Strategic Management

By
Tauseef Iqbal Khan
Faculty Member- IQRA University
Notable Quotes
• It is much better to make your own product
obsolete than allow a competitor to do it.
• Competitive Strategy is about being different. It
means deliberately choosing to perform
activities differently or to perform different
activities than rivals to deliver a unique mix of
value
Chapter 5 :The Five Generic Competitive
Strategies
LEARNING OBJECTIVES
• What distinguishes each of the five generic strategies and why some of
these strategies work better in certain kinds of competitive conditions than
in others
• The major avenues for achieving a competitive advantage based on lower
costs
• The major avenues to a competitive advantage based on differentiating a
company’s product or service offering from the offerings of rivals
• The attributes of a best-cost provider strategy—a hybrid of low-cost
provider and differentiation strategies
 WHY DO STRATEGIES DIFFER?
A firm’s competitive strategy deals exclusively with the specifics of its efforts to
position itself in the market-place, please customers, ward off competitive threats, and
achieve a particular kind of competitive advantage.

Is the firm’s market target

broad or narrow?
Key factors that
distinguish one strategy
from another
Is the competitive advantage
pursued linked to low costs
or product differentiation?

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THE FIVE GENERIC COMPETITIVE STRATEGIES

Low-cost Striving to achieve lower overall costs than rivals on products

provider that attract a broad spectrum of buyers

Broad Differentiating the firm’s product offering from rivals’ with

differentiation attributes that appeal to a broad spectrum of buyers

Focused low- Concentrating on a narrow price-sensitive buyer segment and

cost on costs to offer a lower-priced product

Focused Concentrating on a narrow buyer segment by meeting specific

differentiation tastes and requirements of niche members

Best-cost Giving customers more value for the money by offering upscale
provider product attributes at a lower cost than rivals
 FIGURE 5.1 The Five Generic Competitive Strategies

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 LOW-COST PROVIDER STRATEGIES
• Effective low-cost approaches
• Pursue cost savings that are difficult to imitate
• Avoid reducing product quality to unacceptable levels
• Competitive advantages and risks
• Greater total profits and increased market share gained from underpricing
competitors
• Larger profit margins when selling products at prices comparable to and
competitive with rivals
• Low pricing does not attract enough new buyers
• Rival’s retaliatory price-cutting sets off a price war

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 CORE CONCEPTS (1 of 5)
• A low-cost provider’s basis for competitive advantage is lower overall
costs than competitors.
• Successful low-cost leaders, who have the lowest industry costs, are
exceptionally good at finding ways to drive costs out of their businesses
and still provide a product or service that buyers find acceptable.
• A cost driver is a factor that has a strong influence on a firm’s costs.

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 STRATEGIC MANAGEMENT PRINCIPLE (1 of 7)

A low-cost advantage over rivals can translate into better profitability than
rivals attain.

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 MAJOR AVENUES FOR ACHIEVING
A COST ADVANTAGE
• Low-cost advantage
• Cumulative costs across the overall value chain must be lower than
competitors’ cumulative costs.
• How to gain a low-cost advantage
• Perform value-chain activities more cost-effectively than rivals
• Revamp the firm’s overall value chain to eliminate or bypass cost-producing
activities
 CORE CONCEPT (2 of 5)
A cost driver is a factor that has a strong
influence on a company’s costs.

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 COST-EFFICIENT MANAGEMENT
OF VALUE CHAIN ACTIVITIES
• Cost driver
• A factor with a strong influence on a firm’s costs
• Can be asset-based or activity-based
• Securing a cost advantage
• Use lower-cost inputs and hold minimal assets
• Offer only “essential” product features or services
• Offer only limited product lines
• Use low-cost distribution channels
• Use the most economical delivery methods
 FIGURE 5.2 Cost Drivers: The Keys to Driving Down Company
Costs

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 COST-CUTTING METHODS (1 of 2)
1. Capturing all available economies of scale
2. Taking full advantage of experience and learning-curve effects
3. Operating facilities at full or near-full capacity
4. Improving supply chain efficiency
5. Substituting lower-cost inputs wherever there is little or no sacrifice in product
quality or performance
6. Using the firm’s bargaining power vis-à-vis suppliers or others in the value chain
system to gain concessions
7. Using online systems and sophisticated software to achieve operating efficiencies

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 COST-CUTTING METHODS (2 of 2)
8. Improving process design and employing advanced production technology
9. Being alert to the cost advantages of outsourcing or vertical integration
10. Motivating employees through incentives and company culture

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 REVAMPING THE VALUE CHAIN
SYSTEM TO LOWER COSTS
• Selling direct to consumers and bypassing the activities and costs of
distributors and dealers by using a direct sales force and a company
website
• Streamlining operations to eliminate low value-added or unnecessary
work steps and activities
• Reduce materials handling and shipping costs by having suppliers
locate their plants or warehouses close to the firm’s own facilities
 How Walmart Managed Its Value Chain to Achieve
a Huge Low-Cost Advantage over Rival
Supermarket Chains

• Which Walmart value chain activity would be most easily

overcome by rival supermarket chains?
• Which Walmart value chain activities would be the most
difficult to overcome by rival supermarket chains?
• Assume you have been tasked to revamp a rival
supermarket’s value chain activities to better compete
with Walmart. In what order of expected payoff should
you attempt to revamp its value chain activities?

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 Amazon’s Path to Becoming the Low-
Cost Provider in E-Commerce
• Describe the business segment in which Amazon competes.
• How well are Amazon’s competitive strengths matched to the
five forces in its competitive environment?
• Which of Amazon’s value chain activities would be most easily
overcome by rivals?
• Which Amazon value chain activity would be the most difficult
to overcome by rivals?
• Assume you have been tasked to revamp a rival’s value chain
activities to better compete with Amazon. In what order of
expected payoff should you attempt to revamp its value chain
activities?

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 THE KEYS TO BEING A SUCCESSFUL
LOW-COST PROVIDER
Success in achieving a low-cost edge over rivals comes from out-
managing rivals in finding ways to perform value chain activities faster,
more accurately, and more cost-effectively by:
• Spending aggressively on resources and capabilities that promise to drive
costs out of the business
• Carefully estimating the cost savings of new technologies before investing in
them
• Constantly reviewing cost-saving resources to ensure they remain
competitively superior
STRATEGIC MANAGEMENT PRINCIPLE (2 of 7)
Success in achieving a low-cost edge over rivals comes from out-managing
rivals in finding ways to perform value chain activities faster, more
accurately, and more cost-effectively.

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WHEN A LOW-COST PROVIDER
STRATEGY WORKS BEST
1. Price competition among rival sellers is vigorous.
2. Identical products are available from many sellers.
3. There are few ways to differentiate industry products.
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching among sellers.
 PITFALLS TO AVOID IN PURSUING A
LOW-COST PROVIDER STRATEGY
• Engaging in overly aggressive price cutting that does not result in unit sales gains
large enough to recoup forgone profits
• Relying on a cost advantage that is not sustainable because rival firms can easily
copy or overcome it
• Becoming too fixated on cost reduction such that the firm’s offering is too
features-poor to gain the interest of buyers
• Having a rival discover a new lower-cost value chain approach or develop a cost-
saving technological breakthrough
STRATEGIC MANAGEMENT PRINCIPLE
(3 of 7)

A low-cost provider is in the best position to win the business of price-

sensitive buyers, set the floor on market price, and still earn a profit.

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STRATEGIC MANAGEMENT PRINCIPLE (4 of 7)
Reducing price does not lead to higher total profits unless the added gains
in unit sales are large enough to bring in a bigger total profit despite lower
margins per unit sold.

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STRATEGIC MANAGEMENT PRINCIPLE (5 of 7)
A low-cost provider’s product offering must always contain enough
attributes to be attractive to prospective buyers. Low price, by itself, is not
always appealing to buyers.

