COURSE CODE BCO124COURSE NAME MACROECONOMICS Task brief & rubrics

COURSE CODE BCO124 COURSE NAME
MACROECONOMICS Task brief & rubrics
Task: Individual assignment
· Exercises have to be explained and calculations shown.
1. Consider an economy that produces only pens. In year 1, the
quantity produced is 4 bars and the price is 5 €. In year 2, the
quantity produced is 5 bars and the price is 6. In year 3, the
quantity produced is 6 bars and the price is 7. Year 1 is the base
year.
a. What is nominal GDP for each of these three years?
b. What is real GDP for each of these years?
c. What is the GDP deflator for each of these years?
d. What is the percentage growth rate of real GDP from year 2
to year 3?
e. What is the inflation rate as measured by the GDP deflator
from year 2 to year 3?
2. Suppose that people consume only three goods, as shown in
this table:
Raquets Nets bottle of water
2019 price 3 € 5 € 2 €
2019 quantity 200 200 300
2020 price 3 7 3
2020 quantity 200 200 300
a. What is the percentage change in the price of each of the
three goods?
b. Using a method similar to the CPI, compute the percentage
change in the overall price level.
c. If you were to learn that a bottle of water increased in size

from 2019 to 2020, should that information affect your
calculation of the inflation rate? If so, how?
3. Read the following text:
Many studies have examined the effect of unemployment
insurance on job search. The most persuasive studies use data
on the experiences of unemployed
individuals rather than economy-wide rates of unemployment.
Individual data often yield sharp results that are open to few
alternative explanations.
One study followed the experience of individual workers as they
used up their eligibility for unemployment-insurance benefi ts.
It found that when unemployed
workers become ineligible for benefi ts, they are more likely to
fi nd jobs. In particular, the probability of a person fi nding a
job more than doubles when his
or her benefi ts run out. One possible explanation is that an
absence of benefi ts increases the search effort of unemployed
workers. Another possibility is that
workers without benefi ts are more likely to accept job offers
that would otherwise be declined because of low wages or poor
working conditions.
Additional evidence on how economic incentives affect job
search comes from an experiment that the state of Illinois ran in
1985. Randomly selected new claimants for unemployment
insurance were each offered a $500 bonus if they found
employment within 11 weeks. The subsequent experience of this
group was compared to that of a control group not offered the
incentive. The average duration of unemployment for the group
offered the $500 bonus was 17.0 weeks, compared to18.3 weeks
for the control group. Thus, the prospect of earning the bonus
reduced the average spell of unemployment by 7 percent,
suggesting that more effort was devoted to job search. This
experiment shows clearly that the incentives provided by the

unemployment-insurance system affect the rate of job finding.
a. Give the main ideas in bullet points. (min =6)
b. Give your point of view of each one supported with economic
terms /principles.
4. Suppose one economy decides to reduce investment and
increase consumption.
a. How this changes affect economic growth?
b. What groups in society would benefit from this change? What
groups might be hurt?
Formalities:
· Wordcount: < 1000
· Font: Arial 12 pts.
· Text alignment: Justified.
· The in-text References and the Bibliography have to be in
Harvard’s citation style.
· This assignment is 40 % of total grade
Submission: Week 6 for all students. Deadline of submission
will be 7th March 2021 at 23:59 CEST. Via Turnitin (Moodle)
Weight: This task is a 40% of your total grade for this subject.
It assesses the following learning outcomes:
· Outcome 1: Understand forces determining macroeconomic
variables such as GDP, unemployment, inflation
· Outcome 2: Apply macroeconomic terminology and assess
macroeconomic policy suggestions

Rubrics
Exceptional 90-100
Good 80-89
Fair 70-79
Marginal fail 60-69
Knowledge & Understanding (20%)
Student demonstrates excellent understanding of key concepts
and uses vocabulary in an entirely appropriate manner.
Student demonstrates good understanding of the task and
mentions some relevant concepts and demonstrates use of the
relevant vocabulary.
Student understands the task and provides minimum theory
and/or some use of vocabulary.
Student understands the task and attempts to answer the
question but does not mention key concepts or uses minimum
amount of relevant vocabulary.
Application (30%)
Student applies fully relevant knowledge from the topics
delivered in class.
Student applies mostly relevant knowledge from the topics
delivered in class.
Student applies some relevant knowledge from the topics
delivered in class. Misunderstanding may be evident.
Student applies little relevant knowledge from the topics
delivered in class. Misunderstands are evident.
Critical Thinking (30%)
Student critically assesses in excellent ways, drawing
outstanding conclusions from relevant authors.
Student critically assesses in good ways, drawing conclusions
from relevant authors and references.
Student provides some insights but stays on the surface of the
topic. References may not be relevant.
Student makes little or none critical thinking insights, does not
quote appropriate authors, and does not provide valid sources.
Communication (20%)

Student communicates their ideas extremely clearly and
concisely, respecting word count, grammar and spellcheck
Student communicates their ideas clearly and concisely,
respecting word count, grammar and spellcheck
Student communicates their ideas with some clarity and
concision. It may be slightly over or under the wordcount limit.
Some misspelling errors may be evident.
Student communicates their ideas in a somewhat unclear and
unconcise way. Does not reach or does exceed wordcount
excessively and misspelling errors are evident.
Requirement
The topic is McDonald's and all the examples are related to
McDonald's
Ch 5 and Ch 6 Company’s Environment and Resources
· Read Chapters 5 Evaluating a Company’s Environment & Ch
6 Evaluating a company’s resources, capabilities, and
competitiveness
· Use 2 L.O.s from Ch 5 and 2 L.Os from Ch 6 to analyze the
company’s management (each L.O. should have 3 examples at
100 words per example).
Ch5 and Ch6 are attached
Rating sheet
Thompson et al. Crafting & Executing Strategy
Chapter Rating Form
Content and Organization of the Presentation.

Organization of material (10 points)
1. Cover Page with Date, your name, and Topic
2. Introduce the topic with 1 paragraph
3. Body
a. Answer should include a minimum of 3 answers in addressing
the question
b. clearly states which principles apply to your company
(includes spelling, grammar, and full sentences)
4. Select 2 Learning Objectives (L.O.) for a Chapter
a. How are the L.O.’s relevant to your final paper
b. Minimum 100 words each L.O.
Chapter NAME
L.O. 1
L.O. 2
example [email protected] 100 words
example 1 @ 100 words
Example 2 @ 100 words
Chapter NAME
L.O. 1
L.O. 2

5. Conclusion … 3 key concepts you talked above
6. Works cited
7. Spell check, grammar check, etc.
TOTAL POINTS ____________________
Example
Chapter 3 & 4 Company’s Environment and Resources
Eather Thomas
Professor:Jose
February 27, 2021

Walmart is one of the largest retailers in the world recognizing
factors that can affect the company’s macro environment is
crucial. To analyze potential threats or opportunities for the
organization, I will be using the PESTEL analysis tool to
analyze Walmart’s macro-environment. By using PESTEL to
analyze we can ensure the company can develop strategies that
can help with any challenges posed by external factors. I will
also be discussing the analytic tools that are used to diagnose
the competitive conditions. This is important because knowing
who your competitors are and what they offer can help develop
a strategy to gain a competitive advantage. I will also discuss
Walmart’s resources and capabilities and what has helped them
have the competitive edge on their competitors. Lastly, we will
evaluate the company’s situation and how it can assist mangers
in making critical decisions about their strategic plans.
Chapter 3 Evaluating A Company’s External Environment
LO 1: Recognizing the factors in a company’s broad macro-
environment that may have strategic significance. Using the
economic, technological, and social factors Walmart can
anticipate challenges or opportunities in these areas.
Example 1: Economic factors may affect changes in the
company’s revenues, these changes can be positive or negative
depending on the specific factors. The general economic climate
may include specific factors such as the rate of economic
growth. Economic conditions have affected many organizations
negatively in the retail industry. Despite all the potential threats
Walmart has been able to use PESTEL analysis and focus on the
economic factors and develop strategies that has helped
Walmart remain extremely profitable. Walmart has been able to
exploit opportunities that emerge from countries with growing

economies, as the economy grows so does the demand for
affordable goods good from retailers like Walmart.
Example 2: The pace of technological change and development
is changing rapidly, and it can be the biggest threat for any
organization. In recent years we have seen a shift in the way
customers shop. Because of Covid-19 many retailers were
forced to develop strategies that offer more online shopping
options including ordering on their phones through applications.
Walmart has been able to use this opportunity to increase their
online presence through online marketing. Offering things like
free shipping or free pick-up in store is some of their working
strategies to attract and retain customers. Having competitive
pressure from other retail giants like Amazon, Walmart’s
business process automation with the use of technologies is a
priority helping them increase efficiency with their online
presence.
Example 3: Social-cultural factors can change the customers
perception and preferences of an organization. Social factors
that can affect the macro-environment of an organization may
include cultural influence, societal values, attitudes,
demographics, and population size. These influences can be at a
local scale or entire populations. Walmart has been successful
because they know their market base, they are able to increase
the variety of products to satisfy various cultural preferences.
Even though Walmart has been successful it has also come
under criticism for paying their employees low wages causing
some customers to boycott their stores. Despite the boycotts
Walmart has managed to keep their large part of customer base
intact.
LO: 2 Using analytic tools to diagnose the competitive
conditions in a company’s industry. We will be analyzing the
conditions in the market that determine the level of competition
using the five forces framework using. I will be discussing 3 out
of the 5 forces, supplier bargaining power, buyer bargaining
power and potential new entrants.

Example 1: Supplier bargaining power depends on the strength
of the demand and availability of supplier’s products. The
bargaining power of suppliers has a weak intensity in the retail
industry there is no real impact on the strategic growth of
Walmart. Many of the suppliers depend on giant retailers like
Walmart that make large purchases. Because there is a large
population of suppliers this gives Walmart the advantage to get
change suppliers at any moment keeping the suppliers
bargaining power weak. This has allowed the company to keep
offering relatively lower prices than their competitors remaining
competitive globally. Also having a weak supplier bargaining
power has lowered the industry profitably making it less
attractive to new entrants.
Example 2: When analyzing the buyer bargaining power, we
need to take into considerations is the number and size of
buyers relative to number of sellers. Because Walmart is one of
the largest retailers in the world there is more buyers than
sellers. Another consideration is the buyer’s knowledge of
products, cost, and pricing. Walmart uses the pricing strategy
decreasing the buyer’s bargaining power. Because individual
customers do not make big purchases, they have little to no
influence on the brand. The large population of buyers uses a
weak force in Walmart and the retail industry. Higher buyer
diversity makes it difficult for them to impose pressure on the
company resulting in a weak bargaining power.
Example 3: Potential new entrants come with threats such as
barriers to entry, strong brand preferences and customer loyalty,
access to distribution channels and economies of scale. The
threat of new entrants in the retail industry is low as it uses a
small level of pressure on a company like Walmart because of
its size. Walmart has one of the biggest and efficient
distribution networks and supply chain. Because of their year in
the industry and their size other existing companies have a
difficult time keeping up with Walmart and their low prices.
Walmart economies of scale come from buying their
merchandise in bulk at a huge discount.

