Chapter 5 The Five Generic Competitive Strategy Options: Which One to Employ?

101
Strategy: Core Concepts and Analytical Approaches
Arthur A. Thompson, The University of Alabama 7th Edition, 2022-2023
An e-book marketed by McGraw-Hill Education

Chapter 5
The Five Generic Competitive
Strategy Options: Which One
to Employ?
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 E. Porter

Strategy is all about combining choices of what to do and what not to do into a system that creates the
requisite fit between what the environment needs and what the company does.
—Costas Markides

The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the
ones you possess today.
—Gary Hamel and C. K. Prahalad

Competing in the marketplace is like war. You have injuries and casualties, and the best strategy wins.
—John Collins

A
company can employ any of several basic approaches to competing successfully and gaining a competitive
advantage over rivals, but they all involve striving to deliver superior value to customers compared to the
offerings of rival sellers. Superior customer value can mean a good product at a lower price, a superior
product that is worth paying more for, or a best-value offering that represents an attractive combination of price,
features, quality, service, and other appealing attributes. Delivering superior value—whatever form it takes—
nearly always requires performing value chain activities differently from rivals and developing competitively
potent resources and capabilities that rivals cannot readily match or trump.

This chapter describes the five generic competitive strategy options. Each of the five strategy options represents a
distinctly different approach to competing in the marketplace. Which of the five options to employ is a company’s
first and foremost choice in crafting an overall strategy and beginning the quest for competitive advantage.

101
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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 102

THE FIVE GENERIC COMPETITIVE STRATEGIES

A company’s competitive strategy deals exclusively with the specifics of management’s game plan for competing
successfully—how it intends to please customers, offensive and defensive moves to counter the maneuvers of
rivals, responses to shifting market conditions, and initiatives to strengthen the company’s market position
and achieve a particular kind of competitive advantage. Chances are remote that any two companies—even
companies in the same industry—will employ competitive strategies that are exactly alike in every detail.
Why? Because the differing external and internal circumstances of different companies vary too widely for the
managers of different companies to arrive at precisely the same conclusion about what strategy to employ, down
to each and every detail.

However, when one strips away the details to get at the real substance, the two biggest factors that distinguish
one competitive strategy from another boil down to (1) whether a company’s market target is broad or narrow,
and (2) whether the company is pursuing a competitive advantage linked to lower costs or differentiation. As
shown in Figure 5.1, these two factors give rise to five competitive strategy options for staking out a market
position, operating the business, and delivering superior value to buyers:1

1. A broad low-cost provider strategy—striving to achieve lower overall costs than rivals in offering a product
or service with attributes sufficient to attract a broad spectrum of buyers. Gaining a low-cost advantage
over rivals offering comparable products/services enables a company to either boost sales and market
share by underpricing rivals or else earn bigger profits by simply matching whatever prices its higher-cost
rivals are charging.

2. A broad differentiation strategy—seeking to differentiate the company’s product offering from rivals’
offerings with 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 striving
to meet the specific needs and requirements of niche members at lower costs than rivals, thus being in a
position to win buyer favor and outcompete rivals with a lower-priced product offering.

4. A focused differentiation strategy—concentrating on a narrow buyer segment (or market niche) and
striving to outcompete rivals by offering niche members customized attributes that meet their tastes and
requirements better than the product offerings of rivals.

5. A best-cost provider strategy—striving to incorporate upscale product attributes at a lower cost than rivals.
Being the “best-cost” producer of an upscale, multi-featured product allows a company to give customers
more value for their money by underpricing rivals whose products have similar upscale, multi-featured
attributes. This competitive approach is a hybrid strategy that blends elements of the previous four options
in a unique and often effective way.

The remainder of this chapter explores the ins and outs of these five generic competitive strategy options.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 103

FIGURE 5.1 The Five Generic Competitive Strategy Options

Overall
Broad
A Broad Low-Cost
Differentiation
Cross-Section Provider
Strategy
of Buyers Strategy
Market Target

Best-Cost
Provider
Strategy

A Narrow Focused Focused

Buyer Segment Low-Cost Differentiation
(or Market Niche) Strategy Strategy

Lower Cost Differentiation

Type of Competitive
Advantage Being Pursued
Source: This is an author-expanded version of a three-strategy classification discussed in Michael E. Porter, Competitive Strategy
(New York: Free Press, 1980), pp. 35–40.

BROAD LOW-COST PROVIDER STRATEGIES

The objective of a broad low-cost strategy is to produce a good or service for a broad range of buyers at a lower
overall cost than rivals. Striving to achieve lower overall costs than rivals is an especially potent competitive
approach in markets with many price-sensitive buyers. A
company achieves low-cost leadership when it becomes CORE CONCEPT
the industry’s lowest-cost provider rather than just being The strategic aim of a broad low-cost strategy is
one of perhaps several competitors with comparatively low to produce a good or service for a broad range
costs. However, it is important to understand that a low- of buyers at a lower overall cost than rivals and
cost provider’s true strategic objective is meaningfully thereby gain a cost-based competitive edge in the
lower costs than rivals, but not necessarily the absolutely
marketplace. But the success of a low-cost strategy
lowest possible cost. In striving for a cost advantage over
depends on achieving a low-cost advantage
rivals, company managers must take care to incorporate
that is durable rather than fleeting; this requires
features and attributes that most buyers consider essential.
a company to employ cost-saving approaches
A product offering that is too features-free can undermine
its value and attractiveness to buyers even if it is cheaper and develop cost-reducing capabilities that are
priced. Further, it is important to understand that long- difficult for rivals to copy, and thereby achieve a
term effectiveness of broad low-cost strategies hinges sustainable low-cost advantage.
upon a company employing cost-saving approaches and
developing cost-reducing capabilities that are difficult for rivals to copy. When it is relatively easy or inexpensive
for rivals to imitate the low-cost firm’s means of achieving low costs, the leader’s low-cost advantage evaporates
too quickly to gain a durable and more valuable competitive edge in the marketplace.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 104

Translating a Low-Cost Competitive Edge into Attractively High Total Profits A company has
two strategic options for translating a low-cost advantage over rivals into high profitability. Option 1 is to use
its lower-cost edge to underprice competitors and attract
price-sensitive buyers in great enough numbers to increase A low-cost advantage over rivals can translate into
total profits. Option 2 is to charge a price comparable to better profitability than rivals.
other low-priced rivals, be content with the resulting sales
volume and market share, and rely upon the low-cost edge over rivals to earn a bigger profit margin per unit sold,
thereby boosting the firm’s total profits and return on investment.

While many companies are inclined to exploit a low-cost advantage by using Option 1 (attacking rivals with
lower prices in hopes that the expected gains in sales and market share will lead to higher total profits), moves
to charge a lower price can backfire if several rivals respond with retaliatory price cuts of their own (to defend
against a loss of sales and protect their customer base). Often, a rush by several competitors to cut prices causes
many, if not all, industry members to institute defensive price cuts of their own. Widespread price discounting
runs the risk of triggering a perhaps ferocious price war that erodes the profits of all industry members. The
bigger the risk that rivals will respond with matching price cuts coupled with greater marketing expenditures
on the part of some/many industry rivals to help protect their sales and market shares, the more appealing it
becomes for companies pursuing low-cost strategies to employ the second option for using a low-cost advantage
to achieve higher profitability.

