STRATEGY:

Core Concepts and

Analytical Approaches
7th Edition (2022-2023)
Arthur A. Thompson
The University of Alabama

Chapter 5
The Five Generic
Competitive Strategy
Options: Which One
to Employ

This digitally-delivered material contains proprietary intellectual content intended solely for the use of (1) Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. All rights reserved.
authorized instructors and (2) students or other participants that are duly registered for the ValuePak versions Not for distribution to non-registrants without permission. An e-book published and
of either The Business Strategy Game or GLO-BUS strategy simulations, both of which have been developed distributed by McGraw Hill Education Burr Ridge, Illinois
and copyrighted by Glo-Bus Software, Inc.
 Competitive strategy is about being different.
It means deliberately choosing to perform
activities differently or to perform different
activities than rivals to deliver a unique mix
of value.
—Michael E. Porter
Strategy is all about combining choices of
what to do and what not to do into a system
that creates the requisite fit between what the
environment needs and what the company
does.
—Costas Markides

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–2

 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

Competing in the marketplace is like war.

You have injuries and casualties, and the
best strategy wins.
—John Collins

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–3

 Learning Objectives
1. Understand what distinguishes each of the five generic
competitive strategies and the type of competitive
advantage each can produce.
2. Gain command of why each of the five competitive
strategies works better in certain market situations than in
others.
3. Learn the major avenues for achieving a competitive
advantage based on lower costs.
4. Learn the major avenues for achieving a competitive
advantage based on differentiating a firm’s product or
service offering from the offerings of rivals.
5. Understand the attributes of a best-cost provider strategy.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–4
 Chapter 5 Roadmap

The Five Generic Competitive Strategies

1. Low-Cost Provider Strategies
2. Broad Differentiation Strategies
3. Focused Low-Cost Strategies
4. Focused Differentiation Strategies
5. Best-Cost Provider Strategies
Successful Competitive Strategies Are Always Underpinned
by Resources and Capabilities That Allow the Strategy to Be
Well-Executed

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–5

What Does the Term “Competitive Strategy” Refer
To?

• A firm’s “competitive strategy” deals exclusively with the

specifics of management’s game plan for competing
successfully. A well-conceived competitive strategy
includes:
• Actions and approaches to please customers
• Offensive and defensive moves to counter maneuvers of rivals
• Responses to shifting market conditions
• Initiatives to strengthen the firm’s market position and achieve a
particular kind of competitive advantage.

• Competitive strategy is narrower in scope than business

strategy
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–6
 Why Do Competitive Strategies Differ Among
Firms in the Same Industry?
• Managers at different firms have different views on:
• How to deal with competitive pressures and industry driving forces
• What future market conditions will be like
• What strategy specifics makes the most sense at their firm in light of
• Its particular resources and capabilities (especially those that have the
greatest competitive power in the marketplace)
• Its resource weaknesses and competitive deficiencies
• Its most attractive market opportunities
• Its vulnerability to external threats
• Its competitive strengths and weaknesses vis-à-vis rivals
• Its strategic vision, mission, core values, and performance targets that
firm’s managers have established
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–7
 The Factors that Distinguish One Competitive
Strategy from Another
• Factors that distinguish one firm’s competitive strategy
from another
• Whether a firm’s market target is broad or narrow
• Whether a firm is pursuing a competitive advantage linked to lower
costs or differentiation
• These two factors give rise to five competitive strategy
options for staking out a market position, operating the
business, and delivering superior value to buyers
• A low-cost provider strategy
• A broad differentiation strategy
• A focused low-cost strategy
• A focused differentiation strategy
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–8
• A best-cost provider strategy
FIGURE 5.1 The Five Generic Competitive Strategy Options

Source: This is an author-expanded version of a three-strategy classification discussed

in Michael E. Porter, Competitive Strategy (New York: Free Press, 1980), pp. 35–40.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–9
 Broad Low-Cost Provider Strategies
• The objective of a broad low-cost leadership strategy is to
produce a good or service for a broad range of buyers at a
lower overall cost than rivals.
• In striving for a low-cost advantage over rivals, it is first necessary to
incorporate features and services that buyers consider essential, then
go all out to provide these at a lower cost than rivals.

