05 - The Five (5) Generic Competitive Strategies

IE-E2 403
Strategic
Planning
Evelyn M. Eviota
The Five (5)
Generic
Competitive
Strategies
THE FIVE (5) GENERIC
COMPETITIVE STRATEGIES
INTENDED LEARNING OUTCOMES:

1. Understand what distinguishes each of the five (5)
generic strategies and why some of these strategies
work better in certain kinds of industry & competitive
conditions than in orders.
2. Explain the major avenues for achieving a competitive
advantage based on lower costs.
3. Explain the major avenues for developing a
competitive advantage based on differentiating a
company’s product or service offerings from the
offerings of rivals.
COMPANY’S INTERNAL
ANALYSIS
4. Recognize the attributes of a best-cost provider

strategy (hybrid of low-cost provider and
differentiation strategies).
What is a Competitive Strategy?

- concerns the specifics of management’s game plan for
competing successfully and securing a competitive
advantage over rivals in the market place.
Factors that Distinguish One Competitive Strategy

from Another:
● whether a company’s market target is broad or narrow.
● whether the company is pursuing a competitive
advantage linked to lower cost or differentiation.
The Five (5) Generic Competitive Strategies:

● Low cost provider strategy
● Broad differentiation strategy
● Focused low cost strategy
● Focused differentiation strategy
● Best cost provider strategy
I. Low-Cost Provider Strategy

- striving to achieve lower overall costs than rivals and
appealing to a broad spectrum of customers, usually by
underpricing rivals.
- a low cost leader’s basis for competitive advantage is
lower overall costs than competitors.
- success in achieving a low-cost edge over rivals comes
from eliminating and/or curbing “non-essential
activities” and/or out-managing rivals in performing
essential activities.
Translating Low-Cost Advantage into Attractive

Profit Performance:
a. Use the lower-cost edge to underprice competitors and
attract price-sensitive buyers in great enough numbers
to increase total profit.
b. 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, raising
the firm’s total profits.
Major Avenues for Achieving Low-Cost Leadership:

a. Perform essential value chain activities more cost-
effectively than rivals.
b. Revamp the firm’s overall value chain to eliminate or
by-pass some cost-producing activities.
What is a Cost Driver?

- A factor having a strong effect on the cost of a
company’s value chain activities and cost structure.
Effective Management of Cost Drivers in a

Company’s Value Chain Include:
1. Striving to capture all available economies of scale - stemming
from an ability to lower units costs by increasing the
scale of operations.
2. Taking full advantage of experience and learning curve effects -

the cost of performing an activity can decline overtime
as the learning and experience of company personnel
build.
3. Trying to operate facilities at full capacity - higher rates of
capacity utilization allow depreciation and other fixed
costs to be spread over a larger unit volume, lowering
the fixed cost per unit.
4. Substituting lower-cost inputs – with little or no sacrifice
in product quality or product performance.
5. Employing advanced production technology and process design

to improve overall efficiency - use of tools such as design
for manufacturing (DFM), computer-aided design
(CAD), product reengineering, Six sigma methodology,
and other business process management techniques
that aim to boost efficiency and reduce cost.
6. Using communication systems and information technology to
achieve operating efficiencies – such as sharing data with
suppliers, use of ERP and other software.
7. Using the company’s bargaining power vis-à-vis suppliers to

gain concession - to win price discounts on large volume
purchases.
8. Being alert to the cost advantages of outsourcing and vertical
integration - outsourcing can be more economical than
doing them in-house.
9. Pursuing ways to boost labor productivity and lower overall
compensation cost - can be done by using incentive
compensation systems that provide high productivity.
Important Cost Drivers in a Company’s Value Chain:
Source: Adapted from M. Porter, The Competitive Advantage : Creating & Sustaining Superior Performance
(New York: Free Press, 1985)
Revamping the Value Chain System to Eliminate

Cost Producing Activities:
a. Selling directly to customers cutting out the activities
and costs of distributors and dealers.
b. Streamlining operations by eliminating low-value
added and unnecessary activities.
c. Improving supply chain efficiency to reduce materials
handling and shipping costs.
When A Low-Cost Provider Strategy Works Best:

