Chapter 5

Report
Chapter 5
The Five Generic
Competitive
Strategies
McGraw-Hill/Irwin
Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved.
Competitive Strategy
 Deals exclusively with management’s
game plan for competing successfully
and securing a competitive advantage
over rivals
Specific efforts to give customers
superior value
– A good product at a lower price
– A superior product worth paying more
for
– An attractive mix of price, features,
quality, service, and other appealing
attributes
5-2
Competitive Strategies and Industry
Positioning
5-3
Figure 5.1: The Five Generic
Competitive Strategies
Type of Advantage Sought
Market Target
Lower Cost
Broad
Range of
Buyers
Narrow
Buyer
Segment
or Niche
McGraw-Hill/Irwin
Differentiation
Overall Low-Cost
Broad
Provider
Differentiation
Strategy
Strategy
Stuck in
the
middle
Focused
Focused
Low-Cost
Differentiation
Strategy
Strategy
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
4
Perils of “Stuck in the Middle”
Strategy
 Compromise strategies end up with a
middle-of-the-pack industry rankings
and provide for average performance




An average cost structure
Minimal product differentiation relative to rivals
An average image and reputation
Limited prospect of industry leadership
 Compromise or middle-ground strategies
rarely produce sustainable
competitive advantage
5-5
Low Cost Provider Strategies
 Powerful competitive approach
with price-sensitive buyers
 Have lower costs than rivals—but not
necessarily the absolutely lowest possible
cost
 Must include features and services that
buyers consider essential
 Must not be viewed by consumers as
offering little value even if priced lower than
competing products.
5-6
Translating a Low Cost Strategy Into
Attractive Profit Performance
 Option 1: Use
lower-cost edge
to under-price competitors
and increase market share
 Option 2: Maintain present price, be
content with present market share,
and use lower-cost edge to earn a
higher profit margin on each unit sold
5-7
Approaches to Achieving Low Costs
1. Perform essential value
chain activities more costeffectively than rivals
2. Revamp the firm’s overall
value chain to eliminate or
bypass some costproducing activities
altogether
5-8
When a Low Cost Strategy Works
Best
 Price competition is vigorous
 Product is standardized
 There are few ways to achieve
differentiation
 Buyers incur low switching costs
 Buyers are large and have significant
bargaining power
 Industry newcomers use introductory
low prices to attract buyers and build
customer base
5-9
Hazards of a Low-Cost Strategy
 Cutting price by an amount greater than
size of cost advantage
 Low cost methods are easily imitated
 Becoming too fixated on reducing
costs and ignoring
 Buyer interest in additional features
 Declining buyer sensitivity to price
 Technological breakthroughs open up
cost reductions for rivals
5-10
Differentiation Strategies
 Powerful competitive approach
whenever buyers’ needs and
preferences are too diverse to be
fully satisfied by a standardized
product or service
5-11
Differentiation Strategies
 Incorporate differentiating features that
cause buyers to prefer firm’s
product or service over brands of
rivals
 Not spending more to achieve
differentiation than the price
premium that customers are
willing to pay for all
the differentiating extras
5-12
Benefits of Successful
Differentiation
Successfully executed
differentiation strategies
allow a company to:
 Command a premium
price, and/or
 Increase unit sales,
and/or
 Gain buyer loyalty to its
brand
5-13
Types of Differentiation Themes
 Unique taste – Dr. Pepper
 Multiple features – Microsoft Windows and
Office
 Wide selection – Amazon.com
 Superior service – Ritz-Carlton
 Spare parts availability – Caterpillar
 Engineering design and performance – BMW
 Prestige – Rolex
 Product reliability – Johnson & Johnson
 Quality manufacture – Toyota
 Top-of-line image – Ralph Lauren, Starbucks,
Chanel
5-14
Creating Value for Customers
through Differentiation
 Incorporate product features/attributes
that lower buyer’s overall costs of
using product
 Incorporate features/attributes that raise
the performance a buyer gets out of
the product
 Incorporate features/attributes that
enhance buyer satisfaction in noneconomic or intangible ways
 Exploit competencies and competitive
capabilities that rivals don’t have or
can’t match
5-15
Where to Find Opportunities to
Differentiate
 Supply chain activities
 Product R&D and product
design activities
 Production R&D and
technology-related activities
 Manufacturing activities
 Distribution-related activities
 Marketing, sales, and customer service
activities
5-16
Perceived Value and Signaling
 The price premium commanded by
a differentiation strategy reflects
actual value delivered and value
perceived by the buyer.
 Buyers seldom pay
for value that is
not perceived
5-17
Perceived Value and Signaling
 Important to signal
value when:
 Nature of differentiation is
subjective
 When buyers are making
first-time purchases
 When repurchase is
infrequent
 When buyers are
unsophisticated
5-18
Market Conditions Favoring a
Differentiation Strategy
 There are many ways to differentiate a
product that have value and please
customers
 Buyer needs and uses are diverse
 Few rivals are following a similar
differentiation approach
 Technological change and
product innovation are fast-paced
5-19
Hazards of a Differentiation Strategy
 Buyers see little value in a product’s
unique attributes
 Appealing product features are easily
copied by rivals
 Overspending on efforts to differentiate
5-20
Hazards of a Differentiation Strategy
 Overdifferentiating such
that product
features exceed buyers’
needs
 Charging a price premium
buyers perceive is too
high
 Failing to open up
meaningful gaps in
product or service
attributes
5-21
Focused Low-Cost Strategy
 Reflects a concentration on a
narrow piece of the total market defined by geographic uniqueness
or special product attributes
 Avenues to achieving cost
advantage are the same as for lowcost leadership—outmanage rivals
in keeping costs low and bypassing
or reducing nonessential activities
5-22
Focused Differentiation Strategy
 Keyed to offering
carefully designed
products or services
to appeal to the
unique preferences
and needs of a
narrow, well-defined group of
buyers
5-23
Market Conditions Making a
Focused Strategy Viable
 The target niche is big enough to be
profitable and offers good growth potential
 Industry leaders have chosen not to compete
in the niche
 It is costly or difficult for multisegment
competitors to meet the specialized needs of
niche buyers
 Industry has many niches and segments
 Few rivals are attempting to specialize in the
niche
5-24
Hazards of a Focused Strategy
 Competitors find effective ways to match
a focuser’s capabilities in serving niche
 Niche buyers’ preferences shift towards
product attributes desired by majority of
buyers
 Segment becomes so attractive it
becomes crowded with rivals, causing
segment profits to be splintered
5-25
Successful Strategies Must Be WellMatched to Resources and Capabilities
 Low-Cost Providers
 Must have the resources and capabilities to
keep its costs below those of its competitors
 Must have expertise to cost-effectively
manage value chain activities better than
rivals
 Differentiators
 Must have the resources and capabilities to
incorporate unique attributes that a broad
range of buyers will find appealing and
worth paying for
5-26
Successful Strategies Must Be WellMatched to Resources and Capabilities
 Narrow Segment Focusers
 Must have the capability to do an
outstanding job of satisfying the needs and
expectations of niche buyers
5-27

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