• A product offering that is too frills-free sabotages the attractiveness of

the firm’s product even if it is cheaper-priced.

• Keys to Success
• Having good cost-reduction skills and capabilities
• Pursuing long-term cost-saving approaches and capabilities that are
difficult for rivals to copy or match
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–10
 Core Concept

A low-cost leader’s basis for competitive

advantage is lower overall costs than rivals with
similar product offerings. A low-cost advantage
over rivals can translate into better profitability
than rivals.
Successful low-cost leaders are exceptionally
good at finding ways to drive costs out of their
businesses and using their lower cost advantage
over rivals to achieve better profitability than rivals
when competing on price.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–11

 Translating a Low-Cost Competitive Advantage
into Higher Profits
Option 1:
• Use the lower-cost edge to underprice competitors and
attract price-sensitive buyers in numbers sufficient to
increase total profits
Option 2:
• Charge a price comparable to other low-priced rivals,
be content with the resulting sales volume and market
share, and rely upon the low-cost edge over rivals to earn
a bigger profit margin per unit sold, thereby boosting the
firm’s total profits and return on investment

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–12

 Strategic Insight

A lower price improves profitability only if the lower

price results in gains in unit sales (and thus
revenues) that are large enough to overcome the
combined effects of a smaller profit margin and the
added costs of the extra units sold.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–13

FIGURE 5.2 Cost Drivers—The Keys to Driving Down Costs

Outsourcing or
vertical integration

Source: Adapted by the author from Michael E. Porter,

Competitive Advantage: Creating and Sustaining Superior
Performance (New York: The Free Press, 1985), Chapter 3.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. Access text alternative for slide image 5–14
 The Two Major Avenues for
Achieving a Cost Advantage

Perform value chain activities

Approach 1 more cost effectively than rivals.

Revamp the firm’s overall value

Approach 2 chain to eliminate or bypass
some cost-producing activities.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–15

 Approach 1: Cost Efficient Management
of Value Chain Activities
• Cost-saving approaches that demonstrate effective use of the cost
drivers include:
• Capturing all available economies of scale
• Taking full advantage of experience and learning-curve effects
• Operating facilities at full capacity
• Substituting lower-cost inputs that do not lower product quality or performance
• Using the firm’s bargaining power vis-à-vis suppliers to gain concessions
• Improving supply chain efficiency
• Pursuing actions to lower per-unit labor costs and boost productivity
• Improving product design and cost-saving production techniques
• Using online systems and sophisticated software to achieve operating
efficiencies
• Being alert to the cost advantages of outsourcing and vertical integration
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–16
 Other Cost-Saving Actions: Adopt Strategy
Elements That Lead to Lower Costs Than Rivals

• Have lower specifications for purchased materials, parts,

and components than rivals
• Strip frills and features from product offerings that are not
highly valued by price-sensitive or bargain-hunting buyers
• Offer a limited product line, delete slow-selling items, and try
to satisfy the needs of most buyers rather than all buyers
• Distribute firm’s product only through low-cost distribution
channels and avoid high-cost distribution channels
• Use the most economical method for delivering customer
orders (even if it results in longer delivery times)

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–17

 Approach 2: Revamp the Value Chain

• Reengineer the chain to eliminate costly work

steps and bypass cost-producing chain activities:
• Sell direct to consumers to cut out the activities and costs
of distributors and dealers

• Use technologies and/or information systems to bypass

the need to perform certain value chain activities

• Streamline operations by eliminating low-value-added or

unnecessary work steps and activities

• Have suppliers locate their plants or warehouses close to

a firm’s own facilities to reduce materials handling and
shipping costs
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–18
 Wal-Mart’s Approach to Managing
Its Value Chain

Institute extensive information sharing with vendors via online systems

Pursue global procurement of some items and centralize most purchasing activities

Invest in state-of-the-art automation at the company’s distribution centers

Strive to optimize the product mix and achieve greater sales turnover

Install security systems and store operating procedures that lower shrinkage rates

Negotiate preferred real estate rental and leasing rates with owners of store sites

