus models at costs below other luxury-car makers
Use its relatively lower manufacturing costs tounderprice comparable Mercedes and BMW models
Use its relatively lower manufacturing costs tounderprice comparable Mercedes and BMW models
Establish a new network of Lexus dealers, separate from Toyota dealers, dedicated to providing a level of personalized customer service unmatched in the industry
Establish a new network of Lexus dealers, separate from Toyota dealers, dedicated to providing a level of personalized customer service unmatched in the industry
5-38
Risk of a Best-Cost Provider Strategy
A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies
Low-cost leaders may be able to siphoncustomers away with a lower price
High-end differentiators maybe able to steal customers awaywith better product attributes
5-39
Test Your Knowledge
Which of the following are distinguishing features of a best-cost provider strategy (based on the comparisons of the five generic competitive strategies shown in Figure 5.1)?
A. The strategic target is price-conscious buyers
B. A marketing emphasis on charging a slightly higher price than rival brands having comparable features and attributes
C. A product line that stresses wide selection, many product variations, and emphasis on differentiating features
D. A competitive advantage based on more value for the money
E. Using constant product innovation, excellent R&D skills, and periodic technological breakthroughs to
sustain the strategy
5-40
Focus / Niche Strategies
Involve concentrated attention on a narrow piece of the total market
Serve niche buyers better than rivals
Choose a market niche where buyershave distinctive preferences, specialrequirements, or unique needs
Develop unique capabilities toserve needs of target buyer segment
Objective
Keys to Success
5-41
Geographic uniqueness
Specialized requirements inusing product/service
Special product attributesappealing only to niche buyers
Approaches to Defining a Market Niche
5-42
Examples of Focus Strategies
Community Coffee Specialty coffee retailer
Animal Planet and History Channel Special interest Cable TV programs
Porsche Sports cars
Bandag Specialist in truck tire recapping
CGA Inc. Specialty insurance provider
Match.com Online dating service
5-43
Focus / Niche Strategiesand Competitive Advantage
Achieve lower costs than rivals inserving a well-defined buyer segment
Focused low-cost strategy
Offer a product appealing to uniquepreferences of a well-defined buyer segment
Focused differentiation strategy
Which hat is unique?
Approach 1
Approach 2
5-44
What Makes a NicheAttractive for Focusing?
Big enough to be profitable and offers good growth potential
Not crucial to success of industry leaders
Costly or difficult for multi-segmentcompetitors to meet specializedneeds of niche members
Focuser has resources and capabilitiesto effectively serve an attractive niche
Few other rivals are specializing in same niche
Focuser can defend against challengers via superior ability to serve niche members
5-45
Risks of a Focus Strategy
Competitors with broad product lines having wide appeal find effective ways to matcha focuser’s capabilities in serving niche
Niche buyers’ preferences shifttowards product attributes desiredby majority of buyers – nichebecomes part of overall market
Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered
5-46
For Discussion: Your Opinion
Which of the five generic competitive strategies do you think the following companies are employing:
The Saturn division of General Motors
Abercrombie & Fitch
Amazon.com
Avon Products
5-47
Deciding Which GenericCompetitive Strategy to Use
Each positions a company differently in its market and competitive environment
Each establishes a central theme for how a company will endeavor to outcompete rivals
Each creates some boundaries for maneuvering as market circumstances unfold
Each points to different ways of experimenting with the basics of the strategy
Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategyThe big risk – Mixing and matching pieces of the generic
strategies to create a mixed bag or “stuck in the middle”strategy! This rarely produces a sustainable
competitive advantage or a distinctive competitive position !
5-48
Table 5.1: Distinguishing Features of the Five Generic Competitive Strategies
5-48