Module 5 - Strategy and Competitive Advantage

7/28/2019 Module 5 - Strategy and Competitive Advantage

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Module 5

Strategy and Competitive

Advantage


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Module Outline

5 Generic Competitive Strategies

1. Low-Cost Leadership Strategy2. Broad Differentiation Strategies

3. Best-Cost Provider Strategies

4. Focus Strategies Based on Low Cost5. Focus Strategies Based on Differentiation

Offensive Strategies

Defensive Strategies

Vertical Integration Strategies

First-Mover Advantages and Disadvantages


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Strategy and Competitive Advantage

Competitive Advantage exists when firm

has an edge in Defending against competitive forces, and

Securing customer

Key to Success

Convince customers firms product / service

offers superior value Offer buyers a good product at a lower price

Use differentiation to provide a better product

buyer think is worth a premium price


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Competitive Strategy Principle

Successful companies invest aggressively in

creating sustainable competitive advantage,for it is their single most dependable

contributor to above average ROI!


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Ways to Win a Competitive Advantage

Become the low-cost producer

Make the best-made product

Provide customer more value for the money

Save customer money Provide superior customer service

Enhance performance buyer gets

Provide more convenient locations

Make a more reliable an durable product


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Competitive Strategy: Definition

Competitive Strategy consists of moves to

Attract customer Withstand competitive pressures

Strengthen firms market position

Objectives Earn a competitive advantage

Cultivate clientele ofloyal customer

Knock the socks of rivals, ethically and honorably

Competitive Strategy, narrower in scope thanbusiness strategy, focuses on managements

plan to compete successfully


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The 5 Generic Competitive Strategies

Overall Low-

Cost

LeadershipStrategy

Broad

Differentiation

Strategy

Focused Low-

Cost Strategy

Focused

Differentiation

Strategy

Best-Cost

Provider

Strategy

DifferentiationLower Cost

B

road

Ra

ngeof

Buyers

Buyer

Segmentor

Niche

Type of Advantage Sought

MarketTarge

t


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Low-Cost Leadership

Striving to be the overall lo-cost provider in theindustry

Broad Differentiation

Striving to build customer loyalty bydifferentiating ones product offering from rivalsproduct

Best-Cost Provider Strategy Striving to give customers more value for the

money by combining an emphasis on low costwith an emphasis on upscale differentiation


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Focus Strategy Based on Low Cost

Concentrating on a narrow buyer segment, out-competing rivals on basis of lower cost

Focus Strategy Based on Differentiation

Offering niche members a product or service

customized to their needs


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Low-Cost Leadership

Objective

Open up a sustainable cost advantage overrivals, using lower-cost edge as basis to

Under-price rivals and reap market share gains,

or

Earn higher profit margin selling at going price


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Low-Cost Leadership

Key to Success

Make achievement of low-cost relative torivals the theme of firms business strategy

Find ways to drive costs out of business

year-after-year

Low-cost leadership means low overallcosts, not just low manufacturing or

production costs!


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Opening Up a Cost Advantage Over

RivalsApproach #1

Do better job of boosting efficiency andcontrolling costs along value chain by out-

managing rivals regarding both structural and

executional cost driversApproach #2

Revamp firms value chain to bypass some cost-

producing activities altogether

Approach #3

A combination of approaches #1 and #2


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Opening Up a Cost Advantage Over

RivalsSuccessful low-cost producers aggressively

pursue cost savings throughout the valuechain.

No area is overlooked!

No cost-saving opportunity is ignored!


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Controlling Structural Cost Drivers

Capture scale economies and avoid scale

diseconomies Capture learning and experience curve

effects

Consider linkage with other activities in chain Find sharing opportunities with other

business units in enterprise

Compare benefits of vertical integration vs.outsourcing

Take advantage of locational variables


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Controlling Executional Cost Drivers

Capitalize on timing considerations

associated with first-mover advantages anddisadvantages

Try to increase capacity utilization

Consider cost impact of strategic choices

and operating decisions


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Revamping the Value Chain

Simplify product design

Offer basic, no-frills product / service Reengineer core business processes

Shift to a simpler, less capital-intensive, or more

streamline technological process Use direct-to-end user sales and marketing

approaches

Relocate facilities closer to suppliers or customers

Pursue more vertical integration relative to rivals

Focus on limited product / service to meet special

needs of target segment


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Characteristics of a Low-Cost Provider

Cost conscious organizational culture

Spartan facilities Limited perks and frills for executives

Intolerance of waste

Intensive screening of budget requests

Employee participation in cost control efforts

Low-cost producers champion frugalitywhile aggressively investing in cost-saving

improvements!


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What Managers Have to Do to Achieve

Low-Cost Leadership? Scrutinize each cost-creating activity,

identifying cost drivers Use knowledge about cost drivers to manage

costs for each activity down further year after

year

Consider fundamentally reengineering how

activities are performed and coordinated Be entrepreneurially creative in cutting some

activities out of value chain system


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Competitive Strengths of a Low-Cost

Provider StrategyProvides defenses against competitive forces:

Rival Competitors Better positioned to compete offensively on basis of price

Buyers Better protected from negotiating power of large

customers Suppliers More insulated than competitors from powerful suppliers

Potential Entrants Low-cost providers pricing power is a significant barrier

Substitutes Better positioned to use low price as a defense against

substitutes


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When a Low-Cost Provider Strategy

Works Best? Price competition among rivals is dominant

competitive force Industrys product is a commodity-type item readily

available

Few ways to achieve product differentiation thathave value to buyers

Most buyers have similar needs / requirements

Buyer incur low switching costs changing sellers Buyers are large and have significant bargaining

power


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Drawbacks to a Low-Cost Provider

Strategy Technical breakthrough open up cost reductions for

rivals, negating a low-cost providers efficiencyadvantages

Rivals find it comparatively easy or inexpensive to

imitate leaders low cost methods Low-cost provider become so fixated on cost

reduction it fails to respond to

Increased buyer desires for added quality or servicefeatures

New developments in related products

Declining buyer sensitivity to price


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Differentiation Strategies

Objective

Incorporate differentiating features to causebuyers to prefer firms product / service over

rivals brand

Key to Success

Find ways to differentiate to create value for

buyers that are not easily copied by rivals Not spending more to differentiate than price

premium to be charged


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Differentiation Strategies

Successful differentiation allows firm to

Command a premium price, and / or Increase unit sales, and / or

Build brand loyalty


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Approaches to Differentiation

Different taste Dr. Pepper

Superior service Federal Express Spare parts availability Caterpillar

More for your money McDonalds, Wal-Mart

Engineering design and performance Mercedes

Prestige Rolex

Quality Honda automobiles

Top-of-the-line image Ralph Lauren

Technological leadership 3M Corporation

Unconditional satisfaction L. L. Bean


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Where to Look for Differentiation

Opportunities? Purchasing and procurement activities

Product-oriented R&D activities Production process-oriented R&D activities

Manufacturing activities Outbound logistic and distribution activities

Marketing, sales, and service activities


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chieving a Differentiation-Based

Competitive AdvantageOption 1

Incorporate product attributes and user featuresthat lower buyers costs in using product

Option 2

Incorporate features that raise performancebuyer gets out of product

Option 3

Incorporate features to enhance buyer

satisfaction in non-economic / intangible ways


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Signals of Value

Buyers often judge value on basis ofsignals

Price where it connotes quality How well known brand is said to be

Whether seller has prestige customers

Signals of value may be as important asactual value when

Differences among competing brands are

subjective Buyer are making first-time purchases

Repurchase is infrequent

Buyers are unsophisticated


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Competitive Strengths of a

Differentiation StrategyProvides defenses against competitive forces

Rival Competitors Buyers develop loyalty to brand they like the best

Buyers Mitigates bargaining power of large buyers since other

products are less attractive

Suppliers Seller may be in better position to withstand efforts of

suppliers to raise prices

Potential Entrants Buyer loyalty acts as entry barrier

Substitutes Better positioned to fend off threats of substitutes based

on customers attachment to differentiating attributes


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What Kind of Differentiation to Pursue?

