What is the definition of competitive strategy, and why is this strategy important to firms in the twenty-first century landscape? https://www.youtube.com/watch?v=p3bnOFQQmxQ&feat

26 Sep What is the definition of competitive strategy, and why is this strategy important to firms in the twenty-first century landscape? https://www.youtube.com/watch?v=p3bnOFQQmxQ&feat

Posted at 13:53h in Business & Finance /Management by

Competitive Strategy

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What is the definition of competitive strategy, and why is this strategy important to firms in the twenty-first century landscape?

chapter 5 The Five Generic Competitive Strategy Options: Which One to Employ

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Arthur A. Thompson The University of Alabama

An e-book published and distributed by McGraw Hill Education

Sixth Edition of Strategy: Core Concepts and Analytical Approaches (2020-2021). Arthur A. Thompson, The University of Alabama. Published and distributed by McGraw Hill Education. Image of globe comprised of puzzle pieces with several pieces dislodged and scattered below the globe. Chapter 5 The Five Generic Competitive Strategy Options: Which One to Employ

“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.”

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Michael E. Porter Professor, Harvard Business School

“Strategy is all about combining choices of what to do and what not to do into a system that creates the requisite fit between what the environment needs and what the company does.”

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Costas Markides

“The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.”

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Gary Hamel and C. K. Prahalad

Understand what distinguishes each of the five generic competitive strategies and the type of competitive advantage each can produce.

Gain command of why each of the five competitive strategies works better in certain market situations than in others.

Learn the major avenues for achieving a competitive advantage based on lower costs.

Learn the major avenues for achieving a competitive advantage based on differentiating a firm’s product or service offering from the offerings of rivals.

Understand the attributes of a best-cost provider strategy.

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Learning Objectives

Chapter 5 Roadmap

The Five Generic Competitive Strategies

Low-Cost Provider Strategies

Broad Differentiation Strategies

Focused Low-Cost Strategies

Focused Differentiation Strategies

Best-Cost Provider Strategies

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What Does the Term “Competitive Strategy” Refer To?

A company’s “competitive strategy” deals exclusively with the specifics of management’s game plan for competing successfully:

Actions and approaches to please customers

Offensive and defensive moves to counter maneuvers of rivals

Responses to shifting market conditions

Initiatives to strengthen the firm’s market position and achieve a particular kind of competitive advantage.

Competitive strategy is narrower in scope than business strategy

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Managers at different firms have different views on:

How to deal with competitive pressures and industry driving forces, given the particulars of their company’s situation

What future market conditions will be like

What strategy specifics makes the most sense in light of

Their company’s particular resources and capabilities (especially those that have the greatest competitive power in the marketplace)

Their company’s resource weaknesses and competitive deficiencies

Their company’s most attractive market opportunities

Their company’s vulnerability to external threats

Their company’s specific competitive strengths and weaknesses vis-à-vis rivals

The strategic vision, mission, core values, and performance targets that company managers have established

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Why Do Competitive Strategies Differ Among Firms in the Same Industry?

Factors that distinguish one firm’s competitive strategy from another

Whether a firm’s market target is broad or narrow

Whether a firm is pursuing a competitive advantage linked to lower costs or differentiation

These two factors give rise to five competitive strategy options for staking out a market position, operating the business, and delivering superior value to buyers

A low-cost provider strategy

A broad differentiation strategy

A focused low-cost strategy

A focused differentiation strategy

A best-cost provider strategy

The Factors that Distinguish One Competitive Strategy from Another

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FIGURE 5.1 The Five Generic Competitive Strategy Options

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A low-cost provider’s strategic target is lower overall costs than rivals—but not necessarily the lowest possible costs.

In striving for a low-cost advantage over rivals, it is first necessary to incorporate features and services that buyers consider essential, then go all out to provide these at a lower cost than rivals.

A product offering that is too frills-free sabotages the attractiveness of the firm’s product even if it is cheaper-priced.

Keys to Success

Having good cost-reduction skills and capabilities

Pursuing long-term cost-saving approaches and capabilities that are difficult for rivals to copy or match

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Low-Cost Provider Strategies

Core Concept

A low-cost leader’s basis for competitive advantage is lower overall costs than rivals with similar product offerings. A low-cost advantage over rivals can translate into better profitability than rivals.

Successful low-cost leaders are exceptionally good at finding ways to drive costs out of their businesses and using their low-cost advantage over rivals to achieve better profitability than rivals.

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Translating a Low-Cost Advantage into Higher Profits

Option 1:

Use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits

Option 2:

Charge a price comparable to other low-priced rivals, be content with the resulting sales volume and market share, and rely upon the low-cost edge over rivals to earn a bigger profit margin per unit sold, thereby boosting the firm’s total profits and return on investment.

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Strategic Insight

A lower price improves profitability only if the lower price results in gains in unit sales (and thus revenues) that are big enough to overcome the combined effects of a smaller profit margin and the added costs of the extra units sold.

