© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

1

STRATEGY AND AND COMPETITIVE COMPETITIVE ADVANTAGEADVANTAGE

CHAPTER 5

Screen graphics created by:Jana F. Kuzmicki, PhD, Indiana University Southeast

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

2

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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

3

Strategy and Competitive Advantage

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

Convince customers firm’s 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

Key to Success

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

4

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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

5

Objectives of Competitive Strategy

Build a COMPETITIVE ADVANTAGE

Cultivate clientele of LOYAL CUSTOMERS

Knock the socks off rivals, ethically and honorably

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

6

The Five GenericCompetitive Strategies

Ma

rke

t T

arg

et

Type of Advantage Sought

Overall Low-CostLeadership

Strategy

BroadDifferentiation

Strategy

FocusedLow-CostStrategy

FocusedDifferentiation

Strategy

Best-CostProviderStrategy

Lower Cost Differentiation

Broad Range of Buyers

Narrow Buyer

Segmentor Niche

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

7

A Low-Cost Leadership Strategy

Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to Under-price rivals and reap market

share gains OR Earn higher profit margin selling at

going price

Objective

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

8

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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

9

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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

10

Differentiation Strategies

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

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

Keys to Success

Objective

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

11

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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

12

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

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

13

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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

14

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

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 UNDERPRICE comparable brands

Objectives

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

15

What Makes a NicheAttractive 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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

16

The Competitive Strength ofFocus / Niche Strategies

RIVAL COMPETITORS do not have matching capabilities to meet specialized needs of niche members

Focuser’s competencies/capabilities act as a barrier to POTENTIAL ENTRANTS

Focuser’s competencies/capabilities pose obstacle to sellers of SUBSTITUTES

Focuser’s unique ability to meet niche buyers’ needs can blunt bargaining leverage of powerful BUYERS

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

17

Vertical Integration Strategies

Vertical integration extends a firm’s 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

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

18

Unbundling andOutsourcing Strategies

Involves not performing certain value chain activities internally and relying on

outside vendors to perform needed activities and services

Concept

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

19

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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

20

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-to-company dealings but fall short of

merger or formal joint venture

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

21

The Building and Eroding of Competitive Advantage

Siz

e o

f C

om

pet

itiv

e A

dva

nta

ge

Time

Benefit Period Erosion PeriodBuildup Period

StrategicMovesProduceCompetitiveAdvantage

Moves byRivalsReduceCompetitiveAdvantage

Size ofCompetitiveAdvantageAchieved

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

22

Attacking Competitor Strengths

Appeal Gain market share by

out-matching strengths of weaker rivals

Whittle away at a rival’s competitive advantage

Challenging strong competitors with a lower price is foolhardy unless the aggressor has a COST

ADVANTAGE or advantage of GREATER FINANCIAL STRENGTH!

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

23

Options for Attackinga Competitor’s 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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

24

Attacking Competitor Weaknesses

Basic ApproachConcentrate company strengths and resources

directly against a rival’s 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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

25

Preemptive Strikes

Approach

Involves moving first to secure an advantageous

position that rivals

are foreclosed or discouraged

from duplicating!

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

26

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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

27

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 jobfor their customers

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

28

Offensive Strategy andCompetitive 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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

29

Offensive Strategy Principle

The chances for a successful offensive initiative are improved when it is based on a company’s resource strengths and strongest competencies and capabilities.

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

30

Defensive Strategy

Objectives Fortify firm’s 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

© The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

31

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