Strama Chapter 7 8
Strama Chapter 7 8
As to what to look for in the course of doing SWOT analysis for the
firm, Table 6 is a helpful guide. As shown in Table 6, the for the fun
shows the potential resource strengths which may come in the form
of healthy financial condition, strong brand name/ reputation, cost
and price advantage, etc. Weaknesses on the other hand may prevail
or exist on account of having no clear direction, weak financial
condition, obsolete production system or technologies, etc. The third
and the fourth columns of Table 6 identified other conditions
determinant of the firm's opportunities and threats.
BCG stands for the Boston Consulting Group which developed the
so-called BCG matrix. BCG matrix falls within the purview of
internal and micro environment analysis in the sense that doing the
matrix allows an internal assessment of the products or services
offered by the firm. Knowing and having a BCG matrix for the firm
is basic to business managers in particular the marketing manager.
The BCG matrix gives the members of the business organization an
idea which among its products or services have a relative advantage
or a certain level of competitiveness vis-a-vis its rival firms.
a) attract and please customers; Diagrammatically, the boundaries of the five generic competitive
b) withstand competitive pressures; and strategies are shown in Figure 73.
c) strengthen market position.
15.5 Overall Low-cost Provider Strategy
15.2 Objectives of Competitive Strategies
As the term implies, the concept of overall low-cost provider
Competitive strategies may be proactive or reactive as they may be strategy evolves around the idea of providing products and services
either an offensive or defensive strategy. Proactive strategies come at low cost in all or as many aspects possible. Overall low-cost
in the form of offensive strategies and reactive strategies take the provider strategy means having low overall costs, not just low
form of defensive strategies. As an offensive or defensive strategy, manufacturing or production costs but in other costs as
competitive strategies are also meant to:
Cost drivers are cost components or inputs to a product or services a) abandon traditional business methods and shift to e-
that constitute a large part or portion of the overall cost of producing Business technologies and use of the Internet;
a product or service. Any changes, downward or upward of that b) use direct-to-end-user sales/marketing methods;
particular cost component, will drive the cost and market price of the c) simplify product design;
finished product or service which has impacts on its competitiveness d) offer basic, no-frills product/service;
in the market. e) shift to a simpler, less capital-intensive, or more flexible
f) technological process; find ways to bypass use of high-
It is, therefore, extremely important to manage or control the cost of cost raw materials; f)
raw materials and other form of inputs to stay competitive. The g) relocate facilities closer to suppliers or customers;
following are strategies leading to controlling cost drivers: h) drop "something for everyone" approach and focus on a
limited product/service; and
a) capture scale economies; avoid scale diseconomies;
i) reengineer core business processes.
b) capture learning and experience curve effects;
c) manage costs of key resource inputs To consider initiating revamping or initiating changes in the value
d) consider linkages with other activities in value chain; chain system, it takes identifying specific areas of concern in the
e) find sharing opportunities with other business units; value chain itself and doing detailed financial analysis at that
f) compare vertical integration vs. outsourcing; particular level. Shown in Figure 74 is an example of a value chain
g) assess first-mover advantages vs. disadvantages; where competitive advantage based on low-cost leadership can be
h) control percentage of capacity utilization; developed.
i) make prudent strategic choices related to operations;
j) exercise frugality;
k) invest is cost-saving and efficient technologies or systems;
and
l) exercise tight budget control measures.