Manage and compensate the workforce in a manner that leads to lower labor costs

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–19

Nucor Corporation’s Low-Cost Provider Strategy

• Key Elements of Nucor’s Strategy

• Use electric arc furnaces to lower investment costs and eliminate
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
• Consistently good profitability in an industry where profits have often
been terrible
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–20
 Key Characteristics of Southwest Airlines’
Low-Cost Provider Strategy
• Mastery of fast turnarounds at boarding gates
(25 minutes versus 45 minutes for rivals) allows:
• Planes to fly more hours per day
• More flights to be scheduled per day with fewer aircraft
• More revenue to be generated per plane on average than rivals
• Elimination of several services results 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 needs at reservation centers and airport counters
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–21
 The Keys to Being a Successful
Low-Cost Provider
• Scrutinize each cost-creating activity—understand the cost
drivers and use them as levers to lower costs
• Use knowledge about the cost drivers to streamline or
reengineer how activities are performed
• Engage all personnel in continuous cost improvement
• Use benchmarking to keep close tabs on how the firm’s
costs compare with its rivals and other firms performing
comparable activities in other industries
• Strive to operate with exceptionally small corporate staffs
• Spend aggressively on resources and capabilities that
promise to drive costs out of the business
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–22
 Strategic Insight

Success in achieving a low-cost edge over rivals

comes from out-managing rivals in finding ways to
perform value chain activities faster, more
accurately, and more cost efficiently.

Identify the cost drivers for each value chain

activity and use them as levers to drive
down costs.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–23

When a Low-Cost Provider Strategy Works Best

• A low-cost provider strategy becomes increasingly

appealing and competitively powerful when:
• Price competition among rival sellers is vigorous
• The products of rival sellers are essentially identical and supplies are
readily available from several eager suppliers

• It is hard to achieve product differentiations that buyers value

• Most buyers use different brands of the product in same ways
• Buyers incur low costs in switching purchases to other sellers
• A big fraction of the industry’s sales are made to large-volume buyers
with significant power to bargain down prices

• Industry newcomers use introductory low prices to attract buyers and

build a customer base
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–24
 Pitfalls to Avoid in Pursuing a
Low-Cost Provider Strategy
• Getting carried away with overly aggressive price cutting to win sales
and market share away from rivals

• Reducing price does not lead to higher total profits unless the incremental
gain in total revenues exceeds the incremental increase in total costs

• Relying on cost reduction approaches easily copied by rivals.

• The value of a cost advantage depends on its sustainability in achieving cost
savings that are hard for rivals to copy or otherwise overcome

• Becoming too fixated on reducing costs and ignoring:

• Growing buyer interest in added features, service or an upscale product
• Declining buyer sensitivity to price
• New developments that alter how buyers use the product
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–25
 Strategic Insight

A low-cost provider’s product offering must always

contain enough attributes to be attractive to
prospective buyers—low price, by itself, is not
always appealing to buyers.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–26

 Beware of Overly Aggressive Price-Cutting

• Cutting prices to draw sales and market share away from

rivals does NOT automatically translate into higher
profitability. WHY?
• Because a bigger sales volume drives up total costs (due to
the added production and distribution costs) and because
the lower price will result in a lower profit margin per unit
sold (unless the higher sales volumes result in costs per
unit sold falling enough to totally offset the lower profit
margin).

RULE: Whenever the gain in unit sales from a lower price is not large
enough to overcome the combined effects of a smaller profit margin
and the added costs of the extra units sold, then total profits will be
less at the lower price!!!!

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–27

 Broad Differentiation Strategies

• Broad Differentiation Strategies

• Entail offering unique product attributes that a wide range of buyers
find appealing, valuable, and worth paying for

• Are attractive when buyer needs and preferences are too diverse to
be fully satisfied by a single, standardized product offering

• Keys to Success
• Incorporating buyer-desired attributes into product offering that:
• Will appeal to a broad range of buyers
• Will be different enough to stand apart from rival product offerings

• Creating a product offering that is strongly differentiated rather than

weakly differentiated from the offerings of rivals
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–28
 Core Concept

The strategic aim of a broad differentiation

strategy is to offer unique product attributes that a
wide range of buyers find appealing and worth
paying for (because of the added value they
deliver).

