McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5: The Five Generic
Competitive Strategies: Which
One to Employ?
Screen graphics created by:
Jana F. Kuzmicki, Ph.D.
Troy University
Competitive strategy is about being
different. It means deliberately choosing
to perform activities differently or to
perform different activities than rivals to
deliver a unique mix of value.
Michael Porter
Winners in business play
rough and dont apologize for
it. The nicest part of playing
hardball is watching your
competitors squirm.
George Stalk Jr. and Rob Lachenauer
5-4
Chapter Learning Objectives
1. Gain command of how each of the five generic
competitive strategies lead to competitive
advantage and deliver superior value to
customers.
2. Learn why some of the five generic strategies
work better in certain kinds of industry and
competitive conditions than in others.
3. Learn the major avenues for achieving a
competitive advantage based on lower costs.
4. Learn the major avenues for developing a
competitive advantage based on differentiating
a companys product or service offering from
the offerings of rivals in ways that better
satisfy buyer needs and preferences.
5-5
Chapter Roadmap
The Five Competitive Strategies
Low-Cost Provider Strategies
Broad Differentiation Strategies
Best-Cost Provider Strategies
Focused (or Market Niche) Strategies
The Contrasting Features of the Five
Generic Competitive Strategies: A
Summary
5-6
Strategy and Competitive Advantage
Competitive advantage exists when a
firms strategy gives it an edge in
Attracting customers and
Defending against competitive forces

Convince customers firms product / service
offers superior value
A good product at a low price
A superior product worth paying more for
A best-value product
Key to Gaining a Competitive Advantage
5-7
What Is Competitive Strategy?
Deals exclusively with a
companys business plans
to compete successfully
Specific efforts to please customers
Offensive and defensive moves
to counter maneuvers of rivals
Responses to prevailing market conditions
Initiatives to strengthen its market position
Narrower in scope than business strategy
5-8
Figure 5.1: The Five Generic Competitive Strategies
5-9
1. A low- cost provider strategy appealing
to a broad spectrum of customers by being
the overall low cost provider of product or
services.

2. A broad Differentiation strategy seeking
to differentiate the companys
product/services offering from rivals in ways
that will appeal to a broad spectrum of
buyers.

5-10
3. Best-cost provider strategy giving
customers more value for the money by in
corpora ting good to excellent product
attributes at lower cost than rivals; the target
is to have the lowest (best) costs and prices
compared to rivals offering products with
comparable attributes.
4. A focused ( or market niche) strategy
based on lower cost concentrating on
narrower buyer segment and outcompeting
rivals by serving niche members at lower
cost than rivals.

5-11
5) A focused ( or market niche) strategy
based on Differentiation concentrating
on narrower buyer segment and
outcompeting rivals by offering niche
members customized attributes that meet
their tastes and requirements better than
rivals products.
5-12
Low-Cost Provider Strategies
Make achievement of meaningful
lower costs than rivals the theme
of firms strategy
Include features and services in product
offering that buyers consider essential
Find approaches to achieve a cost
advantage in ways difficult for rivals to
copy or match

Keys to Success
Low-cost leadership means low overall costs, not
just low manufacturing or production costs!
5-13

Option 1: Use lower-cost edge to
under-price competitors and attract
price-sensitive buyers in enough
numbers to increase total profits

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,
thereby increasing total profits
Translating a Low-Cost Advantage into
Higher Profits: Two Options
5-14
Approaches to Securing
a Cost Advantage

Do a better job than rivals of
performing value chain activities
efficiently and cost effectively

