STRATEGY AND

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MODULE 5

• STRATEGY AND
• COMPETITIVE
• ADVANTAGE

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MODULE OUTLINE

• Five Generic Competitive Strategies
• Low-Cost Leadership Strategy
• Broad Differentiation Strategies
• Best-Cost Provider Strategies
• Focus Strategies Based on Low Cost
• Focus Strategies Based on Differentiation
• Offensive Strategies
• Defensive Strategies
• Vertical Integration Strategies
• First-Mover Advantages Disadvantages

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STRATEGY COMPETITIVE ADVANTAGE
COMPETITIVE ADVANTAGE exists when firm has an
edge in Defending against competitive forces
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 buyers think is worth a premium
price
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COMPETITIVE STRATEGY PRINCCIPLE

• 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 durable product

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COMPETITIVE STRATEGYDEFINITION

• COMPETITIVE STRATEGY consists of moves to
• Attract customers
• Withstand competitive pressures
• Strengthen firms market position
• OBJECTIVES
• Earn a COMPETITIVE ADVANTAGE
• Cultivate clientele LOYAL CUSTOMERS
• COMPETITIVE STRATEGY, narrower in scope than
  business strategy, focuses on managements plan
  to compete successfully

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THE FIVE GENERIC COMPETITIVESTRATEGIES
Type of Advantage Sought
Differentiation
Lower Cost
Broad Differentiation Strategy
Overall Low-Cost Leadership Strategy
Broad Range Of Buyers
Best-Cost Provider Strategy
Focused Differentiation Strategy
Focused Low-Cost Strategy
Buyer Segment Or Niche
MARKET TYPE
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THE FIVE GENERIC COMPETITIVE STRATEGIES

• Striving to be the overall low-cost provider in
  industry
• Striving to build customer loyalty by
• differentiating ones product offerings
• from rivals products
• Striving to give customers more value for the
• money by combining an emphasis on low cost with
  an emphasis on upscale differentiation

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THE FIVE GENERIC COMPETITIVE STRATEGIES

• Concentrating on a narrow buyer segment, out
  competing rivals on basis of lower cost
• Offering niche members a products or service
  customized to needs

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LOW-COST LEADERSHIP
Objective
Open up a sustainable cost advantage over
rivals, using lower-cost edge as basis to
Under price rivals reap market share
gains or Earn higher profit margin selling
at going price
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LOW-COSY LEADERSHIP
Keys to Success
Make achievement of low-cost relative to rivals
the THEME Of firms business strategy Find ways
to drive cists out of business year after-year
Low Cost leadership means low OVERALL COSTS,
Not just low manufacturing or production costs!
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OPENING UP A COST ADVANTAGE OVER RIVALS

• Do better job of booting efficiency
• controlling costs along value chain by
• out-managing rivals regarding both
• structural exceptional cost drivers
• Revamp firms value chain to bypass some
  cost-producing activities altogether
• A combination of approaches 1 2

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OPENING UP A COST ADVANTAGE OVER RIVALS

• Successful low-cost producers aggressively
  pursue cost savings throughout the value chain.
• NO AREA IS OVERLOOKED !
• NO COST-SAVING OPPORTUNITY IS IGNORES!

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CONTROLLING STRUCTURALCOST DRIVERS

• Capture scales economies avoid scales
  diseconomies.
• Capture learning experience curve effects
  consider linkages with other activities in chain
• Find sharing opportunities with other business
  units in enterprise
• Compare benefits of vertical integration vs.
• outsourcing
• Take advantage of vocational variables

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CONTROLLING EXECUTIONAL COST DRIVERS

• Capitalize on timing considerations associated
  with-mover advantages disadvantages
• Try to increase capacity utilization
• Consider cost impact of strategic choices
  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 capita-intensive,
• or more streamlines technological process
• Use direct-to-end user sales 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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CHARATERISTICS OF A LOW-COST PROVIDER
Cost conscious organizational culture Spartan
facilities Limited sparks frills for
executives Intolerance of waste Intensive
screening of budget requests Employee
participation in cost control efforts
Low-Cost producers champion FRUGALITY while
aggressively INVESTING in cost-saving
improvements!
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WHAT MANAGERS HAVE TO DO TO ACHIEVE LOW-COST
LEADERSHIP

• Scrutinize each-creating activity, identifying
  cost drivers
• Use knowledge about cost drivers to manage
• Costs of each activity down further ear after
  year
• Consider fundamentally reengineering how
  activities are performed coordinated
• Be entrepreneurial creative in cutting some
• Activities out of value chain system

