chapter 5
The Five Generic
Competitive Strategies
Learning Objectives
TYPES OF GENERIC COMPETITIVE
STRATEGIES
• A company’s competitive strategy lays out the specific efforts of the
company to position itself in the marketplace, please customers, ward off
competitive threats, and achieve a particular kind of competitive
advantage.
• Two factors need to consider –
(1) whether a company’s market target is broad or narrow and
(2) whether the company is pursuing a competitive advantage linked to
lower costs or differentiation.
BROAD LOW-COST
STRATEGIES
• The essence of a broad, low-cost strategy is to produce goods or services
for a broad base of buyers at a lower cost than rivals.
• The Two Major Avenues for Achieving a Cost Advantage
1. Perform internal value chain activities and/or value chain system activities
more cost-effectively than rivals.
2. Revamp the firm’s overall value chain to eliminate or bypass some cost
producing activities.
Revamping of the Value Chain System to
Lower Costs
• Selling direct to consumers and bypassing the activities and costs of
distributors and dealers
• Streamlining operations by eliminating low-value-added or unnecessary
work steps and activities.
• Reducing materials-handling and shipping costs by having suppliers locate
their plants or warehouses close to the company’s own facilities
BROAD LOW-COST STRATEGIES
• The Keys to a Successful Broad Low-Cost Strategy
- continuously invest in complex, cost-saving technologies that are hard for rivals
to match
- an innovative business model
• When a Low-Cost Strategy Works Best
- Price competition among rival sellers is vigorous.
- The products of rival sellers are essentially identical and readily available from
many eager sellers
- There are few ways to achieve product differentiation that have value to buyers
- Buyers incur low costs in switching their purchases from one seller to another
- Buyers are price-sensitive or have the power to bargain down prices
BROAD LOW-COST
STRATEGIES
• Pitfalls to Avoid in Pursuing a Low-Cost Strategy
- overly aggressive price cutting
- relying on cost reduction approaches that can be easily copied by
rivals.
- becoming too fixated on cost reduction
BROAD DIFFERENTIATION
STRATEGIES
• The essence of a broad differentiation strategy is to offer unique
product attributes that a wide range of buyers find appealing and
worth paying more for.
• Successful differentiation allows a firm to do one or more of the
following:
• Command a premium price for its product.
• Increase unit sales (because additional buyers are won over by the
differentiating features).
• Gain buyer loyalty to its brand
BROAD DIFFERENTIATION
STRATEGIES
• Differentiation opportunities can exist in activities all along a
company’s value chain and value chain system.
• A value driver is a factor that is particularly effective in creating
differentiation.
BROAD DIFFERENTIATION STRATEGIES
• Revamping the Value Chain System to Increase Differentiation
• Coordinating with downstream channel allies to enhance customer value
• Coordinating with suppliers to better address customer needs
• Delivering Superior Value via a Broad Differentiation Strategy
• There are four basic routes to achieving the level of satisfaction through
differentiation
• Incorporate product attributes and user features that lower the buyer’s overall
costs of using the company’s product
• Incorporate tangible features that increase customer satisfaction with the
product
• Incorporate intangible features that enhance buyer satisfaction in noneconomic
ways.
• signal the value of the company’s product offering to buyers
BROAD DIFFERENTIATION
STRATEGIES
When a 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
BROAD DIFFERENTIATION
STRATEGIES
• Pitfalls to Avoid in Pursuing a Differentiation Strategy
Common mistakes in crafting a differentiation strategy include
- product or service attributes that are easily and quickly copied.
- When buyers see little value in the unique attributes of a company’s product.
- Overspending on efforts to differentiate the company’s product offering
- Offering only trivial improvements in quality, service, or performance features
visà-vis rivals’ products
- Over-differentiating so that product quality, features, or service levels exceed
the
needs of most buyers
- Charging too high a price premium.
FOCUSED (OR MARKET NICHE)
STRATEGIES
• A Focused Low-Cost Strategy
• A Focused Differentiation Strategy
• When a Focused Low-Cost or Focused Differentiation Strategy Is
Attractive
• The Risks of a Focused Low-Cost or Focused Differentiation
Strategy
BEST-COST (HYBRID)
STRATEGIES
• Best-cost strategies are a hybrid of low-cost and differentiation
strategies, incorporating features of both simultaneously.
• When a Best-Cost Strategy Works Best
• The Risk of a Best-Cost Strategy
THE CONTRASTING FEATURES OF
THE
GENERIC COMPETITIVE
STRATEGIES
• A company’s competitive strategy should be well matched to its
internal situation and based on leveraging its collection of
competitively valuable resources and capabilities.
• Table 5.1 Distinguishing Features of the Five Generic Competitive
Strategies