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McGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved.
Chapter 5Chapter 5
The Five Generic The Five Generic Competitive Competitive StrategiesStrategies
5-2
Competitive StrategyCompetitive Strategy
Deals exclusively with management’sgame plan for competing successfully and securing a competitive advantage over rivals
Specific efforts to give customers superior value
– A good product at a lower price– A superior product worth paying more for– An attractive mix of price, features,
quality, service, and other appealing attributes
5-3
Competitive Strategies and Industry Competitive Strategies and Industry PositioningPositioning
5-4
Low Cost Provider StrategiesLow Cost Provider Strategies
Powerful competitive approach with price-sensitive buyers Have lower costs than rivals—but not
necessarily the absolutely lowest possible cost
Must include features and services that buyers consider essential
Must not be viewed by consumers as offering little value even if priced lower than competing products.
5-5
Translating a Low Cost Strategy Into Translating a Low Cost Strategy Into Attractive Profit PerformanceAttractive Profit Performance
Option 1: Use lower-cost edge to under-price competitors and increase market share
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
5-6
Approaches to Achieving Low CostsApproaches to Achieving Low Costs
1. Perform essential value chain activities more cost-effectively than rivals
2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities altogether
5-7
When a Low Cost Strategy Works When a Low Cost Strategy Works BestBest
Price competition is vigorous Product is standardized There are few ways to achieve
differentiation 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
5-8
Hazards of a Low-Cost StrategyHazards of a Low-Cost Strategy
Cutting price by an amount greater than size of cost advantage
Low cost methods are easily imitated Becoming too fixated on reducing
costs and ignoringBuyer interest in additional featuresDeclining buyer sensitivity to price
Technological breakthroughs open up cost reductions for rivals
5-9
Differentiation StrategiesDifferentiation Strategies
Powerful competitive approach whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product or service
5-10
Differentiation StrategiesDifferentiation Strategies
Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals
Not spending more to achieve differentiation than the price premium that customers are willing to pay for all the differentiating extras
5-11
Benefits of Successful Benefits of Successful DifferentiationDifferentiation
Successfully executed differentiation strategiesallow a company to:
Command a premium price, and/or
Increase unit sales, and/or
Gain buyer loyalty to its brand
5-12
Types of Differentiation ThemesTypes of Differentiation Themes
Unique taste – Dr. Pepper Multiple features – Microsoft Windows and
Office Wide selection – Amazon.com Superior service – Ritz-Carlton Spare parts availability – Caterpillar Engineering design and performance – BMW Prestige – Rolex Product reliability – Johnson & Johnson Quality manufacture – Toyota Top-of-line image – Ralph Lauren, Starbucks,
Chanel
5-13
Creating Value for Customers Creating Value for Customers through Differentiationthrough Differentiation
Incorporate product features/attributes that lower buyer’s overall costs of using product
Incorporate features/attributes that raise the performance a buyer gets out of the product
Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways
Exploit competencies and competitive capabilities that rivals don’t have or can’t match
5-14
Where to Find Opportunities to Where to Find Opportunities to DifferentiateDifferentiate
Supply chain activities Product R&D and product
design activities Production R&D and
technology-related activities Manufacturing activities Distribution-related activities Marketing, sales, and customer service
activities
5-15
Perceived Value and SignalingPerceived Value and Signaling
The price premium commanded by a differentiation strategy reflects actual value delivered and value perceived by the buyer.
Buyers seldom pay for value that is not perceived
5-16
Perceived Value and SignalingPerceived Value and Signaling
Important to signal value when:Nature of differentiation is
subjective
When buyers are making first-time purchases
When repurchase is infrequent
When buyers are unsophisticated
5-17
Market Conditions Favoring a Market Conditions Favoring a Differentiation StrategyDifferentiation Strategy
There are many ways to differentiate aproduct that have value and please customers
Buyer needs and uses are diverse
Few rivals are following a similardifferentiation approach
Technological change andproduct innovation are fast-paced
5-18
Hazards of a Differentiation StrategyHazards of a Differentiation Strategy
Buyers see little value in a product’s unique attributes
Appealing product features are easily copied by rivals
Overspending on efforts to differentiate
5-19
Hazards of a Differentiation StrategyHazards of a Differentiation Strategy
Overdifferentiating such that productfeatures exceed buyers’ needs
Charging a price premiumbuyers perceive is too high
Failing to open up meaningful gaps in product or service attributes
5-20
Focused Low-Cost StrategyFocused Low-Cost Strategy
Reflects a concentration on a narrow piece of the total market - defined by geographic uniqueness or special product attributes
Avenues to achieving cost advantage are the same as for low-cost leadership—outmanage rivals in keeping costs low and bypassing or reducing nonessential activities
5-21
Focused Differentiation StrategyFocused Differentiation Strategy
Keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well-defined group of buyers
5-22
Market Conditions Making a Market Conditions Making a Focused Strategy ViableFocused Strategy Viable
The target niche is big enough to be profitable and offers good growth potential
Industry leaders have chosen not to compete in the niche
It is costly or difficult for multisegment competitors to meet the specialized needs of niche buyers
Industry has many niches and segments
Few rivals are attempting to specialize in the niche
5-23
Hazards of a Focused StrategyHazards of a Focused Strategy
Competitors find effective ways to matcha focuser’s capabilities in serving niche
Niche buyers’ preferences shift towards product attributes desired by majority of buyers
Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered
5-24
Best Cost Provider StrategiesBest Cost Provider Strategies
A hybrid of low cost provider and differentiation strategies
Giving customers more value for money by satisfying buyer expectations on key quality/features/performance/service attributes and beat customer expectations on price
Powerful competitive approach with value-conscious buyers
5-25
Employing Best Cost StrategiesEmploying Best Cost Strategies
Best Cost Strategies are contingent on: A superior value chain configuration that
eliminates or minimizes activities that do not add value
Unmatched efficiency in managing essential value chain activities
Resource strengths and core competencies that allow differentiating attributes to be incorporated at a low cost.
5-26
Danger of Unsound Best Cost Danger of Unsound Best Cost Provider StrategyProvider Strategy
Lack of requisite core competencies, efficiencies, and resources allowing the addition of differentiating features without significantly increasing costs could result in high prices relative to low-cost providers and poor product attributes relative to high-end differentiators.
5-27
Perils of “Stuck in the Middle” Perils of “Stuck in the Middle” StrategyStrategy
Compromise strategies end up with a middle-of-the-pack industry rankings and provide for average performance An average cost structure Minimal product differentiation relative to rivals An average image and reputation Limited prospect of industry leadership
Compromise or middle-ground strategies rarely produce sustainable competitive advantage
5-28
Successful Strategies Must Be Well-Successful Strategies Must Be Well-Matched to Resources and CapabilitiesMatched to Resources and Capabilities
Low-Cost ProvidersMust have the resources and capabilities to
keep its costs below those of its competitorsMust have expertise to cost-effectively
manage value chain activities better than rivals
DifferentiatorsMust have the resources and capabilities to
incorporate unique attributes that a broad range of buyers will find appealing and worth paying for
5-29
Successful Strategies Must Be Well-Successful Strategies Must Be Well-Matched to Resources and CapabilitiesMatched to Resources and Capabilities
Narrow Segment FocusersMust have the capability to do an
outstanding job of satisfying the needs and expectations of niche buyers
Best Cost ProvidersRequired to have the resources and
capabilities to incorporate upscale product or service attributes at a lower cost than rivals