Chapter 5. The Five Generic Competitive Strategies.

A company’s competitive strategy deals exclusively with the specifics of

management’s game plan for competing successfully.
The chances are remote that any two companies (even companies in the same
industry) will employ competitive strategies that are exactly alike in
every detail. The two biggest factors that distinguish one competitive strategy from
another boil down to:
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.
These two factors give rise to five competitive strategy options,
1. A low-cost provider strategy. Striving to achieve lower overall costs than
rivals on comparable products that attract a broad spectrum of buyers,
usually by underpricing rivals.
2. A broad differentiation strategy. Seeking to differentiate the company’s
product offering from rivals’ products by offering superior attributes that will
appeal to a broad spectrum of buyers.
3. A focused low cost strategy. Concentrating on a narrow buyer segment
(or market niche) and outcompeting rivals on costs, thus being able to serve
niche members at a lower price.
4. A focused differentiation strategy. Concentrating on a narrow buyer
segment (or market niche) and outcompeting rivals on costs, thus being
able to serve niche members
at a lower price.
5. A best cost provider strategy. Giving customers more value for their
money by satisfying buyers’ expectations on key quality, features,
performance, and/or service attributes while beating their price expectations.
This option is a hybrid strategy that blends elements of low-cost provider
and differentiation strategies; the aim is to have the lowest (best) costs and
prices among sellers offering products with comparable differentiating
attributes.
A company achieves low-cost leadership when it becomes the industry’s lowest-
cost provider rather than just being one of perhaps several competitors with
comparatively low costs.
A company has two options for translating a low-cost advantage over rivals into
attractive profit performance.
Option 1 is to use the lower-cost edge to underprice competitors and attract
price-sensitive buyers in great enough numbers to increase total profits.
 Option 2 is to maintain the present price, be content with the present market
share, and use the lower-cost edge to earn a higher profit margin on each unit
sold, thereby raising the firm’s total profits and overall return on investment.

A low-cost provider strategy becomes increasingly appealing and competitively

powerful when:
1. Price competition among rival sellers is vigorous.
2. The products of rival sellers are essentially identical and readily available
from
many eager sellers.
3. It is difficult to achieve product differentiation in ways that have value to
buyer.
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching their purchases from one seller to
another.

Perhaps the biggest mistake a low-cost provider can make is getting carried away
with overly aggressive price cutting. Higher unit sales and market shares do not
automatically translate into higher profits.
A second pitfall is relying on an approach to reduce costs that can be easily
copied by rivals. If rivals find it relatively easy or inexpensive to imitate the leader’s
low-cost methods, then the leader’s advantage will be too short-lived to yield a
valuable edge in the marketplace.
A third pitfall is becoming too fixated on cost reduction. Low costs cannot be
pursued so zealously that a firm’s offering ends up being too feature-poor to
generate buyer appeal.