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COMPETITIVE STRENGTHS OF A LOW-COST PROVIDER
STRATEGY

• Providers 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 insulted than competitors from
  powerful suppliers
• POTENTIAL ENTRANTS- Low-cost providers pricing
  power is a significant entry barrier
• SUBSTITUTES- Better positioned to use low price
  as a
• Defense against substitutes

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WHEN A LOW-COST PROVIDERSTRATEGY 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
• that have value to buyers
• Most buyers have similar needs/requirements
• Buyers incur low switching costs changing
  sellers
• Buyers are large have signification bargaining
  power

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DRAWBACKS TO A LOW-COSTPROVIDER STRATEGY

• Technical breakthroughs up cost reductions for
  rivals, negating a low-cost providers efficiency
  advantages
• Rivals find it comparatively easy or inexpensive
  to imitate leaders low cost methods
• Low- cost provider becomes so fixated on cost
  reduction it fails to respond to
• Increased buyer desires for added quality
• or service features
• New developments in related products
• Declining buyer sensitivity to price

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DIFFERENTIATION STRATEGIES
Objective
Incorporate differentiating features to cause
buyers 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 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 procurement activities
• Product-oriented RD activities
• Production process-oriented RD activities
• Outbound logistics distribution activities
• Marketing, sales, service activities

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ACHIEVING A DIFFERENTIATION BASED COMPETITIVE
ADVANTAGE
Option 1
Incorporate product attributes user features
that lower buyers costs in using product
Option 2
Incorporate features that raise performance buyer
gets out Of product
Option 3
Incorporate features that raise performance buyer
satisfaction In non-economic/intangible ways.
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SIGNALS OF VALUE

• Buyers often judge value on basis of SIGNALS
• 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 as
• ACTUAL VALUE when
• Differences among competing brands are
  subjective
• Buyers are making first-time purchases
• Repurchase is infrequent
• Buyers are unsophisticated

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COMPETITIVE STRENGTHS OF A DIFFERENTIATION
STRATEGY

• Provides defenses against competitive
• forces RIVAL COMPETITORS- Buyers
• develop loyalty to brand they like best
• BUYERS-Mitigates bargaining power of large
  buyers since other products are less attractive
  SUPPLIERS Seller may be in better position to
  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 product an attractive,
longer-lasting Edge when its based on
Technical superiority Quality Giving
customers more support services Giving customers
more value for money Core competencies
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WHEN A DIFFERENTIATIONSTRATEGY WORKS BESTS

• There are many ways to differentiate
• product/service differences are perceived by
  buyer to have value
• Buyer needs uses of item are diverse
• Not many rivals are following a similar
• type of differentiation approach

Differentiation strategies are most powerful
when buyer needs preferences are too
diverse To be satisfied by a standardized product!
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PITFALLS OF A DIFFERENTIATION STRATEGY

• 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
• Ignoring need to signal value, depending only
• on real bases of differentiation
• Not identifying what buyers will consider as
  value

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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 attribution as worth paying Additional
money to obtain!
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BEST-COST PRODUCER STRATEGY

• Combines 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

Objectives
Create superior value by MEETING EXCEEDING buyer
expectation On product attributes BEATING their
price expectations Be the low-cost producer of a
product with GOOD-TO-EXCELLENT Product
attributes, then use cost advantage to UNDERPRICE
Comparable brands
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BEST-COST PRODUCER STRATEGY
Keys to Success
Matching close rivals on key attributes beating
them on cost Expertise in incorporating upscale
product attributes at a lower Than
rivals Ability to contain costs by providing
buyers a BETTER product
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POWER OF BEST-COSTPRODUCER STRATEGY

• Competitive advantage comes from MATCHING close
  rivals on key product attributes BEATING them
  on price
• Most successful best-cost producers have skills
  to SIMUL TANEOUSLY manage costs down product
  caliber upward
• Best-cost producer can often out-compete both a
  low-cost provider a differentiator where
• Buyer diversity makes product
  differentiation the norm and
• Many buyers are price value sensitive

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COMPETITIVE STRATEGY PRINCIPLE
The most powerful competitive approach a company
Can pursue is striving relentlessly to become a
lower and lower cost producer of a higher and
higher caliber product, with the eventual intent
of becoming the Industrys absolute lowest cost
producer and, Simultaneously, the producer of
the industrys Overall best product!
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FOCUS/NICHE STRATEGIES
Objectives
Do a better job of serving buyers in target
market niche than rivals
Keys to Success
Choose a market niche where buyers have
distinctive preferences, Special requirements,
or unique needs Develop a unique ability to serve
needs of target buyer segment
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APPROACHES TO FOCUSING
Approach 1
Achieve LOWER COSTS than rivals in serving the
segment- A low-cost strategy
Approach 2
Offer niche buyers SOMETHING DIFFERENT from
rivals A differentiation strategy
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EXAMPLES FOCUS STRATEGIES

