The Five Generic Competitive StrategiesThe five distinctive competitive strategies are:1. Low-cost provider strategy2. Broad Differentiation strategy3. Best-cost provider strategy4. A focused (or market niche) strategy based on lower cost5. A focused (or market niche) strategy based on differentiation

Low-cost provider strategies• A company achieves low-cost leadership when it becomes the

industry's lowest-cost provider. e.g. Nano• It is lower-cost than rivals but not necessarily absolute lowest

cost. E.g. Maruti 800 is low cost car but not lower than Nano• The product should include features and services that buyers

consider essential.• A product offerings that is too frill-free sabotages that

attractiveness of the company's product and can turn buyers off even if it is cheaper than competing products.

• The low-cost has to be achieved in a way that would be difficult for the competitors to copy for the low-cost advantage to yield valuable edge in the marketplace.

There are two options for translating a low-cost advantage into attractive profit performance:

1. Use the lower-cost edge to under price competitors and attract price-sensitive buyers in great numbers to increase total profits.– Here the company has to keep the size of the price cut smaller than

the size of the firm's cost advantage (bigger profit margin per unit) or generate enough added volumes to increase total profits despite thinner margins.

2. Maintain the present price, be content with the present market share, and use low-cost edge to earn a higher profit margin on each unit sold.

Avenues for achieving cost advantage• To achieve a cost advantage, a company must make sure that

its cumulative costs across its overall value chain are lower than competitors' cumulative costs.

• The two ways to accomplish this are:1. Out manage rivals in the efficiency with which value chain activities

are performed and in controlling the factors that drive the costs of value chain activities.

2. Revamp the firm's overall value chain to eliminate some cost-producing activities.

Controlling the cost drivers1. Economics or diseconomies of scale

– Economics of scale arise when activities can be performed more cheaply at larger volumes than smaller volumes and from ability to spread out certain costs like R&D and advertising over a greater sale volume. e.g. in manufacturing it is achieved by simplifying the product line, scheduling longer production runs for fewer models and using common parts and components in different models.

2. Learning curve effects– It is the effect when the cost of performing an activity declines over time

as the experience of the company personnel builds. E.g. Tata’s building Nano versus Bajaj building their low cost car

– It can stem from debugging and mastering newly introduce technologies, finding ways to improve plant layout and work flows, making product design modifications that streamline the assembly process.

– It is important to keep the learning proprietary to whatever possible extent.

3. The cost of key resource inputs– How well a company manages the costs of acquiring key resource

inputs is often a big driver of costs.The input costs are affected by four factors1. Union versus nonunion labor

• Union labor increases cost of production as more facilities are demanded and there are lot of resistance to increasing productivity. e.g. low productivity rate in public sectors

2. Bargaining power vis-a-vis suppliers• Purchasing in large numbers helps in bring down the cost. e.g. Wal-Mart

3. Location variables• Location costs like tax, transport, shipping, wage tax, energy costs play a major

role in input costs. e.g. manufacturing in tax beneficial states like Himachal Pradesh

4. Supply chain management expertise• Partnerships with suppliers, e-procurement lower the cost of supply logistics.

4. Links with other activities in the company or industry value chain– When the cost of one activity is affected by how other activities are

performed, costs can be reduced by ensuring that the linked activities are performed in a cooperative and coordinated fashion. e.g. inventory cost can be brought down by coordination with suppliers for design of parts, quality of manufacturing and just-in-time supply.

5. Sharing opportunities with other organizational or business units within the enterprise– e.g. sharing common resources like sales force, warehouse, billing

system, distribution facilities, etc. can create significant cost savings.

6. The benefits of vertical integration versus outsourcing– Vertical integration ( expanding backwards into source of supply,

forward towards the user, or both) helps when buyers or suppliers have bargaining powers.

– In majority of the cases outsourcing is always helpful as it brings expertise and economics of scale.

– e.g. Reliance used backward integration effectively

7. First-mover advantages and disadvantages– The first mover has the advantage of establishing a brand name at very

low cost. e.g. Google, eBay, Bislere– Competitors have to spend considerable money to compete against

these first mover brands.– When technology is fast developing the later entrants have the

advantage of using better technology at a lower price. e.g. Cost and technology of using internet connection in the early days of software revolution was very high

– Companies that follow product development often study the existing products and avoid mistakes made by the first mover products

8. The percentage of capacity utilization– Capacity utilization for activities with substantial fixed cost. e.g.

manufacturing set-up – It helps in lowering the fixed costs per unit.– It is important for capital intensive businesses.– Operating close to full capacity for most of the time is an important source

of cost advantage.

