The essence of strategy lies in creating tomorrows competitive advantages faster than competitors mimic the ones you

possess today.
Gary Hamel and C.K. Prahalad
Quote

Strategies for taking the hill wont necessarily hold it.

Amar Bhide

Chapter Outline

Generic Competitive Strategies Low-Cost Leadership Strategy Broad Differentiation Strategies Best-Cost Provider Strategies Focused Low-Cost Strategies Focused Differentiation Strategies Vertical Integration Strategies Cooperative Strategies Offensive and Defensive Strategies First-Mover Advantages and Disadvantages
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Strategy and Competitive Advantage

COMPETITIVE ADVANTAGE exists when a firms strategy gives it an edge in Defending against competitive forces and Securing customers

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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What Is Competitive Strategy?

Consists of business approaches to Attract customers, fulfilling their expectations Withstand competitive pressures Strengthen market position Includes offensive and defensive moves to Counter actions of key rivals Shift resources to improve long-term market position Respond to prevailing market conditions Narrower in scope than business strategy
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The Five Generic Competitive Strategies

Type of Advantage Sought
Lower Cost Differentiation

Market Target

Broad Range of Buyers

Narrow Buyer Segment or Niche

Overall Low-Cost Broad Leadership Differentiation Strategy Strategy Best-Cost Provider Strategy Focused Focused Low-Cost Differentiation Strategy Strategy
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A Low-Cost Leadership Strategy

Objective

Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to rivals and reap market share gains OR Earn higher profit margin selling at going price
Under-price
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Low-Cost Leadership
Keys to Success Keys to Success

Make achievement of low-cost relative to rivals the THEME of firms business strategy Find ways to drive costs out of business yearafter-year

Low-cost leadership means low Low-cost leadership means low OVERALL costs, notnot just low OVERALL costs, just low manufacturing or production costs! manufacturing or production costs!
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Approaches to Securing a Cost Advantage

Approach 1 Do a better job than rivals of performing value chain activities efficiently and cost effectively Approach 2
Revamp value chain to bypass some cost-producing activities
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Control costs! By-pass costs!

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Approach 1: 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

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Approach 2: Revamping the Value Chain

Simplify product design Offer basic, no-frills product/service Shift to a simpler, less capital-intensive, or more streamlined technological process Find ways to bypass use of high-cost raw materials Use direct-to-end user sales/marketing approaches Relocate facilities closer to suppliers or customers Reengineer core business processes---be creative in finding ways to eliminate value chain activities Use PC technology to delete works steps, modify processes, cut out cost-producing activities
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Characteristics of a Low-Cost Provider

Cost conscious corporate culture Employee participation in cost-control efforts

Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost improvement

Low-cost producers producers Successful low-cost champion champion FRUGALITY while aggressively frugality but wisely and aggressively INVESTING in cost-saving improvements! invest in cost-saving improvements !
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What Company 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 of each activity down year after year Find ways to reengineer how activities are performed and coordinated---eliminate unnecessary work steps Be creative in cutting some activities out of value chain system---re-invent the industry value chain
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The Competitive Strengths of Low-Cost Leadership

Better positioned than RIVAL COMPETITORS to compete offensively on basis of price

Low-cost provides some protection from bargaining leverage of powerful BUYERS

Low-cost provides some protection from bargaining leverage of powerful SUPPLIERS Low-cost providers pricing power acts as a significant barrier for POTENTIAL ENTRANTS

Low cost puts a company in position to use low price as a defense against SUBSTITUTES
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A Low-Cost Strategy Works Best When:

Price competition is vigorous Product is standardized or readily available from many suppliers There are few ways to achieve differentiation that have value Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant bargaining power
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Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales volume--profits go down,not up) 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
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Differentiation Strategies
Objective

Incorporate differentiating features that cause buyers to prefer firms product or service over the brands of rivals

Keys to Success

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
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The Appeal of Differentiation Strategies

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

Buyers
Rivals

perceive as valuable

find hard to match or copy

Which hat is unique?

Can

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

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The Benefits of Successful Differentiation

A product / service with unique and appealing attributes allows a firm to

Command a premium price and/or

Increase unit sales and/or

Build brand loyalty

= Competitive Advantage
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Types of Differentiation Themes

Unique taste -- Dr. Pepper

Special features -- America Online

Superior service -- FedEx, Ritz-Carlton Spare parts availability -- Caterpillar

More for your money -- McDonalds, Wal-Mart

Engineering design and performance -- Mercedes Prestige -- Rolex Quality manufacture -- Honda , Toyota Technological leadership -- 3M Corporation, Intel Top-of-the-line image -- Ralph Lauren, Chanel
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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 superiority customer service

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Technical

Product

quality and reliability

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Comprehensive
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Where to Find Differentiation Opportunities in the Value Chain

Purchasing and procurement activities Product R&D activities Production R&D; technology-related activities Manufacturing activities Outbound logistics and distribution activities Marketing, sales, and customer service activities
Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Buyer/User Value Chains