The Two Major Avenues for Achieving a Cost Advantage

To gain a valuable low-cost competitive edge over rivals, a firm’s cumulative costs across its overall value chain
must be lower than competitors’ cumulative costs—and the means of achieving the cost advantage must be
durable. There are two ways to accomplish this.2

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 For a company to do a more cost-efficient

job of managing its value chain than rivals, managers must
diligently search out cost-saving opportunities in every CORE CONCEPT
part of the value chain. No activity can escape cost-saving A cost driver is a factor that has a strong influence
scrutiny, and all company personnel must be expected to
on a company’s costs.
use their talents and ingenuity to come up with innovative
and effective ways to keep costs down. Particular attention
must be paid to a set of factors known as cost drivers that have a strong effect on a company’s costs and can
be used as levers to lower costs. Figure 5.2 shows the most important cost drivers. Cost-saving approaches that
demonstrate effective use of the cost drivers include:

l Capturing all available economies of scale. Economies of scale stem from an ability to lower unit
costs by increasing the scale of operation—many occasions arise when a large plant can achieve lower
costs per unit produced than a small or medium-sized plant, when a large distribution center is more
cost-efficient than a small one, or when the unit selling and marketing costs for a wide product line are
lower than for a small product line. Often, manufacturing economies can be achieved by using common
parts and components in different models and/or by cutting back on the number of models offered
(especially slow-selling ones)—which enable a company to escape the costs of inventorying a greater
number of parts and components, avoid the costs associated with model changeover, and schedule
longer production runs for fewer models.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 105

FIGURE 5.2 Cost Drivers—The Keys to Driving Down Costs

Outsourcing or
vertical integration Economies of scale

Online systems
Learning and
and software
experience

COST
Product design DRIVERS Capacity
and production utilization
technology

Labor efficiency, Raw materials

pay scales, and and components
incentives
Supply chain
efficiency Bargaining power
vis-à-vis suppliers

Source: Adapted by the author from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance
(New York: The Free Press, 1985), Chapter 3.

l Taking full advantage of experience and learning-curve effects. The cost of performing an activity can
decline over time as the learning and experience of company personnel build. Learning/experience
economies can stem from debugging and mastering newly introduced technologies, using the experiences
and suggestions of workers to install more efficient plant layouts and assembly procedures, and the
added speed and effectiveness that accrues from repeatedly picking sites for and building new plants,
distribution centers, or retail outlets.

l Operating facilities at full capacity. Whether a company is able to operate at or near full capacity has a
big impact on unit costs when its value chain contains activities associated with substantial fixed costs.
Higher rates of capacity utilization allow depreciation and other fixed costs to be spread over a larger
unit volume, thereby lowering fixed costs per unit. The more capital-intensive the business, or the higher
the percentage of fixed costs as a percentage of total costs, the greater the unit-cost penalty for operating
at less than full capacity. Also, successful efforts to boost sales volumes and move closer to full capacity
utilization spread R&D, advertising, sales promotion, and administrative support costs across more
units, thus contributing to lower costs per unit sold.

l Substituting the use of lower-cost inputs for higher-cost inputs whenever there is little or no sacrifice
in product quality or product performance. If the costs of certain raw materials, parts, and components
are “too high,” a company can switch to using lower-cost items or maybe even design the high-cost
components out of the product altogether.

l Using the company’s bargaining power vis-à-vis suppliers or others in the value chain system to gain
concessions. Companies like Home Depot and Lowe’s have sufficient bargaining clout with suppliers to
win price discounts on large-volume purchases.

l Improving supply chain efficiency. Partnering with suppliers to streamline the ordering and purchasing
process, to reduce inventory carrying costs via just-in-time inventory practices, to economize on shipping
and materials handling, and to ferret out other cost-saving opportunities in supply chain activities is a

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 106

much-used approach to cost reduction. A company with a core competence (or better still, a distinctive
competence) in cost-efficient supply chain management can sometimes achieve a sizable cost advantage
over less adept rivals.

l Pursuing actions to lower labor costs per unit produced. Such actions can include instituting incentive
compensation systems that boost labor productivity and/or curtail production defects, installing robot-
assisted production methods or other types of labor-saving equipment, and training workers in using best
practice production/assembly methods. Achieving lower labor costs may also entail shifting production
from geographic areas where pay scales are high to geographic areas where pay scales are low and
avoiding the use of union labor to escape costly work rules and/or union demands for excessive pay
scales and fringe benefits.

l Improving product design and employing cost-saving production techniques. Many companies aggres­
sively search for ways to redesign parts and components to permit speedier and more economical
manufacture or assembly. Often design and production costs can be cut by (1) using design for manufacture
(DFM) procedures, computer-assisted design (CAD), artificial intelligence-aided design software, and
3D printing techniques (often called additive manufacturing) that enable significantly more integrated
and cost-efficient production methods, (2) investing in highly automated robotic production technology,
and (3) shifting to a production process that enables manufacturing multiple versions of a product as
cost efficiently as mass-producing a single version. Many companies use process management tools like
total quality management systems, business process reengineering, and Six Sigma techniques to boost
efficiency, eliminate errors and mistakes, and reduce the costs of activities across the value chain.

l Using online systems and sophisticated software to achieve operating efficiencies. For example, sharing
data and production schedules with suppliers, coupled with the use of enterprise resource planning (ERP)
and manufacturing execution system (MES) software, can reduce parts inventories, trim production
times, and lower labor requirements. Recently developed artificial intelligence software systems
enable faster design of new products, speed machine learning, lower the cost of performing highly
complex tasks, reduce human error, and allow faster decisions. Many companies are ardent proponents
implementing best practices to perform virtually all of their organization’s value chain activities.

l Using outsourcing and/or vertical integration to achieve cost savings. Outsourcing the performance
of certain value chain activities can be more economical than performing them in-house if outside
specialists, by virtue of their expertise and volume, can perform the activities at a lower cost. Furthermore,
integrating into the activities of either suppliers or distribution channel allies can sometimes lower costs
by increasing internal efficiency, lowering transactions costs, and bypassing suppliers or distributors
with considerable bargaining power.

In addition to the preceding ways of performing value chain activities at lower costs than rivals, managers
can also achieve important cost savings by deliberately opting for a strategy with lower cost elements than the
strategies employed by rivals. For instance, a company can often open up a durable cost advantage over rivals
by:

l Having lower specifications for purchased materials, parts, and components than rivals. For example,
a maker of personal computers can use the cheapest hard drives, microprocessors, monitors, and other
components to achieve lower production costs than rival PC makers.

l Stripping frills and features from its product offering that are not highly valued by price-sensitive or
bargain-hunting buyers. Deliberately restricting the company’s product offering to “the essentials” can
help a company cut costs associated with snazzy attributes and a full lineup of options and extras.
Activities and costs can also be eliminated by offering buyers fewer services.

l Offering a limited product line as opposed to a full product line. Pruning slow-selling items from the
product lineup and being content to meet the needs of most rather than all buyers can eliminate activities
and costs associated with numerous product versions and a wide selection.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 107

l Distributing the company’s product only through low-cost distribution channels and avoiding high-cost
distribution channels.

l Choosing to use the most economical method for delivering customer orders (even if it results in longer
delivery times).

The point here is that a low-cost provider strategy entails not only performing value chain activities cost
effectively but also judiciously choosing cost-saving strategic approaches.