The essence of a broad differentiation strategy

is to offer unique product attributes that a wide
range of buyers find appealing and worth paying
for.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–29

 Differentiation and Competitive Advantage

• A product/service with unique, appealing attributes

can create a competitive advantage for a firm and
allow it to do one or more of the following:
• Command a premium product price (because buyers
believe unique attributes are worth the extra price)
• Increase unit sales (because additional buyers are won
over by the differentiating features)
• Gain buyer loyalty to its brand (because buyer like the
differentiating features and bond with the firm and its
products)

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–30

 Is Differentiation the Road to Profits or
to Failure?

• Differentiation enhances profitability whenever

a firm’s product can:
• Command a sufficiently higher price or produce
sufficiently bigger sales to more than cover the
added costs of achieving the differentiation

• Broad differentiation strategies fail when

• Buyers don’t value the brand’s uniqueness
• A firm’s approach to differentiation is easily copied or
matched by its rivals.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–31
 Options for Differentiating

• Unique taste – Dr. Pepper, Listerine

• Multiple features – Microsoft Office, Apple’s iPhone
• Wide selection and one-stop shopping – Home Depot, [Link]
• Superior service – Nordstrom, Ritz-Carlton
• Engineering design and performance – Mercedes, BMW
• Prestige and distinctiveness – Rolex
• Quality manufacture – Michelin
• Technological leadership – 3M Corporation
• Spare parts availability – Caterpillar
• Full range of services – Charles Schwab
• Wide selection – Campbell’s soups
• High-fashion design – Gucci, Chanel
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–32
FIGURE 5.3 Value Drivers—Keys to Value-Adding Differentiation

Source: Adapted by the author from Michael E. Porter, Competitive

Advantage (New York: The Free Press, 1985), pp. 124–126.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. Access text alternative for slide image 5–33
 Using the Value Drivers to Achieve Stronger
Differentiation and Deliver Added Value

• The most systematic approach to achieving

successful differentiation involves focusing on the
value drivers that are particularly effective in
creating differentiation and adding value for buyers.
• Using value drivers to create unique product
attributes with high buyer appeal is “the secret” to
creating successful differential strategies

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–34

 Managing Value Chain Activities in Ways That
Enhance Differentiation
Ways that managers can use the value drivers to enhance differentiation
include the following:
• Create value-adding product features and performance attributes that appeal to
a wide range of buyers
• Pursuing continuous quality improvements in products and processes
• Emphasizing new product R&D and product innovation
• Improving product selection
• Investing in production-related R&D, striving for technological advances, and
implementing better production techniques
• Improving customer service and/or providing more service options.
• Emphasizing human resource management activities that improve the skills,
expertise, and knowledge of company personnel
• Pursuing sales, marketing, and advertising activities that lead to greater brand
name power.
• Improving distribution capabilities and collaborating with distribution allies to
enhance customer perceptions of value
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–35
 Signaling the Value to Buyers

• Stronger differentiation is achieved by sending

signals to buyers that a product offering has value
• Signaling value is particularly useful when:
• Nature of differentiation is subjective or hard to quantify
• Buyers are making a first-time purchase and are unsure
what their experience with the product will be
• Buyers are not fully aware of a product’s many attributes
• Repurchase is infrequent and buyers need to be
reminded of a product’s value

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–36

 How Is Value Signaled to Buyers?

• Typical signals of value include:

• A high price (in instances where high price implies better quality or
better performance)
• More appealing or fancier packaging
• Ongoing ad campaigns (which impact a product’s image and make it
more widely known)
• Ad content that emphasizes a product’s standout attributes
• The quality of brochures and sales presentations
• The luxuriousness and ambience of high-end retailers and sales
sites frequented by customers
• Making buyers aware that a company (or its products) has
prestigious customers
• The professionalism, appearance, and personalities of the seller’s
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–37
 Achieving Competitive Advantage

• To build sustainable competitive advantage via broad

differentiation, a firm typically must do one or more of the
following:
• Focus on continuous product innovation
• Incorporate features that raise product performance and deliver
added value to the buyer/end-user

• Incorporate product attributes and user features that lower the

buyer’s overall costs of using the firm’s product

• Incorporate features or features that enhance buyer satisfaction in

intangible ways

• Deliver value to customers using competitively potent resources and

capabilities that rivals do not have or cannot afford to match

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–38

 When a Broad Differentiation Strategy
Works Best
• Buyer needs and uses of the product are diverse.
• There are many ways to differentiate the product
or service that have value to buyers.
• Few rival firms are following a similar differentiation
approach.
• Technological change is fast paced and
competition revolves around rapidly evolving
product features and attributes.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–39