• Rolls Royce
• Luxury automobiles
• Apple 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

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WHAT MAKE A SEGMENTATTRACTIVE 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
• Focusing can defend itself against
• Challengers via customer goodwill its superior
  ability to serve buyers in segment

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POWER OF 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

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COMPETITIVE STRENGTHSOF A FOCUS STRATEGY

• Provides 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 obstacle to sellers of substitutes
• BUYERS-Focusers unique ability to meet power of
  largest niche buyers

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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 a
  wider portion of market
• Industry has 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 target market
• Niche buyers preferences may move
• towards product attributes desired by market as
  a whole
• Segment may become so appealing it
• becomes crowded with aggressive rivals,
• causing segment profiles to be split many ways

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OFFENSIVE DEFENSIVE STRATEGIES

• Nearly always results in successful achievement
  of competitive advantage
• Can protect competitive advantage, but
• RARELY are the basis for achieving competitive
  advantage

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The Building and Eroding of Competitive Advantage
Benefit Period
Erosion Period
Buildup Period
Size of Competitive Advantage Achieved
Strategic Move Produce Competitive Advantage
Moves by Rivals Reduce Competitive Advantage
TIME
Size of competitive Advantage
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BUILDING ERODING OF COMPETITIVE ADVANTAGE

• Offensive strategic moves succeed in producing a
  competitive advantage
• Ideally, buildup period is short
• Length is governed by how long it takes rivals to
  respond effectively enough to close gap
• Characterized by launch of counter offensives of
  rivals to attack advantage whittle it away

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PRINCIPLE

• Any competitive advantage
• currently held Will eventually be
• eroded by the actions of
• competent, resourceful
• competitors!

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OPTION FOR MOUNTING STRATEGY OFFENSIVE

• Initiatives to match or exceed rivals
• Strengths
• Initiatives to capitalize on rivals weaknesses
• Simultaneous initiatives on many fronts End-run
  offensives
• Guerrilla warfare tactics
• Preemptive strikes

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Attacking competitorsstrengths

• Gain market share by out-matching strengths of
  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 of GREATER
• FINANCIAL STRENGT!

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ATTACKING COMPETITORSTRENGHS

• Under price rivals
• Boost advertising
• Introduce new features to appeal to rivals
  customers.
• Attack with equally good product lower price
• Develop low-cost edge, use it to under price
  rivals.

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ATTACKING COMPETOTOR WEAKNESSES

• Concentrate ones competitive strengths
  resources directly against rivals weaknesses
• Concentrate on geographic regions where
• has weak market share
• Go after more performance-conscious customers of
  rivals who lag behind challenger
• Attack rivals with weaker advertising brand
  recognition.

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Competitive Strategy Principle
Challenging rivals where they are most
vulnerable is more likely to succeed than
challenging them Where they are strongest
ESPECIALLY when Challenger possesses competitive
advantage in Areas where rivals are weak!
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LAUNCHING OFFENSIVEON MANY FRONTS

• Launch several major initiatives to
• Throw rival off-balance,
• Splinter its attention in many directions, and
  force it to use substantial resources to defend
  its position
• A challenger with superior resources can
• Overpower a weaker rival by outspending it
  across-the-board long enough to buy its way
  into the market .

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END-RUN OFFENSIVES

• DODGE head-to-head confrontations that escalate
  competitive intensity and RISK cutthroat
  competition Attempt to
• MANEUVER AROUND competition.
• Gain first-mover advantage in a new arena Force
  competitors into playing catch up change rules of
  competition in aggressors favor.

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END-RUN OFFENSIVESAPPROACHES

• Move aggressively into new geographic markets
• Where rivals have no market presence
• Introduce products with different attributes
• Features to better meet buyer needs
• Introduce next-generation technologies
• leapfrog rivals
• Come up with more support services for customers

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GUERRILLA OFFENSES

• Use principles of surprise hit-and-run
• To attack in locations at times where
  conditions are most favorable to initiator
• Well-suited to small challengers with limited
  resources

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GUERRILLA OFFENESOPTIONS

• Focus on narrow target weakly defended by rivals
  challenge rivals where they are overextended
  when they are encountering problems
• Make random scattered raids on leaders
• with tactics such as
• Occasional low-balling on price
• Intense bursts of promotional activity
• Legal actions charging antitrust violations,
• patent infringements, unfair advertising

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PREEMPTIVE STRIKES

• Involves moving first to secure an advantageous
  position that rivals are
• foreclosed or discouraged from duplicating !