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

l Selling direct to consumers and cutting out the activities and costs of distributors and dealers. To
circum­vent the need for distributors–dealers, a company can (1) create its own direct sales force (which
adds the costs of maintaining and supporting a sales force but which may well be cheaper than using
independent distributors and dealers), and/or (2) conduct sales operations at the company’s website
(costs for website operations and shipping may be a substantially cheaper way to make sales to customers
than going through distributor–dealer channels). Costs in the wholesale/retail portions of the value chain
frequently represent 35–50 percent of the price final consumers pay, so establishing a direct sales force
or selling online may offer big cost savings.

l Shifting to the use of technologies and/or information systems that bypass the need to perform certain
high-cost value chain activities. Some manufacturers have adopted innovative production or processing
technologies that eliminate the need for costly facilities or equipment and require fewer employees.
Still others have instituted procedures whereby suppliers combine particular parts and components into
preassembled modules, thus permitting a manufacturer to assemble its own product in fewer work steps
and with a smaller workforce. Numerous companies have online systems and software that automate
and communicate order acceptances and shipping notices to customers via e-mail and turn formerly
time-consuming and labor-intensive tasks like purchasing, inventory management, invoicing, and bill
payment into speedily performed mouse clicks.

l Reducing materials handling and shipping costs by having suppliers locate their plants or warehouses close
to a company’s own facilities. Having suppliers locate their plants or warehouses close to a company’s own
plant facilitates just-in-time deliveries of parts and components to the exact workstation where they will be
used in assembling the company’s product. This not only lowers incoming shipping costs but also curbs or
eliminates the company’s need to build and operate storerooms for incoming parts and components, and
have plant personnel move the inventories to workstations as needed for assembly.

l Streamlining operations by eliminating low value-added activities, eliminating unnecessary work

steps, and instituting ways to digitally perform an assortment of internal activities. At Walmart, some
items supplied by manufacturers are delivered directly to retail stores rather than being routed through
Walmart’s distribution centers and delivered by Walmart trucks. In other instances, Walmart unloads
incoming shipments from manufacturers’ trucks arriving at its distribution centers directly onto outgoing
Walmart trucks headed to particular stores without ever moving the goods into the distribution center.
Many supermarket chains have greatly reduced in-store meat butchering and cutting activities by shifting
to meats that are cut and packaged at the meat-packing plant and then delivered to their stores in ready-to-
sell form. Online systems allow warranty claims and product performance problems involving supplier
components to be instantly relayed to the relevant suppliers so corrections can be expedited. Scores
of new software technology companies (such as Snowflake, Databricks, ServiceNow, Atlassian, Zoho,
Digital Turbine, Splunk, Veeva, and Qualtrix) have found eager buyers for their innovative, value-
enhancing software products with the capability to quickly perform complex data analysis tasks, integrate
the results of certain other company operating systems, and also digitally streamline the performance of
time-consuming manual (mostly administrative) activities. The outcome of utilizing these revolutionary
software products is increased internal operating efficiency and lower operating costs.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 108

Examples of Companies That Revamped Their Value Chains to Reduce Costs Nucor Corporation,
the most profitable steel producer in the United States and one of the largest steel producers worldwide, drastically
revamped the value chain process for manufacturing steel products by using relatively inexpensive electric arc
furnaces where scrap steel and direct-reduced iron are melted and then sent to a continuous caster and rolling mill
to be shaped into steel bars, steel beams, steel plates, and sheet steel. Using electric arc furnaces to make new
steel products by recycling scrap steel eliminated many of the steps used by traditional steel mills that made their
steel products from iron ore, coke, limestone, and other ingredients using costly coke ovens, basic oxygen blast
furnaces, ingot casters, and multiple types of finishing facilities—plus Nucor’s value chain system required far
fewer employees. As a consequence, Nucor produces steel with a lower capital investment, a smaller workforce,
and lower operating costs than traditional steel mills. Nucor’s strategy to replace the traditional steel-making
value chain with its simpler, quicker value chain approach has made it one of the world’s lowest-cost producers
of steel, enabling it to take substantial sales and market share away from traditional steel companies and earn
consistently good profits (Nucor reported a profit in 207 out of 211 quarters during 1966–2020—a remarkable
feat in a mature and cyclical industry notorious for roller coaster bottom-line performance).

Southwest Airlines has achieved considerable cost-savings by reconfiguring the traditional value chain of
commercial airlines, thereby permitting it to offer travelers lower fares. Its mastery of fast turnarounds at the
gates (about 25 minutes versus 45 minutes for rivals) allows its planes to fly more hours per day. This translates
into being able to schedule more flights per day with fewer aircraft, allowing Southwest to generate more revenue
per plane on average than rivals. Southwest does not offer assigned seating, baggage transfer to connecting
airlines, or first-class seating and service, thereby eliminating all the cost-producing activities associated with
these features. The company’s fast and user-friendly online reservation system facilitates e-ticketing and reduces
staffing requirements at telephone reservation centers and airport counters. Its use of automated check-in
equipment reduces staffing requirements for terminal check-in. The company’s carefully designed point-to-point
route system minimizes connections, delays, and total trip time for passengers, allowing about 75 percent of
Southwest passengers to fly nonstop to their destinations while at the same time reducing Southwest’s costs for
flight operations.

The Keys to Being a Successful Low-Cost Provider

To succeed with a low-cost provider strategy, company managers must scrutinize each cost-creating activity and
determine what factors result in higher/lower costs. Then, they have to use this knowledge about the cost drivers
to streamline or reengineer how activities are performed,
exhaustively pursuing cost efficiencies throughout the Success in achieving a low-cost edge over rivals
value chain. Normally, low-cost producers try to engage all comes from out-managing rivals in finding ways
company personnel in continuous cost-improvement efforts, to perform value chain activities faster, more
and they strive to keep administrative costs to a minimum. accurately, and more cost efficiently.
Many successful low-cost leaders also use benchmarking
to keep close tabs on how their costs compare with rivals and firms performing comparable activities in other
industries, and they are quick to implement best practices.

But while low-cost providers are champions of frugality, they seldom hesitate to spend aggressively on
technologies and resource capabilities that promise to drive down costs. Indeed, investing in state-of-the art
cost-saving competitive assets is one of the best pathways to achieving sustainable competitive advantage as
a low-cost provider. Walmart, one of the world’s foremost low-cost providers, has been an early adopter of
state-of-the-art technology throughout its operations—its distribution facilities are an automated showcase, it
has developed sophisticated online systems to order goods from suppliers and manage inventories, it equips
its stores with cutting-edge sales-tracking and check-out systems, and it sends daily point-of-sale data to 4,000
vendors, but Walmart carefully estimates the cost savings of new technologies before it rushes to invest in them.
By continuously, yet prudently, investing in cost-saving technologies and operating improvements, Walmart has
sustained its low-cost advantage over rivals for almost 35 years.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 109

Uber and Lyft™, employing a formidable low-cost provider strategy and an innovative business model, have
stormed their way into hundreds of locations across the world, totally disrupting and seemingly forever changing
competition in the taxi markets where they have a presence. And, most significantly, the ultra-low fares charged
by Uber and Lyft™ have resulted in dramatic increases in the demand for taxi services, particularly those
provided by these two low-cost providers. Other companies noted for their successful use of low-cost provider
strategies include Vizio in big-screen TVs, Briggs & Stratton in small gasoline engines, Bic in ballpoint pens,
Stride Rite in footwear, Poulan in chain saws, and General Electric and Whirlpool in major home appliances.