Companies must differentiate their products to a certain degree in a) Lasang Pinoy - Jollibee
order to attract customers and satisfy some minimal level of need. b) More for your money - McDonald's, Wal-Mart
However, some companies differentiate their products to a much c) Prestige- Rolex
greater degree than others, and this difference can give them d) Technological leadership – SM Corporation, Intel
competitive advantage. e) Top-of-the-line image- Ralph Lauren, Chanel
Differentiation strategy usually leads to a strategy known as market 15.6.5 Sustaining differentiation strategy
segmentation. Market segmentation is the way a company decides
to group customers, based on important differences in their needs or How to sustain over a long-term period a differentiation strategy is
preferences, in order to gain a competitive advantage. For instance, challenging and daunting task for managers. For one, a continuing
the company can choose to segment its market into different differentiation strategy means a variation in products and services
constituencies and develop a product to suit the needs for each or it every now and then and this may cost a lot of overhead expenses on
may opt to choose to recognize that the market is segmented but certain product lines. The image of the firm as producer or seller of
concentrates on servicing only one market segment, or niche. unique or different kind of products or services may supplant an
image upon the market or the industry it belongs thereby exerting
15.6.1 Objectives of differentiation strategy pressure upon the company which could be difficult in the long-term.
The principal objective of differentiation strategy is to achieve a To ensure a sustained differentiation strategy initiatives, Thompson
competitive advantage by creating a product (goods or services) that and Strickland (1999) consider the following as the most appealing
is perceived by the customers to be unique in some important way. approach to differentiation:
The differentiated company's ability to satisfy a customer's need in
a way that its competitors cannot means that it can charge a premium a) those hardest for rivals to match or imitate; and
price (meaning higher price). The premium price is usually b) those buyers will find most appealing.
substantially above the price charged by the cost leader, and the
Thompson and Strickland further suggest that among the best
customers pay it because they believe the product's differentiated
choices for gaining a longer-lasting and more profitable competitive
qualities are worth the difference.
edge in the area of differentiation strategy are the following:
Specifically, the objectives of differentiation strategy are as follows:
a) new product innovation;
a) incorporate differentiating features that cause buyers to b) technical superiority;
prefer firm's product or service over brands of rivals; c) product quality and reliability;
b) to produce a product that will serve other market. segment; d) comprehensive customer service; and
and e) unique competitive capabilities.
c) to produce and provide a product or service that will
15.6.6 Differentiation opportunities in the value chain
project another image for the firm.
Looking at the company's value chain is one area where
15.6.2 Keys to success in differentiation strategy
opportunities for differentiation is possible. In particular, processes
To succeed in pursuing a differentiation strategy, doing the following can be examined in the following segments of the value chain can
will be of great help: lead towards product differentiation:
a) find ways to create another form of value for buyers that a) purchasing and procurement activities;
is not easily matched or cheaply copied by rivals; and b) product research and development and product design
b) not spending more to achieve differentiation than the price activities;
premium that can be charged. c) production process/technology-related activities;
d) manufacturing/production activities;
15.6.3 Appeal of differentiation strategies e) distribution-related activities; and
f) marketing, sales, and customer service activities.
It may be considered costly and difficult for the firm to consider
having a variety of products or services but the promises and appeal 15.6.7 Achieving a differentiation-based advantage
it offers in terms of competitiveness serve as the motivating and
rallying point to achieve its goals. The appeal and attractiveness of There are as many possibilities or approaches in differentiating or
differentiation strategies are on account of the following: innovating a product or services and the following approaches can
be a good guide to begin with:
a) Incorporate product features/attributes that lower buyer's be able to serve its market well and do it better than any of its rivals,
overall costs of using product; if any.
b) Incorporate features/attributes that raise the performance
a buyer gets out of the product; Focus or niche strategists exert every effort possible to see to it that
c) Incorporate features/attributes that enhance buyer they can monopolize this particular market and leave the broader
satisfaction in non-economic or intangible ways; market to others. The market size targeted by focus or niche
d) Compete on the basis of superior capabilities; and producers and sellers is usually limited though its combined demand
e) Capitalize on a variety of service schemes to support a may be substantial sufficient for a small producer or seller to survive
product. despite its limited demand in quantitative terms. The relatively small
market size makes it impractical to as many players in this group
15.6.8 When does a differentiation strategy work best? resulting to possibilities of monopolistic condition within the group
or market served by focus or niche strategists.