Revamp value chain to bypass
cost-producing activities that add
little value from the buyers
perspective
Control
costs!
By-pass
costs!
Approach 1
Approach 2
5-15
Approach 1: Controlling the Cost Drivers
1. Capture scale economies; avoid scale diseconomies
2. Capture learning and experience curve effects
3. Control percentage of capacity utilization
4. Pursue efforts to boost sales and spread costs such
as R&D and advertising over more units
5. Improve supply chain efficiency
6. Substitute use of low-cost for
high-cost raw materials
7. Use online systems and sophisticated
software to achieve operating efficiencies
8. Adopt labor-saving operating methods
9. Use bargaining power to gain concessions from
suppliers
10. Compare vertical integration vs. outsourcing
5-16
Use direct-to-end-user
sales/marketing methods
Make greater use of online
technology applications
Streamline operations by eliminating low-
value-added or unnecessary work steps
Relocate facilities closer to suppliers or
customers
Offer basic, no-frills product/service
Offer a limited product/service
Approach 2: Revamping the Value Chain
5-17
Wal-Marts Approach to
Managing Its Value Chain
Institute extensive information sharing with vendors via
online systems
Pursue global procurement of some items and centralize
most purchasing activities
Invest in state-of-the-art automation at its distribution
centers
Strive to optimize the product mix and achieve greater sales
turnover
Install security systems and store operating procedures
that lower shrinkage rates
Negotiate preferred real estate rental and leasing rates with
real estate developers and owners of its store sites
Manage and compensate its workforce in a manner to yield
lower labor costs
5-18
Nucor Corporations
Low-Cost Provider Strategy
Key elements of Nucors strategy
Use of electric arc furnace technology allows for
lower investment costs for facilities and equipment
and eliminates many expensive steps in making
steel products from scratch
Use incentive compensation to achieve high
productivity and low labor costs per ton produced
Locate plants close to customers to keep shipping
costs down
Cost advantages and bottom-line results
Lower capital investment and operating costs
Ability to charge lower prices than traditional steel
companies using make-it-from scratch technology
Earned attractive profits for shareholders since 1966
5-19
Key Characteristics of Southwest
Airlines Low-Cost Provider Strategy
Mastery of fast turnarounds at gates (25 minutes vs.
45 minutes for rivals) allows
Planes to fly more hours per day
More flights to be scheduled per day with fewer aircraft
More revenue generated per plane on average than rivals
Elimination of several services
results in cost savings
In-flight meals
Assigned seating
Baggage transfer to connecting airlines
First-class seating and service
Fast, user-friendly online reservation system
Facilitates e-ticketing
Reduces staffing requirements at telephone
reservation centers and airport counters
5-20
Keys to Success in Achieving
Low-Cost Leadership
Scrutinize each cost-creating activity,
identifying cost drivers
Use knowledge about cost drivers to manage
costs of each activity down year after year
Find ways to restructure value chain to eliminate
nonessential work steps and low-value activities
Work diligently to create cost-conscious corporate
cultures
Feature broad employee participation in continuous cost-
improvement efforts and limited perks for executives
Strive to operate with exceptionally small corporate staffs
Aggressively pursue investments in resources and
capabilities that promise to drive costs out of the
business
5-21
Cost conscious corporate culture
Employee participation in cost-control efforts
Ongoing efforts to benchmark costs
Intensive scrutiny of budget requests
Strong commitment to continuous
cost improvement
Characteristics of a Low-Cost Provider
Successful low-cost producers champion
frugality but wisely and aggressively
invest in cost-saving improvements !
5-22
Price competition is vigorous
Product is standardized or readily available
from many suppliers
There are few ways to achieve
differentiation that have value to buyers
Most buyers use product in same ways
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
When Does a Low-Cost
Strategy Work Best?
5-23
Pitfalls of Low-Cost Strategies
Being overly aggressive in cutting price
Low cost methods are easily
imitated by rivals
Becoming too fixated on
reducing costs and ignoring
Buyer interest in additional features
Declining buyer sensitivity to price
Changes in how the product is used
Technological breakthroughs open up cost
reductions for rivals
5-24
Test Your Knowledge
Striving to be the industrys low-cost provider and
achieving lower costs than rivals entails
A. doing a better job than rivals of performing value
chain activities more cost-effectively.
B. having a smaller labor force than rivals, paying lower
wages than rivals, locating all facilities in countries
where labor costs are low, and outsourcing many
value chain activities to suppliers with world-class
technological capabilities.
C. revamping the firms overall value chain to eliminate
or bypass cost-producing activities that produce little
value added insofar as customers are concerned.
D. adopting activity-based costing, utilizing more best
practices than rivals, and having a narrower product
line than rivals.
E. Both A and C.
5-25
Differentiation Strategies

Incorporate differentiating features that
cause buyers to prefer firms product or
service over brands of rivals

Find ways to differentiate that create
value for buyers and are not easily
matched or cheaply copied by rivals
Keeping the cost of achieving differentiation
below the higher price that can be charged
Objective
Keys to Success
5-26
Benefits of Successful Differentiation
A product / service with unique,
appealing attributes allows a firm to
Command a premium price and/or
Increase unit sales and/or
Build brand loyalty
= Competitive Advantage

