The Five Generic

Competitive Strategies
Chapter 5 Thompson et al
Grant
Why Do Strategies Differ?
A firm’s competitive strategy deals exclusively with the specifics of its efforts to position itself in the market-
place, please customers, ward off competitive threats, and achieve a particular kind of competitive
advantage.

Is the firm’s market

target
broad or narrow?
Key factors that
distinguish one
strategy
Is the competitive
from another
advantage
pursued linked to low
costs
or product
differentiation?
Sustaining Competitive
Advantage: Types Of Isolating
REQUIREMENT FOR IMITATION ISOLATING MECHANISM
Mechanism
Identification • Obscure superior performance
Incentives for imitation • Deterrence: signal aggressive intention to imitators
• Preemptions: exploit all available investment
opportunities
Diagnosis • Rely on multiple sources of competitive advantage to
create “causal ambiguity”
Resource acquisition • Base competitive advantage on resources and capabilities
that are immobile and difficult to replicate
The Five Generic Competitive
Strategies
Low-cost Provider Strategies
Effective low-cost approaches
• Pursue cost savings that are difficult to imitate
• Avoid reducing product quality to unacceptable levels

Competitive advantages and risks

• Greater total profits and increased market share gained from underpricing competitors
• Larger profit margins when selling products at prices comparable to and competitive with rivals
• Low pricing does not attract enough new buyers
• Rival’s retaliatory price-cutting sets off a price war
Cost Drivers: The Keys To
Driving Down Company Costs
Revamping The Value Chain
System To Lower Costs
• Selling direct to consumers and bypassing the activities and costs of distributors and dealers by using a
direct sales force and a company website
• Streamlining operations to eliminate low value-added or unnecessary work steps and activities
• Reduce materials handling and shipping costs by having suppliers locate their plants or warehouses
close to the firm’s own facilities
When to Pursue Low Cost
Provider Strategy or Not
Pitfalls To Avoid In Pursuing A Low-cost Provider
When A Low-cost Provider Strategy Works Best Strategy

1. Price competition among rival sellers is 1. Engaging in overly aggressive price cutting that
vigorous. does not result in unit sales gains large enough
2. Identical products are available from many to recoup forgone profits
sellers. 2. Relying on a cost advantage that is not
sustainable because rival firms can easily copy
3. There are a few ways to differentiate industry
products. or overcome it
3. Becoming too fixated on cost reduction such
4. Most buyers use the product in the same ways. that the firm’s offering is too features-poor to
5. Buyers incur low costs in switching among gain the interest of buyers
sellers. 4. Having a rival discover a new lower-cost value
chain approach or develop a cost-saving
technological breakthrough
Broad Differentiation Strategies
Effective Differentiation Approaches
• Carefully study buyer needs and behaviors, values, and willingness to pay for a unique product or
service
• Incorporate features that both appeal to buyers and create a sustainably distinctive product offering
• Use higher prices to recoup differentiation costs

Advantages of Differentiation
• Command premium prices for the firm’s products
• Increased unit sales due to attractive differentiation
• Brand loyalty that bonds buyers to the differentiating features of the firm’s products
https://www.youtube.com/watch?v=4soTr72UvtY
Analyzing Differentiation:
The Demand Side
Product Attributes and Positioning
• Multidimensional scaling
• Conjoint analysis
• Hedonic price analysis
• Value curve analysis
Analyzing Differentiation:
The Demand Side
The Role of social and psychological factors
• Maslow’s Hierarchy of need
Analyzing Differentiation:
The Demand Side
The Role of social and psychological factors
• http://www.strategicbusinessinsights.com/vals/presurvey.shtml
Identifying Differentiation
Potential: The Demand Side
What needs does What are key
THE PRODUCT it satisfy? attributes?
FORMULATE
Relate patterns of DIFFERENTIATION
customer preference STRATEGY
to product attributes • Select product
By what criteria
positioning in relation
do they choose?
to product attributes
What price premiums • Select target consumer
do product attributes group
THE CUSTOMER
command? • Ensure customer
/product compatibility
What are demographic, • Evaluate costs and
What motivates sociological, benefits of
them? psychological correlates differentiation
of customer behavior?
Identifying Differentiation
Potential: The Supply Side
• The Drivers of Uniqueness
• Product Integrity
Value Drivers: The Keys To Creating A Differentiation
• Signaling and Reputation
Advantage
• Brands
• The Cost of Differentiation
Revamping The Value Chain
System To Increase Differentiation