Just like any other type of competitive strategy, differentiation
strategy has its strong and weak points. In any case, differentiation 15.7.2 Key to success in focus/niche strategy
strategy works best under the following conditions and scenarios:
To succeed and survive in a business using or capitalizing a focus or
a) there are many ways to differentiate a product that has niche strategy means to see to it that it serves or creates a situation
value and pleases customers; where the particular market it serves maintains its demands level and
b) buyer needs and uses are diverse; characteristics. Such scenario has to prevail so that other suppliers
c) few rivals are following a similar differentiation approach; may not take interest in this market segment or sector thus
and maintaining its status as the sole or dominant player in this category
d) technological change and product innovation are fast- of market.
paced.
To succeed in doing in this type of strategy, the philosophy of the
15.6.9 Pitfalls of differentiation strategies focus or niche strategists should be anchored on:
Amidst the promises and opportunities for differentiation strategies a) choosing a market niche where buyers have distinctive
are disadvantages, pitfalls or shortcomings as follows: preferences, special requirements, or unique needs; and
b) developing unique capabilities to serve needs of target
a) trying to differentiate on a feature buyers do not perceive buyer segment.
as lowering their cost or enhancing their well- being;
b) over-differentiating such that product features exceed 15.7.3 Approaches in focus/niche strategy
buyers' needs;
c) charging a price premium that buyers perceive too high Doing a focus or niche strategy is also an opportunity to use any of
failing to signal value; and the other strategies earlier discussed; however, extra efforts have to
d) not understanding what buyers want or prefer and be made to ensure that indeed it is a kind of market that the other
differentiating on the "wrong" things. major players in the market at large cannot serve on account of the
inapplicability of the concept of economies of scale or there is
15.7 Focused or Niche Strategy something in the business that a large majority of the direct and
indirect competitors cannot provide. In other words, its product is
The variety of market or consumer categories and the different not simply unique or different but there is something in its totality
locations they are located give the business organization an that the business can do which others cannot.
opportunity to think and decide what and which particular market or
what particular place to serve. This situation challenges the planners To achieve the above bias of focus or niche strategists, the approach
and strategists to decide to address a broad market or focus efforts to take may take the form of:
to a particular market segment or sector of the economy.
a) Achieve lower costs than rivals in serving the segment - a
Focus strategy is different in that it is directed towards serving the low-cost strategy; and
needs of a limited customer group or segment. Focus strategy b) Offer niche buyers something different from rivals-a
concentrates on serving a particular market niche, which can be differentiation strategy.
defined geographically, by type of customer, or by segment of the
product line. The sector could be either a group or strata of the 15.7.4 Examples of focus strategies
economy (e.g., high-end market or class A market, the low-income
The following are just a few of the firms that use focus or niche
group), a particular group of small-scale producers or businessmen
strategy in the conduct of their business:
using its product as raw material or inputs or small group of buyers
whose needs are not or least served by traditional sources of a a) eBay online auctions
particular product. b) Porsche sports cars
c) Horizon and Comair (commuter airlines) - link major
Niche, a term synonymous to focus, is used to refer to a different or
airports with small cities
unique kind of market which is usually limited in number. Its
d) Jiffy Lube International-maintenance for motor vehicles
similarity with the term focus oftentimes makes it convenient to use
e) Bandag - specialist in truck tire recapping
either focus or niche or both. For instance, concentrating only on a
segment of the product lines means focusing only on say: a) 15.7.5 What makes a niche attractive for focusing?
vegetarian food, and b) designer clothes.
If other business organizations desire to have as many products or
15.7.1 Objectives of focus/niche strategy brands to address a broader market or have a variant of products or
services to be able to have categories of product falling within the
The sole objective of a focus or niche strategy is to concentrate its
ambit of the BCG matrix, others opt to simply look for a particular
attention on a narrow piece of the total market with a view of fully
niche or sector within which they want to conduct their business in
serving the needs of that particular market. The basic strategy used
a quiet or discrete manner beyond recognition of the industry or
by focus or niche strategists is built around the notion they should
sector of the economy where the focus of the media is substantially
present. In doing so, however, focus strategists must see to it that the c) best-cost producer can often out-compete both a low- cost
opportunity within the niche is substantial and sustaining over a long provider and a differentiator when buyers belong to the
term and that it is worth focusing on. lower strata;
d) standardized features/attributes will not meet the diverse
To determine whether a particular sector or niche is worth addressing needs of buyers; and
or focusing on, the following considerations should be addressed: e) many buyers are price and value sensitive.