9. Strategic choices and operating decisions– The following managerial decisions impact the cost

1. Adding/cutting the services provided to buyers e.g. ATM2. Incorporating more/fewer performance and quality features into the product.

E.g., Lexus3. Increasing/decreasing the number of different channels utilized in distributing the

firm's product4. Lengthening/shortening delivery times to customers e.g. Domino's5. Putting more/less emphasis than rivals on the use of incentive compensation,

wage increases and fringe benefits to motivate employees and boost worker productivity.

6. Raising/lowering the specifications for purchased materials

Revamping the value chain• The primary way companies achieve a cost advantage is by

reconfiguring their value chain include:1. Making greater use of internet technology applications

– Internet is a powerful and pervasive tool for reengineering company and industry value chains.

– e.g. in supply chain management, collaboration in new product development, purchasing, just -in-time deliveries, cost-effective customer manufacturing, "back office" data management processes can be handled fast, accurately and with less paperwork and few personnel

– Using the direct-to-end-user sales and marketing approaches e.g. Dell– Costs of the wholesale/retail portions of the value chain frequently represent

35-50 percent of the price end consumers pay.– e.g. direct downloading of software eliminates the cost of burning CDs,

packaging and shipping thus increasing the profit margin of manufacturers and reducing the final price paid by the consumers; increased online sales of tickets have helped airline to eliminate the commission paid to the agents

2. Simplifying the product design– Using computer assisted design techniques, reducing the number of

parts, standardizing parts and components across models and styles and shifting to an easy-to-manufacture product design can all simplify the value chain

3. Stripping away the extras– Offering only basic products or services can help a company cut costs

associated with multiple features and options. e.g. low cost airlines like Go

4. Shifting to simpler, less capital-intensive or more streamlined or flexible technological process– These help in efficiency and product customization

5. Bypassing the use of high-cost raw materials or component parts– With better design

6. Relocating facilities– Moving plants closer to suppliers, customers, or both can help curtail

inbound and outbound logistics costs

7. Dropping the "something for everyone" approach– Pruning slow-selling items and concentrating on needs of most

buyers rather than all buyers helps in elimination of costs associated with numerous product versions.

The keys to success in achieving low-cost leadership1. The managers must scrutinize each cost-creating activity and

determine what drives its cost.2. They need to exhaustively pursue cost savings throughout the

value chain.3. Non-essential work steps and low-cost activities must be

eliminated. 4. Cost-conscious corporate cultures involving employees in cost

improvement efforts must be built.5. Administrative costs must to kept to minimum.6. Benchmarking against the best-in-the-class companies.7. Investment in resources and capabilities that drive down

costs. e.g. Wal-Mart

When a low-cost provider strategy works best1. Price competition among rival sellers is especially vigorous. e.g.

FMCG companies2. The products of rival sellers are essentially identical and supplies

are readily available from any of several eager sellers. 3. There are few ways to achieve product differentiation that have

value to buyers.4. Most buyers use the product in the same ways5. Buyers incur low costs in switching their purchases from one

seller to another. E.g. FMCG products6. Buyers are large and have significant power to bargain down

prices7. Industry newcomers use introductory low prices to attract

buyers and build a customer base

Pitfalls of a low-cost provider strategy1. Getting carried away with overly aggressive cost cutting and

ending up with lower, rather than higher profitability.2. Not emphasizing avenues of cost advantage that can be kept

proprietary. or that relegate rivals to playing catch-up.3. Becoming too fixated on cost reduction.

Differentiation strategies• Differentiation strategies are attractive when buyers' needs and

preferences are too diverse to be fully satisfied by a standardized product or by sellers with identical capabilities.

• A company attempting to succeed through differentiation must study buyers' needs and behavior to learn what buyers consider important, what they think has value and what they are willing to pay for.

• Competitive advantage results once a sufficient number of buyers become strongly attached to the differentiated attribute.

• Differentiation enhances profitability whenever the extra price the product commands outweighs the added costs for achieving the differentiation .

• Differentiation strategy fails when buyers don't value the brand's uniqueness and/or when the differentiation is easily copied by its rivals.

Advantages of successful differentiation for a firm1. It can command a premium price for its product 2. Increase in unit sales due to additional buyers won over by

differentiation.3. Gain buyer loyalty to its brand when buyers are strongly

attracted to the differentiating feature.

