6.

Competitive strategy
1. Competitive argument
2. Generic strategies: leadership in costs, differentiation and focus.
3. Strategic Clock model
4. Strategies and industry life cycle: corporative and competitive implications

Business strategy:
Choices about business
positioning relative to
Unit 6
competitors

Strategic directions:
choices of products,
Strategic choices
industries and markets
to pursue
Unit 5
Strategy methods: How
yo pursue strategies:
organic, acquisition or
alliance

1. Competitive argument

Competitive Argument (rationality)

• Based on costs
• Based on differentiation

Competitive Strategies (Porter’s model): based on 2 dimensions, competitive argument and competitive
scope.
• Costs leadership
• Differentiation
• Segmentation or Focus on cost
Mixed strategies
• Focus on differentiation

Competitive advantage: Any characteristic of the company that differentiates it from others, placing it in a
higher relative position to compete.
- Characteristics: Related to key success factors in the industry – generate a difference from comp –
sustainable over time. To find them we use VRIO
- Bases of capabilities that support it: cost efficiency + generation of added value (differentiation)
 • Each activity of the firm’s value chain can provide a competitive advantage to the firm

• There are some activities that are disjunctive activities. So, firm’s have to opt between competitive
argument
o On cost: Obtaining differentiation but having superior cost than competitors or
o On differentiation: Having better costs than competitor but having lower differentiation than
competitors

• There are other activities that are not disjunctive activities. So, firm’s can opt for
o Obtaining differentiation without having superior cost than competitors or
o Having better costs than competitor without having lower differentiation

Generic competitive strategies of PORTER

1.1 Competitive Advantage in costs

Do two competitors, being one of them leader in cost, has the leader to sell its product at the same price and
be similar to its competitors ? Price needs to be the same but costs have to be lower to be leader

To be leader in costs it doesn’t mean

you have the lowest price in the market,
you have similar prices and product but
lower costs than competitors.

1.2 Competitive Advantage in differentiation

In this case, when being leader, our margin is also higher even if our costs are high (due to better quality,
customer service…) because our price is higher. We can stablish higher prices because of exclusiveness and
prestige related to our products.
2. Generic strategies: Costs leadership, differentiation and focus

Def of Competitive Strategy: Competitive Strategy is understood as the manner in which a firm faces
its competitors in order to outperform them.
- Competitive strategies can be defined differently depending on SBU

2. 1. Models of Competitive Strategies: Porter and Strategy Clock

PORTER. Four strategies: cost leadership, differentiation, focus on cost or focus on differentiation

1. Cost leadership
− Definition: consist in obtaining an advantage in cost over competitors through
achieving lower costs in firm’s activities

− Requirements: high production volumes and investment, budget control…

− Factors that favor the strategy of cost leadership:

o Economies of scale
o Experience effect and learning experience
o Innovation process improving process technology and design
o Favourable access to raw materials
o Cooperation with customers and suppliers
o Flexibility in production to demand to reduce over production

− Conditions for applying

o Customers are high sensitive and cost of change is low
o Competition on price must be relevant
o Standardized products
o High bargaining power of clients
− Risks
o Substitutes
o Limit to cost reduction
o Excess of focus just in costs (poor quality in service…)

2. Differentiation Strategy
− Definition: It implies to offer products or services with characteristics or attributes that
customers perceive as unique, and they are willing to pay more for them.

− Requirements: Excellent marketing, long tradition in the industry, good reputation…

 − Factors that influence differentiation:
o That come from product/service features:
▪ Physical factors: size, color, shape..
▪ Performance factors: reliability, durability, security…
▪ Complements to the main product: post sale services, speed of delivery..
o That come from market features:
▪ Value and perception of the product by the clients
▪ Variety of customers preferences and needs (trends, culture)
▪ Intangible factors: social, psychological…
o That come from organizations features:
▪ Business model (structure, culture, leadership..)
▪ Types of relationships with customers
▪ Business ethics and prestige, involvement on Criteria of SR

− Conditions for applying WHEN?

o Some complexity of the product (not generic)
o Importance od quality in the product
o It is possible to apply different technologies and innovations
o Brands prestige is relevant
o Only few competitors choose similar differentiation criteria
o Differential characteristics are not easy to imitate
− Risks
o Too much differentiation may imply prices that are too high
o Customers may not perceive our product as different any more
o Competitors may imitate our sources of differentiation
o Focused competitors can have better differentiation
o It implies not being able to achieve a huge market share

3. Focus on niche strategy

− Definition: business activity is directed towards a specific market segment
o Choosing one specific product → luxury cars
o Choosing one client type → children’s market
o Focusing in one geographical segment → Comunitat Valenciana
The objective is to meet specific customer needs more effectively than competitors that try to
achieve all market. This implies limiting business growth and must be combined with arguments on
cost or differentiation.

− Requirements: on our chosen market segment

o Is big enough so it can be profitable
o Has a strong growth potential
o The firm has the Resources & Capabilities necessary in the segment
o Has a good image among customers in the segment
o It should not be crucial to the success of important competitors
− Risks
o Segment enlargement: competitors may meet our customers’ needs
o Segment disappearance: preferences and needs of our customers may change
towards the ones in the mainstream market
o New competitors in the segment

In Porters 5 forces leadership in cost and differentiation is incompatible, the firm can become stuck
in the middle.
 Limitations of Porters 5 forces.
• A company with low costs does not necessarily reduce prices
• Low costs due to a decrease in the quality of the product does not provide a CA in costs
• Differentiation does not necessarily translate into a price increase
• There are companies that base their success in a good relation quality-price

STRATEGY CLOCK. 8 different routes

Tries to define the competitive strategy of a SBU or a company considering two dimensions:
• The perceived product or service price (cheap/expensive)
• The perceived added value of the product or service (think about quality)
Value received and awarded to the product

HIGH

The company or SBU “A” can choose

MEDIUM

between 8 ways to change their

situation and try to reach a more
favourable position
LOW

LOW MEDIUM HIGH

Perceived price of the product
1. “No frills” → low price, low perceived product benefits, focus on price-sensitive market segment
• Commodity-like products or services
• Price-sensitive customers
• Do not care about quality
• High buyer power or low switching costs
• Small number of providers with small market share
• No leader in costs, needs high rotation of products to increase sales

2. Low price strategy → lower price than competitors, main similar product benefits
• “Trampas”
o Margin reduction -> Inability to reinvest leading to loss of perceived benefit of product

• Requirements: Need a low cost base

o Low cost itself is not a basis for advantage, you must have low costs different from
competitors (difficult to imitate)

3. Hybrid Strategy → simultaneously achieving differentiation and price lower than competitors
• It needs to achieve greater volumes
• Clarity about activities on which differentiation can be built (core competences)
• Be able to reduce costs on other activities
• Entry strategy in market with established competitors

4 & 5. Differentiation Strategies → Offering benefits different from competitors, widely valued by buyers,
better products at same or higher price.
• Success depends on:
o Identification of strategic customers and knowing what they value
o Knowing the competitors
o Two differentiation strategies: narrow competitor base (5) – wide competitor base (4)

• 5. Focused differentiation -> high perceived product benefit to selected market segment (niche),
premium product heavily branded
o Difficult when the focus strategy is only part of an organisation’s overall strategy
o Possible conflict with stakeholder expectations
o New ventures start off focused, but need to grow
o Market situation may change, reducing differences between segments

6, 7 & 8 Strategies for ultimate failure → Destined to failure except in the case of a monopoly, proce is higher
than the perceived value, may be effective in s-t or trend markets
STRATEGIC CLOCK MODEL

• Advantages
o It gives the possibility to move between routes or stay the same, which means that the
company must be analyzed in a moment of time considering the possible movements of the
competitors
o It completes Porter’ classification
• Contributions
o Strategies oriented to low prices (1 & 2)
o Strategies oriented to differentiation (4 & 5)
o Hybrid Strategy (3)
o Strategies likely to failure (6, 7 & 8)
• Limitations
o Identifies “price” variable with “cost” variable
o Identifies “perceived added value” variable with “differentiation” variable

3. Strategies and industry life cycle: corporative and competitive implications

The structure of the sector and its stage in the life cycle influence the strategy formulation

Stages in the life cycle of the sector:

1. New or emerging sector
2. Growing sector
3. Mature sector
4. Declining sector

1. Introduction (emerging)
• Uncertain in technologies and best strategies
• Sexy new sector -> lots of new companies
• A lot of changes in features of the product
• Success factor: establishing image of the company

2. Growth
• More big companies come in
• Need for big investment to take as many market
• Possible strategies: differentiation or looking for already existing focus

3. Maturity
• Everybody already has the product
• Increasing competition
• No new entries
• Controlling costs structure may become CA
• Possible strategies: control costs but differentiating (hybrid strategies or cost)

4. Decline
• Less and less demand every day
• Super hard competition
• Low prices
Based on Grant INTRODUCTION GROWTH MATURITY DECLINE
Demand Limited to early Rapidly increasing Mass market, Obsolescence.
adopters: high market replacement, Decreasing
income, avant- presentation repeat buying. demand
garde Customers
knowledgeable and
price sensitive

Technology Uncertainty: Standardization Incremental Little product or

competing around dominant innovation. Well process innovation
technologies, rapid technology, rapid diffused technical
innovation process innovation know-how

Products, poor quality, wide High investments Emergence of Commodities the

manufacturing, variety of features in production and overcacity, Trend to norm:
and distribution and technologies, distribution, commodization. differentiation
frequent design Design and quality Attempts to difficult and
changes, short improve, differentiate by unprofitable,
production, emergence of quality, branding chronic
specialized dominant design, and bundling overcapacity
distribution mass production
channels

Competition Few companies Entry, mergers and Shakeout, price Price wars, exits
exits competition
increase
Key success factors Product Design for Cost efficiency Low overheads,
innovation, manufacturing, through capital buyer selection,
establishing access to intensity, scale signaling
credible image of distribution, brand efficiency, and low commitment,
firm and product building, fast input costs rationalizing
product capacity
development,
process innovation

Strategies Consolidate Increasing or Scope reorientation Strategies for

technological maintaining through: External declining stage
innovations. market share growth.
Strategic alliances (through cost Diversification.
to achieve reduction or Internationalization.
flexibility and/or differentiation). Try to obtain strong
synergies Increase position Competitive
on emerging advantage: Cost
segments leadership or diff

3.1 Declining sector options

4. Key points

Competitive argument
• Understand difference between competitive advantage and competitive strategy → the role
of competitive argument
• Understand the relationship between competitive advantage on cost or differentiation,
company’s margins and profits

Porter’s generic comp strategies

• Understand 2 dimensions of the model
• Define each generic strategy and know their requirements
• Understand key factors that allow a company to compete through differentiation, cost
leadership, focused diff and focused costs
• Conditions where can be applied
• Main risks of each strategy
• What is being “stuck in the middle”
• Limitations of Porters model

Strategy clock
• Understand 2 dimensions of the model
• Strategy routes
o Define them
o Requirements
o Risks
• Limitations of the model

Life cycle and strategy (competitive and corporate)

• Define different industries
• Strategy options for each type