a) Is the market big enough to be profitable and offers good 15.8.4 Risk of a best-cost provider strategy
growth potential?
b) The niche is not crucial to success of the other players Just like any other form of strategies, there are risks and
particularly the industry leaders. disadvantages involved, some of which are as follows:
c) It is costly or difficult for multi-segment competitors to
meet specialized needs of niche members. a) Risk - A best-cost provider may get squeezed between
d) The focuser has resources and capabilities to effectively strategies of firms using low-cost and differentiation
serve an attractive niche. strategies;
e) Only a few other rivals are specializing in same niche. b) Low-cost providers may be able to siphon customers away
f) The focuser can defend against challengers via superior with a lower price; and
ability to serve niche members. c) High-end differentiators may be able to steal customers
away with better product attributes.
15.8 Best-cost Provider Strategy
15.9 Risks of Generic Competitive Strategies
As shown in Figure 73, best cost provider strategy is a compromise
of the four other competitive strategies. Best-cost provider strategy While there are advantages in a variety of competitive strategies,
imbibes certain characteristics of the other types of competitive there are risks in considering anyone of them. In general, the variety
strategies. More dominantly, however, best-cost provider strategy of risks among each of the competitive strategies are shown in Table
combines emphasis on low-cost and differentiation strategies. Its 11.
basic characteristics are as follows:
15.10 Offensive Strategies
a) make an upscale product at a lower cost; and
The nature of an offensive strategy takes the form of an aggressor
b) give customers more value for their money.
in the market. A company taking an offensive strategist is never a
15.8.1 Objectives of best-cost provider strategies tail ender but one with a mentality of always in the lead or ahead of
the pack with a penchant for intriguing or attacking a competitor
By its nature, best-cost provider strategy is designed to attract a directly or indirectly. Companies opting for an offensive strategy are
broader market traditionally served by the low-cost provider and generally proactive and oftentimes take preemptive actions as part
differentiator. Since the strategy of a best-cost provider has all the of the offensives.
elements of other types of competitive strategies, it has some
advantage in that it can hit a broader market. A business organization engaging in an offensive strategy is
presumed to have sufficient resources and organizational strength as
Generally, the specific objectives of a best-cost provider are as well as superior product or service to be able to launch and sustain
follows: an offensive strategy. The chances for a successful offensive
initiative are improved when it is based on a company's resource
a) deliver superior value by meeting or exceeding buyer strengths and strongest competencies and capabilities.
expectations on product attributes and beating their price
expectations; and 15.10.1 Where offensive strategy should be done
b) be the low-cost provider of a product with good-to-
excellent product attributes, then use cost advantage to Doing or opting for an offensive strategy is not a matter of wild
underprice comparable brands. option or a choice to be made but an intent anchored on solid ground.
The idea of doing or opting for offensive strategy is justified under
15.8.2 What makes best-cost strategy different? the following situation:
While best-cost strategy imbibes the character of a low-cost strategy, a) Offensive strategy is in stable and market or industry
it is different in that the aim of a low-cost strategy is to achieve lower leader status.
costs than any other competitor in the industry; the intent of best- b) It is done in the place of an established competitor's market
cost provider is to make a more upscale product at lower costs than location.
the makers of other brands with comparable features and attributes. c) It used or employed to build new or stronger market
position and/or create competitive advantage.
A best-cost provider cannot be the industry's absolute low- cost
leader because of the added costs of incorporating the additional
upscale features and attributes that the low-cost leader's product
doesn't have.