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PREEMPTIVE STRIKES OPTIONS

• Expand capacity ahead of demand in hopes of
  discouraging rivals from following suit
• Tie up best or cheapest sources of essential raw
  materials
• Move to secure best geographic locations
• Obtain business of prestigious customers
• Build an image in buyers minds that is unique
  hard to copy
• Secure exclusive or dominant access to best
• distributors
• Acquire desirable, but struggling, competitor

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CHOOSING WHOM TO ATTACK

• Four 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

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OFFENSIVE STRATEGY COMPETITIVE ADVANTAGE

• Competitive advantage areas offering strongest
  basis for a STRATEGIC OFFENSIVE
• Develop lower-cost product operations that
  lower costs or enhance
• differentiation
• Develop product features that deliver superior
• performance or lower users costs
• Give more responsive customer service
• Escalate marketing effort
• Pioneer new distribution channel
• Sell direct to end-users

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OFFENSIVE STRATEGY COMPETITIVE ADVANTAGE
Chances for strategic success are improved when
offensive is tied to what firm best Key
skill Strong function competence
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DEFENSIVE STRATEGY

• Lesson 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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DEFENSIVE STRATEGIESAPPROACHES

• Block avenues challengers can take in
• mounting offensive attacks
• Make it clear any challenge will be met with
  strong counterattack.

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DEFENSIVE STRATEGIESAPPROACH1

• Broaden product line to fill gaps rivals may go
  after
• Keep prices low on models that match rivals
• Sign exclusive agreements distributors
• Offer free training buyers personnel
• Give better credit terms to buyers
• Reduce delivery times for spare parts
• Increase warranty overages
• Patent alternative technologies
• Sign exclusive contracts with best suppliers
• Protect proprietary know-how

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DEFENSIVE STRATEGIES APPROACH 2

• Publicly announce managements strong
• Commitment to maintain present market share
• Publicly announce plans to construct new
• production capacity to meet forecasted demand
• Give out advance information about new products,
  technological breakthroughs, other moves
• Publicly commit firm to policy of matching
  terms offered by rivals
• Maintain war chest of cash reserves
• Make occasional counter-responses to rivals
  moves

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VERTICAL INTEGRATIONSTRATEGIES

• 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 becoming
• FULLY INTEGRATED
• PARTIALLY INTEGRATED

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COMPETITIVE STRATEGY PRINCIPLE
A vertical integration strategy has appeal ONLY
if it Significantly strengthens a firms
competitive Position!
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APPEAL OF BACKWARD INTEGRATION

• Generates cost savings only if volume
• Needed is big enough to capture efficiencies of
  suppliers cost saving 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 firm ends up with a better quality
  part spares firm uncertainty of depending on
  suppliers of crucial raw materials

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APPEAL OF FORWARDINTEGRATION
Advantageous for firm to set up its own wholesale
retail distribution network if Undependable
distribution channels Undermine into
distribution retailing may be cheaper than
going through independent distributors May help
achieve greater product differentiation, allowing
escape from price-oriented competition for
manufacturer, may provide better access to
ultimate consumer.
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STRATEGIC DISADVANTAGES OF VERTICAL INTEGRATION

• Boosts capital requirements
• Results accommodating buyer demands
• for product variety
• 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
  capabilities
• can reduce firms manufacturing flexibility,
• Lengthening design time ability to introduce
  new products

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UNBUNDLING OUTSOURCINGSTRSTEGIES
Concept
Involves withdrawing from certain stages in value
chain System and relying on outside vendors to
perform needed Activities and services
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ADVANTAGES OF OUTSOURCING STRATEGIES

• 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 preference
  streamlines firm operations in ways to
• cut cycle time
• Speed decision-making
• Reduce coordination costs
• Allows firm to concentrate on its core business

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PROS CONS OF VERTICAL INTEGRATION

• 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 response times
• Administrative overhead of coordination
• if a competitive advantage can be created

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FIRST-MOVER ADVANTAGES

• 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
• reputation
• Early commitments to raw material suppliers, new
  technologies, distribution channels can produce
  cost advantage
• Loyalty of first time buyers is high
• Moving first can be a preemptive strike

77
FIRST-MOVER DISADVANTAGES

• Arise WHEN
• Costs of pioneering are sizable loyalty of
  first
• time buyers is weak
• Rapid technological change allows followers to
  Leapfrog pioneers
• Skills know-how of pioneers are easily
• imitated by latecomers to crack market

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FIRST- MOVER DISADVANTAGES

• Arise WHEN
• Costs of pioneering are sizable loyalty of
  first time buyers is weak
• Rapid technological change allows followers to
  leapfrog know-how of pioneers are easily
  imitated by late movers
• It is easy for latecomers to crack market