1. Price competition among rival sellers is vigorous.
2. Products of rival sellers are identical and readily
available from several sellers.
3. Few ways to achieve product differentiation that have
value to buyers.
4. Low switching costs from one seller to another.
5. Majority of industry sales are made to a few, large-
volume buyers.
6. Industry newcomers use introductory low prices to
attract buyers and build a customer base.
Pitfalls in Pursuing a Low Cost Provider Strategy:

1. Getting carried away with overly aggressive price
cutting and ending up with lower profitability.
2. Relying on an approach to reduce cost that can be
easily copied by rivals.
3. Becoming too fixated on cost reduction resulting to a
firm’s offering with poor features that will fail to gain
the interest of buyers.
II. Broad Differentiation Strategy

- seeking to differentiate the company’s product or
service from rivals in ways that will appeal to a broad
spectrum of buyers.
- offering unique product or service attributes that a
wide range of buyers find appealing and is willing to
pay for.
- easy to copy differentiating features cannot produce
sustainable competitive advantage; but differentiation
based on hard to copy competencies and capabilities
tends to be more sustainable.
Successful Differentiation Allows a Firm to:

a. Command a premium price
b. Increase unit sales (additional buyers are won over by
the differentiating features)
c. Gain buyer loyalty to its brand (some buyers are
strongly attracted to the differentiating features, and
bond with the company and its products)
What is a Uniqueness Driver?

- a value chain activity or factor that can have a strong
effect on customer value and creating differentiation.
Systematic Management of Uniqueness Drivers Include:

1. Seeking out high quality inputs.
2. Striving for innovation and technological advances.
3. Creating superior product features, design and
performance.
4. Investing in production-related R&D activities.
5. Pursuing continuous quality improvement.

6. Emphasizing human resource management activities
that improve the skills, expertise and knowledge of
company personnel.
7. Increasing emphasis on marketing and brand-building
activities.
8. Improving customer service or adding additional
services.
Uniqueness Drivers: The Keys to Differentiation Advantage
Source: Adapted from M/ Porter: The Competitive Advantage: Creating & Sustaining Superior Performance (New
York Free Press, 1985)
Revamping the Value Chain System to Increase

Differentiation:
a. Coordinating with channel allies to enhance customer
value.
b. Coordinating with suppliers to better address customer
needs.
Value can be Delivered to Customers via a

Differentiation Strategy:
a. Include product attributes and user features that lower
the buyer’s costs.
b. Incorporate tangible features that improve product
performance.
c. Incorporate intangible features that enhance buyer
satisfaction in non-economic ways.
When A Differentiation Strategy Works Best:

1. Buyer needs and uses of the product are diverse.
2. There are many ways to differentiate the product or
service that have value to buyers.
3. Few rival firms are following a similar differentiation
approach.
4. Technological change is fast-paced and competition
revolves around rapidly evolving product features.
Pitfalls in Pursuing a Differentiation Strategy:

1. Differentiating product or service attributes cab be
easily and quickly copied.
2. When buyers see little value in the unique attributes
of a company’s products.
3. Overspending on efforts to differentiate can erode
profitability.
4. Over-differentiating so that product quality or service
levels exceed buyer’s needs.
5. Trying to charge too high a price premium.
6. Being timid and not striving to open up meaningful

gaps in quality, service, performance features vis-à-vis
the products of rivals.
III. Focused (Or Market Niche) Strategies

- These strategies are concentrating on a narrow piece of
the total market.
- The targeted segment, or niche, can defined by the
geographic uniqueness or by the special product
attributes that appeal only to the niche members.
Focused (Or Market Niche) Strategies Can Be:

1. Focused low-cost strategy
- concentrating on a narrow buyer segment (or market
niche) and outcompeting rivals by having lower
costs than rivals and being able to serve niche
members at a lower price.
2. Focused differentiation strategy
- concentrating on a narrow buyer segment (or market
niche) and outcompeting rivals by offering niche
members customized attributes that meet their
tastes & requirements better than rivals’ products.
When A Focused Low-Cost or Focused