Which
hat is
unique?
5-27
Unique taste Dr. Pepper
Multiple features Microsoft Vista and Office, iPhone
Wide selection and one-stop shopping Home Depot,
Amazon.com
Superior service FedEx
Spare parts availability Caterpillar
Engineering design and performance Mercedes,
BMW
Prestige and distinctiveness Rolex
Product reliability Johnson & Johnson
Quality manufacture Karastan, Michelin, Toyota
Technological leadership 3M Corporation
Top-of-line image Ralph Lauren and Starbucks
Types of Differentiation Themes
5-28
Sustaining Differentiation:
Keys to Competitive Advantage
Most appealing approaches to
differentiation are those
Hardest for rivals to match or imitate
Buyers will find most appealing
Best choices to gain a longer-lasting, more
profitable competitive edge
New product innovation
Technical superiority
Product quality and reliability
Comprehensive customer service
Unique competitive capabilities
5-29
Where to Find Differentiation
Opportunities in the Value Chain
Purchasing and procurement activities
Product R&D and product design activities
Production process / technology-related
activities
Manufacturing / production activities
Distribution-related activities
Marketing, sales, and customer service
activities
Activities,
Costs, &
Margins of
Forward
Channel Allies
Internally
Performed
Activities,
Costs, &
Margins
Activities,
Costs, &
Margins of
Suppliers
Buyer/User
Value
Chains
5-30
How to Achieve a
Differentiation-Based Advantage

Incorporate features that raise
performance a buyer gets out of the product
Incorporate features that enhance buyer
satisfaction in non-economic or intangible ways
Outcompete rivals via superior capabilities
Incorporate product features/attributes that
lower buyers overall costs of using product
Approach 1
Approach 2
Approach 3
Approach 4
5-31
Test Your Knowledge
Which of the following is not one of the four basic
routes to achieving a differentiation-based competitive
advantage?
A. Appealing to high-income buyers who are willing and
able to pay a premium price for a high-performing,
multi-featured product
B. Incorporating features that raise product performance
C. Incorporating product attributes and user features
that lower the buyers overall costs of using the
companys product
D. Delivering value to customers via competencies and
competitive capabilities that rivals dont have or cant
afford to match
E. Incorporating features that enhance buyer
satisfaction in intangible or non-economic ways
5-32
Importance of Perceived Value
Buyers seldom pay for
value that is not perceived
Price premium of a
differentiation strategy reflects
Value actually delivered to the buyer
and
Value perceived by the buyer
Actual and perceived value can differ when
buyers are unable to assess their
experience with a product
5-33
Signaling Value as
Well as Delivering Value
Incomplete knowledge of buyers causes them to
judge value based on such signals as
Price
Attractive packaging
Extensive ad campaigns
Ad content and image
Seller facilities or professionalism and
personality of employees
Having a list of prestigious customers
Signals of value may be as important as
actual value when
Nature of differentiation is hard to quantify
Buyers are making first-time purchases
Repurchase is infrequent
Buyers are unsophisticated
5-34
When Does a Differentiation
Strategy Work Best?
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
5-35
Pitfalls of Differentiation Strategies
Appealing product features are easily copied by
rivals
Buyers see little value in unique attributes of
product
Overspending on efforts to differentiate the product
offering, thus eroding profitability
Over-differentiating such that product features
exceed buyers needs
Charging a price premium
buyers perceive is too high
Not striving to open up meaningful
gaps in quality, service, or performance
features vis--vis rivals products
5-36
For Discussion: Your Opinion
A low-cost provider strategy can defeat a
differentiation strategy when buyers are
satisfied with a basic product and dont think
extra attributes are worth a higher price.
True or false? Explain.
5-37
Best-Cost Provider Strategies
Combine a strategic emphasis on low-cost
with a strategic emphasis on differentiation
Make an upscale product at a lower cost
Give customers more value for the money