 Pitfalls to Avoid in Pursuing
a Differentiation Strategy
• Differentiation keyed to product/service attributes and
features that are easily and quickly copied
• Incorporating differentiation attributes that produce an
unenthusiastic response on the part of buyers
• Overspending to differentiate the firm’s product offering,
thus eroding profitability
• Failing to achieve meaningful differences in quality, service
or performance features vis-à-vis rival products
• Adding frills and extra features that exceed the needs and
use patterns of most buyers
• Charging too high a price premium
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–40
 Core Concept

Any differentiating feature that works well is a

magnet for imitators.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–41

 Pursuing a Differentiation Strategy:
Three Principles to Keep in Mind
• A differentiating feature that works well is a magnet
for imitators
• Over-differentiating and overcharging are fatal
strategy mistakes
• Small differences among the product offerings of
rival firms may not be important to buyers—a good
differentiation strategy must aim at strong rather
than weak product differentiation

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–42

 Focused (or Market Niche) Strategies

• Focused strategies concentrate attention on a

narrow piece of the total market
• The target segment, or market niche, can be
defined by:
• Geographic uniqueness
• Specialized requirements in using the product
• Special product attributes that appeal only to those
buyers that comprise the market niche

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–43

 Focused Low-Cost Strategies

• Seek competitive advantage by serving a target market

niche at a lower cost and lower price than rivals

• Are attractive when a firm can lower its costs significantly

by limiting its customer base to a well-defined segment

• Achieve a cost advantage over rivals by:

• Managing value chain activities more cost effectively than rivals
• Finding innovative ways to bypass certain value chain activities
The difference between a low-cost provider
strategy and a focused low-cost strategy is the
size of the buyer group being targeted.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–44
 Examples of Focused Low-Cost Strategies

• Budget motel chains

• Motel 6, Sleep Inn, Super 8, and Days Inn
• The producers and retailers of private-label goods
• The makers of generic prescription drugs
• The makers of economically-priced replacement
ink cartridges for printers (which carry a
substantially lower price tag than those offered by
makers of name brand printers)

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–45

 Focused Differentiation Strategies

• Aim at securing a competitive advantage with a product

offering designed to appeal to the unique preferences and
needs of a narrow well-defined group of buyers
• Depend on
• A buyer segment looking for special product attributes or
seller capabilities
• A firm’s ability to create a product offering that stands
apart from the offerings of rivals in the same target
market niche
The difference between a broad differentiation
strategy and a focused differentiation strategy
is the size of the buyer group being targeted.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–46

 Examples of Firms Using
Focused Differentiation Strategies

Louis
Vuitton

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–47

 When a Focused Low-Cost or Focused
Differentiation Strategy Is Attractive
• The target niche is big enough to be profitable and offers good growth
potential
• Industry leaders do not view having a presence in the niche as crucial
to their own success
• It is costly or difficult for multi-segment competitors to meet the
specialized needs of niche members
• The industry has many different niches and segments, thereby allowing
a focuser to pick a competitively attractive niche suited to its resource
strengths and capabilities
• Few other rivals are specializing in same target niche (a condition that
reduces the risk of segment overcrowding)
• The focuser can draw upon customer goodwill and loyalty to defend
against ambitious challengers
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–48
 The Risks of a Focused Low-Cost or Focused
Differentiation Strategy
• Competitors find effective ways to match a
focuser’s capabilities in serving the niche
• The preferences and needs of niche members shift
over time to match those of mainstream buyers,
thus causing the niche to dissolve into the overall
market
• A segment is so attractive that entry of new rivals
results in overcrowding, thereby intensifying rivalry
and splintering segment profits

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–49

 Best-Cost Provider Strategies
• Stake out a middle ground:
• Between pursuing a low-cost advantage and a differentiation
advantage
• Between appealing to the broad market as a whole and a
narrow market niche
• Are aimed squarely at buyers looking for appealing
extras and functionality at an appealingly low price

Deliver superior value by meeting or exceeding

The
buyer expectations on product attributes and
Objective beating their price expectations

