The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today. Gary Hamel and C.K

The essence of strategy lies in creating tomorrow’s competitive

advantages faster than competitors mimic the ones you possess today. Gary Hamel and C.K. Prahalad

Strategies for taking the hill won’t necessarily hold it.

Amar Bhide

“Quote”

© The McGraw-Hill Companies, Inc., 1998

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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


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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

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

Key to Success


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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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The Five GenericCompetitive Strategies

Ma

rke

t T

arg

et

Type of Advantage Sought

Overall Low-CostLeadership

Strategy

BroadDifferentiation

Strategy

FocusedLow-CostStrategy

FocusedDifferentiation

Strategy

Best-CostProviderStrategy

Lower Cost Differentiation

Broad Range of Buyers

Narrow Buyer

Segmentor Niche


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A Low-Cost Leadership Strategy

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

Objective


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Low-Cost Leadership

Make achievement of low-cost relative to rivals the THEME of firm’s business strategy

Find ways to drive costs out of business year-after-year

Keys to SuccessKeys to Success

Low-cost leadership means lowOVERALL costs, not just lowmanufacturing or production costs!

Low-cost leadership means lowOVERALL costs, not just low

manufacturing or production costs!


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Approaches to Securinga Cost Advantage

Do a better job than rivals of

performing value chain activities

efficiently and cost effectively

Approach 1

Revamp value chain to bypass

some cost-producing activities

Approach 2 Control costs!

By-pass costs!


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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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Characteristics of aLow-Cost Provider

Cost conscious corporate culture Employee participation in cost-control efforts Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost

improvement

Low-cost producers championFRUGALITY while aggressivelyINVESTING in cost-saving improvements!

Successful low-cost producers championfrugality but wisely and aggressively

invest in cost-saving improvements !


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What Company Managers Have to Do to Achieve Low-Cost Leadership

Scrutinize each cost-creating activity, identifying cost drivers

Use knowledge about cost drivers to manage costs of each activity down year after year

Find ways to reengineer how activities are performed and coordinated---eliminate unnecessary work steps

Be creative in cutting some activities out of value chain system---re-invent the industry value chain


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The Competitive Strengths of Low-Cost Leadership

Better positioned than RIVAL COMPETITORS to compete offensively on basis of price

Low-cost provides some protection from bargaining leverage of powerful BUYERS

Low-cost provides some protection from bargaining leverage of powerful SUPPLIERS

Low-cost provider’s pricing power acts as a significant barrier for POTENTIAL ENTRANTS

Low cost puts a company in position to use low price as a defense against SUBSTITUTES


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A Low-Cost Strategy Works Best When:

Price competition is vigorous Product is standardized or readily

available from many suppliers There are few ways to achieve

differentiation that have value Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant

bargaining power


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Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales volume--profits go down,not up)

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


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Differentiation Strategies

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

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

Keys to Success

Objective


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The Appeal of Differentiation Strategies

A powerful competitive approach when uniqueness can be achieved in ways that Buyers perceive as valuable Rivals find hard to match or copy Can be incorporated

at a cost well below the price premium that buyers will pay

Which hat is unique?


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The Benefits of Successful Differentiation

A product / service with unique and

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 Themes

Unique taste -- Dr. Pepper Special features -- America Online Superior service -- FedEx, Ritz-Carlton Spare parts availability -- Caterpillar More for your money -- McDonald’s, Wal-Mart Engineering design and performance -- Mercedes Prestige -- Rolex Quality manufacture -- Honda , Toyota Technological leadership -- 3M Corporation, Intel Top-of-the-line image -- Ralph Lauren, Chanel


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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

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners


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How to Achieve aDifferentiation-Based Advantage

Incorporate product features/attributes that lower buyer’s overall costs of using product

Approach 1

Incorporate features/attributes that raise the performance a buyer gets out of the product

Approach 2

Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways

Approach 3

Compete on the basis of superior capabilitiesApproach 4


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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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The Competitive Strengths of a Differentiation Strategy

Buyers develop loyalty to brand they like best--can beat RIVAL COMPETITORS in the marketplace

Mitigates bargaining power of large BUYERS since other products are less attractive

