Transcript Chapter 5
Chapter 5
The Five Generic
Competitive
Strategies
McGraw-Hill/Irwin
Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved.
Competitive Strategy
Deals exclusively with management’s
game plan for competing successfully
and securing a competitive advantage
over rivals
Specific efforts to give customers
superior value
– A good product at a lower price
– A superior product worth paying more
for
– An attractive mix of price, features,
quality, service, and other appealing
attributes
5-2
Competitive Strategies and Industry
Positioning
5-3
Figure 5.1: The Five Generic
Competitive Strategies
Type of Advantage Sought
Market Target
Lower Cost
Broad
Range of
Buyers
Narrow
Buyer
Segment
or Niche
McGraw-Hill/Irwin
Differentiation
Overall Low-Cost
Broad
Provider
Differentiation
Strategy
Strategy
Stuck in
the
middle
Focused
Focused
Low-Cost
Differentiation
Strategy
Strategy
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
4
Perils of “Stuck in the Middle”
Strategy
Compromise strategies end up with a
middle-of-the-pack industry rankings
and provide for average performance
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 advantage
5-5
Low Cost Provider Strategies
Powerful competitive approach
with price-sensitive buyers
Have lower costs than rivals—but not
necessarily the absolutely lowest possible
cost
Must include features and services that
buyers consider essential
Must not be viewed by consumers as
offering little value even if priced lower than
competing products.
5-6
Translating a Low Cost Strategy Into
Attractive Profit Performance
Option 1: Use
lower-cost edge
to under-price competitors
and increase market share
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
5-7
Approaches to Achieving Low Costs
1. Perform essential value
chain activities more costeffectively than rivals
2. Revamp the firm’s overall
value chain to eliminate or
bypass some costproducing activities
altogether
5-8
When a Low Cost Strategy Works
Best
Price competition is vigorous
Product is standardized
There are few ways to achieve
differentiation
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
5-9
Hazards of a Low-Cost Strategy
Cutting price by an amount greater than
size of cost advantage
Low cost methods are easily imitated
Becoming too fixated on reducing
costs and ignoring
Buyer interest in additional features
Declining buyer sensitivity to price
Technological breakthroughs open up
cost reductions for rivals
5-10
Differentiation Strategies
Powerful competitive approach
whenever buyers’ needs and
preferences are too diverse to be
fully satisfied by a standardized
product or service
5-11
Differentiation Strategies
Incorporate differentiating features that
cause buyers to prefer firm’s
product or service over brands of
rivals
Not spending more to achieve
differentiation than the price
premium that customers are
willing to pay for all
the differentiating extras
5-12
Benefits of Successful
Differentiation
Successfully executed
differentiation strategies
allow a company to:
Command a premium
price, and/or
Increase unit sales,
and/or
Gain buyer loyalty to its
brand
5-13
Types of Differentiation Themes
Unique taste – Dr. Pepper
Multiple features – Microsoft Windows and
Office
Wide selection – Amazon.com
Superior service – Ritz-Carlton
Spare parts availability – Caterpillar
Engineering design and performance – BMW
Prestige – Rolex
Product reliability – Johnson & Johnson
Quality manufacture – Toyota
Top-of-line image – Ralph Lauren, Starbucks,
Chanel
5-14
Creating Value for Customers
through Differentiation
Incorporate product features/attributes
that lower buyer’s overall costs of
using product
Incorporate features/attributes that raise
the performance a buyer gets out of
the product
Incorporate features/attributes that
enhance buyer satisfaction in noneconomic or intangible ways
Exploit competencies and competitive
capabilities that rivals don’t have or
can’t match
5-15
Where to Find Opportunities to
Differentiate
Supply chain activities
Product R&D and product
design activities
Production R&D and
technology-related activities
Manufacturing activities
Distribution-related activities
Marketing, sales, and customer service
activities
5-16
Perceived Value and Signaling
The price premium commanded by
a differentiation strategy reflects
actual value delivered and value
perceived by the buyer.
Buyers seldom pay
for value that is
not perceived
5-17
Perceived Value and Signaling
Important to signal
value when:
Nature of differentiation is
subjective
When buyers are making
first-time purchases
When repurchase is
infrequent
When buyers are
unsophisticated
5-18
Market Conditions Favoring a
Differentiation Strategy
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
5-19
Hazards of a Differentiation Strategy
Buyers see little value in a product’s
unique attributes
Appealing product features are easily
copied by rivals
Overspending on efforts to differentiate
5-20
Hazards of a Differentiation Strategy
Overdifferentiating such
that product
features exceed buyers’
needs
Charging a price premium
buyers perceive is too
high
Failing to open up
meaningful gaps in
product or service
attributes
5-21
Focused Low-Cost Strategy
Reflects a concentration on a
narrow piece of the total market defined by geographic uniqueness
or special product attributes
Avenues to achieving cost
advantage are the same as for lowcost leadership—outmanage rivals
in keeping costs low and bypassing
or reducing nonessential activities
5-22
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
5-23
Market Conditions Making a
Focused Strategy Viable
The target niche is big enough to be
profitable and offers good growth potential
Industry leaders have chosen not to compete
in the niche
It is costly or difficult for multisegment
competitors to meet the specialized needs of
niche buyers
Industry has many niches and segments
Few rivals are attempting to specialize in the
niche
5-24
Hazards of a Focused Strategy
Competitors find effective ways to match
a focuser’s capabilities in serving niche
Niche buyers’ preferences shift towards
product attributes desired by majority of
buyers
Segment becomes so attractive it
becomes crowded with rivals, causing
segment profits to be splintered
5-25
Successful Strategies Must Be WellMatched to Resources and Capabilities
Low-Cost Providers
Must have the resources and capabilities to
keep its costs below those of its 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
5-26
Successful Strategies Must Be WellMatched to Resources and Capabilities
Narrow Segment Focusers
Must have the capability to do an
outstanding job of satisfying the needs and
expectations of niche buyers
5-27