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.
The strategy achieves its aim when an attractively large number of buyers find the
customer value proposition appealing and become strongly attached to a
company’s differentiated attributes.
Differentiation enhances profitability whenever a company’s product can command
a sufficiently higher price or produce sufficiently bigger unit sales to more than
cover the added costs of achieving the differentiation. Company differentiation
strategies fail when buyers don’t value the brand’s uniqueness sufficiently and/or
when a company’s approach to differentiation is easily matched by its rivals.
The most systematic approach that managers can take, however, involves
focusing on the value drivers, a set of factors (A value driver is a factor that can
have a strong differentiating effect) Ways that managers can enhance
differentiation based on value drivers include the following:
1. Create product features and performance attributes that appeal to a wide
range of buyers.
 2. Improve customer service or add extra services.
3. Invest in production-related R&D activities.
4. Strive for innovation and technological advances.
5. Pursue continuous quality improvement.
6. Increase marketing and brand-building activities.
7. Seek out high-quality inputs.
8. Emphasize human resource management activities that improve the skills,
expertise, and knowledge of company personnel.
Differentiation strategies depend on meeting customer needs in unique ways or
creating new needs through activities such as innovation or persuasive advertising.
The objective is to offer customers something that rivals can’t. There are four basic
routes to achieving this aim.
The first route is to incorporate product attributes and user features that lower the
buyer’s overall costs of using the company’s product. Producers of materials and
components often win orders for their products by reducing a buyer’s raw-material
waste (providing cut-to-size components), reducing a buyer’s inventory
requirements (providing just-in-time deliveries), using online systems to reduce a
buyer’s procurement and order processing costs, and providing free
technical support. A second route is to incorporate tangible features that increase
customer satisfaction with the product, such as product specifications, functions,
and styling. A third route to a differentiation-based competitive advantage is to
incorporate intangible features that enhance buyer satisfaction in noneconomic
ways. The fourth route is to signal the value of the company’s product offering to
buyers. Typical signals of value include a high price (in instances where high price
implies high quality and performance), more appealing or fancier packaging than
competing
products, ad content that emphasizes a product’s standout attributes, the quality of
brochures and sales presentations, and the luxuriousness and ambience of a
seller’s facilities (important for high-end retailers and for offices or other facilities
frequented by customers).
Differentiation strategies can fail for any of several reasons. A differentiation
strategy keyed to product or service attributes that are easily and quickly copied is
always suspect.
Differentiation strategies can also falter when buyers see little value in the unique
attributes of a company’s product.
The third big pitfall is overspending on efforts to differentiate the company’s
product offering, thus eroding profitability.
A focused strategy based on low cost aims at securing a competitive advantage by
serving buyers in the target market niche at a lower cost and lower price than those
of rival competitors. This strategy has considerable attraction when a firm can
lower costs significantly by limiting its customer base to a well-defined buyer
segment.
A focused strategy aimed at securing a competitive edge based on either low costs
or differentiation becomes increasingly attractive as more of the following
conditions are met:
1. The target market niche is big enough to be profitable and offers good
growth potential.
2. Industry leaders have chosen not to compete in the niche—in which case
focusers can avoid battling head to head against the industry’s biggest and
strongest competitors.
3. It is costly or difficult for multisegment competitors to meet the specialized
needs of niche buyers and at the same time satisfy the expectations of their
mainstream customers.
The advantages of focusing a company’s entire competitive effort on a single
market niche are considerable, especially for smaller and medium-sized
companies that may lack the breadth and depth of resources to tackle going after a
broader customer base with a more complex set of needs. YouTube has become a
household name by concentrating on short video clips posted online. Papa John’s
and Domino’s Pizza have created impressive businesses by focusing on the home
delivery segment.
Best-cost provider strategies stake out a middle ground between pursuing a low-
cost advantage and a differentiation advantage and between appealing to the
broad market as a whole and a narrow market niche.
The essence of a best-cost provider strategy is giving customers more value for
the money by satisfying buyer desires for appealing features and charging a lower
price for these attributes compared to rivals with similar- caliber product offerings.
To profitably employ a best-cost provider strategy, a company must have the
capability to incorporate upscale attributes into its product offering at a lower cost
than rival.
The target market for a bestcost provider is value-conscious buyers. Buyers who
are looking for appealing extras and functionality at a comparatively low price.
Value-hunting buyers (as distinct from price-conscious buyers looking for a basic
product at a bargain-basement price) often
constitute a very sizable part of the overall market for a product or service.
A company’s biggest vulnerability in employing a best-cost provider strategy is
getting squeezed between the strategies of firms using low-cost and high-end
differentiation strategies. Low-cost providers may be able to siphon customers
away with the appeal of a lower price (despite less appealing product attributes).
High-end differentiators may be able to steal customers away with the appeal of
better product attributes (even though their products carry a higher price tag).
Deciding which generic competitive strategy should serve as the framework on
which to hang the rest of the company’s strategy is not a trivial matter. Each of the
five generic competitive strategies positions the company differently in its market
and competitive environment. Each establishes a central theme for how the
company will endeavor to outcompete rivals. Each creates some boundaries or
guidelines for maneuvering as market circumstances unfold and as ideas for
improving the strategy are debated. Each entails differences in terms of product
line, production emphasis, marketing emphasis, and means of maintaining the
strategy.