Chapter: 5

TYPES OF GENERIC COMPETITIVE S TRATEGIES:

1. A low-cost provider strategy —striving to achieve lower overall costs than rivals on comparable products
that attract a broad spectrum of buyers, usually by underpricing rivals.

2. A broad differentiation strategy —seeking to differentiate the company’s product offering from rivals’
products by offering superior attributes that will appeal to a broad spectrum of buyers.

3. A focused low-cost strategy —concentrating on a narrow buyer segment (or market niche) and
outcompeting rivals on costs, thus being able to serve niche members at a lower price.

4. A 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 and
requirements better than rivals’ products.

5. A best-cost provider strategy —giving customers more value for their money by satisfying buyers’
expectations on key quality, features, performance, and/or service attributes while beating their price
expectations. This option is 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.

LOW-COSTPRO VIDERS TRATEGIES

A company has two options for translating a low-cost advantage over rivals into attractive profit performance.
Option 1 is to use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough
numbers to increase total profits. Option 2 is to 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, thereby raising the firm’s total
profits and overall return on investment.

The Two Major Avenues for Achieving a Cost Advantage

To achieve a low-cost edge over rivals, a firm’s cumulative costs across its overall value chain must be lower
than competitors’ cumulative costs. There are two major avenues for accomplishing this:

1. Perform value chain activities more cost-effectively than rivals.

2. Revamp the firm’s overall value chain to eliminate or bypass some cost producing activities.

Cost-Efficient Management of Value Chain Activities

 Capturing all available economies of scale

 Taking full advantage of experience
 Operating facilities at full capacity
 Improving supply chain efficiency.
 Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance.
  Using the company’s bargaining power vis-à-vis suppliers or others in the value chain system to gain
concessions
 Using online systems and sophisticated software to achieve operating efficiencies.
 Improving process design and employing advanced production technology.
 Being alert to the cost advantages of outsourcing or vertical integration.
 Motivating employees through incentives and company culture.

Revamping the Value Chain System to Lower Costs

Dramatic cost advantages can often emerge from redesigning the company’s value chain system in ways that
eliminate costly work steps and entirely bypass certain cost-producing value chain activities. Such value chain
revamping can include:

 Selling direct to consumers and bypassing the activities and costs of distributors and dealers.
 Streamlining operations by eliminating low-value-added or unnecessary work steps and activities.
 Reducing materials handling and shipping costs by having suppliers locate their plants or warehouses
close to the company’s own facilities.

The Keys to Being a Successful Low-Cost Provider

While low-cost providers are champions of frugality, they seldom hesitate to spend aggressively on resources
and capabilities that promise to drive costs out of the business.

Indeed, having competitive assets of this type and ensuring that they remain competitively superior is essential
for achieving competitive advantage as a low-cost provider.

When a Low-Cost Provider Strategy Works Best

 Price competition among rival sellers is vigorous.

 The products of rival sellers are essentially identical and readily available from many eager sellers.
 It is difficult to achieve product differentiation in ways that have value to buyers.
 Most buyers use the product in the same ways
 Buyers incur low costs in switching their purchases from one seller to another

Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy

 A low-cost provider is in the best position to win the business of price-sensitive buyers, set the floor on
market price, and still earn a profit.

 Reducing price does not lead to higher total profits unless the added gains in unit sales are large enough
to offset the loss in revenues due to lower margins per unit sold.

 A low-cost provider’s product offering must always contain enough attributes to be attractive to
prospective buyers—low price, by itself, is not always appealing to buyers.
BROAD DIFFERENTIATIONS TRATEGIES

The essence of a broad differentiation strategy is to offer unique product attributes that a wide range of buyers
find appealing and worth paying for.

Successful differentiation allows a firm to do one or more of the following:

 Command a premium price for its product.

 Increase unit sales (because additional buyers are won over by the differentiating features).
 Gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features
and bond with the company and its products).
Managing the Value Chain to Create the Differentiating Attributes

 Create product features and performance attributes that appeal to a wide range of buyers.
 Improve customer service or add extra services.
 Invest in production-related R&D activities.
 Strive for innovation and technological advances.
 Pursue continuous quality improvement.
 Increase marketing and brand-building activities
 Seek out high-quality inputs.
 Emphasize human resource management activities that improve the skills, expertise, and knowledge of
company personnel’s

Revamping the Value Chain System to Increase Differentiation

Just as pursuing a cost advantage can involve the entire value chain system, the same is true for a differentiation
advantage. Activities performed upstream by suppliers or downstream by distributors and retailers can have a
meaningful effect on customers’ perceptions of a company’s offerings and its value proposition. Approaches to
enhancing differentiation through changes in the value chain system include:

 Coordinating with channel allies to enhance customer value.

 Coordinating with suppliers to better address customer needs

Delivering Superior Value via a Broad Differentiation Strategy

 The first route is to incorporate product attributes and user features that lower the buyer’s overall costs of
using the company’s product.

 A second route is to incorporate tangible features that increase customer satisfaction with the product,
such as product specifications, functions, and styling.

 A third route to a differentiation-based competitive advantage is to incorporate intangible features that

enhance buyer satisfaction in noneconomic ways.