Deliver superior value by meeting or exceeding
buyer expectations on product attributes and
beating their price expectations
Be the low-cost provider of a product with good-
to-excellent product attributes, then use cost
advantage to underprice comparable brands
Objectives
5-38
Competitive Strength of a
Best-Cost Provider Strategy
Competitive advantage is based on the
capability to include upscale attributes at a
lower cost than rivals comparable products
To achieve competitive advantage,
a company must be able to
Incorporate attractive features
at a lower cost than rivals
Manufacture a good-to-excellent quality
product at a lower cost than rivals
Develop a product that delivers good-to-excellent
performance at a lower cost than rivals
Provide attractive customer service at a lower
cost than rivals
5-39
When Is a Best-Cost
Provider Strategy Appealing?
When buyer diversity
makes product
differentiation the norm
When many buyers are
also sensitive to price
and value
5-40
Key Characteristics of Toyotas
Best-Cost Provider Strategy for the Lexus
Design an array of high-performance characteristics and
upscale features into Lexus models to make them comparable
in performance/luxury to other high-end models, i.e. Mercedes,
BMW
Transfer its capabilities in making high-quality Toyota
models at low cost to making premium-quality Lexus models
at costs below other luxury-car makers
Use its relatively lower manufacturing costs to
underprice comparable Mercedes and BMW models
Establish a new network of Lexus dealers, separate from
Toyota dealers, dedicated to providing a level of
personalized customer service unmatched in the industry
5-41
Risk of a Best-Cost Provider Strategy
A best-cost provider may get squeezed
between strategies of firms using low-cost
and differentiation strategies
Low-cost leaders may be able to siphon
customers away with a lower price
High-end differentiators may
be able to steal customers away
with better product attributes
5-42
Test Your Knowledge
Which of the following are distinguishing features of a best-
cost provider strategy (based on the comparisons of the five
generic competitive strategies shown in Figure 5.1)?
A. The strategic target is price-conscious buyers
B. A marketing emphasis on charging a slightly higher
price than rival brands having comparable features
and attributes
C. A product line that stresses wide selection, many
product variations, and emphasis on differentiating
features
D. A competitive advantage based on more value for the
money
E. Using constant product innovation, excellent R&D
skills, and periodic technological breakthroughs to
sustain the strategy
5-43
Focus / Niche Strategies
Involve concentrated attention on a narrow
piece of the total market

Serve niche buyers better than rivals

Choose a market niche where buyers
have distinctive preferences, special
requirements, or unique needs
Develop unique capabilities to
serve needs of target buyer segment
Objective
Keys to Success
5-44
Geographic uniqueness
Specialized requirements in
using product/service
Special product attributes
appealing only to niche buyers
Approaches to Defining a Market Niche
5-45
Examples of Focus Strategies
Community Coffee
Specialty coffee retailer
Animal Planet and History Channel
Special interest Cable TV programs
Porsche
Sports cars
Bandag
Specialist in truck tire recapping
CGA Inc.
Specialty insurance provider
Match.com
Online dating service
5-46
Focus / Niche Strategies
and Competitive Advantage


Achieve lower costs than rivals in
serving a well-defined buyer segment
Focused low-cost strategy


Offer a product appealing to unique
preferences of a well-defined buyer segment
Focused differentiation strategy
Which hat
is unique?
Approach 1
Approach 2
5-47
What Makes a Niche
Attractive for Focusing?
Big enough to be profitable and offers good
growth potential
Not crucial to success of industry leaders
Costly or difficult for multi-segment
competitors to meet specialized
needs of niche members
Focuser has resources and capabilities
to effectively serve an attractive niche
Few other rivals are specializing in same niche
Focuser can defend against challengers via
superior ability to serve niche members
5-48
Risks of a Focus Strategy
Competitors with broad product lines having
wide appeal find effective ways to match
a focusers capabilities in serving niche
Niche buyers preferences shift
towards product attributes desired
by majority of buyers niche
becomes part of overall market
Segment becomes so attractive it becomes
crowded with rivals, causing segment profits
to be splintered
5-49
For Discussion: Your Opinion
Which of the five generic competitive
strategies do you think the following
companies are employing:
The Saturn division of General Motors
Abercrombie & Fitch
Amazon.com
Avon Products
5-50
Deciding Which Generic
Competitive Strategy to Use
Each positions a company differently in its market and
competitive environment
Each establishes a central theme for how a company will
endeavor to outcompete rivals
Each creates some boundaries for maneuvering as
market circumstances unfold
Each points to different ways of experimenting with the
basics of the strategy
Each entails differences in product line, production
emphasis, marketing emphasis, and means to sustain
the strategy
The big risk Mixing and matching pieces of the generic
strategies to create a mixed bag or stuck in the middle
strategy! This rarely produces a sustainable competitive
advantage or a distinctive competitive position !
5-51
Table 5.1: Distinguishing Features of the Five Generic Competitive Strategies
5-51