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 BROAD DIFFERENTIATION STRATEGIES
• Effective Differentiation Approaches
• Carefully study buyer needs and behaviors, values, and
willingness to pay for a unique product or service
• Incorporate features that both appeal to buyers and create
a sustainably distinctive product offering
• Use higher prices to recoup differentiation costs
• Advantages of Differentiation
• Command premium prices for the firm’s products
• Increased unit sales due to attractive differentiation
• Brand loyalty that bonds buyers to the differentiating
features of the firm’s products

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 CORE CONCEPT (3 of 5)
Differentiation enhances profitability whenever a company’s product can
command a sufficiently higher price or produce sufficiently greater unit
sales to more than cover the added costs of achieving the differentiation.

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 CORE CONCEPTS (4 of 5)
The essence of a broad differentiation strategy is to
offer unique product attributes that a wide range of
buyers find appealing and worth paying for.
A uniqueness driver is a factor that can have a strong
differentiating effect.

© McGraw-Hill Education.
 COST-EFFICIENT MANAGEMENT
OF VALUE CHAIN ACTIVITIES
• A uniqueness driver can
• Have a strong differentiating effect
• Be based on physical as well as functional attributes of a firm’s products
• Be the result of superior performance capabilities of the firm’s human capital
• Have an effect on more than one of the firm’s value chain activities
• Create a perception of value (brand loyalty) in buyers where there is little
reason for it to exist
 FIGURE 5.3 Value Drivers: The Keys to Creating a Differentiation
Advantage

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MANAGING THE VALUE CHAIN TO CREATE
THE DIFFERENTIATING ATTRIBUTES
1. Create product features and performance attributes that
appeal to a wide range of buyers.
2. Improve customer service or add extra services.
3. Invest in production-related R&D activities.
4. Strive for innovation and technological advances.
5. Pursue continuous quality improvement.
6. Increase marketing and brand-building activities.
7. Seek out high-quality inputs.
8. Emphasize human resource management activities that
improve the skills, expertise, and knowledge of company
personnel.
 REVAMPING THE VALUE CHAIN SYSTEM TO INCREASE
DIFFERENTIATION

Coordinating with channel

Approaches allies to enhance customer
perceptions of value
to enhancing
differentiation
through changes in
the value chain
system Coordinating with suppliers
to better address customer needs

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 DELIVERING SUPERIOR VALUE VIA A BROAD DIFFERENTIATION
STRATEGY
Broad Differentiation:
Offering Customers Something That Rivals Cannot

Incorporate product attributes and user features that lower the buyer’s
1. overall costs of using the firm’s product

Incorporate tangible features (e.g., styling) that increase customer

2. satisfaction with the product

Incorporate intangible features (e.g., buyer image) that enhance buyer

3. satisfaction in noneconomic ways

Signal the value of the firm’s product offering to buyers (e.g., price,
4. packaging, placement, advertising)

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DIFFERENTIATION: SIGNALING VALUE
Signaling value is important when:
• The nature of differentiation is based on intangible features and is therefore
subjective or hard to quantify by the buyer.
• Buyers are making a first-time purchase and are unsure what their experience will
be with the product.
• Product or service repurchase by buyers is infrequent.
• Buyers are unsophisticated.

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 STRATEGIC MANAGEMENT PRINCIPLES (6 of 7)
• Differentiation can be based on tangible or intangible attributes.
• Easy-to-copy differentiating features cannot produce a sustainable
competitive advantage.
• Any differentiating feature that works well is a magnet for imitators.
• Overdifferentiating and overcharging are fatal strategy mistakes.

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SUCCESSFUL APPROACHES TO SUSTAINABLE
DIFFERENTIATION
• Differentiation that is difficult for rivals to duplicate or imitate
• Company reputation
• Long-standing relationships with buyers
• A unique product or service image
• Differentiation that creates substantial switching costs that lock in
buyers
• Patent-protected product innovation
• Relationship-based customer service
 WHEN A DIFFERENTIATION STRATEGY
WORKS BEST

Market Circumstances
Favoring Differentiation

There are many Few rival firms are There is rapid

Buyer needs
ways that following change in the
and uses for
differentiation a similar product’s
the product are
can have value differentiation technology and
diverse.
to buyers. approach features

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PITFALLS TO AVOID IN PURSUING A
DIFFERENTIATION STRATEGY
• Relying on product attributes easily copied by rivals
• Introducing product attributes that do not evoke an enthusiastic buyer response
• Eroding profitability by overspending on efforts to differentiate the firm’s product
offering
• Offering only trivial improvements in quality, service, or performance features vis-
à-vis the products of rivals
• Over-differentiating the product quality, features, or service levels exceeds the
needs of most buyers
• Charging too high a price premium
 FOCUSED (OR MARKET NICHE) STRATEGIES

Focused Strategy
Approaches

Focused
Low-Cost Focused Market
Strategy Niche Strategy

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 Clinícas del Azúcar’s Focused
Low-Cost Strategy
• Which uniqueness drivers are responsible for the
success of Clinícas del Azúcar?
• Which competitive conditions would mitigate against
successful entry of the Clinícas del Azúcar into the
U.S. diabetes care market?
• What part do customer expectations about patient-
doctor relationships play in the delivery of health
care in the U.S.?

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WHEN A FOCUSED LOW-COST OR
FOCUSED DIFFERENTIATION STRATEGY
IS ATTRACTIVE
• The target market niche is big enough to be profitable and
offers good growth potential.
• Industry leaders chose not to compete in the niche; focusers
avoid competing against strong competitors.
• It is costly or difficult for multi-segment competitors to meet
the specialized needs of niche buyers.
• The industry has many different niches and segments.
• Rivals have little or no entry interest in the target segment.
THE RISKS OF A FOCUSED LOW-COST
OR FOCUSED DIFFERENTIATION
STRATEGY
1. Competitors will find ways to match the focused firm’s capabilities in
serving the target niche.
2. The specialized preferences and needs of niche members shift over
time toward the product attributes desired by the majority of
buyers.
3. As attractiveness of the segment increases, it draws in more
competitors, intensifying rivalry and splintering segment profits.
Canada Goose’s Focused Differentiation Strategy

• Which decisions did CEO Dani Reiss make that

launched Canada Goods on its chosen strategic path?
• Which uniqueness drivers are responsible for the
success of Canada Goose?
• Which of Canada Goose’s uniqueness drivers are
competitors likely to attempt to copy first?

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BEST-COST PROVIDER STRATEGIES

Differentiation: Low Cost Provider:

Providing desired quality, Charging a lower price
features, performance, than rivals with similar
service attributes caliber product offerings

Best-Cost Provider
Hybrid Approach

Value-Conscious Buyer

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 CORE CONCEPT (5 of 5)
Best-cost provider strategies are a hybrid of low-cost provider and
differentiation strategies that aim at providing more desirable attributes
(quality, features, performance, service) while beating rivals on price.

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 WHEN A BEST-COST PROVIDER
STRATEGY WORKS BEST
• Product differentiation is the market norm.
• There are a large number of value-conscious buyers who prefer mid-
range products.
• There is competitive space near the middle of the market for a
competitor with either a medium-quality product at a below-average
price or a high-quality product at an average or slightly higher price.
• Economic conditions have caused more buyers to become value-
conscious.
 THE RISK OF A BEST-COST PROVIDER
STRATEGY—GETTING SQUEEZED ON
BOTH SIDES

Best-Cost
Low-Cost High-End
Providers
Provider Differentiators
Strategy

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 American Giant’s Best-Cost
Provider Strategy

• How can product quality lower product costs?

• In which stages of an industry life cycle are low-cost
leadership, differentiation, focused niche, and best-
cost provider strategies most appropriate?
• Could the higher-selling prices of American Giant’s
clothing versus its competitors be used as a proxy for
measuring the strength of its best-cost strategy?