Chapter 4 Evaluating a Company’s Resources, Capabilities and
Competitiveness.
LO 1: Why a company’s resources and capabilities are centrally
important in giving the company a competitive edge over rivals.
Example:1 A Resource is a competitive asset that is owned or
controlled by an organization. Using resources analysis to
determine if an organization can sustain competitive advantage
over their competitors is what Walmart has been able to do with
their intangible and tangible resources. One of their strongest
physical resources is Real Estate Walmart owns the buildings
and surrounding storefronts. Walmart also has strong financial
resources holding higher cash assets giving them the flexibility
to invest in their firm. Organizational resources such as their
large supply chain network and low pricing strategy, their focus
on customer service has given Walmart a competitive
advantage.
Example:2 Organizational capabilities support long term
competitive advantage; capabilities are the core competencies of
the organization that helps develop strategies. Walmart’s core
competencies are low-cost operations, buying power and supply
chain management. Using the SWOT analysis, the company can
evaluate the strengths and weaknesses and the market
opportunities and external threats of an organization. Walmart’s
strengths derive from a high efficiency supply chain the
advance in technologies for controlling the movement of
inventory from suppliers to stores. Being able to buy in bulk
gives Walmart the discount needed to keep prices low, this is
what they are known for their extremely low prices.
Example:3 Walmart’s competitive edge began with their
business venture offering low prices and great customer
services which has been the biggest contributor to their success.
Walmart has developed a partnership alliance with its
stakeholders that has allowed them to make the necessary
changes in their organization. They have created sustainability

programs that align with their long-term goals. And developed
action programs that helped developed new relationships which
helped them reached integrated level. The organization price
strategy is the strength that makes the business competitive
against other retail giants. This competitive edge has allowed
Walmart to operate in the global retail market. They have a
strong brand reputation and the financial resources to continue
to grow their business.
LO:2 Comprehensive evaluation of a company’s competitive
situation can assist mangers in making critical decisions about
their strategic moves.
Example :1 Company mangers look at value chain systems for
an organization to help improve efficiency and effectiveness.
Optimizing the value chain can make it more efficient and can
help generate strategies of competitive advantage for the
organization. The suppliers’ part of the value chain system is
important for Walmart because the relationship with their
suppliers has allowed for Walmart to have an effective supply
chain. Walmart has also been able to pressure suppliers for
lower price this a cost-saving opportunity. Walmart’s inventory
management technique is a supply chain practice called cross
docking. Cross docking removes the storage link of the supply
therefore reducing cost of transportation.
Example: 2 Strategic approaches can be used to improve the
effectiveness of customer’s value. Managers need to understand
the underlying reasons on why a strategy works. The first step
is to analyze opportunities that managers need to address first.
Competitive challenges like expanding to another country, for
example Walmart has not been able to be successful in South
Korea despite trying once before. The problem was they did not
have enough customer information and did not offer South
Koreans anything new that would get them excited to choose
Walmart over other local retailers. Other opportunities like the
shift to online shopping can help management develop a
strategic plan that can help with the expansion in other

countries.
Example :3 Gaining customers and increasing its market share
is a good indicator that the firm’s strategy is working well.
Pricing strategy is one of the key elements of marketing
strategy the everyday low-price strategy has helped with the
brand reputation of Walmart. By building the reputation of low
prices the marketing management can develop strategies to
attract more customers by adding deals either in-store or online.
Walmart has also improved their Human Resources Management
by improving on employee wages and has developed funds for
education and training. Investing on their employees and
managing their strategies are good indicators that Walmart will
continue to be successful.
Conclusion
Walmart has understood that times has changed any everything
is unpredictable just like the Covid-19 pandemic. They know
that changing and being aggressive with meeting their goals and
commitments will be key for a successful future in the
corporation. Even though, many things have changes over the
years Walmart has remained committed to the founder’s core
beliefs. Offering low prices, serving the community and high
levels of integrity. Walmart will remain a very competitive
organization because of the relationship that it has built over
the years with their employees, customers, and suppliers.

Resources
Thompson, A. A., Peteraf, M. A., Gamble, J., & Strickland, A.
J. (2016). Crafting and executing strategy: The quest for
competitive advantage: Concepts and readings. New York, NY:
McGraw-Hill Education.
Greenspan, R. (2019, February 22). Walmart Inc. five forces
Analysis (porter's model), Recommendations. Retrieved March
01, 2021, from http://panmore.com/walmart-five-forces-
analysis-porters-model-case-study
https://www.rancord.org/walmart-vrio-analysis-competitive-
advantages-core-competencies

12 | Page
CHAPTER 6 Strengthening a Company’s Competitive Position:
Strategic Moves, Timing, and Scope of Operations
1
LEARNING OBJECTIVES
THIS CHAPTER WILL HELP YOU UNDERSTAND:
Whether and when to pursue offensive or defensive strategic
moves to improve a firm’s market position
When being a first mover or a fast follower or a late mover is
most advantageous
The strategic benefits and risks of expanding a firm’s horizontal
scope through mergers and acquisitions
The advantages and disadvantages of extending the company’s
scope of operations via vertical integration
The conditions that favor outsourcing certain value chain
activities to outside parties
When and how strategic alliances can substitute for horizontal
mergers and acquisitions or vertical integration and how they

can facilitate outsourcing
© McGraw-Hill Education.
MAXIMIZING THE POWER OF A STRATEGY
Offensive and defensive
competitive
actions
Competitive
dynamics and the timing of strategic moves
Scope of
operations along
the industry’s
value chain
Making choices that complement
a competitive approach and
maximize the power of strategy
CONSIDERING STRATEGY-ENHANCING MEASURES
Whether and when to go on the offensive strategically
Whether and when to employ defensive strategies
When to undertake strategic moves—first mover,
a fast follower, or a late mover
Whether to merge with or acquire another firm
Whether to integrate backward or forward into more stages of
the industry’s activity chain
Which value chain activities, if any, should be outsourced
Whether to enter into strategic alliances or partnership
arrangements

LAUNCHING STRATEGIC OFFENSIVES TO IMPROVE A
COMPANY’S MARKET POSITION
Strategic offensive principles
Focusing relentlessly on building competitive advantage and
then striving to convert it into sustainable advantage
Applying resources where rivals are least able to defend
themselves
Employing the element of surprise as opposed to doing what
rivals expect and are prepared for
Displaying a capacity for swift, decisive, and overwhelming
actions to overpower rivals
STRATEGIC MANAGEMENT PRINCIPLE (1 of 8)
Sometimes a company’s best strategic option is to seize the
initiative, go on the attack, and launch a strategic offensive to
improve its market position.
CHOOSING THE BASIS FOR COMPETITIVE ATTACK
Avoid directly challenging a targeted competitor where it is
strongest.
Use the firm’s strongest strategic assets to attack a competitor’s
weaknesses.
The offensive may not yield immediate results
if market rivals are strong competitors.
Be prepared for the threatened competitor’s counter-response.

The best offensives use a company’s most powerful resources
and capabilities to attack rivals in the areas where they are
competitively weakest.
PRINCIPAL OFFENSIVE STRATEGY OPTIONS
Offering an equally good or better product at a lower price
Leapfrogging competitors by being first to market with next-
generation products
Pursuing continuous product innovation to draw sales and
market share away from less innovative rivals
Pursuing disruptive product innovations to create new markets
Adopting and improving on the good ideas of other companies
(rivals or otherwise)
Using hit-and-run or guerrilla marketing tactics to grab market
share from complacent or distracted rivals
Launching a preemptive strike to secure an industry’s limited
resources or capture a rare opportunity
CHOOSING WHICH RIVALS TO ATTACK
Market leaders
that are in
vulnerable competitive positions
Runner-up firms with weaknesses
in areas where
the challenger

is strong
Struggling enterprises on
the verge of
going under
Small local
and regional
firms with limited capabilities
Best Targets for
Offensive Attacks
BLUE-OCEAN STRATEGY—A SPECIAL KIND OF
OFFENSIVE
The business universe is divided into:
An existing market with boundaries and rules in which rival
firms compete for advantage
A “blue ocean” market space, where the industry has not yet
taken shape, with no rivals and wide-open long-term growth and
profit potential for a firm that can create demand for new types
of products
Blue ocean aka blue skies
Core Concept (1 of 8)
A blue-ocean strategy offers growth in revenues and profits by
discovering or inventing new industry segments that create
altogether new demand.

DEFENSIVE STRATEGIES—PROTECTING MARKET
POSITION AND COMPETITIVE ADVANTAGE
Purposes of
Defensive Strategies
Lower the firm’s
risk of being attacked
Weaken the impact
of an attack
that does occur
Influence challengers to aim their efforts
at other rivals
FORMS OF DEFENSIVE STRATEGIES
Defensive strategies can take either of two forms
Actions to block challengers
Actions to signal the likelihood of strong retaliation
Good defensive strategies can help protect a competitive
advantage but rarely are the basis for creating one.
There are many ways to throw obstacles in the path of would-be
challengers.

BLOCKING THE AVENUES OPEN TO CHALLENGERS
Introduce new features and models to broaden product lines to
close off gaps and vacant niches.
Maintain economy-pricing to thwart lower price attacks.
Discourage buyers from trying competitors’ brands.
Make early announcements about new products or price changes
to induce buyers to postpone switching.
Offer support and special inducements to current customers to
reduce the attractiveness of switching.
Challenge quality and safety of competitor’s products.
Grant discounts or better terms to intermediaries who handle the
firm’s product line exclusively.
SIGNALING CHALLENGERS THAT RETALIATION IS
LIKELY
Signaling is an effective defensive strategy when the firm
follows through by:
Publicly announcing its commitment to maintaining the firm’s
present market share
Publicly committing to a policy of matching competitors’ terms
or prices
Maintaining a war chest of cash and marketable securities
Making a strong counter-response to the moves of weaker rivals
to enhance its tough defender image
To be an effective defensive strategy, signaling needs to be

accompanied by a credible commitment to follow through.
Because of first-mover advantages and disadvantages,
competitive advantage can spring from when a move is made as
well as from what move is made.
TIMING A FIRM’S OFFENSIVE AND DEFENSIVE
STRATEGIC MOVES
Timing’s importance:
Knowing when to make a strategic move is as crucial as
knowing what move to make.
Moving first is no guarantee of success or competitive
advantage.
The risks of moving first to stake out a monopoly position
versus being a fast follower or even a late mover must be
carefully weighed.
CONDITIONS THAT LEAD TO FIRST-MOVER
ADVANTAGES
When pioneering helps build a firm’s reputation and creates
strong brand loyalty
When a first mover’s customers will thereafter face significant
switching costs
When property rights protections thwart rapid imitation of the
initial move
When an early lead enables movement down the learning curve

ahead of rivals
When a first mover can set the technical standard for the
industry
THE POTENTIAL FOR LATE-MOVER ADVANTAGES OR
FIRST-MOVER DISADVANTAGES
When pioneering is more costly than imitating and offers
negligible experience or learning-curve benefits
When the products of an innovator are somewhat primitive and
do not live up to buyer expectations
When rapid market evolution allows fast followers to leapfrog a
first mover’s products with more attractive next-version
products
When market uncertainties make it difficult to ascertain what
will eventually succeed
When customer loyalty is low and first mover’s skills, know -
how, and actions are easily copied or surpassed
TO BE A FIRST MOVER OR NOT
Does market takeoff depend on complementary products or
services that currently are not available?
Is new infrastructure required before buyer demand can surge?
Will buyers need to learn new skills or adopt new behaviors?
Will buyers encounter high switching costs in moving to the
newly introduced product or service?
Are there influential competitors in a position to delay or derail
the efforts of a first mover?

STRENGTHENING A FIRM’S MARKET POSITION VIA ITS
SCOPE OF OPERATIONS
Range of its
activities
performed
internally
Breadth of its
product and
service offerings
Extent of its geographic
market
presence and
its mix of
businesses
Size of its competitive footprint on
its market
or industry
Defining the Scope of
the Firm’s Operations
The scope of the firm refers to the range of activities that the
firm performs internally, the breadth of its product and service
offerings, the extent of its geographic market presence, and its
mix of businesses.
Scope issues are at the very heart of corporate-level strategy.

Core Concepts (4 of 8)
Horizontal scope is the range of product and service segments
that a firm serves within its focal market.
Vertical scope is the extent to which a firm’s internal activities
encompass one, some, many, or all of the activities that make
up an industry’s entire value chain system, ranging from raw -
material production to final sales and service activities.
HORIZONTAL MERGER AND ACQUISITION STRATEGIES
Merger:
Is the combining of two or more firms into a single corporate
entity that often takes on a new name
Acquisition:
Is a combination in which one firm, the "acquirer," purchases
and absorbs the operations of another firm, the "acquired"
STRATEGIC OJECTIVES FOR HORIZONTAL MERGERS
AND ACQUISITIONS
Creating a more cost-efficient operation out
of the combined companies
Expanding the firm’s geographic coverage
Extending the firm’s business into new product categories
Gaining quick access to new technologies or other resources and
capabilities
Leading the convergence of industries whose boundaries are

being blurred by changing technologies and new market
opportunities
BENEFITS OF INCREASING HORIZONTAL SCOPE
Increasing a firm’s horizontal scope strengthens its business and
increases its profitability by:
Improving the efficiency of its operations
Heightening its product differentiation
Reducing market rivalry
Increasing the firm’s bargaining power over
suppliers and buyers
Enhancing its flexibility and dynamic capabilities
WHY MERGERS AND ACQUISITIONS SOMETIMES FAIL
TO PRODUCE ANTICIPATED RESULTS
Strategic issues
Cost savings may prove smaller than expected.
Gains in competitive capabilities take longer to realize or never
materialize at all.
Organizational issues
Cultures, operating systems and management styles fail to mesh
due to resistance to change from organization members.
Key employees at the acquired firm are lost.
Managers overseeing integration make mistakes in melding the
acquired firm into their own.

A vertically integrated firm is one that performs value chain
activities along more than one stage of an industry’s value chain
system.
VERTICAL INTEGRATION STRATEGIES
Vertically integrated firm
One that participates in multiple segments or stages of an
industry’s overall value chain
Vertical integration strategy
Can expand the firm’s range of activities backward into its
sources of supply or forward toward end users of its products
TYPES OF VERTICAL INTEGRATION STRATEGIES
Full integration
A firm participates in all stages of the vertical activity chain.
Partial integration
A firm builds positions only in selected stages of the vertical
chain.
Tapered integration
A firm uses a mix of in-house and outsourced activity in any
stage of the vertical chain.

THE ADVANTAGES OF A VERTICAL INTEGRATION
STRATEGY
Benefits of a Vertical
Integration Strategy
Add materially
to a firm’s technological capabilities
Strengthen
the firm’s competitive position
Boost
the firm’s profitability
Backward integration involves entry into activities previously
performed by suppliers or other enterprises positioned along
earlier stages of the industry value chain system.
Forward integration involves entry into value chain system
activities closer to the end user.
INTEGRATING BACKWARD TO ACHIEVE GREATER
COMPETITIVENESS
Integrating backwards by:
Achieving same scale economies as outside suppliers: low -cost
based competitive advantage
Matching or beating suppliers’ production efficiency with no
drop-off in quality: differentiation-based competitive advantage
Reasons for integrating backwards
Reduction of supplier power
Reduction in costs of major inputs
Assurance of the supply and flow of critical inputs

Protection of proprietary know-how
INTEGRATING FORWARD TO ENHANCE
COMPETITIVENESS
Reasons for integrating forward:
To lower overall costs by increasing channel activity
efficiencies relative to competitors
To increase bargaining power through control of channel
activities
To gain better access to end users
To strengthen and reinforce brand awareness
To increase product differentiation
DISADVANTAGES OF A VERTICAL INTEGRATION
STRATEGY
Increased business risk due to large capital investment
Slow acceptance of technological advances or more efficient
production methods
Less flexibility in accommodating shifting buyer preferences
that require non-internally produced parts
Internal production levels may not reach volumes that create
economies of scale
Efficient production of internally-produced components and
parts hampered by capacity matching problems
New or different resources and capabilities requirements

WEIGHING THE PROS AND CONS OF VERTICAL
INTEGRATION
Will vertical integration enhance the performance of strategy-
critical activities ways that lower cost, build expertise, protect
proprietary know-how, or increase differentiation?
What impact will vertical integration have on investment costs,
flexibility, and response times?
What administrative costs are incurred by coordinating
operations across more vertical chain activities?
How difficult will it be for the firm to acquire the set of skills
and capabilities needed to operate in another stage of the
vertical chain?
Outsourcing involves contracting out certain value chain
activities that are normally performed in-house to outside
vendors.
OUTSOURCING STRATEGIES: NARROWING THE SCOPE
OF OPERATIONS
Outsource an activity if it:
Can be performed better or more cheaply by outside specialists
Is not crucial to achieving sustainable competitive advantage
Improves organizational flexibility and speeds time to market
Reduces risk exposure due to new technology or buyer
preferences
Allows the firm to concentrate on its core business, leverage

key resources, and do even better what it already does best
THE BIG RISKS OF OUTSOURCING VALUE CHAIN
ACTIVITIES
Hollowing out resources and capabilities that the firm needs to
be a master of its own destiny
Loss of direct control when monitoring, controlling, and
coordinating activities of outside parties by means of contracts
and arm’s-length transactions
Lack of incentives for outside parties to make investments
specific to the needs of the outsourcing firm’s value chain
A company must guard against outsourcing activities that
hollow out the resources and capabilities that it
needs to be a master of its own destiny.
A strategic alliance is a formal agreement between two or more
separate companies in which they agree to work cooperatively
toward some common objective.
A joint venture is a partnership involving the
establishment of an independent corporate entity that the
partners own and control jointly, sharing in its revenues and

expenses.
FACTORS THAT MAKE AN ALLIANCE “STRATEGIC”
A strategic alliance:
Facilitates achievement of an important business objective
Helps build, sustain, or enhance a core competence or
competitive advantage
Helps remedy an important resource deficiency or competitive
weakness
Helps defend against a competitive threat, or mitigates a
significant risk to a company’s business
Increases the bargaining power over suppliers or buyers.
Helps open up important new market opportunities
Speeds development of new technologies or product innovations
BENEFITS OF STRATEGIC ALLIANCES AND
PARTNERSHIPS
Minimize the problems associated with vertical integration,
outsourcing, and mergers and acquisitions
Are useful in extending the scope of operations via international
expansion and diversification strategies
Reduce the need to be independent and self-sufficient when
strengthening the firm’s competitive position
Offer greater flexibility should a firm’s resource requirements
or goals change over time
Are useful when industries are experiencing high-velocity
technological advances simultaneously

Companies that have formed a host of alliances need to manage
their alliances like a portfolio.
WHY AND HOW STRATEGIC ALLIANCES ARE
ADVANTAGEOUS
Strategic Alliances:
Expedite development of promising new technologies or
products
Help overcome deficits in technical and manufacturing expertise
Bring together the personnel and expertise needed to create new
skill sets and capabilities
Improve supply chain efficiency
Help partners allocate venture risk sharing
Allow firms to gain economies of scale
Provide new market access for partners
CAPTURING THE BENEFITS OF STRATEGIC ALLIANCES
Picking a good partner
Being sensitive to cultural differences
Recognizing that the alliance must benefit both sides
Adjusting the agreement over time to fit new circumstances
Structuring the decision-making process for swift actions
Ensuring both parties keep their commitments
Strategic Alliance Factors

The best alliances are highly selective, focusing on particular
value chain activities and on obtaining a specific competitive
benefit.
Alliances enable a firm to learn and to build on its strengths.
REASONS FOR ENTERING INTO STRATEGIC ALLIANCES
When seeking global market leadership
Enter into critical country markets quickly.
Gain inside knowledge about unfamiliar markets and cultures
through alliances with local partners.
Provide access to valuable skills and competencies concentrated
in particular geographic locations.
When staking out a strong industry position
Establish a stronger beachhead in target industry.
Master new technologies and build expertise and competencies.
Open up broader opportunities in the target industry.
PRINCIPLE ADVANTAGES OF STRATEGIC ALLIANCES
They lower investment costs and risks for each partner by
facilitating resource pooling and risk sharing.
They are more flexible organizational forms and allow for a
more adaptive response to changing conditions.
They are more rapidly deployed—a critical factor when speed is

of the essence.
STRATEGIC ALLIANCES VERSUS OUTSOURCING
Key advantages of strategic alliances
The increased ability to exercise control over the partners’
activities.
A greater commitment and willingness of the partners to make
relationship-specific investments as opposed to arm’s-length
outsourcing transactions.
ACHIEVING LONG-LASTING STRATEGIC ALLIANCE
RELATIONSHIPS
Collaborating with partners that do not compete directly
Establishing
a permanent trusting relationship
Continuing to collaborate is
in the parties’
mutual interest
Factors Influencing
the Longevity of Alliances
THE DRAWBACKS OF STRATEGIC ALLIANCES AND
PARTNERSHIPS
Culture clash and integration problems due to different
management styles and business practices

Anticipated gains not materializing due to an overly optimistic
view of the potential for synergies or the unforeseen poor fit of
partners’ resources and capabilities
Risk of becoming dependent on partner firms for essential
expertise and capabilities
Protection of proprietary technologies, knowledge bases, or
trade secrets from partners who are rivals
HOW TO MAKE STRATEGIC ALLIANCES WORK
Create a system for managing the alliance.
Build trusting relationships with partners.
Set up safeguards to protect from the threat of opportunism by
partners.
Make commitments to partners and see that partners do the
same.
Make learning a routine part of the management process.
Appendix 1 Maximizing the Power
of a Strategy
Making choices that complement a competitive approach and
maximize the power of strategy includes:
Offensive and defensive competitive actions
Competitive dynamics and the timing of strategic moves
Scope of operations along the industry's value chain

Appendix 2 Choosing Which
Rivals to Attack
The best targets for offensive attacks are: market leaders that
are in vulnerable competitive positions, runner-up firms with
weaknesses in areas where the challenger is strong, struggling
enterprises on the verge of going under, and small local and
regional firms with limited capabilities.
Appendix 3 Defensive Strategies—Protecting Market Position
and Competitive Advantage
The three purposes of defensive strategies
Lower the firm's risk of being attacked
Weaken the impact of an attack that does occur
Influence challengers to aim their efforts at other rivals
Appendix 4 Strengthening a Firm’s Market Position Via Its
Scope of Operations
The scope of a firm's operations is defined as: the range of its
activities performed internally; the breadth of its product and
service offerings; the extent of its geographic market presence
and its mix of business; and the size of its competitive footprint
on its market or industry.
Appendix 5 The Advantages of a Vertical Integration Strategy
Three benefits of a vertical integration strategy

Add materially to a firm's technological capabilities
Strengthen the firm's competitive positon
Boost the firm's profitability
Appendix 6 Capturing the Benefits of Strategic Alliances
The strategic alliance factors are:
Being sensitive to culture differences
Recognizing that the alliance must benefit both sides
Adjusting the agreement over time to fit new circumstances
Structuring the decisions-making process for swift actions
Ensuring both parties keep their commitments
Picking a good partner
Appendix 7 Achieving Long-Lasting Strategic Alliance
Relationships
Three factors that influence the longevity of alliances
Collaborating with partners that do not compete directly
Establishing a permanent trusting relationship
Continuing to collaborate is in the parties' mutual interest
LEARNING OBJECTIVES
Whether and when to pursue offensive or defensive strategic
moves to improve a firm’s market position
When being a first mover or a fast follower or a late mover is
most advantageous
The strategic benefits and risks of expanding a firm’s horizontal

scope through mergers and acquisitions
The advantages and disadvantages of extending the company’s
scope of operations via vertical integration
The conditions that favor outsourcing certain value chain
activities to outside parties
When and how strategic alliances can substitute for horizontal
mergers and acquisitions or vertical integration and how they
can facilitate outsourcing
CHAPTER 5
The Five Generic Competitive Strategies
Copyright © McGraw-Hill Education. Permission required for
reproduction or display.
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

2
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 competitive advantage
pursued linked to low costs
or product differentiation?
Is the firm’s market target
broad or narrow?
Key factors that
distinguish one strategy
from another
THE FIVE GENERIC COMPETITIVE STRATEGIESLow-cost
providerStriving to achieve lower overall costs than rivals on
products that attract a broad spectrum of buyersBroad
differentiationDifferentiating the firm’s product offering from
rivals with attributes that appeal to a broad spectrum of
buyersFocused low-costConcentrating on a narrow price-
sensitive buyer segment and on costs to offer a lower-priced
productFocused differentiationConcentrating on a narrow buyer
segment by meeting specific tastes and requirements of niche
membersBest-cost providerGiving customers more value for the
money by offering upscale product attributes at a lower cost
than rivals

FIGURE 5.1 The Five Generic Competitive Strategies
Jump to Appendix 2 long image description
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
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.
A low-cost advantage over rivals can translate into better
profitability than rivals attain.
MAJOR AVENUES FOR ACHIEVING A COST ADVANTAGE
Low-cost advantage
Cumulative costs across the overall value chain must be lower
than competitors’ cumulati ve 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
A cost driver is a factor that has a strong influence on a
company’s costs.
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
COST-CUTTING METHODS (1 of 2)
Capturing all available economies of scale
Taking full advantage of experience and learning-curve effects
Operating facilities at full or near-full capacity
Improving supply chain efficiency
Substituting lower-cost inputs wherever there is little or no
sacrifice in product quality or performance
COST-CUTTING METHODS (2 of 2)
Using the firm’s bargaining power vis-à-vis suppliers or others
in the value chain system to gain concessions
Using online systems and sophisticated software to achieve
operating efficiencies
Improving process design and employing advanced production

technology
Being alert to the cost advantages of outsourcing or vertical
integration
Motivating employees through incentives and company culture
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
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.
WHEN A LOW-COST PROVIDER STRATEGY WORKS BEST
Price competition among rival sellers is vigorous.
Identical products are available from many sellers.
There are few ways to differentiate industry products.
Most buyers use the product in the same ways.
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.
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.
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.
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

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.
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.
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
Influence 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
MANAGING THE VALUE CHAIN TO CREATE THE
DIFFERENTIATING ATTRIBUTES
Create product features and performance attributes that appeal
to a wide range of buyers.
Improve customer service or add extra services.
Invest in production-related R&D activities.
Strive for innovation and technological advances.
Pursue continuous quality improvement.
Increase marketing and brand-building activities.
Seek out high-quality inputs.
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 suppliers
to better address customer needs
Coordinating with channel
allies to enhance customer perceptions of value
Approaches
to enhancing differentiation through changes in the value chain

system
DELIVERING SUPERIOR VALUE VIA A BROAD
DIFFERENTIATION STRATEGYBroad Differentiation:
Offering Customers Something That Rivals Cannot1.Incorporate
product attributes and user features that lower the buyer’s
overall costs of using the firm’s product2.Incorporate tangible
features (e.g., styling) that increase customer satisfaction with
the product3.Incorporate intangible features (e.g., buyer image)
that enhance buyer satisfaction in noneconomic ways4.Signal
the value of the firm’s product offering to buyers (e.g., price,
packaging, placement, advertising)
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.
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.
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
Buyer needs
and uses for
the product are diverse.
There are many ways that differentiation
can have value
to buyers.
Few rival firms are following
a similar differentiation approach
There is rapid change in the product’s technology and featur es
Market Circumstances
Favoring Differentiation

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 Market Niche Strategy
Focused
Low-Cost
Strategy
Focused Strategy
Approaches
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
Competitors will find ways to match the focused firm’s
capabilities in serving the target niche.
The specialized preferences and needs of niche members shift
over time toward the product attributes desired by the majority
of buyers.
As attractiveness of the segment increases, it draws in more
competitors, intensifying rivalry and splintering segment
profits.
BEST-COST PROVIDER STRATEGIES
Value-Conscious Buyer
Best-Cost Provider
Hybrid Approach
Differentiation:
Providing desired quality, features, performance,
service attributes

Low Cost Provider:
Charging a lower price
than rivals with similar
caliber product offerings
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.
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

High-End
Differentiators
Low-Cost
Providers
Best-Cost
Provider
Strategy
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)Low-Cost ProviderBroad
DifferentiationFocused low-cost providerFocused
differentiationBest-Cost ProviderStrategic targetA broad cross-

section of the marketA broad cross-section of the marketA
narrow market niche where buyer needs and preferences are
distinctively differentA narrow market niche where buyer needs
and preferences are distinctively differentValue-conscious
buyers. Or, a middle-market rangeBasis of competitive
strategyLower overall costs than competitorsAbility to offer
buyers something attractively different from competitors’
offeringsLower overall cost than rivals in serving niche
membersAttributes that appeal specifically to niche
membersAbility to offer better goods at attractive pricesProduct
lineA good basic product with few frills (acceptable quality and
limited selection)Many product variations, wide selection,
emphasis on differentiating featuresFeatures and attributes
tailored to the tastes and requirements of niche
membersFeatures and attributes tailored to the tastes and
requirements of niche membersItems with appealing attributes
and assorted features; better quality, not bestProduction
emphasisA continuous search for cost reduction without
sacrificing acceptable quality and essential featuresBuild in
whatever differentiating features buyers are willing to pay for;
strive for product superiorityA continuous search for cost
reduction for products that meet basic needs of niche
membersSmall-scale production or custom-made products that
match the tastes and requirements of niche membersBuild in
appealing features and better quality at lower cost than rivals
Table 5.1 Distinguishing Features of the Five Generic
Competitive Strategies (2 of 2)Low-Cost ProviderBroad
DifferentiationFocused low-cost providerFocused
differentiationBest-Cost ProviderMarketing emphasisLow
prices, good value
Also, try to make a virtue out of product features that lead to

low costTout differentiating features.
Also, charge a premium price to cover the extra costs of
differentiating featuresCommunicate attractive features of a
budget-priced product offering that fits niche buyers’
expectationsCommunicate how product offering does the best
job of meeting niche buyers’ expectationsEmphasize delivery of
best value for the moneyKeys to maintaining the
strategyEconomical prices, good value
Also, strive to manage costs down, year after year, in every area
of the businessStress constant innovation to stay ahead of
imitative competitors
Also, concentrate on a few key differentiating features.Stay
committed to serving the niche at the lowest overall cost; don’t
blur the firm’s image by entering other market segments or
adding other products to widen market appealStay committed to
serving the niche better than rivals; don’t blur the firm’s image
by entering other market segments or adding other products to
widen market appeal.Unique expertise in simultaneously
managing costs down while incorporating upscale features and
attributesResources and capabilities requiredCapabilities for
driving costs out of the value chain system.
Examples: large-scale automated plants, an efficiency-oriented
culture, bargaining powerCapabilities concerning quality,
design, intangibles, and innovation Examples: marketing
capabilities, R&D teams, technologyCapabilities to lower costs
on niche goods Examples: Lower input costs for the specific
product desired by the niche, batch production
capabilitiesCapabilities to meet the highly specific needs of
niche members
Examples: custom production, close customer
relations.Capabilities to simultaneously deliver lower cost and
higher-quality or differentiated feature
Examples: TQM practices, mass customization

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.
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.
Appendix 1 Why Do Strategies Differ?
Two key factors that distinguish one strategy from another
Is the firm's market target broad or narrow?
Is the competitive advantage pursued linked to low costs or
product differentiation?
Appendix 2 Figure 5.1 The Five Generic Competitive Strategies
The illustration lists two types of competitive advantages being
pursued: lower cost and differentiation. It also lists two market
targets: a broad cross-section of buyers, and a narrow buyer
segment (or market niche). The combination of these types
creates the five generic strategies:

Overall low-cost provider strategy (lower cost or a broad cross-
section of buyers)
Focused low-cost strategy (lower cost or a narrow buyer
segment)
Broad differentiation strategy (differentiation or a broad cross -
section of buyers)
Focused differentiation strategy (differentiation or a narrow
buyer segment)
Best-Cost Provider strategy (an equal balance of competitive
advantages and market targets)
Appendix 3 Figure 5.2 Cost Drivers: The Keys to Driving Down
Company Costs
Incentive systems and culture;
economies of scale;
learning and experience;
capacity utilization;
supply chain efficiencies;
input costs;
production technology and design;
communication systems and information technology;
bargaining power;
and outsourcing or vertical integration
The cost drivers listed are:
Appendix 4 Figure 5.3 Value Drivers: The Keys to Creating a
Differentiation Advantage
quality control processes;
product features and performance;
customer services;
employee skill, training, experience;

The value drivers listed are:
production R&D;
technology and innovation;
input quality;
sales
and marketing.
Appendix 5 Revamping the Value Chain System to Increase
Differentiation
The two approaches to enhancing differentiation through
changes in the value chain system are:
Coordinating with channel allies to enhance customer
perceptions of value
Coordinating with suppliers to better address customer needs
Appendix 6 When a Differentiation Strategy Works Best
The four market circumstances that favor differentiation are:
Diversity of buyer needs and uses for the product
Many ways that differentiation can have value to buyers
Few rival firms follow a similar differentiation approach
Rapid change in technology and product features
Appendix 7 Best-Cost Provider Strategies
A combination of differentiation (providing desired quality,
features, performance, service attributes)
and low-cost provider (charging a lower price than rivals with
similar caliber product offerings)
leads to the best-cost provider hybrid approach, which connects
with the value-conscious buyer.

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
55

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