Most appealing types of differentiation

strategies Those least subject to imitation

Most likely to produce an attractive, longer-

lasting edge when its based on: Technical superiority

Quality

Giving customer more support services

Giving customer more value for money

Core competencies

ff S


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When a Differentiation Strategy Works

Best? There are many ways to differentiate product

/ service and differences are perceived bybuyers to have value

Buyer needs and uses of items are diverse

Not many rivals are following a similar type ofdifferentiation approach

Differentiation strategies are most powerfulwhen buyer needs and preferences are toodiverse to be satisfied by a standardized

product!


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Pitfalls of a Differentiation Strategy

Trying to differentiate on a feature buyer do

not perceive as lowering their cost orenhancing their well-being

Over-differentiating such that product

features exceed buyers needs

Charging need to signal value, depending

only on real bases of differentiation

Not identifying what buyers will consider as

value


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a low-cost producer strategy can defeat a

differentiation strategy when buyers aresatisfied with a standard product and do not

see extra attributes as worth paying

additional money to obtain!


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Best-Cost Producer Strategy

Combines a strategic emphasis on low-cost with astrategic emphasis on differentiation Make an upscale product at a lower cost

Give customers more value for the money

Objective Create superior value by meeting or exceeding

buyer expectations on product attributes and

beating their price expectations Be the low-cost producer of a product with good-

to-excellent product attributes, then use cost

advantage to under-price comparable brands


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Best-Cost Producer Strategy

Key to Success

Matching close rivals on key attributes andbeating them on cost

Expertise in incorporating upscale product

attribute at a lower cost than rivals

Ability to contain costs by providing buyer a

betterproduct

Po er of a Best Cost Prod cer


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Power of a Best-Cost Producer

Strategy Competitive advantage comes from matching

close rivals on key product attributes and beating

them on price

Most successful best-cost producer have skills to

simultaneously manage costs down and product

caliber upward

Best-cost producer can often out-compete both a

low-cost provider and a differentiator where

Buyer diversity makes product differentiation the norm,

and

Many buyers are price and value sensitive


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The most powerful competitive approach a

company can pursue is striving relentlesslyto become a lower and lower cost producer

of a higher and higher caliber product, with

the eventual intent of becoming the industrysabsolute lowest cost producer and,

simultaneously, the producer of the industrys

overall best product!


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Focus / Niche Strategies

Objective

Do a better job of serving buyers in targetmarket niche than rivals

Key to Success

Choose a market niche where buyers have

distinctive preferences, special requirements,

or unique needs Develop a unique ability to serve needs of a

target buyer segment


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Approaches to Focusing

Approach #1

Achieve lower costs than rivals in serving thesegment a low-cost strategy

Approach #2

Offer niche buyers something different fromrivals a differentiation strategy


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Example: Focus Strategies

Rolls Royce

Luxury automobilesApple Computer

Desktop publishing

Fort Howard Paper Paper products for industrial / commercial firms

Commuter Airlines

Link major airports with small population centers

Motel 6

Caters to price-conscious travelers

What Makes a Segment Attractive for


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What Makes a Segment Attractive for

Focusing? Big enough to be profitable

Good growth potential Not crucial to success of major competitors

Focusing firm has resources to effectively

serve segment

Focuser can defend itself against challenger

via customer goodwill and its superior abilityto serve buyers in segment


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Power of a Focus Strategy

Competitive power is greatest when

Industry has fast-growing segments Big enough to be profitable, but

Small enough to be of secondary interest to large

rivals

No other rivals are concentrating on segment

Buyers in segment require

Specialized expertise, or Customized product attributes

Competitive Strengths of a Focus


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Competitive Strengths of a Focus

StrategyProvides defenses against competitive forces

Rival Competitors Rivals do not have ability to meet specialized needs of

target clientele

Potential Entrants

Focusers core competence can act as a barrier Substitutes

Focusers core competence provides obstacles to seller

of substitutes Buyers

Focusers unique ability to meet niche buyers needs canblunt bargaining power of largest niche buyers

When Does a Focus Strategy Work


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When Does a Focus Strategy Work

Best? It is costly or difficult for multi-segment rivals

to serve specialized needs of target niche No other rivals are concentrating on same

segment

Firms resources do not permit it to go after awider portion of market

Industry had many different segments,creating more focusing opportunities


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Risks of a Focus Strategy

Broad-line competitors may find effective

ways to match focused firm in serving targetmarket

Niche buyers preferences may move

towards product attributes desired by marketas a whole

Segment may become co appealing it

becomes crowded with aggressive rivals,

causing segment profits to be split many

ways

Off i d D f i S i


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Offensive and Defensive Strategies

Offensive Strategies

Nearly always result in successful achievementof competitive advantage

Defensive Strategies Can protect competitive advantage, but rarely

are the basis for achieving competitive

advantage

The Building and Eroding of


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The Building and Eroding of

Competitive Advantage

Buildup Period Erosion PeriodBenefit Period

Size ofCompetitive

Advantage

Achieved

Strategic

MovesProduce

Competitive

Advantage

Moves by

RivalsReduce

Competitive

AdvantageSizeofCompetitiveAdvant

age

Time

Building and Eroding of Competitive


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Building and Eroding of Competitive

AdvantageBuildup Period

Offensive strategic moves succeed in producinga competitive advantage ideally, buildup period

is short

Benefit Period Length is governed by how long it takes rivals to

respond effectively enough to close gap

Erosion Period Characterized by launch of counter offensive of

rivals to attack advantage and whittle it away

St t i M t P i i l


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Strategic Management Principle

Any competitive advantage currently held will

eventually be eroded by the actions ofcompetent, resourceful competitors!

Options for Mounting Strategic


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p g g

Offensives Initiatives to match or exceed rivals

strengths Initiatives to capitalize on rivals weaknesses

Simultaneously initiatives on many fronts

End-run offensives

Guerilla warfare tactics

Preemptive strikes

Att ki C tit St th


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Attacking Competitor Strengths

Appeal

Gain market share by out-matching strengthsof weaker rivals

Whittle away at a rivals competitive

advantage

Challenging strong competitors with a lower

price is foolhardy unless aggressor has a

cost advantage or advantage ofgreater

financial strength!



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Possible Offensive Options

Under-pricing rivals

Boost advertising

Introduce new features to appeal to rivals customer

Best Options

Attack with equally good product and lower price

Develop low-cost edge, use it to under-price rivals

Attacking Competitor Weaknesses


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Attacking Competitor Weaknesses

Basic Approach

Concentrate ones competitive strengths and

resources directly against rivals weaknesses

Weaknesses to Attack

Concentrate on geographic regions where rival hasweak market share

Go after buyer segments rival is neglecting

Go after more performance-conscious customer ofrivals who lag behind challenger

Attack rivals with weaker advertising and brand

recognition



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Challenging rivals where they are must

vulnerable is more likely to succeed thanchallenging them where they are strongest,

especially when challenger possesses

competitive advantage in areas where rivalsare weak!

Launching Offensives on Many Fronts


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Launching Offensives on Many Fronts

Objective

Launch several major initiatives to Throw rivals off-balance Splinter its attention in many direction, and

Force it to use substantial resources to defend itsposition

Appeal

A challenger with superior resources canoverpower a weaker rival by outspending itacross-the-board long enough to buy its way

into the market

End Run Offensives


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End-Run Offensives

Objective

Dodge head-to-head confrontations thatescalate competitive intensity and riskcutthroat competition attempt to maneuveraround competition

Appeal

Gain first-mover advantage in a new arena

Force competitors into playing catch up Change rules of competition in aggressors

favor

End Run Offensive: Approaches


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End-Run Offensive: Approaches

Move aggressively into new geographic

markets where rivals have no marketpresence

Introduce product with different attributes and

features to better meet buyer needs Introduce next-generation technologies and

leapfrog rivals

Come up with more support services for

customers

Guerilla Offenses


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Guerilla Offenses

Approach

Use principles of surprise and hit-and-run toattack in locations and at times where

conditions are most favorable to initiator

Appeal

Well-suited to small challengers with limited

resources

Guerilla Offenses: Options


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Guerilla Offenses: Options

Focus on narrow target weakly defended byrivals

Challenge rivals where they areoverextended and when they areencountering problems

Make random scattered raids on leaders withtactics such as

Occasional low-balling on price Intense bursts of promotional activity

Legal actions charging antitrust violations, patentinfringements, and unfair advertising

Preemptive Strike


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Preemptive Strike

Approach

Involves moving first to secure anadvantageous position that rivals are

foreclosed or discouraged from duplicating!