 The fourth route is to signal the value of the company’s product offering to buyers.
  Signaling value is particularly important

 When the nature of differentiation is based on intangible features and is therefore subjective or hard to
quantify,
 when buyers are making a first-time purchase and are unsure what their experience with the product will
be,
 When repurchase is infrequent, and
 When buyers are unsophisticated.

When a Differentiation Strategy Works Best

 Buyer needs and uses of the product are diverse

 There are many ways to differentiate the product or service that have value to buyers.
 Few rival firms are following a similar differentiation approach.
 Technological change is fast-paced and competition revolves around rapidly evolving product features.

Pitfalls to Avoid in Pursuing a Differentiation Strategy

 A differentiation strategy keyed to product or service attributes that are easily and quickly copied is
always suspect.

 Differentiation strategies can also falter when buyers see little value in the unique attributes of a
company’s product.

 The third big pitfall is overspending on efforts to differentiate the company’s product offering, thus
eroding profitability.

 Offering only trivial improvements in quality, service, or performance features vis-à-vis rivals’ products.

 Over-differentiating so that product quality, features, or service levels exceed the needs of most buyers.

 Charging too high a price premium.

FOCUSED (OR MARKET NICHE) STRATEGIES

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 lower price than those of rival competitors. This strategy has considerable
attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

A Focused Differentiation Strategy

Focused differentiation strategies involve offering superior products or services designed to appeal to the unique
preferences and needs of a narrow, well-defined group of buyers. Successful use of a focused differentiation
strategy depends on

(1) The existence of a buyer segment that is looking for special product attributes or seller capabilities and

(2) A firm’s ability to stand apart from rivals competing in the same target market niche.
When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive

A focused strategy aimed at securing a competitive edge based on either low costs or differentiation becomes
increasingly attractive as more of the following conditions are met:

 The target market niche is big enough to be profitable and offers good growth potential.

 Industry leaders have chosen not to compete in the niche—in which case focusers can avoid battling head
to head against the industry’s biggest and strongest competitors.

 It is costly or difficult for multisegment competitors to meet the specialized needs of niche buyers and at
the same time satisfy the expectations of their mainstream customers.

 The industry has many different niches and segments, thereby allowing a focuser to pick the niche best
suited to its resources and capabilities. Also, with more niches there is more room for focusers to avoid
competing for the same customers.

 Few if any rivals are attempting to specialize in the same target segment—a condition that reduces the
risk of segment overcrowding.

The Risks of a Focused Low-Cost or Focused Differentiation Strategy

 Focusing carries several risks. One is the chance that competitors will find effective ways to match the
focused firm’s capabilities in serving the target niche—perhaps by coming up with products or brands
specifically designed to appeal to buyers in the target niche or by developing expertise and capabilities
that offset the focuser’s strengths.

 A second risk of employing a focused strategy is the potential for the preferences and needs of niche
members to shift over time toward the product attributes desired by the majority of buyers.

BEST-COST PROVIDER STRATEGIES

Best-cost provider strategies are a hybrid of low-cost provider and differentiation strategies that aim at
providing more desirable attributes (quality, features, performance, service) while beating rivals on price.

The essence of a best-cost provider strategy is giving customers more value for the money by satisfying buyer
desires for appealing features and charging a lower price for these attributes compared to rivals with similar-
caliber product offerings. 6

To profitably employ a best-cost provider strategy, a company must have the capability to incorporate upscale
attributes into its product offering at a lower cost than rivals.

Being a best-cost provider is different from being a low-cost provider because the additional attractive attributes
entail additional costs (which a low-cost provider can avoid by offering buyers a basic product with few frills).
The two strategies aim at a distinguishably different market target. The target market for a bestcost provider is
value-conscious buyers— buyers who are looking for appealing extras and functionality at a comparatively low
price.

When a Best-Cost Provider Strategy Works Best

A best-cost provider strategy works best in markets where product differentiation is the norm and an attractively
large number of value-conscious buyers can be induced to purchase midrange products rather than cheap, basic
products or expensive, top-of-the-line products. 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 price. Best-cost provider strategies also work well in recessionary times, when masses of buyers
become value-conscious and are attracted to economically priced products and services with more appealing
attributes. But unless a company has the resources, know-how, and capabilities to incorporate upscale product or
service attributes at a lower cost than rivals, adopting a best-cost strategy is ill-advised.

The Risk of a Best-Cost Provider Strategy

A company’s biggest vulnerability in employing a best-cost provider strategy is getting squeezed between the
strategies of firms using low-cost and high-end differentiation strategies.

Low-cost providers may be able to siphon customers away with the appeal of a lower price (despite less appealing
product attributes).

High-end differentiators may be able to steal customers away with the appeal of better product attributes (even
though their products carry a higher price tag). Thus, to be successful, a best-cost provider must achieve
significantly lower costs in providing upscale features so that it can outcompete high-end differentiators on the
basis of a significantly lower price. Likewise, it must offer buyers significantly better product attributes to justify
a price above what low-cost leaders are charging. In other words, it must offer buyers a more attractive customer
value proposition.