When a Low-Cost Provider Strategy Works Best

A low-cost provider strategy becomes increasingly appealing and competitively powerful when:

l Price competition among rival sellers is vigorous. Low-cost providers are in the best position to
compete offensively on the basis of price, to use the appeal of lower price to grab sales (and market
share) from rivals, to win the business of price-sensitive buyers, to remain profitable despite strong price
competition, and to survive price wars.

l The products of rival sellers are essentially identical and readily available from many eager sellers.
Look-alike products and/or overabundant supplies set the stage for lively price competition. In such
markets, it is the less efficient, higher-cost companies whose profits get squeezed the most.

l It is difficult to achieve product differentiation in ways that have value to buyers. When the differences
between brands do not matter much to buyers, buyers are nearly always sensitive to price differences
and the industry-leading companies tend to be those with the lowest-price brands.

l Most buyers use the product in the same ways. With common user requirements, a standardized product
can satisfy the needs of most buyers, in which case low selling price, not features or quality, becomes
the dominant factor in causing buyers to choose one seller’s product over another’s.

l Buyers incur low costs in switching their purchases from one seller to another. Low switching costs
give buyers the flexibility to shift purchases to lower-priced sellers having equally good products, or
to attractively priced substitute products. A low-cost leader is well positioned to use low price both to
attract new customers and to induce its customers not to switch to rival brands or substitutes.

l Large-volume buyers with significant power to bargain down prices account for a big fraction of the
industry’s sales. Low-cost providers have partial profit-margin protection in bargaining with high-
volume buyers, since powerful buyers are rarely able to bargain prices down past the survival level of
the next most cost-efficient seller.

l Industry newcomers use introductory low prices to attract buyers and build a customer base. A low-cost
provider can use price cuts of its own to make it harder for a new rival to win customers. Moreover, the
pricing power of a low-cost provider acts as a barrier for new entrants.

Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy

Perhaps the biggest mistake a low-cost provider can make to spoil the profitability of its low-cost advantage is
getting carried away with overly aggressive price cutting
to win sales and market share away from rivals. Higher A lower price improves profitability only if the
unit sales and market shares do not automatically translate lower price results in gains in unit sales (and thus
into higher total profits. Reducing price results in earning revenues) that are big enough to overcome the
a lower profit margin on each unit sold. For a lower price combined effects of a smaller profit margin and
to result in larger total profits, the gains in unit sales must the added costs of the extra units sold.
be large enough to produce revenue increases sufficient to
overcome the effects of a lower profit margin. Otherwise, a lower price results in lower, not higher profitability. A

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 110

simple numerical example tells the story: suppose a firm selling 1,000 units at a price of $10, a cost of $9, and a
profit margin of $1 opts to cut the price five percent to $9.50—which reduces the firm’s profit margin to $0.50 per
unit sold (unless higher sales volumes cause unit costs to fall below $9); assuming unit costs remain at $9, then
it takes a 100 percent sales increase to 2,000 units just to offset the narrower profit margin and get back to total
profits of $1,000—and a more than 100 percent sales increase for the price cut to boost total profits above what
was being earned at the $10 price. Hence, whether a price cut will result in higher or lower profitability depends
on how big the resulting sales gains will be and how much, if any, unit costs will fall as sales volumes increase.

A second pitfall of a low-cost provider strategy is relying on cost reduction approaches that can be easily copied
by rivals. The value of a cost advantage depends on its sustainability. Sustainability, in turn, hinges on whether
the company achieves its cost advantage in ways that can be kept proprietary or that are very costly and/or time-
consuming for rivals to copy.

A third pitfall is becoming too fixated on cost reduction. Low cost cannot be pursued so zealously that a firm’s
offering ends up being too features poor to generate buyer
appeal. Furthermore, a company driving hard to push its A low-cost provider’s product offering must
costs down must guard against misreading or ignoring always contain enough attributes to be attractive
increased buyer interest in added features or service, to prospective buyers—low price, by itself, is not
declining buyer sensitivity to price, or new developments always appealing to buyers.
that start to alter how buyers use the product. A low-cost
zealot risks losing market ground if buyers start opting for more upscale or features-rich products.

Even if these mistakes are avoided, a low-cost provider strategy still entails risk. An innovative rival may discover
an even lower-cost value chain approach. Important cost-saving technological breakthroughs may suddenly
emerge. And if a low-cost provider has heavy investments in its present means of operating, it can prove costly
to quickly shift to the new value chain approach or a new technology.

BROAD DIFFERENTIATION STRATEGIES

Differentiation strategies are attractive whenever buyers’
needs and preferences are too diverse to be fully satisfied CORE CONCEPT
by a standardized product offering. Successful product The strategic aim of a broad differentiation
differentiation requires careful study to determine what strategy is to offer unique product attributes that
features and attributes buyers will view as appealing, a wide range of buyers find appealing and worth
valuable, and worth paying for.3 Then the company must paying for (because of the added value they
incorporate a combination of these features and attributes deliver).
into its product offering that will not only be attractive to
a broad range of buyers but also be unique and different
enough to stand apart from rivals’ product offerings—in this latter regard, a strongly differentiated product
offering is always preferable to a weakly differentiated one. A broad differentiation strategy can yield a
competitive advantage when an attractively large number of buyers become strongly attached to a company’s
differentiated attributes.

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

l Command a premium price for its product.

l Increase unit sales (because additional buyers are won over by the differentiating features).

l Gain buyer loyalty to its brand (because many customers really like the differentiating features and bond
with the company and its products).

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 111

Differentiation enhances profitability whenever a company’s product can command a sufficiently higher price
or generate sufficiently bigger unit sales to more than cover the added costs of achieving the differentiation.
Company differentiation strategies fail when buyers don’t place much value on the brand’s uniqueness and/or
when a company’s differentiating features are easily copied by rivals.

Companies can pursue differentiation from many angles: a unique taste (Dr Pepper, Listerine, Red Bull); multiple
features (Microsoft Office, Apple Watch); wide selection and one-stop shopping (The Home Depot, Amazon.com);
superior service (Nordstrom, Ritz-Carlton); engineering design and performance (Mercedes, BMW); prestige
and distinctiveness (Rolex); quality manufacture (Michelin in tires); technological leadership (3M Corporation
in bonding and coating products); spare parts availability (Caterpillar in heavy construction equipment and John
Deere in farm and lawn equipment); a full range of services (Charles Schwab stock brokerage); many varieties
(Campbell’s soups, Frito-Lay snack foods); and high-fashion design (Gucci, Prada, and Chanel).

Managing Value Chain Activities to Create Differentiating

Attributes that Add Customer Value
Differentiation is not something hatched in marketing and advertising departments, nor is it limited to the catchalls
of quality and service. Differentiation opportunities can
exist in activities all along an industry’s value chain. CORE CONCEPT
Success in employing a differentiation strategy comes
A value driver is a factor that can be effective in
from deliberate efforts to perform value chain activities
enhancing differentiation and adding value for
in ways that create value-adding differentiating attributes
customers.
and also better differentiate the company’s product/service
offering from rivals’ offerings. Perhaps, the most systematic
approach managers can take to achieve successful differentiation involves focusing on the value drivers, a set
of factors—analogous to cost drivers—that are particularly effective in creating differentiation and adding value
for customers—see Figure 5.3.

