Strategy and Competitive Advantage

What is Competitive Advantage?

• Being able to do something that the customer wants better than your competitors.

Where does it come from?

• Develop a product or service that the customer wants to buy and then being able to defend against attempts by your competitors to copy or surpass it.

How can we develop a competitive advantage?

• Develop one or more distinctive competencies in areas that the company’s customers perceive is important.

• What the customer considers important is called value.

What is Value?

• Cost benefit analysis• Value is perceived • Everything is valuable to somebody

STP

• Segmentation• Targeting • Positioning

The Five GenericCompetitive Strategies

Mar

ket T

arge

t

Type of Advantage Sought

Overall Low-CostProviderStrategy

BroadDifferentiation

Strategy

FocusedLow-CostStrategy

FocusedDifferentiation

Strategy

Best-CostProviderStrategy

Lower Cost Differentiation

BroadRange of Buyers

Narrow Buyer

Segmentor Niche

OK, so what does a low cost strategy look like?

Low-Cost Leadership

• Make achievement of low-cost relative to rivals the theme of firm’s business strategy

• Find ways to drive costs out of business year-after-year

Low-cost leadership means lowOVERALL costs, not just lowmanufacturing or production costs!

Keys to Success

Options: Achieving a Low-Cost Strategy

• Open up a sustainable cost advantage over rivals, using lower-cost edge to either

– Under-price rivals and reap market share gains

or

– Earn higher profit margin selling at going price

So, how do I get to low cost advantage?

• Do a better job of engineering and managing your company’s value chain

Figure 4.2: Typical Company Value Chain

DistributionAnd

OutboundLogistics

Operations

PurchasedSupplies

andInboundLogistics

Sales and Marketing Service Profit

Margin

Product R&D, Technology, Systems Development

Human Resources Management

General Administration

Primary Activities and Costs

Support Activities and Costs

Figure 4.3: The Value Chain System for an Entire Industry

SupplierValue

Chains

A Company’s Own

Value Chain

Forward ChannelValue Chains

Activities, Costs, &

Margins ofForwardChannelAllies &

StrategicPartners

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer or End User

ValueChains

Approaches to Securinga Cost Advantage

Do a better job than rivals of performing value chain activities efficiently and cost effectively

Approach 1

Revamp value chain to bypass cost-producing activities that add little

value from the buyer’s perspective

Approach 2Control costs!

By-pass costs!

Approaches to Securinga Cost Advantage

Approach 1Revamp value chain to

bypass cost-producing activities that add little value

from the buyer’s perspective

Approach 2• Do a better job than

rivals of performing value chain activities efficiently and cost effectively

Control costs!

By-pass costs!

Approach 1: Revamping the Value Chain

• Abandon traditional business methods and shift to e-business technologies and use of Internet

• Use direct-to-end-user sales/marketing methods• Simplify product design• Offer basic, no-frills product/service• Shift to a simpler, less capital-intensive, or more flexible

technological process• Find ways to bypass use of high-cost raw materials• Relocate facilities closer to suppliers or customers• Drop “something for everyone” approach and focus on a

limited product/service• Reengineer core business processes

Approach 2: Controlling the Cost Drivers

• Capture scale economies; avoid scale diseconomies• Capture learning and experience curve effects• Manage costs of key resource inputs• Consider linkages with other activities in value chain• Find sharing opportunities with other business units• Compare vertical integration vs. outsourcing• Assess first-mover advantages vs. disadvantages• Control percentage of capacity utilization• Make prudent strategic choices related to operations

When Does a Low-CostStrategy Work Best?

• When the customer perceives the cost side of the value equation to be more important than any differentiation that can be presented.

When Does a Low-CostStrategy Work Best?

• Price competition is vigorous• Product is standardized or readily available

from many suppliers• There are few ways to achieve

differentiation that have value to buyers• Most buyers use product in same ways• Buyers incur low switching costs • Buyers are large and have

significant bargaining power• Industry newcomers use introductory low prices to

attract buyers and build customer base

What do I need to be careful about?

• Being overly aggressive in cutting price• Low cost methods are easily imitated by

rivals• Becoming too fixated on reducing costs

and ignoring– Buyer interest in additional features– Declining buyer sensitivity to price– Changes in how the product is used

• Technological breakthroughs open up cost reductions for rivals

Differentiation Strategies

Being able to do something different that the customer

perceives important

Keys to success

• Create value– The benefit side of the value equation

• Find ways to differentiate that create value for buyers and that are not easily matched or cheaply copied by rivals

• Not spending more to achieve differentiation than the price premium that can be charged

Appeal of Differentiation Strategies

• A powerful competitive approach when uniqueness can be achieved in ways that

– Buyers perceive as valuable and are willing to pay for

– Rivals find hard to match or copy– Can be incorporated

at a cost well below the price premium that buyers will pay

Which hat is unique?

Types of Differentiation Themes

• Unique taste --? • Multiple features --? • Wide selection one-stop shopping --?• Superior service -- ?• Spare parts availability -- ?• More for your money -- ?• Prestige --? • Quality manufacture -- ?• Technological leadership -- ?• Top-of-the-line image -- ?

Sustaining Differentiation: The Key to Competitive Advantage

• Most appealing approaches to differentiation– Those hardest for rivals to match or imitate– Those buyers will find most appealing

• Best choices for gaining a longer-lasting, more profitable competitive edge – New product innovation– Technical superiority– Product quality and reliability– Comprehensive customer service– Unique competitive capabilities

Where to Find Differentiation Opportunities in the Value

Chain• Purchasing and procurement activities• Product R&D and product design activities• Production process / technology-related

activities• Manufacturing / production activities• Distribution-related activities• Marketing, sales, and customer service

activities

How to Achieve aDifferentiation-Based Advantage

Incorporate product features/attributes that lower buyer’s overall costs of using product

Approach 1

Incorporate features/attributes that raise the performance a buyer gets out of the product

Approach 2

Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways

Approach 3

Compete on the basis of superior capabilitiesApproach 4

Signaling Value as Well as Delivering Value

• Buyers seldom pay for value that is not perceived

• Signals of value may be as important as actual value when– Nature of differentiation is hard to

quantify– Buyers are making first-time purchases– Repurchase is infrequent– Buyers are unsophisticated

When Does a DifferentiationStrategy Work Best?

• There are many ways to differentiate a product that have value and please customers

• Buyer needs and uses are diverse

• Few rivals are following a similar differentiation approach

• Technological change and product innovation are fast-paced

Pitfalls of Differentiation Strategies

• Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their well-being

• Over-differentiating such that product features exceed buyers’ needs

• Charging a price premium that buyers perceive is too high

• Failing to signal value• Not understanding what buyers want or prefer

and differentiating on the “wrong” things

Competitive Strategy Principle

A low-cost producer strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra attributes as worth paying

additional money to obtain!

A low-cost provider strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not

see extra differentiating attributes as worth

paying for!

What is Best Cost Strategy

•First, it is not both low cost and differentiation!!

Best Cost Provider Strategies• Combine a strategic emphasis on low-cost

with a strategic emphasis on differentiation– Make an upscale product at a lower cost– Give customers more value for the money

• Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations

• Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands

Objectives

Risk of a Best-Cost Provider Strategy

• Risk – A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies

– Low-cost leaders may be able to siphon customers away with a lower price

– High-end differentiators may be able to steal customers away with better product attributes