Chapter 5: The Five Generic Competitive Strategies

The Five Generic Competitive Strategies5ChapterScreen graphics created by:Jana F. Kuzmicki, Ph.D.Troy State University-Florida and Western Region Chapter RoadmapFive Competitive StrategiesLow-Cost Provider StrategiesDifferentiation StrategiesBest-Cost Provider StrategiesFocused (or Market Niche) StrategiesThe Contrasting Features of the Five Generic Competitive Strategies: A SummaryStrategy andCompetitive AdvantageCompetitive advantage exists when a firm’s strategy gives it an edge inAttracting customers andDefending against competitive forcesConvince customers firm’s product / service offers superior valueA good product at a low priceA superior product worth paying more forA best-value productKey to Gaining a Competitive AdvantageWhat Is“Competitive Strategy”?Deals exclusively with a company’sbusiness plans to compete successfullySpecific efforts to please customersOffensive and defensive movesto counter maneuvers of rivalsResponses to prevailing market conditionsInitiatives to strengthen its market positionNarrower in scope than business strategyFig. 5.1: The Five GenericCompetitive StrategiesMake achievement of meaningful lower coststhan rivals the theme of firm’s strategyInclude features and services in productoffering that buyers consider essentialFind approaches to achieve a cost advantagein ways difficult for rivals to copy or matchLow-cost leadership means lowoverall costs, not just lowmanufacturing or production costs!Keys to SuccessLow-Cost Provider StrategiesWhen Does a Low-CostStrategy Work Best?Price competition is vigorousProduct is standardized or readily availablefrom many suppliersThere are few ways to achievedifferentiation that have value to buyersMost buyers use product in same waysBuyers incur low switching costs Buyers are large and havesignificant bargaining powerIndustry newcomers use introductory low prices to attract buyers and build customer basePitfalls of Low-Cost StrategiesBeing overly aggressive in cutting priceLow cost methods are easily imitated by rivalsBecoming too fixated on reducing costsand ignoringBuyer interest in additional featuresDeclining buyer sensitivity to priceChanges in how the product is usedTechnological breakthroughs open up cost reductions for rivalsDifferentiation StrategiesIncorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivalsFind ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivalsNot spending more to achieve differentiationthan the price premium that can be chargedObjectiveKeys to SuccessBenefits of Successful DifferentiationA product / service with unique, appealing attributes allows a firm toCommand a premium price and/orIncrease unit sales and/orBuild brand loyalty= Competitive AdvantageWhichhat is unique?Signaling Value as Wellas Delivering ValueIncomplete knowledge of buyers causes them tojudge value based on such signals asPriceAttractive packagingExtensive ad campaignsAd content and imageCharacteristics of sellerFacilitiesCustomersProfessionalism and personality of employeesSignals of value may be as important as actual value whenNature of differentiation is hard to quantifyBuyers are making first-time purchasesRepurchase is infrequentBuyers are unsophisticatedWhen Does a DifferentiationStrategy Work Best?There are many ways to differentiate a productthat have value and please customersBuyer needs and uses are diverseFew rivals are following a similardifferentiation approachTechnological change andproduct innovation are fast-pacedWhen Does a DifferentiationStrategy Work Best?There are many ways to differentiate a product that have value and please customersBuyer needs and uses are diverseFew rivals are following a similar differentiation approachTechnological change andproduct innovation are fast-pacedPitfalls ofDifferentiation StrategiesBuyers see little value in unique attributes of productAppealing product features are easily copied by rivalsDifferentiating on a feature buyers do not perceive as lowering their cost or enhancing their well-beingOver-differentiating such that productfeatures exceed buyers’ needsCharging a price premiumbuyers perceive is too highNot striving to open up meaningful gaps in quality, service, or performance features vis-à-vis rivals’ productsBest-Cost Provider StrategiesCombine a strategic emphasis on low-cost with a strategic emphasis on differentiationMake an upscale product at a lower costGive customers more value for the moneyDeliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectationsBe the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brandsObjectivesA best-cost provider’s competitive advantage comes from matching close rivals on key product attributes and beating them on priceSuccess depends on having the skills and capabilities to provide attractive performance and features at a lower cost than rivalsA best-cost producer can often out-compete botha low-cost provider and a differentiator whenStandardized features/attributeswon’t meet diverse needs of buyers Many buyers are price and value sensitiveCompetitive Strength of a  Best-Cost Provider StrategyA best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategiesLow-cost leaders may be able to siphoncustomers away with a lower priceHigh-end differentiators may be able tosteal customers away with better product attributesRisk of a Best-CostProvider StrategyFocus / Niche StrategiesInvolve concentrated attention on a narrow piece of the total market Serve niche buyers better than rivalsChoose a market niche where buyers have distinctive preferences, special requirements, or unique needsDevelop unique capabilities to serve needs of target buyer segmentObjectiveKeys to SuccessWhat Makes a NicheAttractive for Focusing?Big enough to be profitable and offers good growth potentialNot crucial to success of industry leadersCostly or difficult for multi-segment competitorsto meet specialized needs of niche membersFocuser has resources and capabilitiesto effectively serve an attractive nicheFew other rivals are specializing in same nicheFocuser can defend against challengers via superior ability to serve niche membersRisks of a Focus StrategyCompetitors find effective ways to matcha focuser’s capabilities in serving nicheNiche buyers’ preferences shift towards product attributes desired by majority of buyers – nichebecomes part of overall marketSegment becomes so attractive it becomes crowded with rivals, causing segment profits to be splinteredDeciding Which Generic Competitive Strategy to UseEach positions a company differently in its marketEach establishes a central theme for how a company will endeavor to outcompete rivalsEach creates some boundaries for maneuvering as market circumstances unfoldEach points to different ways of experimenting with the basics of the strategyEach entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategyThe big risk – Selecting a “stuck in the middle” strategy! This rarely produces a sustainable competitiveadvantage or a distinctive competitive position.