CHAPTER 5

THE FIVE GENERIC

COMPETITIVE
STRATEGIES: WHICH ONE
TO EMPLOY?
1. Understand what distinguishes each of the five
generic strategies and why some of these strategies
work better in certain kinds of industry and
competitive conditions than in others.
2. Understand the major avenues for achieving
a competitive advantage based on lower costs.
3. Learn the major avenues to a competitive advantage
based on differentiating a company’s product or
service offering from the offerings of rivals.
4. Understand the attributes of a focused strategy.
5. Recognize the attributes of a best-cost provider
strategy.
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WHY DO STRATEGIES DIFFER?

Is the firm’s target market

broad or narrow?
Key factors that
distinguish one
strategy
from another
Is the competitive advantage
pursued linked to low costs
or product differentiation?

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 THE FIVE GENERIC
COMPETITIVE STRATEGIES
Low-Cost Striving to achieve lower overall costs than rivals on
Provider products that attract a broad spectrum of buyers.

Broad Differentiating the firm’s product offering from rivals’ with

Differentiation attributes that appeal to a broad spectrum of buyers.

Focused Concentrating on a narrow price-sensitive buyer

Low-Cost segment and on costs to offer a lower-priced product.

Focused Concentrating on a narrow buyer segment by meeting

Differentiation specific tastes and requirements of niche members

Best-Cost Giving customers more value for the money by offering

Provider upscale product attributes at a lower cost than rivals

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FIGURE 5.1 The Five Generic Competitive Strategies

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 LOW-COST PROVIDER STRATEGIES

◆ Effective Low-Cost Approaches:

● Pursue cost-savings that are difficult to imitate.

● Avoid reducing product quality to unacceptable levels.

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 LOW-COST PROVIDER STRATEGIES

◆ A company has Two Options for Translating a

Low-Cost Advantage into Attractive Profit
Performance:
● Underpricing Competitors: Greater total profits and
increased market share gained from underpricing
competitors.
Low pricing does not always attract enough new buyers.
Rival’s retaliatory price cutting set off a price war.

● Maintaining the Present Price: Larger profit margins

when selling products at prices comparable to and
competitive with rivals.
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CORE CONCEPT
♦ A low-cost provider’s basis for competitive
advantage is lower overall costs than competitors.
Successful low-cost leaders, who have the
lowest costs in the industry, are exceptionally
good at finding ways to drive costs out of their
businesses and still provide a product or service
that buyers find acceptable.
♦ A cost driver is a factor that has
a strong influence on a firm’s costs.

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 MAJOR AVENUES FOR ACHIEVING
A COST ADVANTAGE

◆ How to Gain a Low-cost Advantage:

Two Major Avenues:

1. Perform value chain activities more cost-effectively

than rivals.

2. Revamp the firm’s overall value chain to eliminate or

bypass cost-producing activities.

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 COST-EFFICIENT MANAGEMENT
OF VALUE CHAIN ACTIVITIES

◆ Managers must launch a concerted and

ongoing efforts to cut costs in every part of the
value chain.

◆ In particular, attention needs to be paid to cost

drivers which have a strong influence on a
firm’s costs.

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FIGURE 5.2 Cost Drivers: The Keys to Driving Down Company Costs

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 COST-CUTTING METHODS

◆ Striving to capture economies of scale.

❖ Economies of scale are unit cost reductions

associated with a large scale of output.

❖ Diseconomies of scale refer to the increase of unit

cost associated with a large scale of output.

❖ Diseconomies of scale occur primarily because of

increased bureaucracy associated with large-scale
enterprises and the managerial inefficiencies that
can result.
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 COST-CUTTING METHODS

◆ Taking full advantage of learning and experience-curve

effects.

Learning effects are cost savings that come from learning

by doing. Labor, for example, learns by repetition how to best
carry out a task.

The experience curve a concept that states that there is a

consistent relationship between the cumulative production
quantity of a company and the cost of production.

The concept implies that the more experienced a company is

in manufacturing a specific product, the lower its cost of
production. In other words, the more a firm produces of a
particular good or service, the more it gains efficiency.
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 COST-CUTTING METHODS

◆ Trying to operate facilities at full capacity.

● (Depreciation and other fixed costs can be spread over larger
number of units)

◆ Improving supply chain efficiency.

● (Partnering with suppliers, JIT to reduce carrying cost,
economizing shipping and materials handling)

◆ Using lower cost inputs wherever doing so will not entail

too great a sacrifice in quality.
● (Nonunionized labor, a location with lower rental fee)

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 COST-CUTTING METHODS

◆ Using the firm’s bargaining power vis-à-vis suppliers or

others in the value chain system to gain concessions.
● (Bargaining with suppliers to win price discount on large-volume
purchase)

◆ Using communication systems and information

technology to achieve operating efficiencies.
● [Sharing data and production schedules with suppliers along
with the use of enterprise resource planning (ERP),
manufacturing execution system (MES) software]

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 COST-CUTTING METHODS (cont’d)
◆ Employing advanced production technology and
process design to improve overall efficiency.
● (Lean production system, flexible manufacturing system,
automated robotic production technology, CAD, TQM, business
process reengineering, six sigma methodology)

◆ Being alert to the cost advantages of outsourcing or

vertical integration.