There are a variety of offensive strategies to employ or use As opposed to offensive strategy, defensive strategy is an option
depending on the sector or situation the business is involved. Some taken by business organizations that are reactive to market
of the offensive strategy options are as follows: conditions. Business firms taking the posture of a defensive strategy
generally view that to avoid further losing their market share or
a) Frontal assault. In this strategy, the firm goes head- to- foothold in the market, they have to do something to deter or counter
head with its competitor. It matches the competitor in the motives and agenda of competitors taking offensive strategies.
every category from the product to the price and
promotional activities. To be successful, the attacker must The basic approach to dealing with defensive strategy is twofold,
not only have superior resources but also the willingness namely:
to persevere. This is generally very expensive and may
a) block avenues open to challengers; and
serve to awaken a sleeping giant.
b) signal challengers that vigorous retaliation is likely if the
b) End run offensives. It is a dodge head-to-head
business is under attack or being pursued.
confrontations that escalate competitive intensity or risk
cutthroat competition. It attempts to maneuver around 15.11.1 Objectives of defensive strategy
strong competitors concentrating on areas of market where
competition is weakest. Taking the defensive posture is a matter of choice or in reaction to
c) Guerilla warfare. It uses the principle of surprise and hit- an offensive move by any of the competitors in the industry. It is
and-run to attack in locations and at times where aimed at achieving the following objectives:
conditions are most favorable to initiator. It is well- suited
to small challengers with limited resources and market a) fortify firm's present position;
visibility. b) help sustain any competitive advantage held;
d) Bypass attack. Rather than directly attacking the c) lessen risk of being attacked;
established competitor frontally or on its flanks, a d) blunt impact of any attack that occurs; and
company or business unit may choose to change the rules e) influence challengers to aim attacks at other rivals
of the game. This strategy attempts to cut the market out 15.11.2 Some specific defensive options
from under the established defender by offering a new type
of product that makes the competitor's product Whether the business organization is an industry leader or a runner-
unnecessary. up, either is subject to attack or offensive strategies of others simply
e) Flanking attack. Rather than going straight for a because among others, business is a marketing war. Given this, it is
competitor's position of strength with a frontal assault, a necessary to use or employ defensive strategies or do counter-attack
firm may attack a part of the market where the competitor or else decimate.
is weak.
f) Encirclement. It usually evolves out of frontal assault or Doing the following defensive options will be of great help to
flanking maneuver. Encirclement occurs as an attacking survive in business competition especially under hostile conditions:
company or unit-encircles the competitor's position in
a) Raise structural barrier. This means raising the walls of the
terms of products or markets or both. The encircler has a
business to avoid being attacked or creating entry barriers
greater product variety (a complete product line ranging
meant to block a challenger's logical avenues of attack. The
from low to high price) and/or serves more markets (it
structural or market barriers are suggested by Porter as follows:
dominates every secondary market)
i. offer a full range of product in every profitable market
segment to close off any entry points;
ii. block channel access by signing exclusive agreements
with distributors;
iii. raise buyer switching costs by offering low-cost training
to users;
iv. raise the cost of gaining trial users by keeping prices low
on items new users are more likely to purchase;
v. increase scale economies to reduce unit costs;
vi. foreclose alternative technologies through patenting or
licensing;
vii. limit outside access to facilities and personnel;
viii. tie up suppliers by obtaining exclusive contracts or
purchasing key locations;
ix. avoid suppliers that also serve competitors; and
x. encourage the government to raise barriers such as safety
and pollution standards or favorable trade policies.
b) Lower the inducement for attack. This type of defensive
strategy is meant to reduce a challenger's expectations of future
profits in the industry. For example, an airline company can
deliberately keep prices low and constantly invest in cost-
reducing measures. With prices kept very low, there is little
profit incentive for a new entrant.
c) Increased expected retaliation. This involves any action that
increases, the perceived threat of retaliation for an attack. For
example, management may strongly defend any erosion of
market share by drastically cutting prices or matching
challenger's promotional activities through a policy of
accepting any price reduction coupons for a competitor's
product.