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How to Achieve a Differentiation-Based Advantage

Approach 1
Incorporate product features/attributes that lower buyers overall costs of using product

Approach 2
Incorporate features/attributes that raise the performance a buyer gets out of the product

Approach 3
Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways

Approach 4
Compete on the basis of superior capabilities
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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
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The Competitive Strengths of a Differentiation Strategy

Buyers develop loyalty to brand they like best--can beat RIVAL COMPETITORS in the marketplace Mitigates bargaining power of large BUYERS since other products are less attractive Differentiation puts a seller in better position to withstand efforts of SUPPLIERS to raise prices Buyer loyalty acts as a barrier to POTENTIAL ENTRANTS Differentiation puts a seller in better position to fend off threats of SUBSTITUTES not having comparable features
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A Differentiation Strategy Works Best When:

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 type of differentiation approach

Technological change is fast-paced and competition is focused on evolving product features
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What Can Make a Differentiation Strategy Fail

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
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Competitive Strategy Principle

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

paying for! additional money to obtain!

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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

Objectives

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 GOODTO-EXCELLENT product attributes, then use cost advantage to UNDERPRICE comparable brands
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The Competitive Strength of a Best-Cost Provider Strategy

Competitive advantage comes from matching

close rivals on key product attributes and beating them on price

Success depends on having the skills and capabilities to provide attractive performance and features at a lower cost than rivals
A best-cost producer can often out-compete both a low-cost provider and a differentiator when Standardized features/attributes wont meet the diverse needs of buyers Many buyers are price and value sensitive
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Focus / Niche Strategies

Involve concentrated attention on a narrow piece of the total market

Objective
Serve niche buyers better than rivals

Keys to Success

Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs Develop unique capabilities to serve needs of target buyer segment
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Focus / Niche Strategies and Competitive Advantage 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

Which hat is unique?

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Examples of Focus Strategies

Netscape

Software to browse World Wide Web Sports cars

Porsche

Cannondale

Mountain bikes
Link major airports with small cities Maintenance for motor vehicles
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Horizon and Comair - Commuter airlines

Jiffy Lube International

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What Makes a Niche Attractive for Focusing?

Big enough to be profitable Good growth potential Not crucial to success of major competitors
(making it unlikely they will compete hard in niche)

Focuser has resources to effectively serve segment Focuser can defend against challengers via superior ability to serve buyers in segment and customer goodwill
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The Competitive Strength of Focus / Niche Strategies

RIVAL COMPETITORS do not have matching capabilities to meet specialized needs of niche members Focusers competencies/capabilities act as a barrier to POTENTIAL ENTRANTS Focusers competencies/capabilities pose obstacle to sellers of SUBSTITUTES Focusers unique ability to meet niche buyers needs can blunt bargaining leverage of powerful BUYERS
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When Does a Focus Strategy Work Best?

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 allow it to go after a bigger piece of market

Industry has many different segments, creating more focusing opportunities
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Risks of a Focus Strategy

Competitors find effective ways to match a focusers capabilities in serving niche Niche buyers preferences shift towards product attributes desired by majority of buyers--the niche becomes part of the overall market Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered
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Vertical Integration Strategies

Vertical integration extends a firms competitive scope within same industry Backward into sources of supply Forward toward end-users of final product Can aim at either full or partial integration
Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Activities, Costs, & Margins of Suppliers

Buyer/User Value Chains

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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 Potential to reduce costs exists when
Suppliers

have sizable profit margins Item supplied is a major cost component

requirements are easily met Can produce a differentiation-based competitive advantage when it results in a better quality part Reduces risk of depending on suppliers of crucial raw materials / parts / components
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Appeal of Forward Integration

Advantageous for a firm to establish its own distribution network if Undependable distribution channels undermine steady production operations Integrating forward into distribution and retailing May be cheaper than going through independent distributors May help achieve stronger product differentiation, allowing escape from price competition May provide better access to users
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Strategic Disadvantages of Vertical Integration

Boosts resource requirements Locks firm deeper into same industry Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety Poses problems of balancing capacity at each stage of value chain May require radically different skills / capabilities Reduces manufacturing flexibility, lengthening design time and ability to introduce new products
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Unbundling and Outsourcing Strategies

Concept
Involves not performing certain value chain activities internally and relying on outside vendors to perform needed activities and services

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Advantages of Outsourcing Strategies

Outside specialists may can perform the activity better or more cheaply Activity is not crucial to achieving competitive advantage Reduces risk exposure to changing technology and/or changing buyer preferences Streamlines operations to Cut cycle time Speed decision-making Reduce coordination costs Allows firm to concentrate on its core business
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Pros and Cons of Vertical Integration

The appeal of a vertical integration strategy depends on Its ability to enhance performance of strategy-critical activities by Lowering costs or Increasing differentiation Its impact on Resource requirements Flexibility and response times Administrative overhead of coordination Its ability to create a competitive advantage
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Cooperative Strategies
Companies sometimes use strategic alliances or strategic partnerships or collaborative agreements to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-tocompany dealings but fall short of merger or formal joint venture

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Why Are Strategic Alliances Formed?