FIGURE 5.3 Value Drivers—Keys to Value-Adding Differentiation

Product features
and performance

Distribution
activities Inputs and activities
that improve product
quality and reliability

Marketing, VALUE New product R&D and

advertising, and product innovation
brand-building DRIVERS

Employee Production R&D

skills, training, and breakthrough
experience production techniques

Customer Wide product

service selection

Source: Adapted by the author from Michael E. Porter, Competitive Advantage (New York: The Free Press, 1985), pp. 124–126.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 112

Ways that managers can use the value drivers to enhance differentiation include the following:

l Create new value-adding product features and performance attributes that appeal to a wide range of
buyers. A product’s physical and functional features have a big influence on differentiation. Styling and
looks are big differentiating factors in the apparel and motor vehicle industries. Size and weight matter
in binoculars and mobile devices. Most companies employing broad differentiation strategies make a
point of incorporating innovative and novel features in their product/service offering, especially those
that improve performance and functionality, and they regularly introduce next-generation versions with
both upgraded existing features and additional features. Offering a growing set of features is generally a
strong plus. Having unique features and performance capabilities not found in rival products is a must.
Often new or improved attributes that will have wide buyer appeal are developed in close collaboration
with suppliers.

l Pursuing continuous quality improvements via the use of better parts, components, or ingredients and
the use of quality control processes throughout the value chain. Customer-perceived differences in
quality are an important differentiating and value-adding attribute. Improvements in product quality
can lead to greater reliability, fewer repairs and less frequent maintenance, longer product life, and the
convenience of trouble-free use—all of which make it economical to offer longer warranty coverage and
contribute to an enhanced reputation for quality among customers. Quality improvement opportunities
exist in such value chain activities as product design, the caliber of items purchased from suppliers,
manufacturing and assembly, and customer service. For example, Starbucks gets high ratings on its
coffees partly because it works closely with coffee growers to produce coffee beans that will meet its
strict quality specifications. Quality differentiation can also be achieved by using assorted quality control
techniques throughout the value chain rather than in just manufacturing or assembly. For instance, using
quality control techniques in customer service can lead to more accurate handling of service requests
and consistently solving customer problems on the first attempt or contact.

l Emphasizing new product R&D and product innovation. The potential differentiating outcomes here
include greater ongoing ability to introduce new and improved innovative products (which can lead to
more first-on-the-market victories and a reputation for product innovation), new or improved features
and styling, better functional performance, more aesthetic product designs and appearance, expanded
end uses and applications, added user safety, or environmentally safe use of the product. Innovation that
is hard for rivals to replicate is a source of competitive advantage.

l Improving production selection. Amazon.com and big-box retailers like The Home Depot and Target
have demonstrated that an expansive lineup of products, together with multiple models/styles/varieties
of each type of product, is attractive to a broad spectrum of shoppers. Not only does wide selection offer
the time-saving benefit of a one-stop shopping experience, but it also enables shoppers to compare the
assorted models/styles/varieties within a product category and pick what suits their tastes, requirements,
and pocketbook. An added differentiating feature of shopping at Amazon.com and other online retailers
is one-click access to reviews of each item offered for sale—information gleaned from reviews often
facilitates making wiser buying decisions.

l Investing in production-related R&D, striving for technological advances, and implementing better
production techniques. Better or different performance of production-related value chain activities
can spur breakthrough production techniques for making an innovative product, enable custom-order
manufacture at an efficient cost, make production methods safer for the environment, curtail production-
related defects, reduce premature product failure, or improve economy of use.

l Improving customer service and/or providing more service options. In some businesses, offering better
customer service and/or a bigger range of service options contribute as much to differentiation enhancement
as attributes relating to product quality, features, or performance. Examples of differentiation-enhancing
customer services include no-hassle return policies, multiple payment plans, better credit terms, faster

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 113

or better-quality maintenance and repairs, expert technical assistance, personal concierge services, more
and better product information, training for end users, and round-the-clock availability of knowledgeable
customer-service representatives (as opposed to having to call only during regular business hours).

l Emphasizing human resource management activities that improve the skills, expertise, and knowledge
of company personnel. A company with high-caliber intellectual capital often has the capacity to
generate the kinds of ideas that drive product innovation, technological advances, better product
design and product performance, improved production techniques, and higher product quality. Skilled
customer service representatives can make a huge difference in how customers perceive the caliber of
a company’s customer services. Well-designed incentive compensation systems can often unleash the
efforts of talented personnel to develop and implement new and effective differentiating attributes.

l Pursuing sales, marketing, and advertising activities that lead to greater brand name power. The
manner in which a company conducts its marketing and brand management activities has a significant
influence on customer perceptions of the value of a company’s product offering and the price they will
pay for it. A highly skilled and competent sales force, effectively communicated product information,
eye-catching ads, in-store displays, and special promotional campaigns can all cast a favorable light on
the differentiating attributes of a company’s product/service offering and contribute to greater brand-
name awareness and brand-name power. A highly positive brand image keyed to various differentiating
attributes builds customer loyalty to the brand and raises customers’ perceived cost of switching to a
rival brand. Activities that contribute to greater brand name power are thus an important avenue for
achieving stronger differentiation.

l Improving distribution capabilities and collaborating with distribution allies to enhance customer
perceptions of value. Distribution activities hold potential for a variety of differentiating attributes.
Differentiation can be enhanced via a bigger distributor/dealer network than rivals and/or wider geographic
distribution capabilities than rivals. Close collaboration with distribution partners—independent
distributors, dealers, and retailers—can produce an assortment of differentiating attributes. It is common
for motor vehicle manufacturers to set facilities standards for their dealerships (nice showrooms, well-
appointed waiting areas) and to insist that all mechanics and service managers be factory trained and
maintain ongoing factory certification. Many manufacturers work directly with retailers on in-store
displays and signage, joint advertising campaigns, and providing salesclerks with product knowledge
and tips on sales techniques—all to enhance customer-buying experiences. Companies can work with
distributors and shippers to ensure fewer “out-of-stock” annoyances, quicker delivery to customers,
more accurate order filling, lower shipping costs, and provide a variety of shipping choices to customers.

Signaling Value to Buyers A company can often assist its efforts to achieve differentiation by signaling the
value of its product offering to buyers.4 Typical signals of
value include a high price (in instances where high price Signaling value to buyers can assist a company’s
implies high quality and performance), more appealing or differentiation efforts.
fancier packaging than competing products, ongoing or
extensive ad campaigns (which impact a product’s image and make it more widely known), ad content that
emphasizes a product’s standout attributes, the quality of brochures and sales presentations, the luxuriousness and
ambience of a seller’s facilities (important for high-end retailers and for offices or other facilities that customers
frequent), making buyers aware that a company has prestigious customers, and the professionalism, appearance,
and personalities of the seller’s employees. Signaling value is particularly important when (1) the nature of
differentiation is subjective or hard to quantify, (2) buyers are making a first-time purchase and are unsure what
their experience with the product will be, (3) buyers are not fully aware of a product’s many attributes, and (4)
repurchase is infrequent and buyers need to be reminded of a product’s value.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 114

Achieving Sustainable Competitive Advantage The most appealing approaches to differentiation are
those that are hard or expensive for rivals to duplicate. Resourceful competitors can, in time, clone almost
any product feature or attribute. If General Motors offers
self-driving features in many of its models, so can Ford Easy-to-copy differentiating attributes cannot
and Toyota. If Samsung offers QLED TVs with super ultra- produce sustainable competitive advantage.
high definition, so can Sony and LG. Consequently, for a
company to build a sustainable competitive advantage via differentiation, it needs to base its differentiation
strategy on attributes that are difficult or expensive for rivals to copy or to overcome or that creates high switching
costs for users. The best routes to sustainable differentiation include:

l Focusing on continuous product innovation, with a goal of developing the resources and capabilities
to out-innovate rivals on an ongoing basis as concerns appealing product features, better product
performance, and/or higher product quality. Patent-protected innovations have enormous differentiating
value because rivals must wait until the patent expires to introduce the innovation into its own product
offering.

l Incorporating features that raise product performance and deliver added value to the buyer/end-user.
This can be accomplished by including attributes that add functionality, expand the range of uses, save
time for the user, are more reliable, or make the product cleaner, safer, quieter, simpler to use, portable,
more convenient, or longer lasting than rival brands.

l Incorporating product attributes and user features that lower the buyer’s overall costs of using the
company’s product. Fewer product defects, greater product reliability, and longer maintenance intervals
reduce user costs for repairs and maintenance. Energy-saving light bulbs and appliances cut buyers’
utility bills. Fuel-efficient vehicles reduce buyer outlays for gasoline.