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THE CONTRASTING FEATURES OF THE
FIVE GENERIC COMPETITIVE STRATEGIES:
A SUMMARY
Each generic strategy:
• Positions the firm differently in its market
• Establishes a central theme for how the firm
intends to outcompete rivals
• Creates boundaries or guidelines for strategic
change as market circumstances unfold
• Entails different ways and means of maintaining
the basic strategy
 Table 5.1 Distinguishing Features of the Five Generic Competitive Strategies (1 of 2)

Focused low-cost Focused

Low-Cost Provider Broad Differentiation provider differentiation Best-Cost Provider
Strategic A broad cross- A broad cross-section A narrow market niche A narrow market Value-conscious
target section of the of the market where buyer needs and niche where buyer buyers. Or, a middle-
market preferences are needs and market range
distinctively different preferences are
distinctively different

Basis of Lower overall costs Ability to offer buyers Lower overall cost than Attributes that Ability to offer better
competitive than competitors something rivals in serving niche appeal specifically to goods at attractive
strategy attractively different members niche members prices
from competitors’
offerings

Product line A good basic Many product Features and attributes Features and Items with appealing
product with few variations, wide tailored to the tastes attributes tailored to attributes and
frills (acceptable selection, emphasis and requirements of the tastes and assorted features;
quality and limited on differentiating niche members requirements of better quality, not best
selection) features niche members

Production A continuous search Build in whatever A continuous search for Small-scale Build in appealing
emphasis for cost reduction differentiating cost reduction for production or features and better
without sacrificing features buyers are products that meet custom-made quality at lower cost
acceptable quality willing to pay for; basic needs of niche products that match than rivals
and essential strive for product members the tastes and
features superiority requirements of
niche members

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 Table 5.1 Distinguishing Features of the Five Generic Competitive Strategies (2 of 2)

Broad Focused low-cost Focused

Low-Cost Provider Differentiation provider differentiation Best-Cost Provider
Marketing Low prices, good value Tout differentiating Communicate attractive Communicate how Emphasize delivery
emphasis Also, try to make a features. features of a budget- product offering does of best value for the
virtue out of product Also, charge a priced product offering the best job of meeting money
features that lead to low premium price to that fits niche buyers’ niche buyers’
cost cover the extra costs of expectations expectations
differentiating features

Keys to Economical prices, good Stress constant Stay committed to serving Stay committed to Unique expertise in
maintaining the value innovation to stay the niche at the lowest serving the niche better simultaneously
strategy Also, strive to manage ahead of imitative overall cost; don’t blur than rivals; don’t blur managing costs
costs down, year after competitors the firm’s image by the firm’s image by down while
year, in every area of Also, concentrate on a entering other market entering other market incorporating
the business few key differentiating segments or adding other segments or adding upscale features and
features. products to widen market other products to widen attributes
appeal market appeal.

Resources and Capabilities for driving Capabilities concerning Capabilities to lower costs Capabilities to meet the Capabilities to
capabilities costs out of the value quality, design, on niche goods Examples: highly specific needs of simultaneously
required chain syste. intangibles, and Lower input costs for the niche members deliver lower cost
Examples: large-scale innovation Examples: specific product desired Examples: custom and higher-quality or
automated plants, an marketing capabilities, by the niche, batch production, close differentiated
efficiency-oriented R&D teams, production capabilities customer relations. feature
culture, bargaining technology Examples: TQM
power practices, mass
customization

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SUCCESSFUL COMPETITIVE
STRATEGIES ARE RESOURCE-BASED
• A firm’s competitive strategy is most likely to succeed
if it is predicated on leveraging a competitively
valuable collection of resources and capabilities that
match the strategy.
• Sustaining a firm’s competitive advantage depends
on its resources, capabilities, and competences that
are difficult for rivals to duplicate and have no good
substitutes.
 STRATEGIC MANAGEMENT PRINCIPLE (7 of 7)
A company’s competitive strategy should be well-matched to its internal
situation and predicated on leveraging its collection of competitively
valuable resources and capabilities.

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