◆ Motivating employees through incentives and company

culture.
● (Rewarding greater worker productivity and cost-saving
innovations)

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Six Sigma and Normal Distribution
 REVAMPING THE VALUE CHAIN
SYSTEM TO LOWER COSTS

◆ Use a direct sales force and a company website

to bypass the activities and costs of distributors
and dealers.
● (Sometimes, use of intermediaries represents 35 to 50% of the
price paid by final consumers)

◆ Streamline operations by eliminating low

value-added or unnecessary work steps and
activities.
● (At Walmart, some items supplied by manufacturers are
delivered directly to retail stores rather than being routed
through Walmart’s distribution centers and delivered by their
trucks)
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 REVAMPING THE VALUE CHAIN
SYSTEM TO LOWER COSTS

◆ Reduce materials handling and shipping costs

by having suppliers locate their plants or
warehouses close to the firm’s own facilities.

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STRATEGIC MANAGEMENT PRINCIPLE

♦ Success in achieving a low-cost edge over

rivals comes from finding ways to perform
value chain activities faster, more accurately,
and more cost-effectively.

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 WHEN A LOW-COST PROVIDER
STRATEGY WORKS BEST
1. Price competition among rival sellers is vigorous.
(Competitors are in price war; customers are price sensitive; the
appeal of lower price should be used to grab sales)
2. Identical products are available from many sellers.
3. There are few ways to differentiate industry products.
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching among sellers.
6. The majority of industry sales are made to a few, large
volume buyers.
7. New entrants can use introductory low prices to attract
buyers and build a customer base.
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 PITFALLS TO AVOID IN PURSUING
A LOW-COST PROVIDER STRATEGY
◆ Engaging in overly aggressive price cutting does not
result in unit sales gains large enough to recoup
forgone profits.
◆ Relying on a cost advantage that is not sustainable
because rival firms can easily copy or overcome it.
◆ Becoming too fixated on cost reduction such that the
firm’s offering is too features-poor to gain the interest
of buyers.
◆ Having a rival discover a new lower-cost value chain
approach or develop a cost-saving technological
breakthrough.

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STRATEGIC MANAGEMENT PRINCIPLE

♦ 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.

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 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 firm’s products

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CORE CONCEPTS
♦ 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.
♦ A uniqueness driver is a factor that can have
a strong influence on differentiation.

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FIGURE 5.3 Uniqueness Drivers: The Keys to Creating a Differentiation Advantage

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 ENHANCING DIFFERENTIATION BASED
ON UNIQUENESS DRIVERS
◆ Striving to create superior product features, design, and
performance.
(aesthetic features, added customer safety, enhanced environmental
protection, greater recycling capacity, energy saving features)

◆ Improving customer service or adding additional services.

(Superior technical assistance to buyers, higher-quality maintenance
services, better credit terms, quicker order processing, or greater customer
convenience)

◆ Pursuing production R&D activities.

(flexible manufacturing system, custom-made manufacturing, wider range of
products, increased quality of products, safer production system,
eco-friendly manufacturing system, eco-friendly products)

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 ENHANCING DIFFERENTIATION BASED
ON UNIQUENESS DRIVERS
◆ Striving for innovation and technological advances.
(Innovation proves hard to replicate due to patent protection)

◆ Pursuing continuous quality improvement.

(TQM, Quality Control Processes for reducing defective rates of
products, preventing premature product failure, and extending
product life)

◆ Increasing emphasis on marketing and brand-building activities.

◆ Seeking out high-quality inputs.

● For example, Starbucks has very strict specifications on the
coffee beans purchased from suppliers.
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 ENHANCING DIFFERENTIATION BASED
ON UNIQUENESS DRIVERS

◆ Emphasizing human resource management activities that improve

the skills, expertise, and knowledge of company personnel.
● A high-caliber intellectual capital has the capacity to generate
ideas that drive innovation, technological advances, improved
production techniques, better product design and product
performance.

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REVAMPING THE VALUE CHAIN
SYSTEM TO INCREASE
DIFFERENTIATION

Coordinating with channel

allies to enhance customer
Approaches
perceptions of value
to enhancing
differentiation
through changes
in the value chain
Coordinating with suppliers
system to better address customer
needs

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Delivering Superior Value via a
Broad Differentiation Strategy

Broad Differentiation:
Offering Customers Something That Rivals Cannot

Incorporate product attributes and user features that lower

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

Incorporate tangible features (e.g., styling) that increase

2. customer satisfaction with the product.

Incorporate intangible features (e.g., buyer’s image) that

3. enhance buyer satisfaction in noneconomic ways.

Signal the value of the firm’s product (e.g., price, packaging,

4. placement, advertising) offering to buyers.

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 SUCCESSFUL APPROACHES
TO SUSTAINABLE DIFFERENTIATION

◆ Differentiation that is difficult for rivals to

duplicate or imitate:
● Company reputation for superior product quality and
reliability
● Long-standing relationships with buyers
● Well-established brand image
● Technological superiority
● Differentiation that creates switching costs high for
buyers
● Patent-protected product innovation

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 WHEN A DIFFERENTIATION
STRATEGY WORKS BEST

Market Circumstances
Favoring Differentiation

Diversity of Many ways that Rapid change

Rival firms follow
buyer needs differentiation in technology
differentiation
for can have value and product
approach
the product to buyers features

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 PITFALLS TO AVOID IN PURSUING
A DIFFERENTIATION STRATEGY
◆ Relying on product attributes easily copied by rivals.
◆ Introducing product attributes that do not evoke an
enthusiastic buyer response.
◆ Eroding profitability by overspending on efforts to
differentiate the firm’s product offering.
◆ Offering only trivial improvements in quality, service, or
performance features vis-à-vis the products of rivals.
◆ Adding frills and features such that the product exceeds
the needs and use patterns of most buyers.
◆ Charging too high a price premium.

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FOCUSED (OR MARKET NICHE)
STRATEGIES

Focused Strategy
Approaches

Focused Focused
Low-Cost Market Niche
Strategy Strategy

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 Focused Low-Cost Strategy

♦ A focused low-cost strategy aims at securing a

competitive advantage by serving buyers in the target
market niche at a lower cost (and usually lower price)
than those of rival competitor.
♦ The avenues to achieving a cost advantage over rivals
also serving the target market niche are the same as
those for broad low-cost leadership—use the cost
drivers to perform value chain activities more efficiently
than rivals and search for innovative ways to bypass
nonessential value chain activities.
 Focused Differentiation Strategy

♦ Differentiation strategies involve offering superior

products or services tailored to the unique preferences
and needs of a narrow, well-defined group of buyers.
♦ Successful use of a focused differentiation strategy
depends on
1. the existence of a buyer segment that is looking for
special product or service attributes and
2. a firm’s ability to create a product or service offering
that stands apart from that of rivals competing in the
same target market niche.
 WHEN A FOCUSED LOW-COST OR
FOCUSED DIFFERENTIATION
STRATEGY IS ATTRACTIVE
◆ The target market niche is big enough to be profitable
and offers good growth potential.
◆ Industry leaders have chosen not to compete in the
niche—focusers avoid competing against strong
competitors
◆ It is costly or difficult for multi-segment competitors to
meet the specialized needs of niche buyers.
◆ The industry has many different niches and segments.
◆ Rivals have little or no interest in the target segment.

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THE RISKS OF A FOCUSED LOW-COST OR
FOCUSED DIFFERENTIATION STRATEGY

1. Competitors will find ways to match the focused

firm’s capabilities in serving the target niche.
2. The specialized preferences and needs of
niche members to shift over time toward the
product attributes desired by the majority of
buyers.
3. As attractiveness of the segment increases, it
draws in more competitors, intensifying rivalry
and splintering segment profits.

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 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

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CORE CONCEPT
♦ Best-cost provider strategies are a hybrid of
low-cost provider and differentiation strategies
that aim at providing desired quality/features/
performance/service attributes while beating
rivals on price.

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 WHEN A BEST-COST PROVIDER
STRATEGY WORKS BEST

◆ Product differentiation is the market norm.

◆ There are a large number of value-conscious
buyers who prefer midrange products.
◆ There is competitive space with either a
medium-quality product at a below-average
price or a high-quality product at an average or
slightly higher price.
◆ Economic conditions have caused more buyers
to become value-conscious.

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 THE BIG RISK OF A BEST-COST
PROVIDER STRATEGY—GETTING
SQUEEZED ON BOTH SIDES

Best-Cost
Low-Cost High-End
Provider
Providers Differentiators
Strategy

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TABLE 5.1 Distinguishing Features of the Five Generic Competitive Strategies

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TABLE 5.1 Distinguishing Features of the Five Generic Competitive Strategies (cont’d)

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 SUCCESSFUL COMPETITIVE
STRATEGIES ARE RESOURCE-BASED

◆ Sustaining a firm’s competitive advantage

depends on its resources, capabilities, and
competences that are difficult for rivals to
duplicate and have no good substitutes.

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THANK YOU….