l Incorporating features or attributes that enhance buyer satisfaction in intangible ways. Tesla’s battery-
powered vehicles and Toyota’s Prius appeal to environmentally conscious motorists who wish to help
reduce global carbon dioxide emissions. Rolls Royce, Tiffany, Rolex, and Prada enjoy differentiation-
based competitive advantages linked to the desires of luxury goods buyers for status, prestige, upscale
fashion, craftsmanship, and the finer things in life. While rivals can often duplicate tangible product
features quickly, such intangible attributes as a highly-regarded brand name and long-standing
relationships with customers take a long time to imitate.

l Delivering value to customers on the basis of competitively valuable resources and capabilities that
rivals don’t have or can’t afford to match.5 Competencies and capabilities that are sufficiently unique in
delivering value to buyers provide a route to differentiation that is not tied exclusively to the attributes of
a product or service. A company with superior technological capabilities vis-à-vis rivals can incorporate
attributes into its product offering directly linked to its technological capabilities and thereby gain
substantial protection from the rivals’ attempts to match its product offering. Health care facilities
like M.D. Anderson, Mayo Clinic, and Cleveland Clinic have specialized expertise and equipment for
treating certain diseases that most hospitals and health care providers cannot afford to emulate.

When a Broad Differentiation Strategy Works Best

Broad differentiation strategies tend to work best in market circumstances where:

l Buyer needs and uses of the product are diverse. Diverse buyer preferences present competitors with a
bigger window of opportunity to do things differently and set themselves apart with product attributes
that appeal to particular buyers. For instance, the diversity of consumer preferences for menu selection,
ambience, pricing, and customer service gives restaurants exceptionally wide latitude in creating
a differentiated product offering. Other companies that have many ways to strongly differentiate
themselves from rivals include magazine publishers, motor vehicle manufacturers, and the makers of
cabinetry and countertops.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 115

l There are many ways to differentiate the product or service that have value to buyers. There’s plenty
of room for retail apparel competitors to stock different styles and quality of apparel merchandise.
Likewise, there is ample differentiation opportunity among the makers of furniture and breakfast cereals.
Hotels and restaurants have easy pathways to setting themselves apart. But there is almost no way for
the makers of paper clips, copier paper, gasoline, and cane sugar to set their products apart in ways that
deliver added value to consumers.

l Few rival firms are following a similar differentiation approach. The best differentiation approaches
involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator
encounters less head-to-head rivalry when it goes its own separate way in creating uniqueness. When
several (or even worse, many) rivals base their differentiation efforts on the same attributes, the most
likely result is a market space that is overcrowded with competitors trying to appeal to much the same
buyers with weakly differentiated product offerings that deliver much the same value.

l Technological change is fast paced, and competition revolves around rapidly evolving product features
and attributes. Rapid product innovation and frequent introductions of next-version products heighten
buyer interest and provide space for companies to pursue separate differentiating paths. In wearable
Internet devices, golf equipment, battery-powered and self-driving cars, unmanned drones for hobbyists
and commercial use, rivals are locked into an ongoing battle to set themselves apart by introducing the
best next-generation products. Companies that fail to come up with ongoing product improvements and
unique features quickly lose ground in the marketplace.

Pitfalls to Avoid in Pursuing a Differentiation Strategy

Differentiation strategies can fail for any of several reasons. A differentiation strategy keyed to product or service
attributes that are easily and quickly copied is always
doomed. Rapid imitation means that no rival achieves CORE CONCEPT
differentiation, since whenever one firm introduces some
Any differentiating feature that works well is a
aspect of uniqueness that strikes the fancy of buyers, fast-
magnet for imitators.
following copycats quickly reestablish similarity. This
is why a firm must search out sources of uniqueness that
are time-consuming or burdensome for rivals to match if it hopes to use differentiation to win a sustainable
competitive edge.

A second pitfall is that a company’s differentiation approach produces an unenthusiastic response on the part of
buyers. Thus, even if a company succeeds in setting its product apart from those of rivals, its strategy can result in
disappointing sales and profits in the event that buyers do not perceive the differentiating features as valuable or worth
paying for. Any time many potential buyers look at a company’s differentiated product offering and conclude “so
what,” the company’s differentiation strategy is in deep trouble.

The third big pitfall of a differentiation strategy is overspending on efforts to differentiate the company’s product
offering, thus eroding profitability. Company efforts to achieve differentiation nearly always raise costs. The key
to profitable differentiation is either to keep the costs of achieving differentiation below the price premium the
differentiating attributes can command in the marketplace (thus increasing the profit margin per unit sold) or to offset
thinner profit margins per unit by selling enough additional units to increase total profits. If a company goes overboard
in pursuing costly differentiation efforts and then unexpectedly discovers that buyers are unwilling to pay a sufficient
price premium to cover the added costs of differentiation, it ends up saddled with unacceptably thin profit margins or
even losses. The need to contain differentiation costs is why many companies add little touches of differentiation that
add to buyer satisfaction but are inexpensive to institute. Upscale restaurants often provide valet parking. Laundry
detergent and soap manufacturers add pleasing scents to their products. Ski resorts provide skiers with complimentary
coffee or hot apple cider at the base of the lifts in the morning and late afternoon.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 116

Other common mistakes in crafting a differentiation strategy include:6

l Being timid and not striving to open up meaningful gaps in quality or service or performance features
vis-à-vis the products of rivals. Tiny or trivial differences between rivals’ product offerings may not be
visible or important to buyers. If a company wants to generate the fiercely loyal customer following
needed to earn superior profits and open up a differentiation-based competitive advantage over rivals,
then its strategy must result in strong rather than weak product differentiation. In markets where
differentiators do no better than achieve weak product differentiation (because buyers view the attributes
of rival brands as very similar), customer loyalty to any one brand is weak, the costs of buyers to switch
to rival brands are fairly low, and no one company has enough of a differentiation edge to command
much of a price premium.

l Adding so many frills and extra features that the product exceeds the needs and use patterns of most
buyers. A dazzling array of features and options not only drives up a product’s price but also runs the
risk that many buyers will conclude that a less deluxe and lower-priced brand is a better value since they
have little occasion or reason to use some of the deluxe attributes.

l Charging too high a price premium. While buyers may be intrigued by a product’s deluxe features,
they may nonetheless see it as being overpriced
relative to the value delivered by the differentiating Over-differentiating and overcharging are fatal
attributes. A company must guard against turning differentiation strategy mistakes.
off would-be buyers with what is perceived as
“price gouging.” Normally, the bigger the price premium for the differentiating extras, the harder it is to
keep buyers from switching to the lower-priced offerings of competitors.

A low-cost provider strategy can defeat a broad differentiation strategy when most buyers are satisfied with a
basic product and don’t think “extra” attributes deliver enough added value to justify paying a higher price.

FOCUSED (OR MARKET NICHE) STRATEGIES

What sets focused strategies apart from broad low-cost provider and broad differentiation strategies is
concentrated attention on a narrow piece of the total market. The target segment, or niche, can be defined by
geographic uniqueness, by specialized requirements in using the product, or by special product attributes that
appeal only to buyers comprising the market niche. Examples of firms that concentrate on a well-defined market
niche keyed to a particular product or buyer segment include Animal Planet and the History Channel (in cable
TV); Tiffany and Cartier (in high-end jewelry); Airbnb in by-owner lodging rental; Bandag (a specialist in truck
tire recapping that promotes its recaps aggressively at more than 1,000 truck stops), CGA, Inc. (a specialist in
providing insurance to cover the cost of lucrative hole-in-one prizes at golf tournaments); and Ferrari (in sports
cars). Micro-breweries, bed-and-breakfast inns, local bakeries, and local owner-managed retail boutiques have
also scaled their operations to serve niche markets.