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FIGURE 5.2 Cost Drivers—The Keys to Driving Down Costs

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The Two Major Avenues for Achieving a Cost Advantage

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Approach 1

Approach 2

Perform value chain activities more cost effectively than rivals.

Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.

Cost-saving approaches that demonstrate effective use of the cost drivers include:

Striving to capture all available economies of scale

Taking full advantage of experience and learning-curve effects

Trying to operate facilities at full capacity

Substituting low-cost for high-cost raw materials or component parts that do not sacrifice product quality or product performance

Using the firm’s bargaining power vis-à-vis suppliers to gain concessions

Improving supply chain efficiency

Pursuing ways to boost labor productivity, reduce workforce size, and otherwise trim compensation costs

Improving product design and employing cost-saving production techniques

Using online systems and sophisticated software to achieve operating efficiencies

Being alert to the cost advantages of outsourcing and vertical integration

Approach 1: Manage Value Chain Activities Very Cost Efficiently

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Adopt Economical Strategy Elements That Lead to Lower Costs Than Rivals: Some Examples

Have lower specifications for purchased materials, parts, and components than rivals

Strip frills and features from product offerings that are not highly valued by price-sensitive or bargain-hunting buyers

Offer a limited selection or few versions of a product line by deleting slow-selling items and being content to meet the needs of most buyers rather than all buyers

Distribute firm’s product only through low-cost distribution channels and avoid high-cost distribution channels

Use the most economical method for delivering customer orders (even if it results in longer delivery times)

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Approach 2: Revamping the Value Chain

Reengineer the chain to eliminate costly work steps and bypass cost-producing chain activities:

Sell direct to consumers to cut out the activities and costs of distributors and dealers

Use technologies and/or information systems to bypass the need to perform certain value chain activities

Streamline operations by eliminating low-value-added or unnecessary work steps and activities

Have suppliers locate their plants or warehouses close to a firm’s own facilities to reduce materials handling and shipping costs

Wal-Mart’s Approach to Managing Its Value Chain

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Institute extensive information sharing with vendors via online systems

Pursue global procurement of some items and centralize most purchasing activities

Invest in state-of-the-art automation at the company’s distribution centers

Strive to optimize the product mix and achieve greater sales turnover

Install security systems and store operating procedures that lower shrinkage rates

Negotiate preferred real estate rental and leasing rates with owners of store sites

Manage and compensate the workforce in a manner that leads to lower labor costs

Key Elements of Nucor’s Strategy

Use electric arc furnaces to recycle/melt scrap steel, thus lowering investment costs and eliminating expensive steps in making steel products from scratch

Use incentive compensation to achieve high productivity and low labor costs per ton produced

Locate plants close to customers to keep shipping costs down

Cost Advantages and Bottom-line Results

Lower capital investment and operating costs

Ability to charge lower prices than traditional steel companies using make-it-from-scratch technology

Consistently good profitability in an industry where profits have fluctuated wildly from good to OK to terrible

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Nucor Corporation’s Low-Cost Provider Strategy

Key Characteristics of Southwest Airlines’ Low-Cost Provider Strategy

Master fast turnarounds at boarding gates (25 minutes versus 45 minutes for rivals) allows:

Planes to fly more hours per day

More flights to be scheduled per day with fewer aircraft

More revenue to be generated per plane on average than rivals

Elimination of several services results in cost savings:

In-flight meals

Assigned seating

Baggage transfer to connecting airlines

First-class seating and service

Fast, user-friendly online reservation system:

Facilitates e-ticketing

Reduces staffing needs at reservation centers and airport counters

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The Keys to Being a Successful Low-Cost Provider

Scrutinize each cost-creating activity—understand the cost drivers and use them as levers to lower costs

Use knowledge about the cost drivers to streamline or reengineer how activities are performed

Engage all personnel in continuous cost improvement

Use benchmarking to keep close tabs on how the firm’s costs compare with its rivals and other firms performing comparable activities in other industries

Strive to operate with exceptionally small corporate staffs

Spend aggressively on resources and capabilities that promise to drive costs out of the business

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Strategic Insight

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 efficiently.

Understand the cost drivers for each value chain activity and use them as levers to drive down costs.

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A low-cost provider strategy becomes increasingly appealing and competitively powerful when:

Price competition among rival sellers is vigorous

The products of rival sellers are essentially identical and supplies are readily available from many eager suppliers

It is hard to achieve product differentiation in ways that have value to buyers

Most buyers use different brands of the product in same ways

Buyers incur low costs in switching purchases to other sellers

A big fraction of the industry’s sales are made to large-volume buyers with significant power to bargain down prices

Industry newcomers use introductory low prices to attract buyers and build a customer base

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When a Low-Cost Provider Strategy Works Best

Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy

Getting carried away with overly aggressive price cutting to win sales and market share away from rivals

Reducing price does not lead to higher total profits unless the incremental gain in total revenues exceeds the incremental increase in total costs

Relying on cost reduction approaches easily copied by rivals

The value of a cost advantage depends on its sustainability in achieving cost savings that can be kept proprietary or that are very costly and/or time-consuming for rivals to copy

Becoming too fixated on reducing costs and ignoring:

Growing buyer interest in added features, service or an upscale product

Declining buyer sensitivity to price

New developments that alter how buyers use the product

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Strategic Insight

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 sufficiently appealing to buyers to cause them to purchase the product.

