Generic Strategies – Chapter 5

Low-Cost Provider
Refers to striving to achieve lower overall costs than rivals on products that attract a broad
spectrum of buyers, while avoiding reducing the quality to unacceptable levels.

Broad Differentiation
Refers to differentiating the firm’s product offering from rivals’ with attributes that appeal to
a broad spectrum of buyers.

Focused Low-Cost
Refers to 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.

Focused Differentiation
Refers to concentrating on a narrow buyer segment by meeting specific tastes and requirements
of niche members

Best-Cost Provider
Refers to 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.

Low-Cost Provider

To achieve a low-cost edge over rivals, a firm’s cumulative costs across its overall value
chain must be lower than competitors’ cumulative costs. There are two major avenues for
accomplishing this:
1. Perform value chain activities more cost-effectively than rivals.
2. Revamp the firm’s overall value chain to eliminate or bypass some cost- producing activities.

Cost-Efficient Management of Value Chain Activities

1. Capturing all available economies of scale.
2. Use lower-cost inputs and hold minimal assets
3. Offer only “essential” product features or services
4. Offer only limited product lines
5. Use low-cost distribution channels
6. Use the most economical delivery methods

Revamping the Value Chain System to Lower Costs

1. Bypass the activities and costs of distributors and dealers by selling directly to
consumers.
 2. Coordinate with suppliers to bypass activities,
3. speed up their performance, or otherwise increase overall efficiency.
4. Reduce handling and shipping costs by locating suppliers close to the firm’s own
facilities.

A low-cost provider strategy works best when

1. Price competition among rival sellers is vigorous
- Low-cost providers are in the best position to compete offensively on the basis of
price, to gain market share at the expense of rivals, to win the business of price-
sensitive buyers, to remain profitable despite strong price competition, and to
survive price wars

2. Products are readily available from many sellers

- Look-alike products and/or overabundant product supply set the stage for lively
price competition; in such markets, it is the less efficient, higher-cost companies
whose profits get squeezed the most.

3. Industry products are not easily differentiated

- When the differences between product attributes or brands do not matter much to
buyers, buyers are nearly always sensitive to price differences, and industry leading
companies tend to be those with the lowest-priced brands.

4. Most buyers use the product in the same ways

- With common user requirements, a standardized product can satisfy buyers’ needs,
in which case low price, not features or quality, becomes the dominant factor in
causing buyers to choose one seller’s product over another’s.

5. Buyers incur low costs in switching among sellers

- Low switching costs give buyers the flexibility to shift purchases to lower-priced
sellers having equally good products or to attractively priced substitute products. A
low-cost leader is well positioned to use low price to induce potential customers to
switch to its brand.

6. Large buyers have the power to bargain down prices

- When large buyers have the ability to bargain down prices it is best to use a low-
cost strategy because the buyers would not have to bargain as the prices are already
low. Higher-cost companies may not benefit from this as strong bargaining power
of buyers can hurt the company’s profits, since the prices or their products will drop.

7. New entrants in the market

- New entrants can use a low introductory price to attract buyers and build a customer
based. Thereby gaining brand loyal customers in the market.
Pros
1. Cost advantage of industry competitors
- Havin a lower cost than competitors mean that the firm can charge lower prices to
customers. Thus, gaining a loyal customer base.

2. Less affected by increased prices of inputs if there are powerful suppliers

3. Less affected by a fall in prices of inputs if there are powerful buyers

4. Purchases in large quantities increase bargaining power over suppliers

- When a firm purchases inputs in large quantities they have the ability to acquire
special discounts, due to economies of scale, therefore increasing bargaining power
against suppliers.

5. Low costs and prices are a barrier to entry

- New entrants may be hesitant to enter the market if the low-cost provider has strong
customer loyalty and has obtained most of the market share. They may find it
difficult to compete with such firms as they have high economies of scale.

6. Able to reduce price to compete with substitute products

Cons

1. Higher unit sales and market shares do not automatically translate into higher profits.
- A lower price improves profitability only if the lower price increases unit sales
enough to offset the loss in revenues due to a lower margin on each unit sold.
Lowering selling prices results in gains that are smaller than the increases in total
costs, reducing profits rather than raising them.