Types of differentiation themes1. Unique taste. e.g. MTR 2. Multiple features. e.g. Microsoft office3. Wide selection and one-stop shopping e.g. Big Bazaar4. Superior service e.g. FedEx5. Spare part availability e.g. Caterpillar6. Engineering design and performances e.g. Mercedes7. Prestige and distinctiveness e.g. Rolex8. Product reliability e.g. J&J in baby products9. Quality manufacture e.g. Toyota10.Technology leadership e.g. 3M in bonding and coating products11.A full range of services e.g. ICICI bank12.A complete line of products e.g. Samsung13.Top-of-the-line image and reputation e.g. Oberoi hotels

Where along the value chain to create the differentiating attributes

1. Supply chain activities that affect the performance or quality of the company's end product. e.g. Starbucks has very strict specifications on the coffee beans it purchases.

2. Product R&D activities that aim at– improved product designs and performance features– wider variety– added user safety– enhanced environmental protection.

3. Production R&D and technology-related activities that– permit custom-order manufacture at an efficient cost– make production safer for the environment – improve product quality, reliability and appearance. – e.g. Toyota manufacturing different models of cars from the same assembly

line.

4. Manufacturing activities that– reduce product defects– prevent premature product failure– extend product life– allow better warranty coverage– improve economy of use– result in more end-user convenience or enhanced product appearance. – e.g. Japanese manufacturing technology

5. Outbound logistics and distribution activities that– allow for faster delivery– more accurate order filling– lower shipping costs– fewer warehouse and on-the-shelf stoke outs.

6. Marketing, sales and customer service activities that result in– superior technical assistance to buyers– faster maintenance and repair services– more and better product information provided to customers– more and better training materials for end users– better credit terms– quicker order processing – greater customer convenience.

Achieving a differentiation based competitive advantage• One approach is to incorporate product attributes and user

features that lower the buyer's overall costs of using the company's product.– reduce buyer's raw material waste (providing to-size components)– reduce a buyer's inventory requirements (providing just-in-time

deliveries)– increasing maintenance intervals and product reliability thus reducing

repair and maintenance cost– use online system to reduce buyer's procurement and order

processing costs– providing free technical support

• Second approach is to incorporate features that raise product performance– by providing greater reliability, durability, convenience or ease of use

• Third option is to incorporate features that enhance buyer satisfaction in noneconomic or intangible ways.– LIC provides a sense of safety– BMW, Rolex provide status, image, prestige, upscale fashion, superior

craftsmanship and finer things in life.– giving lifelong guarantees to products

• A fourth approach is to differentiate on the basis of capabilities - to deliver value to customers via competitive capabilities that rivals don't have or can't afford to match.– Japanese automakers can bring new models to market faster than

others– Indian software companies can provide best quality software at most

competitive prices

The importance of perceived value• The price premium commanded by a differentiating strategy

reflects the value actually delivered and the value perceived.• Actual and perceived value can differ whenever buyers have

trouble assessing what their experience with the product will be• Incomplete knowledge on the part of the customers often cause

them to judge value based on things like– price (where price connotes quality)– attractive packaging – expensive ad campaigns – ad content and image– quality of brochures and sales representatives– seller's facilities– seller's list of customers– firm's market share– length of time the firm has been in business and professionalism– personality of seller's employees

Perceived value may be important as much as actual value when 1. The nature of differentiation is subjective or hard to quantify2. Buyers are making a first-time purchase3. Repurchase is infrequent4. Buyers are unsophisticated

Keeping the cost of differentiation in line• Profitable differentiation is possible when

– the cost of achieving the differentiation is below the price premium the differentiating attributes can command in the market (thus increasing the profit margin)

– offset thinner profit margins with enough added volume to increase total profits.

– e.g. FedEx provide tracking system for all orders, free home delivery, providing free parking space at a apartment

When a differentiating strategy works best1. There are many ways to differentiate the product or service

and many buyers perceive these differences as having value– e.g. Five star hotels, mobile phone handsets

2. Buyer needs and users are drivers– The more diverse buyer preferences are, the more room firms have

to pursue different approaches to differentiate.eg. mobile phone handsets

3. Few rival firms are following similar differentiation approach.– Each of the companies are pursuing their own differentiation path

with less overlapping. e.g. Intel and AMD

4. Technological change is fast-paced and competition revolves around rapidly evolving product features– Frequent introductions of next-version products help maintain buyer

interest and provide space for companies to pursue separate differentiating paths. e.g. mobile phone handsets

The pitfalls of a differentiation strategy1. No guarantee that differentiation will produce a meaningful competitive

advantage.2. Buyers may see little value in the unique attributes or capabilities of a

product.3. Competitors can copy the differentiating features.4. It is very time consuming to come up with genuine differentiators which

would be difficult to copy.5. Adding features that do not reduce the buyer's cost or enhance a buyer's

well-being, as perceived by the buyer.6. Over differentiating so that the product quality or service level exceeds

buyer's needs.7. Trying to charge too high a premium. It may give an opportunity for

buyers to switch to a lower cost product. 8. Not striving to fill the real gaps in quality or performance or service of the

rival firms. Tiny difference between product offerings may not be important for the buyers.