A Focused Low-Cost Strategy

A focused low-cost strategy seeks to achieve a competitive advantage by serving buyers in the target market
niche at a lower cost and lower price than 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. The avenues
to achieving a cost advantage over rivals also serving the target market niche are the same as for low-cost
leadership—out-manage rivals in using the cost drivers to perform value chain activities very cost-efficiently
and search for innovative ways to bypass non-essential value chain activities. The only real difference between
a broad low-cost provider strategy and a focused low-cost strategy is the size of the buyer group that a company
is trying to appeal to—the former involves a product offering that appeals broadly to most all buyer groups and
market segments, whereas the latter aims at just meeting the specialized needs of buyers in a small segment of
the total market.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 117

Focused low-cost strategies are fairly common. Costco, Sam’s Club, and BJ’s Wholesale sell goods at wholesale
prices to small businesses and bargain-hunting shoppers. Producers of private-label goods are able to achieve
low costs in product development, marketing, distribution, and advertising by concentrating on making generic
items imitative of name-brand merchandise and selling directly to retail chains wanting a basic house brand to
sell to price-sensitive shoppers. For example, The Perrigo Company specializes in providing private-label over-
the-counter health care and personal care products to such retailers in the United States as Costco, Walmart,
Target, Dollar General, Walgreens, CVS, Kroger, Safeway, and other grocery chains, plus similar retailers in
many other parts of the world. Budget motel chains—like Motel 6, Sleep Inn, Super 8, and Days Inn—cater to
price-conscious travelers who just want to pay for a clean, no-frills place to spend the night.

A Focused Differentiation Strategy

A focused strategy keyed to differentiation aims at securing a competitive advantage with a product offering
tailored 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). 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 create an appealing product offering that stands apart
from those of rivals competing in the same target market niche.

Whole Foods Market, acquired by Amazon in 2017, has become the largest organic and natural foods
supermarket chain in the United States by catering to healthy-eating and nutrition-conscious consumers who
prefer organic, natural, minimally processed, locally grown, and healthier-style prepared foods, Celebrity-
chef restaurants employ focused differentiation strategies aimed at fine dining enthusiasts. Companies like
Godiva Chocolates, Louis Vuitton, Haägen-Dazs, Ferrari, Boll and Branch (high-end bed linens), and W. L.
Gore (the maker of GORE-TEX) have been successful with differentiation-based focused strategies targeting
upscale buyers wanting products and services with world-class attributes. Indeed, most markets contain a buyer
segment willing to pay a big price premium for the finest items available, thus opening the strategic window
for some competitors to pursue differentiation-based focused strategies aimed at the high-end of the market.

When a Focused Low-Cost or Focused Differentiation

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

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

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

l It is costly or difficult for companies with a broad market target to put capabilities in place to meet
the specialized needs of buyers comprising the target market niche and at the same time satisfy the
expectations of their mainstream customers.

l The industry has many different niches and segments, thereby allowing a focuser to pick a competitively
attractive niche suited to its resources and capabilities. Also, with more niches there is room for focusers
to concentrate on different market segments and avoid competing in the same niche for the same
customers.

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

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 118

l The focuser has a reservoir of customer goodwill and loyalty (accumulated from having catered to niche
members’ specialized needs and preferences over many years) that it can draw upon to help stave off any
ambitious challengers looking to horn in on its business.

The advantages of focusing a company’s entire competitive effort on a single market niche are considerable,
especially for smaller and medium-sized companies that may lack the breadth and depth of resources to tackle
going after a broad customer base with a “something for everyone” lineup of models, styles, and product selection.
YouTube has become a household name by concentrating on short video clips posted online. Papa John’s and
Domino’s Pizza have created impressive businesses by focusing on the home delivery segment. Porsche and
Ferrari have done well catering to wealthy sports car enthusiasts. Canada Goose has become the world’s leader
provider of upscale cold weather parkas made of goose down sourced from rural Canada, achieving sales of
nearly $900 million in 50 countries.

The Risks of a Focused Low-Cost or Focused Differentiation

Strategy
Focusing carries several risks. One is the chance that competitors outside the niche 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 resources and capabilities that offset
the focuser’s strengths. In the lodging business, large chains like Marriott have launched multibrand strategies
that allow them to compete effectively in several lodging segments simultaneously. Marriott has flagship JW
Marriott and Ritz-Carlton hotels with deluxe accommodations for business travelers and resort vacationers. Its
Courtyard by Marriott and SpringHill Suites brands cater to business travelers looking for moderately priced
lodging, whereas Marriott Residence Inns and TownePlace Suites are designed as a “home away from home”
for travelers staying five or more nights, and the Fairfield Inn & Suites brand is intended to appeal to travelers
looking for quality lodging at an “affordable” price. Multibrand strategies are attractive to large companies like
Marriott, Procter & Gamble, and Nestlé precisely because they enable entry into smaller market segments and
siphon away business from companies employing a focused strategy.

A second risk of employing a focus strategy is the potential for the preferences and needs of niche members
to shift over time toward the product attributes desired by buyers in the mainstream portion of the market. An
erosion of the differences across buyer segments lowers entry barriers into a focuser’s market niche and provides
an open invitation for rivals in adjacent segments to begin competing for the focuser’s customers. A third risk
is that the segment may become so attractive it is soon inundated with competitors, intensifying rivalry and
splintering segment profits. And there is always the risk for segment growth to slow to such a small rate that a
focusers’ prospects for future sales and profit gains become unacceptably dim.

BEST-COST PROVIDER STRATEGIES

As Figure 5.1 indicates, best-cost provider strategies stake out a middle ground between pursuing a low-cost
advantage and a differentiation advantage, and between appealing to the broad market as a whole and a narrow
market niche. Such a middle ground allows a company to aim squarely at the sizable mass of middle-market
buyers looking for a good-to-very-good product or service at an economical price. Such buyers frequently shy
away from both cheap low-end products and expensive high-end products, but they are quite willing to pay
a “fair” price for extra features and functionality they find appealing and useful. The essence of a best-cost
provider strategy is giving customers the best value for the money by satisfying buyer desires for appealing
features/performance/quality/service and charging a lower price for these attributes compared to rivals with
similar-caliber product offerings.7 From a competitive positioning standpoint, best-cost provider strategies are
thus a hybrid, balancing a strategic emphasis on low cost against a strategic emphasis on differentiation (desirable
extras at an attractive price).

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 119

To profitably employ a best-cost provider strategy, a

company must have the capability to incorporate attractive CORE CONCEPT
upscale attributes at a lower cost than those rivals with The competitive advantage of a best-cost
comparable upscale product offerings. When a company provider is lower costs than rivals in incorporating
can incorporate appealing features, good-to-excellent upscale attributes (such as appealing features,
product performance or quality, or more satisfying customer functionality, quality, and/or satisfying customer
service into its product offering at a lower cost than rivals, service), putting the company in a position to
then it enjoys “best cost” status—it is the low-cost provider underprice rivals whose products have similar
of a product or service with upscale attributes. A best- upscale attributes.
cost provider can use its low-cost advantage to underprice
rivals whose products or services have similar upscale attributes and still earn attractive profits. It is usually not
difficult for a company to entice buyers away from rivals when it offers buyers an equally good product at a more
economical price.

Being a best-cost provider is different from being a low-cost provider because the additional upscale attributes
entail additional costs (that a low-cost provider can avoid by offering buyers a basic product with fewer features).
Moreover, the two strategies aim at a distinguishably different target market. The target market for a best-cost
provider is buyers looking for appealing extras and functionality at an appealingly low price. The target market
for a low-cost provider is price-conscious buyers who are looking for or are satisfied with a basic low-priced
product. One of the attractive reasons for adopting a best-cost provider strategy is that buyers hunting for upscale
products at a “good” price often constitute a large segment of the overall market for a product or service.

