strm05.ppt
- 1. STRATEGY AND COMPETITIVE ADVANTAGE CHAPTER 5 Screen graphics created by: Jana F. Kuzmicki, PhD, Mississippi University for Women
- 2. Strategy and Competitive Advantage • Competitive advantage exists when a firm’s strategy gives it an edge in – Defending against competitive forces and – Securing customers • Convince customers firm’s product / service offers superior value – Offer buyers a good product at a lower price – Use differentiation to provide a better product buyers think is worth a premium price Key to Gaining a Competitive Advantage
- 3. What is “Competitive Strategy”? • Consists of a company’s market initiatives and business approaches to – Attract and please customers – Withstand competitive pressures – Strengthen market position • Includes offensive and defensive moves to – Counter actions of key rivals – Shift resources to improve long-term market position – Respond to prevailing market conditions • Narrower in scope than business strategy
- 4. Figure 5.1: The Five Generic Competitive Strategies Market Target Type of Advantage Sought Overall Low-Cost Provider Strategy Broad Differentiation Strategy Focused Low-Cost Strategy Focused Differentiation Strategy Best-Cost Provider Strategy Lower Cost Differentiation Broad Range of Buyers Narrow Buyer Segment or Niche
- 5. Distinctive Features of the Five Generic Competitive Strategies 8
- 6. Low-Cost Leadership • Make achievement of low-cost relative to rivals the theme of firm’s business strategy • Find ways to drive costs out of business year-after- year Low-cost leadership means low OVERALL costs, not just low manufacturing or production costs! Low-cost leadership means low overall costs, not just low manufacturing or production costs! Keys to Success
- 7. Options: Achieving a Low-Cost Strategy • Open up a sustainable cost advantage over rivals, using lower-cost edge to either – Under-price rivals and reap market share gains or – Earn higher profit margin selling at going price
- 8. Approaches to Securing a Cost Advantage Do a better job than rivals of performing value chain activities efficiently and cost effectively Approach 1 Revamp value chain to bypass cost-producing activities that add little value from the buyer’s perspective Approach 2
- 9. 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
- 10. Approach 2: Revamping the Value Chain • Abandon traditional business methods and shift to e- business technologies and use of Internet • 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 • Reengineer core business processes
- 11. When Does a Low-Cost Strategy Work Best? • Price competition is vigorous • Product is standardized or readily available from many suppliers • There are few ways to achieve differentiation that have value to buyers • Most buyers use product in same ways • Buyers incur low switching costs • Buyers are large and have significant bargaining power • Industry newcomers use introductory low prices to attract buyers and build customer base
- 12. 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
- 13. Differentiation Strategies • Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals • Find ways to differentiate that create value for buyers and that are not easily matched or cheaply copied by rivals • Not spending more to achieve differentiation than the price premium that can be charged Keys to Success Objective
- 14. Appeal of Differentiation Strategies • A powerful competitive approach when uniqueness can be achieved in ways that –Buyers perceive as valuable and are willing to pay for –Rivals find hard to match or copy –Can be incorporated at a cost well below the price premium that buyers will pay
- 15. Benefits of Successful Differentiation A product / service with unique and appealing attributes allows a firm to Command a and/or rease unit sales and/or Build brand loyalty = Competitive Advantage
- 16. 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, Intel • Top-of-the-line image -- Ralph Lauren, Chanel
- 17. Sustaining Differentiation: The Key to Competitive Advantage • Most appealing approaches to differentiation – Those hardest for rivals to match or imitate – Those buyers will find most appealing • Best choices for gaining a longer-lasting, more profitable competitive edge – New product innovation – Technical superiority – Product quality and reliability – Comprehensive customer service – Unique competitive capabilities
- 18. 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
- 19. Pitfalls of Differentiation Strategies • Trying to differentiate 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 that buyers perceive is too high • Failing to signal value • Not understanding what buyers want or prefer and differentiating on the “wrong” things
- 20. Competitive Strategy Principle A low-cost producer strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra attributes as worth paying additional money to obtain! A low-cost provider strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra differentiating attributes as worth paying for!