Coordinating with channel

allies to enhance customer
perceptions of value
Approaches
to enhancing
differentiation
through changes in
the value chain
system
Coordinating with suppliers
to better address customer
needs
Differentiation: Signaling Value
Signaling value is important when:
 The nature of differentiation is based on intangible features and is therefore subjective or hard to
quantify by the buyer.
 Buyers are making a first-time purchase and are unsure what their experience will be with the product.
 Product or service repurchase by buyers is infrequent.
 Buyers are unsophisticated.
Successful Approaches To
Sustainable Differentiation
Differentiation that is difficult for rivals to duplicate or imitate
• Company reputation
• Long-standing relationships with buyers
• A unique product or service image

Differentiation that creates substantial switching costs that lock in buyers

• Patent-protected product innovation
• Relationship-based customer service
When to Pursue Differentiation
Strategy or Not
Pitfalls To Avoid In Pursuing A Differentiation
When A Differentiation Strategy Works Best Strategy

1. Buyer’s needs and uses for the product are 1. Relying on product attributes easily copied by
diverse. rivals
2. There are many ways that differentiation 2. Introducing product attributes that do not
can have value to buyers. evoke an enthusiastic buyer response

3. Few rival firms are following 3. Eroding profitability by overspending on efforts

a similar differentiation approach. to differentiate the firm’s product offering
4. Offering only trivial improvements in quality,
4. There is a rapid change in the product’s service, or performance features vis-à-vis the
technology and features products of rivals
5. Over-differentiating the product quality,
features, or service levels exceeds the needs of
most buyers
6. Charging too high a price premium
Focused (Or Market Niche)
Strategies

Focused Strategy
Approaches

Focused
Low-Cost Focused Market
Strategy Niche Strategy
When to Pursue Focused
Strategy or Not
When A Focused Low-cost Or Focused The Risks Of A Focused Low-cost Or Focused
Differentiation Strategy Is Attractive Differentiation Strategy

1. The target market niche is big enough to be 1. Competitors will find ways to match the
profitable and offers good growth potential. focused firm’s capabilities in serving the target
2. Industry leaders chose not to compete in the niche.
niche; focusers avoid competing against strong 2. The specialized preferences and needs of niche
competitors. members shift over time toward the product
3. It is costly or difficult for multi-segment attributes desired by the majority of buyers.
competitors to meet the specialized needs of 3. As attractiveness of the segment increases, it
niche buyers. draws in more competitors, intensifying rivalry
4. The industry has many different niches and and splintering segment profits.
segments.
5. Rivals have little or no entry interest in the
target segment.
Best-cost Provider Strategies
Differentiation: Low Cost Provider:
Providing desired quality, Charging a lower price
features, performance, than rivals with similar
service attributes caliber product offerings

Best-Cost Provider
Hybrid Approach

Value-Conscious Buyer
When to Pursue Best-Cost
Provider Strategy or Not

When A Best-cost Provider Strategy Works Best The Risk Of A Best-cost Provider Strategy