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Reducing price to capture a bigger sales volume does not lead to higher total profits unless the incremental gain in total revenues exceeds the incremental increase in total costs associated with the bigger sales volume.

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Beware of Charging a Price That Is Too Low

Broad Differentiation Strategies

Entail offering unique product attributes that a wide range of buyers find appealing, valuable, and worth paying for

Are attractive when buyer needs and preferences are too diverse to be fully satisfied by a single, standardized product offering

Keys to Success

Incorporating buyer-desired attributes into product offering that:

Will appeal to a broad range of buyers

Will be different enough to stand apart from rival product offerings

Creating a product offering that is strongly differentiated rather than weakly differentiated from the offerings of rivals

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Broad Differentiation Strategies

Core Concept

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.

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Differentiation and Competitive Advantage

A product/service with unique, appealing attributes can create a competitive advantage for a firm and allow it to do one or more of the following:

Command a premium price for its product (because many buyers believe the unique attributes are worth the extra price)

Increase unit sales (because additional buyers are won over by the differentiating features)

Gain buyer loyalty to its brand (because some buyers really like the differentiating features and bond with the firm and its products)

Differentiation enhances profitability whenever a firm’s product can:

Command a sufficiently higher price or produce sufficiently bigger sales to more than cover the added costs of achieving the differentiation

Broad differentiation strategies fail when

Buyers don’t value the brand’s uniqueness

A firm’s approach to differentiation is easily and quickly copied or matched by its rivals.

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Is Differentiation the Road to Profits or to Failure?

Options for Differentiating

Unique taste – Dr. Pepper, Listerine

Multiple features – Microsoft Office, Apple’s iPhone

Wide selection and one-stop shopping – Home Depot, Amazon.com

Superior service – Nordstrom, Ritz-Carlton

Engineering design and performance – Mercedes, BMW

Prestige and distinctiveness – Rolex

Quality manufacture – Michelin

Technological leadership – 3M Corporation

Spare parts availability – Caterpillar

Full range of services – Charles Schwab

Wide selection – Campbell’s soups

High-fashion design – Gucci, Chanel

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FIGURE 5.3 Value Drivers—Keys to Successful Differentiation

Source: Adapted by the author from Michael E. Porter, Competitive Advantage (New York: The Free Press, 1985), pp. 124-126.

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Susan Walsh (sw) – Not sure you'd add punctuation; flagging for review

Perhaps the most systematic approach managers can take to achieve successful differentiation involves focusing on the value drivers, those factors that are particularly effective in creating differentiation and adding value for buyers.

Astutely using the value drivers to create unique product attributes that have high buyer appeal (because of the added value they deliver) is typically “the secret” to creating a successful differentiation strategy

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Using the Value Drivers to Achieve Stronger Differentiation and Deliver Added Value

Managing Value Chain Activities in Ways That Enhance Differentiation

Ways that managers can use the value drivers to enhance differentiation include:

Create value-adding product features and performance attributes that appeal to a wide range of buyers

Pursuing continuous quality improvements via the use of better parts, components, or ingredients and the use of quality control processes

Emphasizing new product R&D and product innovation

Improving product selection

Investing in production-related R&D, striving for technological advances, and implementing better production techniques

Improving customer service and/or providing more service options.

Emphasizing human resource management activities that improve the skills, expertise, and knowledge of company personnel

Pursuing sales, marketing, and advertising activities that lead to greater brand name power.

Improving distribution capabilities and collaborating with distribution allies to enhance customer perceptions of value

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Signaling the Value of a Firm’s Differentiated Product Offering to Buyers

Signaling value to buyers can often assist a company’s differentiation efforts

Signaling value is particularly important when:

Nature of differentiation is subjective or hard to quantify

Buyers are making a first-time purchase and are unsure what their experience with the product will be

Buyers are not fully aware of a product’s many attributes

Repurchase is infrequent and buyers need to be reminded of a product’s value

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Ways Value Can Be Signaled to Buyers

A high price (in instances where high price implies better quality or better performance)

More appealing or fancier packaging

Ongoing ad campaigns (which impact a product’s image and make it more widely known)

Ad content that emphasizes a product’s standout attributes

The quality of brochures and sales presentations

The luxuriousness and ambience of high-end retailers and sales sites frequented by customers

Making buyers aware that a company (or its products) has prestigious customers

The professionalism, appearance, and personalities of the seller’s employees

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To build sustainable competitive advantage via broad d

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26 Sep What is the definition of competitive strategy, and why is this strategy important to firms in the twenty-first century landscape? https://www.youtube.com/watch?v=p3bnOFQQmxQ&feat

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