Differentiation Strategy Works:
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.
3. It is costly or difficult for multi segment competitors
to meet the specialized needs of niche buyers and at
the same time satisfy the expectations of mainstream
customers.
4. The industry has many different niches and segments,

thereby allowing a focuser to pick a niche suited to its
resource strengths and capabilities.
5. Few rivals are attempting to specialize in the same
target segment.
The Risk of a Focused Low-Cost or Focused

Differentiation Strategy :
1. The chance that competitors will find effective ways
to match the focused firm’s capabilities in serving the
target niche.
2. The potential for the preferences and needs of niche
markets to shift over time toward the product
attributes desired by the majority of buyers.
3. The segment may become so attractive that it is soon
filled with competitors, intensifying rivalry and
splintering segment profits.
IV. Best-Cost Provider Strategies

- 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.
- when a company incorporates appealing features, good
to excellent product performance or quality or more
satisfying customer service into its product offering at a
lower cost than rivals.
When A Best-Cost Provider Strategy Works Best:

1. Works best in markets where product differentiation is
the norm and attractively large numbers of value-
conscious buyers can be induced to purchase mid-
range products rather than the basic products of low-
cost producers or the expensive products of top of the
line differentiators.
2. A best cost provider needs to position itself near the
middle of the market with either a medium-quality
product at a below average price or a high quality
product at an average or slightly higher than average
price.
3. Best cost provider strategies also works well in

recessionary times when great masses of buyers
become value conscious and are attracted to
economically priced products and services with
specially appealing attributes.
The Danger of an Unsound Best-Cost Provider

Strategy:
1. When the company employing a best-cost provider
strategy is not having the requisite core competencies
and efficiencies in managing value chain activities to
support the addition of differentiating features without
significantly increasing the cost.
2. Low cost providers maybe able to siphon customers away
with the appeal of a lower price.
3. High-end differentiators maybe able to steal customers
away with the appeal of appreciably better product
attributes.
NOTE:
“Successful best-cost providers must offer buyers
significantly better product attributes to justify
a price above what low-cost leaders are charging but
has to achieve significantly lower cost in providing
upscale features so that it can outcompete high-end
differentiators on the basis of significantly lower
price.”

05 - The Five (5) Generic Competitive Strategies

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IE-E2 403

INTENDED LEARNING OUTCOMES:

4. Recognize the attributes of a best-cost provider

What is a Competitive Strategy?

Factors that Distinguish One Competitive Strategy

The Five (5) Generic Competitive Strategies:

I. Low-Cost Provider Strategy

Translating Low-Cost Advantage into Attractive

Major Avenues for Achieving Low-Cost Leadership:

What is a Cost Driver?

Effective Management of Cost Drivers in a

2. Taking full advantage of experience and learning curve effects -

5. Employing advanced production technology and process design

7. Using the company’s bargaining power vis-à-vis suppliers to

Important Cost Drivers in a Company’s Value Chain:

Revamping the Value Chain System to Eliminate

When A Low-Cost Provider Strategy Works Best:

Pitfalls in Pursuing a Low Cost Provider Strategy:

II. Broad Differentiation Strategy

Successful Differentiation Allows a Firm to:

What is a Uniqueness Driver?

Systematic Management of Uniqueness Drivers Include:

5. Pursuing continuous quality improvement.

Uniqueness Drivers: The Keys to Differentiation Advantage

Revamping the Value Chain System to Increase

Value can be Delivered to Customers via a

When A Differentiation Strategy Works Best:

Pitfalls in Pursuing a Differentiation Strategy:

6. Being timid and not striving to open up meaningful

III. Focused (Or Market Niche) Strategies

Focused (Or Market Niche) Strategies Can Be:

When A Focused Low-Cost or Focused

4. The industry has many different niches and segments,

The Risk of a Focused Low-Cost or Focused

IV. Best-Cost Provider Strategies

When A Best-Cost Provider Strategy Works Best:

3. Best cost provider strategies also works well in

The Danger of an Unsound Best-Cost Provider

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