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chapter 5

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

 Competitive Strategy
 Deals exclusively with management’s game
plan for competing successfully and securing
a competitive advantage over rivals
 Represents the firm’s specific efforts to provide
superior value to customers by offering:
 An equally good product at a lower price
A superior product with unique features perceived
as worth paying more for
 An attractive overall mix of price, features, quality,
service, and other appealing attributes

FIGURE 5.1 The Five Generic Competitive Strategies

The Five Generic Competitive Strategies

Low-cost Striving to achieve lower overall costs than rivals and appealing to a
provider broad spectrum of customers, usually by underpricing rivals

Broad Seeking to differentiate the firm’s product or service from rivals’ in

differentiation ways that will appeal to a broad spectrum of buyers

Concentrating on a narrow buyer segment (or market niche) and

outcompeting rivals by having lower costs than rivals and thus being
low-cost able to serve niche members at a lower price

Concentrating on a narrow buyer segment (or market niche) and

outcompeting rivals by offering niche members customized attributes
differentiation that meet their tastes and requirements better than rivals’ products

Giving customers more value for the money by satisfying buyers’

expectations on key quality/features/performance/service attributes
provider while beating their price expectations

 Core Concept 

A low-cost leader’s basis for competitive

advantage is lower overall costs than com-
petitors. Success in achieving a low-cost
edge over rivals comes from eliminating
and/or curbing “nonessential” activities and/or
outmanaging rivals in performing essential

The Two Major Avenues for Achieving
Low-Cost Leadership

1. Perform essential value chain activities

more cost-effectively than rivals
2. Revamp the firm’s overall value chain to
eliminate or bypass some cost-producing

Revamping the Value Chain

Reengineering the
firm’s value chain

Sell directly to Streamline operations Reduce materials

consumers and cut by eliminating low handling and shipping
out the activities and value-added or costs by having
costs of distributors unnecessary work suppliers locate plants
and dealers steps and activities or warehouses close to
a firm’s own facilities

 Core Concept 

The essence of a broad differentiation

strategy is to offer unique product or
service attributes that a wide range of
buyers find appealing and worth paying for.

Benefits of Successful Differentiation

Successful execution of a
differentiation strategy
allows a firm to:

Command a Increase its Gain buyer loyalty

premium price unit sales to its brand

Delivering Superior Value via
a Differentiation Strategy

1. Include product attributes and user

features that lower the buyer’s costs.
2. Incorporate tangible features that
improve product performance.
3. Incorporate intangible features that
enhance buyer satisfaction in
noneconomic ways.

Managing the Value Chain in Ways
That Enhance Differentiation

Supply chain Manufacturing

activities activities

Product Distribution and
that Enhance shipping activities

Production R&D Marketing, sales,

and technology- and customer
related activities service activities

Focused (or Market Niche) Strategies

 Reflect a concentration on a narrow piece of the

total market defined by geographic uniqueness or
special product attributes.
 Appeal to smaller and medium-sized firms that may
lack the breadth and depth of resources to tackle
going after a whole market customer base.

A Focused Low-Cost Strategy

 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 a lower price than rival
 Avenues to achieving cost advantage are
the same as for low-cost leadership—out-
manage rivals in keeping costs low and
bypassing or reducing nonessential

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 (as
opposed to a broad differentiation strategy aimed at
many buyer groups and market segments).

 Core Concept 

Best-cost provider strategies are

a hybrid of low-cost provider and
differentiation strategies that aim at
satisfying buyer expectations
on key quality/features/performance/
service attributes and beating
customer expectations on price.

Successful Competitive Strategies
Are Resource Based

 Low-Cost Providers
 Must have the resources and capabilities to keep
costs below those of 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

Successful Competitive Strategies
Are Resource Based (cont’d)

 Narrow Segment Focusers

 Must have the capability to do an outstanding job of
satisfying the needs and expectations of niche buyers
 Best-Cost Providers
 Must have the resources and capabilities to
incorporate upscale product or service attributes at a
lower cost than rivals

Perils of a “Stuck in the Middle” Strategy

 Compromise strategies can result in middle-

of-the-pack industry rankings and, at best,
average performance due to:
 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

Launching Strategic Offensives to
Improve a Company’s Market Position

 Aggressive strategic offensives are called

for when a firm:
 Spots opportunities to gain profitable market share
at the expense of rivals
 Has no choice but to try to whittle away at a strong
rival’s competitive advantage
 Can reap the benefits a competitive edge offers—a
leading market share, excellent profit margins, and
rapid growth
 The best offensives use a firm’s resource
strengths to attack its rivals’ weaknesses.
Choosing the Basis for
Competitive Attack