- 21. 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 • 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 Objectives
- 22. How a Best-Cost Strategy Differs from a Low-Cost Strategy • Aim of a low-cost strategy--Achieve lower costs than any other competitor in the industry • Intent of a best-cost strategy--Make a more upscale product at lower costs than the makers of other brands with comparable features and attributes – A best-cost provider cannot be the industry’s absolute low-cost leader because of the added costs of incorporating the additional upscale features and attributes that the low-cost leader’s product doesn’t have
- 23. Competitive Strength of 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 the diverse needs of buyers – Many buyers are price and value sensitive
- 24. Risk of a Best-Cost Provider Strategy • Risk – 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
- 25. Focus / Niche Strategies • Involve concentrated attention on a narrow piece of the total market Serve niche buyers better than rivals • Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs • Develop unique capabilities to serve needs of target buyer segment Objective Keys to Success
- 26. What Makes a Niche Attractive for Focusing? • Big enough to be profitable and offers good growth potential • Not crucial to success of industry leaders • Costly or difficult for multi-segment competitors to meet specialized needs of niche members • Focuser has resources and capabilities to effectively serve an attractive niche • Few other rivals are specializing in same niche • Focuser can defend against challengers via superior ability to serve niche members
- 27. 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
- 28. Cooperative Strategies 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 formal joint venture.
- 29. 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
- 30. 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 include – Diverging objectives and priorities of partners – Inability of partners to work well together – Emergence of more attractive technological paths – Marketplace rivalry between one or more allies
- 31. 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
- 32. Benefits of Mergers and Acquisitions • Combining operations may result in – More or better competitive capabilities – More attractive line-up of products / services – Wider geographic coverage – Greater financial resources to invest in R&D, add capacity, or expand – Cost-saving opportunities – Filling in of resource or technological gaps – Stronger technological skills – Greater ability to launch next-wave products / services
- 33. 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 in combining and integrating the operations of the once-different companies – Greater-than-anticipated difficulties in • Achieving expected cost-savings • Sharing of expertise • Achieving enhanced competitive capabilities
- 34. Vertical Integration Strategies • Vertical integration extends a firm’s competitive scope within same industry –Backward into sources of supply –Forward toward end-users of final product • Can aim at either full or partial integration Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners
- 35. Competitive Strategy Principle A vertical integration strategy has appeal only if it significantly strengthens a firm’s competitive position!
- 36. Strategic Advantages of Backward Integration • Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers • Potential to reduce costs exists when –Suppliers have sizable profit margins –Item supplied is a major cost component –Resource requirements are easily met
- 37. Strategic Advantages of Backward Integration • Can produce a differentiation-based competitive advantage when it results in a better quality part • Reduces risk of depending on suppliers of crucial raw materials / parts / components
- 38. Strategic Advantages of Forward Integration • Advantageous for a firm to establish its own distribution network if – Undependable distribution channels undermine steady production operations • A firm may sell directly to end users if it lacks a broad enough product line to justify integrating forward into stand-alone distributorships or retail outlets.
- 39. Strategic Advantages of Forward Integration • Direct sales and Internet retailing may –Lower distribution costs –Produce a relative cost advantage over rivals –Enable lower selling prices to end users
- 40. Strategic Disadvantages of Vertical Integration • Boosts resource requirements • Locks firm deeper into same industry • Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety • Poses problems of balancing capacity at each stage of value chain • May require radically different skills / capabilities • Reduces manufacturing flexibility, lengthening design time and ability to introduce new products
- 41. Unbundling and Outsourcing Strategies De-Integration or unbundling involves narrowing the scope of the firm’s operations, focusing on performing certain “core” value chain activities and relying on outsiders to perform the remaining value chain activities Concept Internally Performed Activities Suppliers Support Services Functional Activities Distributors or Retailers
- 42. 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 doing those “core” value chain activities that best suit its resource strengths and capabilities
- 43. 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 if 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
- 44. Pitfalls of Outsourcing • Farming out too many or the wrong activities, thus –Hollowing out its capabilities –Losing touch with activities and expertise that determine its overall long-term success