Preemptive Strikes: Options


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Preemptive Strikes: Options

Expand capacity ahead of demand in hopesof discouraging rivals from following suit

Tie up best or cheapest sources of essentialraw materials

Move to secure best geographic locations Obtain an image in buyers minds that is

unique and hard to copy

Secure exclusive or dominant access to bestdistributors

Acquire desirable, but struggling, competitor

Choosing Whom to Attack


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Choosing Whom to Attack

4 types of firms at which to aim an offensive

Market leaders Runner-up firms

Struggling rivals on verge of going under

Small local / regional firms not doing the job

Offensive Strategy and Competitive


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Advantage Competitive advantage areas offering

strongest basis for a strategic offensive

Develop lower-cost product design

Make changes in production operations thatlower costs or enhance differentiation

Develop product features that deliver superiorperformance or lower users costs

Give more responsive customer service

Escalate marketing effort

Pioneer new distribution channel

Sell direct to end-users

Offensive Strategy and Competitive


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AdvantageChances for strategic success are improved

when offensive is tied to what firm does best:

Key skill

Strong functional competence

Defensive Strategy


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Defensive Strategy

Objectives

Lessen risk of being attacked Blunt impact of any attack that occurs

Influence challengers to aim attacks at other

rivals

Strengthen firms present position

Help sustain any competitive advantage held


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Vertical Integration Strategies


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g g

Vertical integration extends a firms

competitive scope within same industry

Backward into sources of supply

Forward toward end-users of final product

Moves to vertically integrate can aim at

becoming

Fully integrated

Partially integrated



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p gy p

A vertical integration strategy has appeal

only if it significantly strengthens a firms

competitive position!

Appeal of Backward Integration


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pp g

Generates cost savings only if volume needed is

big enough to capture efficiencies of suppliers

Cost savings potential is strongest when

Suppliers have sizable profit margins

Item being supplied is a major cost component

Necessary technical skills are easily mastered

A differentiation-based competitive advantage

arises when firms ends up with better quality part

Spares firm uncertainty of defending on suppliers of

crucial raw materials

Appeal of Forward Integration


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pp g

Advantageous for firm to set up its own wholesale-

retail distribution network if

Undependable distribution channels undermine steady

production operations

Integration into distribution and retailing may be

cheaper than going through independentdistributors

May help achieve greater product differentiation,

allowing escape from price-oriented competition For manufacturer, may provide better access to

ultimate consumer

Strategic Disadvantages of Vertical


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Integration Boosts capital requirements

Results in fixed sources of supply and less flexibility

in accommodating buyer demands for productvariety

Extends firms scope of activity, locking it deeper

into industry Poses problems of balancing capacity at each

stage of value chain

Requires radically different skills and capabilities Can reduce firms manufacturing flexibility,

lengthening design time and ability to introducenew products

Unbundling and Outsourcing Strategies


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Concept

Involves withdrawing from certain stages invalue chain system and relying on outside

vendors to perform needed activities and

services

Advantages of Outsourcing Strategies


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Activity can be performed better or more cheaply by

outside specialists

Activity is not crucial to achieving competitive

advantage

Reduces firms risk exposure to changing

technology and / or changing buyer preferences

Streamlines firm operations in ways to

Cut cycle time

Speed decision-making

Reduce coordination costs

Allows firm to concentrate on its core business

Pros and Cons of Vertical Integration


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Use of a vertical integration strategy depends

on

If it can enhance performance of strategy-critical

activities to either

Lower costs, or

Increase differentiation

Impact on

Investment costs

Flexibility and response times

Administrative overhead of coordination

If a competitive advantage can be created

First-Mover Advantages


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When to make a strategic move is often as

crucial as what move to make

First-mover advantages arise when

Pioneering helps build firms image and

reputation Early commitments to raw material suppliers,

new technologies, and distribution channels can

produce cost advantage Loyalty of first time buyer is high

Moving first can be a preemptive strike

First-Mover Disadvantages


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Arise when

Costs of pioneering are sizable and loyalty of

first buyers is weak

Rapid technological change allows followers to

leapfrog pioneers

Skills and know-how of pioneers are easily

imitated by late movers

It is easy for latecomers to crack market


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End of Module 5

Module 5 - Strategy and Competitive Advantage

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