2. Not a sustainable competitive advantage

- 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. Relying on a cost advantage that is not sustainable because
rivals can copy or otherwise overcome it.

3. 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. Furthermore, a company driving hard to push
 down its costs has to guard against ignoring declining buyer sensitivity to price,
increased buyer interest in added features or service, or new developments that alter
how buyers use the product. Otherwise, it risks losing market ground if buyers start
opting for more upscale or feature-rich products.

Broad Differentiation
Effective Differentiation Approaches:
● Carefully study buyer needs and behaviours, values and willingness to pay 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.

Cost-Efficient Management of Value Chain Activities

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.
Revamping the Value Chain System to Lower Costs
1. Coordinating with channel allies to enhance customer value.
- Coordinating with downstream partners such as distributors, dealers, brokers, and
retailers can contribute to differentiation in a variety of ways. Coordinating with
retailers is important for enhancing the buying experience and building a company’s
image. Coordinating with distributors or shippers can mean quicker delivery to
customers, more accurate order filling, and/or lower shipping costs.

2. Coordinating with suppliers to better address customer needs.

- Coordinating and collaborating with suppliers can improve many dimensions
affecting product features and quality
Differentiation Strategy Works Best when:
1. Diversity of buyer needs and uses for the product
- Diverse buyer preferences allow industry rivals to set themselves apart with
product attributes that appeal to particular buyers. For instance, the diversity of
consumer preferences for menu selection, ambience, pricing, and customer service
gives restaurants exceptionally wide latitude in creating a differentiated product
offering.
 2. There are many ways to differentiate the product or service that have value to buyers
- For example, hotel chains can differentiate on such features as location, size of
room, range of guest services, in-hotel dining, and the quality and luxuriousness
of bedding and furnishings.
3. Few rival firms are following a similar differentiation approach

4. Technological change is fast-paced, and competition revolves around rapidly evolving

product features
- Rapid product innovation and frequent introductions of next-version products
heighten buyer interest and provide space for companies to pursue distinct
differentiating paths. Companies that fail to come up with new and improved
products and distinctive performance features quickly lose out in the marketplace.

Pros
1. Premium prices for products
2. Increased unit sales
3. Brand loyalty

Cons
1. Relying on product attributes easily copied by rivals.
2. Introducing product attributes that do not evoke an enthusiastic buyer response.
3. Eroding profitability by overspending on efforts to differentiate the firm’s product
offering.
4. Not opening up meaningful gaps in quality, service, or performance features vis-à-vis
the products of rivals.
5. Adding frills and features such that the product exceeds the needs and uses of most
buyers.
6. Charging too high a price premium.

Focused Strategies (Low-cost and differentiation)

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:

• 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—in which case focusers can
avoid battling head to head against the industry’s biggest and strongest competitors.

• It is costly or difficult for multisegmented competitors to meet the specialized needs of

niche buyers and at the same time satisfy the expectations of their mainstream customers.
 • The industry has many different niches and segments, thereby allowing a focuser to pick
the niche best suited to its resources and capabilities. Also, with more niches there is
more room for focusers to avoid competing for the same customers.

• Few if any rivals are attempting to specialize in the same target segment—a condition
that reduces the risk of segment overcrowding.

• The focuser has a reservoir of buyer goodwill and long-term loyalty.

Risks
 Competitors will find ways to match the focused firm’s capabilities in serving the target
niche.

 The specialized preferences and needs of niche members to shift over time toward the
product attributes desired by the majority of buyers.

 As attractiveness of the segment increases, it draws in more competitors, intensifying rivalry

and splintering segment profits

Best Cost Provider

Best Cost Strategy Works Best when:
 Product differentiation is the market norm.

 There are a large number of value-conscious buyers who prefer midrange products.

 There is competitive space near the middle of the market for a competitor 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.

Risk
 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). Thus, to be successful, a
best-cost provider must achieve significantly lower costs in providing upscale
features so that it can outcompete high-end differentiators based on a significantly
lower price. Likewise, it must offer buyers significantly better product attributes
to justify a price above what low-cost leaders are charging. In other words, it must
offer buyers a more attractive customer value proposition.