Differentiation puts a seller in better position to withstand efforts of SUPPLIERS to raise prices

Buyer loyalty acts as a barrier to POTENTIAL ENTRANTS

Differentiation puts a seller in better position to fend off threats of SUBSTITUTES not having comparable features


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A Differentiation Strategy Works Best When:

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 type

of differentiation approach Technological change is fast-paced

and competition is focused on evolving product features


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What Can Make aDifferentiation Strategy Fail

Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their well-being

Over-differentiating such that product features exceed buyers’ needs

Charging a price premium that buyers perceive is too high

Failing to signal value Not understanding what buyers want or prefer

and differentiating on the “wrong” things


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Competitive Strategy Principle

A low-cost producer strategy can

defeat a differentiation strategy

when buyers are satisfied with a

standard product and do not see

extra attributes as worth paying

additional money to obtain!

A low-cost producer strategy can

defeat a differentiation strategy

when buyers are satisfied with

a standard product and do not

see extra attributes as worth

paying for!


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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

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

Objectives


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The Competitive Strength of a Best-Cost Provider Strategy

Competitive advantage comes from matching close rivals on key product attributes and beating them on price

Success depends on having the skills and capabilities to provide attractive performance and features at a lower cost than rivals

A best-cost producer can often out-compete both a low-cost provider and a differentiator when Standardized features/attributes won’t meet the

diverse needs of buyers Many buyers are price and value sensitive


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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 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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Focus / Niche Strategies and Competitive Advantage

Achieve LOWER COSTS than

rivals in serving the segment--

A low-cost strategy

Offer niche buyers SOMETHING DIFFERENT from rivals--A differentiation strategy

Approach 1

Approach 2 Which hat is unique?


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Examples of Focus Strategies

Netscape Software to browse World Wide Web

Porsche Sports cars

Cannondale Mountain bikes

Horizon and Comair - Commuter airlines Link major airports with small cities

Jiffy Lube International Maintenance for motor vehicles


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What Makes a NicheAttractive 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 ofFocus / 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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When Does a FocusStrategy Work Best?

Costly or difficult for multi-segment rivals to serve specialized needs of target niche

No other rivals are concentrating on same segment

Firm’s resources do not allow it to go after a bigger piece of market

Industry has many different segments, creating more focusing opportunities


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Risks of a Focus Strategy

Competitors find effective ways to match a focuser’s capabilities in serving niche

Niche buyers’ preferences shift towards product attributes desired by majority of buyers--the niche becomes part of the overall market

Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered


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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

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners


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Competitive Strategy Principle

A vertical integration strategy has

appeal ONLY if it significantly

strengthens a firm’s competitive

position!


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Appeal of Backward Integration

Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers

Potential to reduce costs exists when Suppliers have sizable profit margins Item supplied is a major cost component Resource requirements are easily met

Can produce a differentiation-based competitive advantage when it results in a better quality part

Reduces risk of depending on suppliers of crucial raw materials / parts / components


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Appeal of Forward Integration

Advantageous for a firm to establish its own distribution network if Undependable distribution channels

undermine steady production operations Integrating forward into distribution and retailing

May be cheaper than going through independent distributors

May help achieve stronger product differentiation, allowing escape from price competition

May provide better access to users


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Strategic Disadvantages ofVertical Integration

Boosts resource requirements Locks firm deeper into same industry Results in fixed sources of supply and

less flexibility in accommodatingbuyer demands for product variety

Poses problems of balancing capacity at each stage of value chain

May require radically different skills / capabilities Reduces manufacturing flexibility, lengthening

design time and ability to introduce new products


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Unbundling andOutsourcing Strategies

Involves not performing certain value chain activities internally and relying on

outside vendors to perform needed activities and services

Concept


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Advantages ofOutsourcing Strategies

Outside specialists may can perform the activity better or more cheaply

Activity is not crucial to achieving competitive advantage

Reduces risk exposure to changing technology and/or changing buyer preferences

Streamlines operations to Cut cycle time Speed decision-making Reduce coordination costs

Allows firm to concentrate on its core business


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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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Why Are Strategic Alliances Formed?