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–50

 The Standout Traits of Best-Cost Provider
Strategies
• The essence of a best-cost provider strategy is
giving customers more value for the money by:
• Satisfying buyer desires for appealing
features/performance/quality/service

• Charging a lower price for those attributes than its rivals

• To profitably employ a best-cost provider strategy,
a firm must incorporate attractive upscale
attributes at lower costs than its rivals

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–51

 A Best-Cost Provider’s Competitive Advantage

• A best-cost provider’s competitive advantage is its

lower costs in incorporating upscale attributes than
rivals
• This low-cost advantage allows a firm to underprice rivals
and still earn attractive profits (provided the size of the
price discount does not squeeze profit margins)

Competitive It is usually not difficult to entice buyers away

Strategy from rivals with an equally good product at a
Principle more economical price

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–52

 Core Concept

The competitive advantage of a best-cost provider

is lower costs than rivals in incorporating upscale
attributes (appealing features or functionality or
quality or more satisfying customer service),
thereby putting the company in a position to
underprice rivals whose products have similar
upscale attributes.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–53

 How a Best-Cost Strategy Differs
from a Low-Cost Strategy

• Upscale product attributes in a best-cost provider’s offering

entail added costs that a low-cost provider avoids by
offering a basic product with few frills

• The two strategies are aimed at different buyers:

• Best-cost provider’s target market is value-conscious buyers looking
for valued extras and utility at an appealingly low price

• Low-cost provider’s target market is price-conscious buyers seeking

a basic product at a bargain price

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–54

When a Best-Cost Provider Strategy Works Best

• Markets where product differentiation is the norm

• The buying side of the market consists of attractively large
numbers of value-conscious buyers that can be induced to
purchase mid-range or near-luxury products rather than
• The cheap basic products of low-cost producers
• The expensive products of top-of-the-line differentiators
• Economically tough times when there are even more buyers
attracted to economically-priced products/services with
especially appealing attributes

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–55

 The Big Risk of a Best-Cost Provider Strategy

• A best-cost provider is squeezed between low-cost and

high-end differentiation rivals when:
• Low-cost providers are able to lure customers away with a lower
price (despite their less-appealing attributes)

• High-end differentiators are able to steal customers away with

better product attributes (despite the higher price tag)

• Thus, to be successful, a best-cost provider must

• Offer buyers significantly better product attributes to justify a price
above what low-cost leaders are charging

• Achieve significantly lower costs in providing upscale features so it

can outcompete high-end differentiators on the basis of a
significantly lower price

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–56

Key Question for Simulation Company Managers

• Which generic competitive strategy is your firm

currently pursuing?
• Can you cite at least 3 specific actions your firm has taken to
execute this competitive strategy?
• Can you cite hard evidence that indicates your firm has executed
your competitive strategy successfully?
See the cost/profit margin benchmarks in the Industry Report and the Comparative
Competitive Efforts Report for such hard evidence

• If you struggle to find 2-3 pieces of hard evidence, it is fair

to say that one or more rivals have been more successful
than your company in pursuing much the same
competitive strategy and that your firm’s management
team has some “catching up” to do to be more competitive
and to improve the execution of your strategy.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc.
5–57
 More Questions for Simulation
Company Co-Managers
• Have you studied how many rivals are pursuing a competitive strategy similar to
your firm’s strategy and are thus in the same strategic group as your company?
• Which company or companies in your strategic group are performing the best?
• Do you regularly check the Comparative Competitive Efforts Report to discover
what these rivals did in the prior year to fine-tune or overhaul their competitive
strategies from the year before? Did some rivals make better adjustments than
your company?
• Are there too many rivals in your strategic group targeting much the same buyer
segment? If so, is this causing segment overcrowding and splintered profits?
Should your company to consider changing to a different strategic group?
• Which rivals have obscure or muddled or unclear strategies—perhaps because
their management teams are pursuing inconsistent or confused actions or are
changing strategies every year (because the strategies they have pursued have
produced weak results)?
• Are firms with shifting or unclear strategies likely to keep experimenting until
they find a strategy that works well enough to stick with for a while? Are there
any obvious changes in competitive efforts these companies should make?
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc.. 5–58
A Couple of Suggestions for Simulation Company
Co-Managers
• After each decision round, closely study the data in the Comparative
Competitive Efforts section of the Competitive Intelligence Reports to learn:
• The number of rivals that appear to be pursuing low-cost, differentiation,
best-cost, and focus strategies—and those whose strategies are unclear
• Be sure to zero in on how those firms with a strategy similar to yours (and in
your strategic group) differed in their respective levels of effort on the various
competitive factors. Pay particular attention to the sizes of your company’s
competitive advantages and disadvantages on the various competitive
factors.
• Check to see what rivals (those in your strategic group and the industry’s top
performers) did in the prior year to fine-tune or overhaul their competitive
strategies in an effort to improve overall performance.—but most particularly
those companies pursuing much the same competitive strategy as your
company. Identify the rival in your strategic group that made the “best”
adjustments. The worst adjustments. Identify the company in the industry
that made the biggest improvement in performance and what competitive
factors caused this improvement.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc.. 5–59
 Tips for Company Co-Managers