Attack the competitive Adopt and improve on

weaknesses of rivals good ideas of other firms

Offer an equal or better Offensive Attack profitable market
product at a lower price Strategy segments of key rivals
Pursue continuous Capture unoccupied or
product innovation less contested markets

Leapfrog competitors to Use hit-and-run or guerrilla

be the first to market marketing tactics

Launch a preemptive strike

on a market opportunity

Principal Offensive Strategy Options
 Attacking the competitive weaknesses of rivals
 Offering an equally good or better product at a
lower price
 Pursuing continuous product innovation
 Leapfrogging competitors by being the first to
market with next generation technology or products
 Adopting and improving on the good ideas of other
companies (rivals or otherwise)
 Deliberately attacking those market segments
where a key rival makes big profits
 Maneuvering around competitors to capture
unoccupied or less contested market territory

Principal Offensive Strategy Options (cont’d)

 Using hit-and-run or guerrilla warfare tactics to grab

sales and market share from complacent or
distracted rivals
 Launching a preemptive strike to capture a rare
opportunity or secure an industry’s limited
 Secure the best distributors in a particular geographic region or
 Secure the most favorable retail locations

 Tie up the most reliable, high-quality suppliers via exclusive

partnerships, long-term contracts, or even acquisition

Blue Ocean Strategy—
A Special Kind of Offensive

 Involves a firm seeking sizable and durable

competitive advantage by abandoning its
existing markets and, then, inventing a new
industry or distinctive market segment in
which that firm has exclusive access to new

 Core Concept 

Blue ocean strategies offer growth in

revenues and profits by discovering or
inventing new industry segments that
create altogether new demand.

Using Defensive Strategies to Protect
a Company’s Market Position and
Competitive Advantage
 Defensivestrategies help fortify a
competitive position by:
 Lowering the risk of being attacked.
 Weakening the impact of any attack that occurs.
 Influencing challengers to redirect their competitive
efforts toward other rivals.
 Good defensive strategies help protect
competitive advantage but rarely are the
basis for creating it.

Blocking the Avenues
Open to Challengers

Introduce new Maintain economy-

features priced models

Defending a Announce new

Add new models Competitive products or price
Position changes

Broaden product Grant volume

line to fill vacant discounts or better
niches financing terms

Blocking the Avenues
Open to Challengers
 Introduce new features
 Add new models
 Broaden product line to fill vacant niches
 Maintain economy-priced models
 Make early announcements about upcoming new
products or planned price changes
 Grant volume discounts or better financing terms to
dealers and distributors to discourage them from
experimenting with other suppliers

Vertical Integration: Operating Across
More Industry Value Chain Segments

 Involves extending a firm’s competitive and

operating scope within the same industry
 Backward into sources of supply
 Forward toward end users of final product

 Can aim at either full or partial integration

 Core Concept 

A vertically integrated firm is one that performs

value chain activities along more than one stage
of an industry’s overall value chain.
A vertical integration strategy has appeal only
if it significantly strengthens a firm’s competitive
position and/or boosts its profitability

 Core Concept 

Backward integration involves performing

industry value chain activities previously
performed by suppliers or other enterprises
engaged in earlier stages of the industry value
chain; forward integration involves performing
industry value chain activities closer to the end

Outsourcing Strategies:
Narrowing the Scope of Operations
 Outsourcing an activity is a consideration when:
 It can be performed better or more cheaply by outside specialists.

 It is not crucial to achieve a sustainable competitive advantage

and will not hollow out capabilities, core competencies, or
technical know-how of a firm.
 It improves organizational flexibility and speeds time to market.

 It reduces a firm’s risk exposure to changing technology and/or

buyer preferences.
 It allows a firm to concentrate on its core business, leverage its
key resources and core competencies, and do even better what it
already does best.

 Core Concept 

Outsourcing involves contracting out certain

value chain activities to outside specialists and
strategic allies.

 Core Concept 

A strategic alliance is a formal agreement

between two or more companies to work
cooperatively toward some common objective.
A joint venture is a type of strategic alliance
that involves the establishment of an
independent corporate entity that is jointly
owned and controlled by the two partners.

Reasons for Firms to Enter
into Strategic Alliances

Expedite development
Improve supply chain
of new technologies
or products

Overcome technical Gain economies of

Reasons for
or manufacturing scale in production
expertise deficits Alliances and/or marketing

Bring together personnel Acquire or improve

to create new skill sets market access via joint
and capabilities marketing agreements

Merger and Acquisition Strategies

 An attractive strategic option for achieving

operating economies, strengthening
competencies, and opening avenues to new
market opportunities:
 Merger
 The combining of two or more firms into a single entity, with the
newly created firm often taking on a new name
 Acquisition
 The combination in which one firm, the acquirer, purchases
and absorbs the operations of another, the acquired firm