To collaborate on technology development or new product development To improve supply chain efficiency To gain economies of scale in production and/or marketing To fill gaps in technical or manufacturing expertise To speed new products to market To acquire or improve market access
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Offensive and Defensive Strategies

Offensive Strategies
Are undertaken to build new or stronger market positions and/or create competitive advantage

Defensive Strategies
Can protect competitive advantage, but rarely are the basis for creating advantage
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The Building and Eroding of Competitive Advantage

Size of Competitive Advantage
Buildup Period Benefit Period Erosion Period

Strategic Moves Produce Competitive Advantage

Size of Competitive Advantage Achieved

Moves by Rivals Reduce Competitive Advantage

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Time

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Options for Mounting Strategic Offensives

1. Initiatives to match or exceed rivals strengths 2. Initiatives to capitalize on rivals weaknesses

3. Simultaneous initiatives on many fronts

4. End-run offensives

5. Guerrilla warfare tactics

6. Preemptive strikes
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Attacking Competitor Strengths

Appeal

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 the aggressor has a COST ADVANTAGE or advantage of GREATER FINANCIAL STRENGTH!
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Attacking Competitor Strengths

Possible Offensive Options

Under-price rivals Boost advertising Introduce new features to appeal to rivals customers

Best Options

Attack with equally good product & lower price Develop low-cost edge, use it to under-price rivals
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Options for Attacking a Competitors Strengths

Offer equally good product at a lower price

Offer a better product at the same price

Leapfrog into next-generation technologies

Add appealing new features Run comparison ads Construct new plant capacity Offer a wider product line

Develop better customer service capabilities

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Attacking Competitor Weaknesses

Basic Approach
Concentrate company strengths and resources directly against a rivals weaknesses

Weaknesses to Attack

Geographic regions where rival is weak Segments rival is neglecting Go after those customers a rival is least equipped to serve Rivals with weaker marketing skills Introduce new models exploiting gaps in rivals product lines
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Launching Simultaneous Offensives on Many Fronts Objective

Launch several major initiatives to Throw rivals off-balance Splinter their attention Force them to use substantial resources to defend their position

Appeal
A challenger with superior resources can overpower weaker rivals by out-competing them across-theboard long enough to become a market leader.
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End-Run Offensives
Objectives
DODGE head-to-head confrontations that escalate competitive intensity or risk cutthroat competition Attempt to MANEUVER around areas of strong competition--concentrate on those areas of market where competition is weakest

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Optional Approaches for End-Run Offensives

Build presence in geographic areas where rivals have little presence or exposure Introduce products with different attributes and features to better meet buyer needs Introduce next-generation technologies and leapfrog rivals Add more support services for customers

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Guerrilla Offenses
Approach
Use principles of surprise and hit-and-run to attack in locations and at times where conditions are most favorable to initiator

Appeal
Well-suited to small challengers with limited resources
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Options for Guerrilla Offenses

Focus on narrow target weakly defended by rivals Challenge rivals where they are overextended and when they are encountering problems Make random scattered raids on leaders Occasional low-balling on price Intense bursts of promotional activity Legal actions charging antitrust violations, patent infringements, or unfair advertising
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Preemptive Strikes
Approach
Involves moving first to secure an
advantageous position that rivals

are foreclosed or discouraged

from duplicating!

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Preemptive Strike 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 can be the target of an offensive: Market leaders Runner-up firms Struggling rivals on verge of going under Small local or regional firms not doing a good job for their customers
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Offensive Strategy and Competitive Advantage

STRATEGIC OFFENSIVE options offering strongest basis for COMPETITIVE ADVANTAGE Develop lower-cost product design Make changes in production 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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Defensive Strategy
Objectives

Fortify firms present position Help sustain any competitive advantage held Lessen risk of being attacked Blunt impact of any attack that occurs Influence challengers to aim attacks at other rivals
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Defensive Strategies: Approaches

Approach 1 Block avenues challengers can take in mounting offensive attacks

Approach 2 Make it clear any challenge will be met with strong counterattack
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Blocking Avenues for Rivals Offensives

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

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, and other moves Publicly commit firm to policy of matching prices and terms offered by rivals Maintain war chest of cash reserves Make occasional counter-responses to rivals moves
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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 and 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
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First-Mover Disadvantages

Moving early can be a disadvantage (or fail to produce an advantage) when Costs of pioneering are sizable and loyalty of first time buyers is weak Rapid technological change allows followers to leapfrog pioneers Achievements of pioneers are easily and quickly imitated by late movers It is relatively easy for latecomers to crack the market
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Timing and Competitive Advantage

Principle 1
Being a first-mover holds potential for competitive advantage in some cases but not in others

Principle 2
Being a fast follower can sometimes yield as good a result as being a first mover

Principle 3
Being a late-mover may or may not be fatal--it varies with the situation
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