• Commit to a basic competitive strategy and aggressively

pursue the competitive advantage potential it offers.
• Avoid “getting stuck in the middle” by mixing the five
strategies and not achieving a clear-cut competitive edge.
• Consider switching to a different strategy if:
• “Too many” rivals have adopted much the same strategy and your
firm finds itself in a strategic group that is “overcrowded”

• Rivals pursuing much the same strategy as your firm are effectively
blocking your company’s path to achieving better overall business
results

• Opportunities are more promising in a different strategic group

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–60

 Successful Competitive Strategies Are Always
Underpinned by Resources and Capabilities That
Allow the Strategy to Be Well-Executed
• Successful strategies rely on an appropriate set of
resources, know-how, and competitive capabilities
• A low-cost provider must have the resource strengths and
capabilities to keep costs below those of competitors.
• To pursue a differentiation strategy, a firm must have the resources
and capabilities to incorporate unique attributes into its product
offering that buyers will find appealing, valuable, and worth paying
for.
• Focus strategies require the resources and capabilities to
outcompete rivals in satisfying the needs and expectations of buyers
in the target market niche.
• A best-cost strategy requires the resources and capabilities to
incorporate upscale attributes/features at a lower cost than rivals.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–61
 Core Concept

A company’s competitive strategy is unlikely to

result in good performance or sustainable
competitive advantage unless the company has a
competitively potent collection of resources and
capabilities that enable the company to execute its
strategy with great proficiency.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–62

 Accessibility Content: Text Alternatives for Images

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 5–63

 Figure 5.1 The Five Generic Competitive Strategies, Text
Alternative
Return to parent slide

The illustration lists two types of competitive advantages being pursued:

lower cost and differentiation. It also lists two market targets: a broad
cross-section of buyers, and a narrow buyer segment (or market niche).
The combination of these types creates the five generic strategies:
1. Overall low-cost provider strategy (lower cost or a broad cross-section
of buyers)
2. Focused low-cost strategy (lower cost or a narrow buyer segment)
3. Broad differentiation strategy (differentiation or a broad cross-section of
buyers)
4. Focused differentiation strategy (differentiation or a narrow buyer
segment)
5. Best-Cost Provider strategy (an equal balance of competitive
advantages and market targets)

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. Return to parent slide
5–64
 Figure 5.2 Cost Drivers: The Keys to Driving Down Costs,
Text Alternate
Return to parent slide

The cost drivers are:

• Outsourcing or vertical integration.
• Economies of scale.
• Learning and experience.
• Capacity utilization.
• Raw materials and components.
• Bargaining power vis a vis suppliers.
• Supply chain efficiency.
• Labor efficiency, pay scales, and incentives.
• Product design and production technology.
• Online systems and software.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. Return to parent slide 5–65
 FIGURE 5.3 Value Drivers—Keys to Successful Differentiation, Text
Alternate
Return to parent slide

The value drivers are:

• Product features and performance.
• Inputs and activities that improve product quality and reliability.
• New product research and development and product innovation.
• Production research and development and breakthrough production
techniques.
• Wide product selection.
• Customer service.
• Employee skills, training, experience.
• Marketing, advertising, and brand-building.
• Distribution activities.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. Return to parent slide. 5–66