1. Product differentiation is the market norm. 1. Getting Squeezed On Both Sides

2. There are a large number of value-conscious
buyers who prefer mid-range products.
3. There is competitive space near the middle of
the market for a competitor with either a
medium-quality product at a below-average Best-
price or a high-quality product at an average or Cost
slightly higher price. High-End
Low-Cost Provid
Differenti
4. Economic conditions have caused more buyers Providers er
ators
to become value-conscious. Strate
gy
Distinguishing Features Of The
Five Generic Competitive Strategies (1
Of 2) Low-Cost Provider Broad Differentiation Focused
provider
low-cost
Focused differentiation Best-Cost Provider
Strategic A broad cross-section A broad cross-section A narrow market niche A narrow market niche Value-conscious
target of the market of the market where buyer needs and where buyer needs and buyers. Or, a middle-
preferences are preferences are market range
distinctively different distinctively different

Basis of Lower overall costs Ability to offer buyers Lower overall cost than Attributes that appeal Ability to offer better
competitive than competitors something attractively rivals in serving niche specifically to niche goods at attractive
strategy different from members members prices
competitors’ offerings

Product line A good basic product Many product Features and attributes Features and attributes Items with appealing
with few frills variations, wide tailored to the tastes and tailored to the tastes attributes and
(acceptable quality selection, emphasis on requirements of niche and requirements of assorted features;
and limited selection) differentiating members niche members better quality, not best
features

Production A continuous search Build in whatever A continuous search for Small-scale production Build in appealing
emphasis for cost reduction differentiating cost reduction for or custom-made features and better
without sacrificing features buyers are products that meet basic products that match quality at lower cost
acceptable quality willing to pay for; needs of niche members the tastes and than rivals
and essential features strive for product requirements of niche
superiority members
Distinguishing Features Of The
Five Generic Competitive Strategies (2
Of 2) Low-Cost Provider Broad Differentiation
Focused low-cost
provider
Focused
differentiation Best-Cost Provider
Marketing Low prices, good value Tout differentiating features. Communicate attractive Communicate how Emphasize delivery of
emphasis Also, try to make a Also, charge a premium features of a budget- product offering does best value for the
virtue out of product price to cover the extra priced product offering the best job of meeting money
features that lead to costs of differentiating that fits niche buyers’ niche buyers’
low cost features expectations expectations

Keys to Economical prices, Stress constant innovation Stay committed to Stay committed to Unique expertise in
maintaining good value to stay ahead of imitative serving the niche at the serving the niche simultaneously
the strategy Also, strive to manage competitors lowest overall cost; don’t better than rivals; managing costs down
costs down, year after Also, concentrate on a few blur the firm’s image by don’t blur the firm’s while incorporating
year, in every area of key differentiating features. entering other market image by entering upscale features and
the business segments or adding other other market segments attributes
products to widen market or adding other
appeal products to widen
market appeal.

Resources Capabilities for driving Capabilities concerning Capabilities to lower Capabilities to meet Capabilities to
and costs out of the value quality, design, intangibles, costs on niche goods the highly specific simultaneously
capabilities chain syste. and innovation Examples: Examples: Lower input needs of niche deliver lower cost and
required Examples: large-scale marketing capabilities, R&D costs for the specific members higher-quality or
automated plants, an teams, technology product desired by the Examples: custom differentiated feature
efficiency-oriented niche, batch production production, close Examples: TQM
culture, bargaining capabilities customer relations. practices, mass
power customization
Implementing Cost Leadership
And Differentiation Strategy
Generic Strategy Key Strategy Elements Resource and organizational requirements
Cost leadership Scale-efficient plants Access to capital
Design for manufacture Process engineering skills
Control of overheads and R&D Frequent reports
Process innovation Tight cost control
Outsourcing (especially Specialization of jobs and functions
overseas)
Avoidance of marginal Incentives linked to quantitative targets
customer accounts
Differentiation Emphasis on branding Marketing abilities
advertising, design, service,
quality, and new product Product engineering skills
development Cross-functional coordination
Creativity
Research capability
Incentives linked to qualitative performance rating
What are their strategy? Why?
• https://www.youtube.com/watch?
v=0J8YW9K8qGU

• https://www.youtube.com/watch?
v=6e9d8W9zFxA

• https://www.youtube.com/watch?
v=FaLAkoYn55s
THANK YOU