THE FIVE GENERIC COMPETITIVE STRATEGIES
Transcript of THE FIVE GENERIC COMPETITIVE STRATEGIES
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THE FIVE GENERIC COMPETITIVE STRATEGIES
---WHICH TO CHOOSE
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Business-Level Strategy (Defined)
• An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
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Business-Level Strategy
•
Business-levelBusiness-levelStrategyStrategy
Which good or Which good or service to provideservice to provide
How to Distribute itHow to Distribute it
How to manufactureHow to manufactureitit
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Core Competencies and StrategyResources and superior capabilities that are sources of competitive advantage over a firm’s rivals
Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets
Core Core CompetenciesCompetencies
StrategyStrategy
Business-level Business-level StrategyStrategy
An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage
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Business-Level Strategy
• Business-Level Strategies
– Are intended to create differences between the firm’s position relative to those of its rivals
• To position itself, the firm must decide whether it intends to:
– Perform activities differently or
– Perform different activities as compared to its rivals
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Types of Potential Competitive Advantage
• Achieving lower overall costs than rivals
– Performing activities differently (cheaper process)
• Possessing the capability to differentiate the firm’s product or service and command a premium price
– Performing different (valuable) activities
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Two Targets of Competitive Scope
• Broad Scope
– The firm competes in many customer segments
• Narrow Scope
– The firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others
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Southwest Airlines’ Activity System
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Five Business-Level Strategies
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Cost Leadership Strategy
• An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers
– Relatively standardized products
– Features acceptable to many customers
– Lowest competitive price
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Cost Leadership Strategy
• Cost saving actions required by this strategy:– Building efficient scale facilities
– Tightly controlling production costs and overhead
– Minimizing costs of sales, R&D and service
– Building efficient manufacturing facilities
– Monitoring costs of activities provided by outsiders
– Simplifying production processes
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How to Obtain a Cost Advantage
Drivers
Cost DriversCost Drivers Value ChainValue Chain
Determine and control
Reconfigure, if needed
Alter production processAlter production process
Change in automationChange in automation
New distribution channelNew distribution channel
New advertising mediaNew advertising media
New raw materialNew raw material
Forward integrationForward integration
Backward integrationBackward integration Change location relative Change location relative
to suppliers or buyersto suppliers or buyers
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Examples of Value-Creating Activities
Associated with the
Cost Leadership
Strategy
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Value-Creating Activities for Cost Leadership
• Cost-effective MIS• Few management layers• Simplified planning• Consistent policies• Effecting training• Easy-to-use
manufacturing technologies
• Investments in technologies
• Finding low cost raw materials
• Monitor suppliers’ performances
• Link suppliers’ products to production processes
• Economies of scale
• Efficient-scale facilities
• Effective delivery schedules
• Low-cost transportation
• Highly trained sales force
• Proper pricing
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Cost Leadership Strategy: New Entrants
Can frighten off new entrants due to:Their need to enter on a large scale in order to be cost competitiveThe time it takes to move down the learning curve
The Threat of The Threat of Potential EntrantsPotential Entrants
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Cost Leadership Strategy: Suppliers
Bargaining Power of Suppliers
• Can mitigate suppliers’ power by:– Being able to absorb cost increases due to
low cost position– Being able to make very large purchases,
reducing chance of supplier using power
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Cost Leadership Strategy: Buyers
Can mitigate buyers’ power by:Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm
Bargaining Powerof Buyers
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Cost Leadership Strategy: Substitutes
Product SubstitutesProduct Substitutes
Cost leader is well positioned to:•Make investments to be first to create substitutes•Buy patents developed by potential substitutes•Lower prices in order to maintain value position
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Cost Leadership Strategy: Competitors
Rivalry with Existing Competitors
Due to cost leader’s advantageous position:
Rivals hesitate to compete on basis of priceLack of price competition leads to greater profits
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Cost Leadership Strategy (cont’d)
• Competitive Risks
– Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations
– Focus on cost reductions may occur at expense of customers’ perceptions of differentiation
– Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy