Module 5 generic competitive strategies (1)
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This document discusses five generic competitive strategies: low-cost provider, differentiation, best-cost provider, and focused strategies. It provides details on each strategy, including keys to success and potential pitfalls. For a low-cost strategy, a firm must make lowering costs a priority and find ways to achieve cost advantages that are difficult for rivals to copy. Differentiation requires incorporating unique features that cause buyers to prefer the firm's products over rivals. A best-cost strategy combines aspects of low-cost and differentiation to provide superior value. Focused strategies involve targeting a narrow niche market and developing capabilities to serve that niche's specific needs.
Module 5 generic competitive strategies (1)
- 1. Module 5 Generic competitive Strategies
- 2. “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.” Michael E. Porter
- 3. CHAPTER ROADMAP Five Competitive Strategies Low-Cost Provider Strategies Differentiation Strategies Best-Cost Provider Strategies Focused (or Market Niche) Strategies Strategic Alliances and Collaborative Partnerships Mergers and Acquisition Strategies – Outsourcing Strategies International Business level Strategies.
- 4. STRATEGY AND COMPETITIVE ADVANTAGE Competitive advantage exists when a firm’s strategy gives it an edge in Attracting customers and Defending against competitive forces Key to Gaining a Competitive Advantage Convince customers firm’s product / service offers superior value A good product at a low price A superior product worth paying more for A best-value product
- 5. WHAT IS “COMPETITIVE STRATEGY”? Deals exclusively with a company’s business plans to compete successfully Specific efforts to please customers Offensive and defensive moves to counter maneuvers of rivals Responses to prevailing market conditions Initiatives to strengthen its market position Narrower in scope than business strategy
- 6. FIG. 5.1: THE FIVE GENERIC COMPETITIVE STRATEGIES
- 7. LOW-COST PROVIDER STRATEGIES Keys to Success Make achievement of meaningful lower costs than rivals the theme of firm’s strategy Include features and services in product offering that buyers consider essential Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match Low-cost leadership means low overall costs, not just low manufacturing or production costs!
- 8. OPTIONS: ACHIEVING A LOW-COST ADVANTAGE Option 1: Use lower-cost edge to Underprice competitors and attract price-sensitive buyers in enough numbers to increase total profits Option 2: Maintain present price, be content with present market share, and use lower-cost edge to Earn a higher profit margin on each unit sold, thereby increasing total profits
- 9. APPROACHES TO SECURING A COST ADVANTAGE Approach 1 Do a better job than rivals of performing value chain activities efficiently and cost effectively Approach 2 Revamp value chain to bypass cost-producing activities that add little value from the buyer’s perspective Control costs! By-pass costs!
- 10. APPROACH 1: CONTROLLING THE COST DRIVERS Capture scale economies; avoid scale diseconomies Capture learning and experience curve effects Manage costs of key resource inputs Consider linkages with other activities in value chain Find sharing opportunities with other business units Compare vertical integration vs. outsourcing Assess first-mover advantages vs. disadvantages Control percentage of capacity utilization Make prudent strategic choices related to operations
- 11. APPROACH 2: REVAMPING THE VALUE CHAIN Make greater use of Internet technology applications Use direct-to-end-user sales/marketing methods Simplify product design Offer basic, no-frills product/service Shift to a simpler, less capital-intensive, or more flexible technological process Find ways to bypass use of high-cost raw materials Relocate facilities closer to suppliers or customers Drop “something for everyone” approach and focus on a limited product/service
- 12. KEYS TO SUCCESS IN ACHIEVING LOW-COST LEADERSHIP Scrutinize each cost-creating activity, identifying cost drivers Use knowledge about cost drivers to manage costs of each activity down year after year Find ways to restructure value chain to eliminate nonessential work steps and low-value activities Work diligently to create cost-conscious corporate cultures Feature broad employee participation in continuous cost-improvement efforts and limited perks for executives Strive to operate with exceptionally small corporate staffs Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business
- 13. CHARACTERISTICS OF A LOW-COST PROVIDER Cost conscious corporate culture Employee participation in cost-control efforts Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost improvement Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !
- 14. PITFALLS OF LOW-COST STRATEGIES Being overly aggressive in cutting price Low cost methods are easily imitated by rivals Becoming too fixated on reducing costs and ignoring Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used Technological breakthroughs open up cost reductions for rivals
- 15. DIFFERENTIATION STRATEGIES Objective Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals Keys to Success Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals Not spending more to achieve differentiation than the price premium that can be charged
- 16. BENEFITS OF SUCCESSFUL DIFFERENTIATION A product / service with unique, appealing attributes allows a firm to Command a premium price and/or Increase unit sales and/or Build brand loyalty Which hat is unique? = Competitive Advantage
- 17. TYPES OF DIFFERENTIATION THEMES Unique taste -- Dr. Pepper Multiple features -- Microsoft Windows and Office Wide selection and one-stop shopping -- Home Depot and Amazon.com Superior service -- FedEx, Ritz-Carlton Spare parts availability -- Caterpillar More for your money -- McDonald’s, Wal-Mart Prestige -- Rolex Quality manufacture -- Honda, Toyota Technological leadership -- 3M Corporation Top-of-line image -- Ralph Lauren, Chanel, Cross
- 18. SUSTAINING DIFFERENTIATION: KEYS TO COMPETITIVE ADVANTAGE Most appealing approaches to differentiation Those hardest for rivals to match or imitate Those buyers will find most appealing Best choices to gain a longer-lasting, more profitable competitive edge New product innovation Technical superiority Product quality and reliability Comprehensive customer service Unique competitive capabilities
- 19. HOW TO ACHIEVE A DIFFERENTIATION-BASED ADVANTAGE Approach 1 Incorporate product features/attributes that lower buyer’s overall costs of using product Approach 2 Incorporate features/attributes that raise the performance a buyer gets out of the product Approach 3 Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways Approach 4 Compete on the basis of superior capabilities
- 20. WHEN DOES A DIFFERENTIATION STRATEGY WORK BEST? There are many ways to differentiate a product that have value and please customers Buyer needs and uses are diverse Few rivals are following a similar differentiation approach Technological change and product innovation are fast-paced
- 21. WHEN DOES A DIFFERENTIATION STRATEGY WORK BEST? There are many ways to differentiate a product that have value and please customers Buyer needs and uses are diverse Few rivals are following a similar differentiation approach Technological change and product innovation are fast-paced
- 22. PITFALLS OF DIFFERENTIATION STRATEGIES Buyers see little value in unique attributes of product Appealing product features are easily copied by rivals Differentiating on a feature buyers do not perceive as lowering their cost or enhancing their well-being Over-differentiating such that product features exceed buyers’ needs Charging a price premium buyers perceive is too high Not striving to open up meaningful gaps in quality, service, or performance features vis-à-vis rivals’ products
- 23. BEST-COST PROVIDER STRATEGIES Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation Make an upscale product at a lower cost Give customers more value for the money Objectives Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations Be the low-cost provider of a product with good-to- excellent product attributes, then use cost advantage to underprice comparable brands
- 24. A BEST-COST PROVIDER STRATEGY A best-cost provider’s competitive advantage comes from matching close rivals on key product attributes and beating them on price Success depends on having the skills and capabilities to provide attractive performance and features at a lower cost than rivals A best-cost producer can often out-compete both a low-cost provider and a differentiator when Standardized features/attributes won’t meet diverse needs of buyers Many buyers are price and value sensitive
- 25. RISK OF A BEST-COST PROVIDER STRATEGY A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies Low-cost leaders may be able to siphon customers away with a lower price High-end differentiators may be able to steal customers away with better product attributes
- 26. FOCUS / NICHE STRATEGIES Involve concentrated attention on a narrow piece of the total market Objective Serve niche buyers better than rivals Keys to Success Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs Develop unique capabilities to serve needs of target buyer segment
- 27. APPROACHES TO DEFINING A MARKET NICHE Geographic uniqueness Specialized requirements in using product/service Special product attributes appealing only to niche buyers
- 28. EXAMPLES OF FOCUS STRATEGIES eBay Online auctions Porsche Sports cars Jiffy Lube International Maintenance for motor vehicles Pottery Barn Kids Children’s furniture and accessories Bandag Specialist in truck tire recapping
- 29. FOCUS / NICHE STRATEGIES AND COMPETITIVE ADVANTAGE Approach 1 Achieve lower costs than rivals in serving the segment -- A focused low-cost strategy Approach 2 Which Offer niche buyers something different from rivals -- hat is unique? A focused differentiation strategy
- 30. RISKS OF A FOCUS STRATEGY Competitors find effective ways to match a focuser’s capabilities in serving niche Niche buyers’ preferences shift towards product attributes desired by majority of buyers – niche becomes part of overall market Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered
- 31. DECIDING WHICH GENERIC COMPETITIVE STRATEGY TO USE Each positions a company differently in its market and competitive environment Each establishes a central theme for how a company will endeavor to outcompete rivals Each creates some boundaries for maneuvering as market circumstances unfold Each points to different ways of experimenting with the basics of the strategy Each entails differences in product line, production emphasis, marketing emphasis, and means to sustainthe strategy
- 32. DECIDING WHICH GENERIC COMPETITIVE STRATEGY TO USE Each positions a company differently in its market Each establishes a central theme for how a company will endeavor to outcompete rivals Each creates some boundaries for maneuvering as market circumstances unfold Each points to different ways of experimenting with the basics of the strategy Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy The big risk – Selecting a “stuck in the middle” strategy! This rarely produces a sustainable competitive advantage or a distinctive competitive position.
- 34. FIG. 6.1: A COMPANY’S MENU OF STRATEGY OPTIONS
- 35. STRATEGIC ALLIANCES AND COLLABORATIVE PARTNERSHIPS Companies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-to-company dealings but fall short of merger or full joint venture partnership.
- 36. ALLIANCES CAN ENHANCE A FIRM’S COMPETITIVENESS Alliances and partnerships can help companies cope with two demanding competitive challenges Racing against rivals to build a market presence in many different national markets Racing against rivals to seize opportunities on the frontiers of advancing technology Collaborative arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities
- 37. CAPTURING THE FULL POTENTIAL OF A STRATEGIC ALLIANCE Capacity of partners to defuse organizational frictions Ability to collaborate effectively over time and work through challenges Technological and competitive surprises New market developments Changes in their own priorities and competitive circumstances Collaborative partnerships nearly always entail an evolving relationship whose competitive value depends on Mutual learning Cooperation Adaptation to changing industry conditions Competitive advantage emerges when a company acquires valuable capabilities via alliances it could
- 38. WHY ARE STRATEGIC ALLIANCES FORMED? To collaborate on technology development or new product development To fill gaps in technical or manufacturing expertise To acquire new competencies To improve supply chain efficiency To gain economies of scale in production and/or marketing To acquire or improve market access via joint marketing agreements
- 39. POTENTIAL BENEFITS OF ALLIANCES TO ACHIEVE GLOBAL AND INDUSTRY LEADERSHIP Get into critical country markets quickly to accelerate process of building a global presence Gain inside knowledge about unfamiliar markets and cultures Access valuable skills and competencies concentrated in particular geographic locations Establish a beachhead to participate in target industry Master new technologies and build new expertise faster than would be possible internally Open up expanded opportunities in target industry by combining firm’s capabilities with resources of partners
- 40. WHY ALLIANCES FAIL Ability of an alliance to endure depends on How well partners work together Success of partners in responding and adapting to changing conditions Willingness of partners to renegotiate the bargain Reasons for alliance failure Diverging objectives and priorities of partners Inability of partners to work well together Changing conditions rendering purpose of alliance obsolete Emergence of more attractive technological paths Marketplace rivalry between one or more allies
- 41. MERGER AND ACQUISITION STRATEGIES Merger – Combination and pooling of equals, with newly created firm often taking on a new name Acquisition – One firm, the acquirer, purchases and absorbs operations of another, the acquired Merger-acquisition Much-used strategic option Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunities Ownership allows for tightly integrated operations, creating more control and autonomy than alliances
- 42. TYPES OF MERGERS Vertical mergers: It is a combination of two or more firms, not necessarily in the same line of business, having complimentary in terms of supply of materials or marketing of goods and services. Horizontal mergers: It is a combination of two or more firms in the same line of business; Concentric mergers: It is a combination of two or more firms somewhat related to each other in terms of customer functions, customer groups, production processes, or technologies used. Conglomerate mergers: It is a combination of two or more firms unrelated to each other.
- 43. OBJECTIVES OF MERGERS AND ACQUISITIONS To pave way for acquiring firm to gain more market share and create a more efficient operation To expand a firm’s geographic coverage To extend a firm’s business into new product categories or international markets To gain quick access to new technologies To invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities
- 44. PITFALLS OF MERGERS AND ACQUISITIONS Combining operations may result in Resistance from rank-and-file employees Hard-to-resolve conflicts in management styles and corporate cultures Tough problems of integration Greater-than-anticipated difficulties in Achieving expected cost-savings Sharing of expertise Achieving enhanced competitive capabilities
- 45. OUTSOURCING STRATEGIES Concept Outsourcing involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities Internally Performed Activities Suppliers Support Services Functional Activities Distributors or Retailers
- 46. WHEN DOES OUTSOURCING MAKE STRATEGIC SENSE? Activity can be performed better or more cheaply by outside specialists Activity is not crucial to achieve a sustainable competitive advantage Risk exposure to changing technology and/or changing buyer preferences is reduced Operations are streamlined to Cut cycle time Speed decision-making Reduce coordination costs Firm can concentrate on “core” value chain activities that best suit its resource strengths
- 47. STRATEGIC ADVANTAGES OF OUTSOURCING Improves firm’s ability to obtain high quality and/or cheaper components or services Improves firm’s ability to innovate by interacting with “best-in-world” suppliers Enhances firm’s flexibility should customer needs and market conditions suddenly shift Increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently Allows firm to concentrate its resources on performing those activities internally which it can perform better than outsiders
- 48. PITFALLS OF OUTSOURCING Farming out too many or the wrong activities, thus Hollowing out capabilities Losing touch with activities and expertise that determine overall long-term success
- 49. 9-49 © 2006 by Nelson, a division of Thomson INTERNATIONAL STRATEGY OPPORTUNITIES & OUTCOMES Canada Limited. Identify International Opportunities Explore Resources & Capabilities Use Core Competence Strategic Competitiveness Outcomes International Strategies Modes of Entry Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Bus.-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy Exporting Licensing Strategic Alliances Acquisition Establishment of New Sub. Management Problems, Risk, and First Steps Higher Performance Returns Innovation Management Problems, Risk, and First Steps
- 50. 50 MOTIVATIONS FOR INTERNATIONAL EXPANSION IInnccrreeaassee MMaarrkkeett SShhaarree DDoommeessttiicc mmaarrkkeett mmaayy llaacckk tthhee ssiizzee ttoo ssuuppppoorrtt eeffffiicciieenntt ssccaallee mmaannuuffaaccttuurriinngg ffaacciilliittiieess RReettuurrnn oonn IInnvveessttmmeenntt LLaarrggee iinnvveessttmmeenntt pprroojjeeccttss mmaayy rreeqquuiirree gglloobbaall mmaarrkkeettss ttoo jjuussttiiffyy tthhee ccaappiittaall oouuttllaayyss WWeeaakk ppaatteenntt pprrootteeccttiioonn iinn ssoommee ccoouunnttrriieess iimmpplliieess tthhaatt ffiirrmmss sshhoouulldd eexxppaanndd oovveerrsseeaass rraappiiddllyy iinn oorrddeerr ttoo pprreeeemmpptt iimmiittaattoorrss
- 51. 51 MOTIVATIONS FOR INTERNATIONAL EXPANSION EEccoonnoommiieess ooff SSccaallee oorr LLeeaarrnniinngg EExxppaannddiinngg ssiizzee oorr ssccooppee ooff mmaarrkkeettss hheellppss ttoo aacchhiieevvee eeccoonnoommiieess ooff ssccaallee iinn mmaannuuffaaccttuurriinngg aass wweellll aass mmaarrkkeettiinngg,, RR && DD oorr ddiissttrriibbuuttiioonn CCaann sspprreeaadd ccoossttss oovveerr aa llaarrggeerr ssaalleess’’ bbaassee IInnccrreeaassee pprrooffiitt ppeerr uunniitt LLooccaattiioonn AAddvvaannttaaggeess LLooww ccoosstt mmaarrkkeettss mmaayy aaiidd iinn ddeevveellooppiinngg ccoommppeettiittiivvee aaddvvaannttaaggee MMaayy aacchhiieevvee bbeetttteerr aacccceessss ttoo:: • RRaaww mmaatteerriiaallss • LLoowweerr ccoosstt llaabboorr • KKeeyy ccuussttoommeerrss • EEnneerrggyy
- 52. 52 INTERNATIONAL CORPORATE-LEVEL STRATEGY GGlloobbaall ssttrraatteeggyy TTrraannssnnaattiioonnaall ssttrraatteeggyy MMuullttiiddoommeessttiicc ssttrraatteeggyy NNeeeedd ffoorr LLooccaall RReessppoonnssiivveenneessss NNeeeedd ffoorr GGlloobbaall IInntteeggrraattiioonn HHiigghh LLooww LLooww HHiigghh
- 53. FIRST-MOVER Advantages & Disadvantages Benefits derived from being the first firm to offer a new or modified product or service. Advantages 1. An opportunity to exploit a virgin market network 2. Can establish significant Brand Loyalty 3. Be able to grab sales volume ahead of rivals 4. Be able to create switching costs for its customers 5. Be able to accumulate valuable knowledge related to customer needs
- 54. FIRST-MOVER Disadvantages Significant pioneering costs is to be incurred Prone to make mistakes Risk of building the wrong resource and capabilities Risk of investing in an inferior or obsolete technology
- 55. INTERNATIONAL BUSINESS LEVEL STRATEGIES Most manufacturing Cos begin their global expansion as exporters and only later switch to one of the other does for serving a foreign market. International licensing International franchising Exporting Foreign Branching Wholly Owned Subsidiary Joint Venture Mergers & Acquisitions Strategic alliance & Collaborations