Best cost provider strategies • It aims at giving customers more value for the money.• The objective is to deliver superior value to buyers by

satisfying their expectations on key quality/feature/performance attributes and beating their expectations on price.

• It derives from the ability to incorporate attractive attributes at a low cost than rivals.

• To become a best-cost provider a company must have resources and capabilities to achieve good-to-excellent quality, appealing features, match product performance and provide good-to-excellent services - all a lower cost than rivals.

• The best-cost provider strikes out a middle path between persuing lower cost advantage and a differentiating advantage and between appealing to the broad market or the niche market.

• Best-cost strategy is a hybrid, which does a balancing of strategic emphasis on low cost against a strategic emphasis on differentiation.

• The target market is the value conscious buyer.• The competitive advantage of a best-cost provider is lower

costs than rivals in incorporating good-to-excellent attributes.• It is very effective in markets where buyer diversity makes

differentiation the norm and where many buyers are also sensitive to price and value.

• The pricing strategy can be a medium-quality product at a lower price or a high quality product at an average price.

Illustration on page 131 about strategy followed by Toyota for Lexus

Risk of a best-cost provider strategy• The company using this will get squeezed between companies

following low-cost strategy and differentiating strategies.• Low cost companies get customers with low cost and

differentiating companies will offer more additional features to attract the customers.

• A best-cost provider product must have "significantly" better attributes in order to justify the cost above what the low-cost leaders are charging and should be "significantly" lower-cost with upscale features so that it can outcompete higher end differentiators on the basis of an attractive lower price.

Focused (or market niche) strategies• This strategy focuses on a small size of the total market. • The target market, or niche, can be defined by geographic

uniqueness, specialized requirements in using the product, or special product attributes that appeal only to relatively small number of buyers.

• e.g. eBay (online auctions), L&T Constructions (infrastructure projects), Ayush from HUL (ayurveda), Himalaya (herbal products)

Focused low-cost strategy• A focused strategy based on low-cost aims at securing a

competitive advantage by serving buyers in the target niche market at a lower cost and price than the rivals.

• It is attractive when the company can find the niche market and lower its cost significantly to serve that market.

• The strategy to provide lower cost than rivals in the niche market is controlling factors that drive the cost.– e.g. Producers of private label generic items with less product

development cost, marketing, distribution and advertisement can offers these products at lower price than branded products.

– Manufacturers of clone products like ink cartridges for HP printers without violating patents.

Focused differentiation strategy• It focuses on offering feature differentiations which would be

perceived by the niche customers as well suited to their own unique tastes and preferences.

• This strategy depends on the existence of an buyer segment that is looking for special product attributes and the ability of the company to provide those features.– e.g. Rolex (watches), Rolls Royce - focus of upscale customers looking

for best products.– Himalaya (herbal products), Cafe Coffee Day (business ambience)

When does a focused strategy become attractive1. The target niche is big enough to be profitable and offers

good growth potential.2. Industry leaders do not see having a presence in the niche to

be crucial to their own success. This prevents having competition from the big players.

3. It is costly or difficult for multisegment players to put capabilities in place to meet the specialized needs of the niche and at the same time satisfy the expectations of their main customers.

4. The industry has many niches and segments, allowing the company to choose a niche matching the capabilities of the company. With multiple niches players can choose their niche without competing with other players.

5. A very few other rivals being interested in the same segment. This prevents overcrowding.

6. The company focused on a niche has the capability to serve the niche the best due to its capabilities and the goodwill it would have generated with the customers. This can act as a barrier for rivals planning to enter this segment. This also makes manufacturers of substitute products think if they should focus on a niche already dominated by another company.

The risks of a focused low-cost and of a focused differentiation strategy

1. Competitors will find effective ways of matching the capabilities of the company serving the niche market. E.g. Microsoft offering photo editing feature to compete with Photoshop

2. Shifting of the preferences and needs of the customers over time to those preferred by majority of the buyers.

3. An erosion of the differences between segments thus reducing the entry barriers for companies in other segments to target customers from the company's niche market.

4. The segment may become very attractive thus inviting many competitors and intensifying rivalry and reducing segment profits.