To collaborate on technology development or new product development

To improve supply chain efficiency To gain economies of scale in production

and/or marketing To fill gaps in technical or manufacturing

expertise To speed new products to market To acquire or improve market access


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Offensive and Defensive Strategies

Are undertaken to build new or stronger market positions and/or

create competitive advantage

Offensive Strategies

Can protect competitive advantage, but rarely are the basis for creating advantage

Defensive Strategies


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The Building and Eroding of Competitive Advantage

Siz

e o

f C

om

pet

itiv

e A

dva

nta

ge

Time

Benefit Period Erosion PeriodBuildup Period

StrategicMovesProduceCompetitiveAdvantage

Moves byRivalsReduceCompetitiveAdvantage

Size ofCompetitiveAdvantageAchieved


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Options for MountingStrategic Offensives

1. Initiatives to match or exceed rivals’ strengths

2. Initiatives to capitalize on rivals’ weaknesses

3. Simultaneous initiatives on many fronts

4. End-run offensives

5. Guerrilla warfare tactics

6. Preemptive strikes


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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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Attacking Competitor Strengths

Possible Offensive Options

Under-price rivals Boost advertising Introduce new features to appeal to rivals’

customers

Best Options Attack with equally good product & lower price Develop low-cost edge, use it to under-price

rivals


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Options for Attackinga 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 ApproachConcentrate 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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Launching Simultaneous Offensiveson Many Fronts

Objective Launch several major initiatives to

Throw rivals off-balance Splinter their attention Force them to use substantial resources

to defend their position

AppealA challenger with superior resources can overpower

weaker rivals by out-competing them across-the-board long enough to become a market leader.


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End-Run Offensives

Objectives DODGE head-to-head confrontations that

escalate competitive intensity or risk cutthroat competition

Attempt to MANEUVER around areas of strong competition--concentrate on those areas of market where competition is weakest


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Optional Approaches for End-Run Offensives

Build presence in geographic areas where rivals have little presence or exposure

Introduce products with different attributes and features to better meet buyer needs

Introduce next-generation technologies and leapfrog rivals

Add more support services for customers


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Guerrilla Offenses

Approach

Use principles of surprise and hit-and-run to attack in locations and at times where conditions are most favorable to initiator

Appeal

Well-suited to small challengers with limited resources


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Options for Guerrilla Offenses

Focus on narrow target weakly defended by rivals Challenge rivals where they are overextended and

when they are encountering problems Make random scattered raids on leaders

Occasional low-balling on price Intense bursts of promotional

activity Legal actions charging antitrust

violations, patent infringements, or unfair advertising


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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 jobfor their customers


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Offensive Strategy andCompetitive 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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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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Blocking Avenues for Rivals’ Offensives

Broaden product line to fill gaps rivals may go after Keep prices low on models that match rivals Sign exclusive agreements with distributors Offer free training to buyers’ personnel Give better credit terms to buyers Reduce delivery times for spare parts Increase warranty coverage Patent alternative technologies Sign exclusive contracts with best suppliers Protect proprietary know-how


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Signaling Defensive Toughness

Publicly announce management’s strong commitment to maintain present market share

Publicly announce plans to construct new production capacity to meet forecasted demand

Give out advance information about new products, technological breakthroughs, and other moves

Publicly commit firm to policy of matching prices and terms offered by rivals

Maintain war chest of cash reserves Make occasional counter-responses to rivals’

moves


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First-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 raw material suppliers,

new technologies, & distribution channels can produce cost advantage

Loyalty of first time buyers is high Moving first can be a preemptive strike


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First-Mover Disadvantages

Moving early can be a disadvantage (or fail to produce an advantage) when Costs of pioneering are sizable and loyalty of

first time buyers is weak Rapid technological change

allows followers to leapfrog pioneers

Achievements of pioneers are easily and quickly imitated by late movers

It is relatively easy for latecomers to crack the market


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Timing and Competitive Advantage

Principle 1Being a first-mover holds potential for

competitive advantage in some cases but not in others

Principle 2Being a fast follower can sometimes yield as

good a result as being a first mover

Principle 3Being a late-mover may or may not be fatal--it

varies with the situation

Documents

The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today. Gary Hamel and C.K