Toyota has employed a classic best-cost provider strategy for its Lexus line of motor vehicles. It has designed an
array of high-performance characteristics and upscale features into its Lexus models to make them comparable
in performance and luxury to Mercedes, BMW, Audi, and Jaguar models. To further draw buyer attention, Toyota
established a network of Lexus dealers, separate from Toyota dealers, dedicated to providing exceptional and
attentive customer service. Most important, though, Toyota has drawn upon its considerable skills and know-
how in making high-quality Toyota models at low cost to produce its high-tech, upscale-quality Lexus models
at substantially lower costs than Mercedes, BMW, and other luxury vehicle makers have been able to achieve in
producing their models. To capitalize on its lower manufacturing costs, Toyota prices its Lexus models below
those of comparable Mercedes, BMW, Audi, and Jaguar models to induce value-conscious luxury car buyers
to purchase a Lexus instead. The price differential has typically been quite significant. For example, in 2021 a
well-equipped Lexus RX 350, a mid-sized SUV, had a sticker price of $57,185, whereas the sticker price of a
comparably equipped Mercedes GLE-class SUV was $65,950 and the sticker price of a comparably equipped
BMW X5 SUV was $67,945.

When a Best-Cost Provider Strategy Works Best

A best-cost provider strategy works best in markets where product differentiation is the norm and attractively
large numbers of buyers shopping for “best value for the money” products can be induced to purchase midrange
or near-luxury products rather than the cheap basic products of low-cost producers or the expensive products of
top-of-the-line differentiators. A best-cost provider usually needs to position itself near or just above the middle
of the market with either a medium-quality product at a below-average price or a good-to-high quality product
at a price significantly lower than premium-priced, premium quality products. Best-cost provider strategies
also work well in hard economic times when even more buyers are attracted to economically-priced products
and services with especially appealing attributes. But unless a company has the resources and capabilities to
incorporate upscale product or service attributes at a lower cost than rivals, adopting a best-cost strategy is ill-
advised because the company lacks ability to execute it.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 120

The Big 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 their 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). To escape being squeezed from both below and above, a best-cost
provider needs to offer buyers significantly better product attributes to justify a price above what low-cost leaders
are charging while also having significantly lower costs in providing upscale features so it can out-compete high-
end differentiators on the basis of a significantly lower price.

SUCCESSFUL COMPETITIVE STRATEGIES ARE ALWAYS

UNDERPINNED BY RESOURCES AND CAPABILITIES
THAT ALLOW THE STRATEGY TO BE WELL-EXECUTED
For a company’s competitive strategy to deliver good profitability and the intended competitive edge over rivals,
it must be underpinned by resources and capabilities that enable the company to execute its strategy with a
high degree of proficiency. To succeed in employing a broad low-cost provider strategy, a company must have
the resources and capabilities to keep its costs below those
of other rivals pursuing a broad low-cost strategy. This CORE CONCEPT
means having the expertise to leverage the cost drivers
A company’s competitive strategy is unlikely
and manage value chain activities more cost-efficiently
to result in good performance or sustainable
than these rivals and/or the innovative capability to bypass
competitive advantage unless the company has a
certain value chain activities being performed by such
rivals. To succeed in strongly differentiating its product in competitively potent collection of resources and
ways that are appealing to buyers, a company must have the capabilities that enable the company to execute
capabilities to leverage the value drivers and incorporate its strategy with great proficiency.
unique attributes into its product offering that a broad range
of buyers will find appealing and worth paying for. This is easier said than done because, given sufficient time,
competitors can clone most any product feature that buyers find appealing. Hence, long-term differentiation
success is usually dependent on having a hard-to-imitate portfolio of resources and capabilities (like key patents,
top-notch technological know-how, proven skills in product innovation and fast product development that enable
it to be first-to-market with next-generation versions, and expertise in customer service) to achieve and sustain
a competitive edge. Successful focus strategies require the resources and capabilities to do an outstanding job
of satisfying the needs and expectations of buyers in the target market niche. Success in employing a best-cost
strategy requires the resources and capabilities to incorporate upscale product or service attributes at a lower cost
than rivals. For all types of competitive strategies, success in sustaining the competitive edge depends on having
at least some unique and valuable resources/capabilities that are hard for rivals either to duplicate or to develop
offsetting close substitute resources/capabilities.

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 Chapter 5 • The Five Generic Competitive Strategy Options: Which One to Employ? 121

KEY POINTS
Deciding which of the five generic competitive strategies to employ—overall low-cost, broad differentiation,
focused low-cost, focused differentiation, or best-cost—is perhaps the most important strategic commitment a
company makes. It tends to drive the remaining strategic actions a company undertakes and sets the whole tone
for pursuing a competitive advantage over rivals.

In employing a broad low-cost provider strategy and trying to achieve a low-cost advantage over rivals, a
company must do a better job than rivals of cost effectively managing value chain activities and/or it must find
innovative ways to bypass or eliminate cost-producing value chain activities. Broad low-cost provider strategies
work particularly well when the products of rival sellers are virtually identical or very weakly differentiated,
when supplies are readily available from many eager sellers, when there are not many ways to achieve value-
adding differentiation, when many buyers are price sensitive and shop the market for the lowest price, and when
buyer switching costs are low.

Broad differentiation strategies seek to produce a competitive edge by incorporating attributes and features that
set a company’s product/service offering apart from rivals in ways that buyers consider valuable and worth
paying for. Successful differentiation allows a firm to (1) command a premium price for its product, (2) increase
unit sales (because additional buyers are won over by the differentiating features), and/or (3) gain buyer loyalty
to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company
and its products). Differentiation strategies work best when diverse buyer preferences open up windows of
opportunity to strongly differentiate a company’s product offering from those of rival brands, in situations
where few other rivals are pursuing a similar differentiation approach, and in circumstances where companies
are racing to bring out the most appealing next-generation product. A differentiation strategy is doomed when
competitors are able to quickly copy most or all of the appealing product attributes a company comes up with,
when a company’s differentiation efforts fail to interest many buyers, and when a company overspends on efforts
to differentiate its product offering or tries to overcharge for its differentiating extras.

A focus strategy delivers competitive advantage either by achieving lower costs than rivals in serving buyers
comprising the target market niche, or by developing a specialized ability to offer niche buyers an appealingly
differentiated offering that meets their specialized needs and preferences better than rival brands. A focused
strategy based on either low cost or differentiation becomes increasingly attractive when the target market niche
is big enough to be profitable and offers good growth potential, when it is costly or difficult for multi-segment
competitors to put capabilities in place to meet the specialized needs of the target market niche and at the same
time satisfy the expectations of their mainstream customers, when there are one or more niches that present a
good match with a focuser’s resources and capabilities, and when the target segment is not overcrowded with
rivals.

Best-cost provider strategies create competitive advantage by giving buyers the best value for the money—an
approach that entails (1) matching close rivals on key quality/service/features/performance attributes, (2) beating
them on the costs of incorporating such attributes into the product or service, and (3) charging a more economical
price. A best-cost provider strategy works best when there is a big buyer segment desirous of purchasing upscale
products/services for less money than comparable upscale products.

In all cases, achieving sustained competitive advantage depends on having first-rate resources and capabilities
that enable the company to execute its chosen competitive strategy with great proficiency.

Copyright © 2022 by Arthur A. Thompson. All rights reserved.

Reproduction and distribution of the contents are expressly prohibited without the author’s written permission.