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The Five
Generic
Com
petitive
Strategies
Chapter Learnlng Obiectives
LOl.
Gain
an understanding
of how
each
of the five
generic
competitive
strategies
go
about
buitding competitive
advantage
and
delivering
suoerior value
to
customers.
LO2. Recognize
why some
of the
five
generic
strategies
work better
in
certain
kinds of industry and competitive
conditions
than in others.
LO3.
Learn
the
maior avenues for achieving a
competltive advantage
based
on
lower costs,
LO4. Learn the
major avenues
for
developing
a
competitive
advantage
based
on
differentiating a
company's
product
or
service
offering
from
the offerings of rivals.
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Chapter
5 The
F¡ve Generic
Competitive
Strategies
The¡e are several
basic approaches to competing successfully
and gaining
a
competitive
advantage, but
they all involvc giving buyers
r'r'ha
t they
per-
ceive
as
superior
value compared
to thc offcrings of
rival
sellers. Superior
value
can
mean offering
a good product at a lorver price,
a
superior pr<ld-
uct that
is worth paying more
for,
or
a
best-value
offering
that represents
an
attractivc combination of price,
features,
quality,
service, and other
appealing
attributes.
This chapter describes the five basic competitiue
strate¡ /
options
for
building
competitive
advantage and delivering superior
value
to
customers-\4'hich
of
the
five to employ
is a
company's
first and
foremost
choice
in crafting an over-
all strategy
and
beginnir.rg
its quest for
competitive
advantage.
Competitive
Strategies
and
Industry Positioning
A
company's
cornpetitive strategy deals exclusiaely
zuith the specifics of mnnage-
nrent's
gnnrc
plnn for
competing
*ccessfully-its
specific
efforts
Lo
please
custonters,
its
offensiue nntl
defensiae nnaes to counter
the
nnneuuers
of
riuals,
its responses to tuhoteaer
market
cottditions
preaail
A competitive
strategy
concerns
the
specifrcs
nt
tlrc
ntoment,
nnd
its opproach f.o securing
a
competitiae
of
managemenfs
game
plan
for competing
ndaantnge
uis-i
uis
riaals.
There are countlcss
variations
successfully
and
securing
a competitive
in
thc competitive strategies
that
companies employ,
advantage over
rivals.
mainlv
because
each company's strategic
approach
entails custom-designed actions
to
fit
its own
circumstances
ancl industry
environment.
The
custom-tailored
nature
of
each company's strategy
is
also
the
result
of
management's
efforts to
uniquely position the company
in
its
inciustrv
Companies
are
much more
likely
to achieve competitive
advantagc
and earn above-average
profits
if
they
are
ablc
to
find
a
unique way
of
deliver-
ing
superior
value
to
customers.
For example, the
iPod's attractive styling,
easy-to-use
controls, attcntion-grabbing
ads,
and extensive collection of music
available
at Apple's iTunes Store has
given
Apple a competitive
advantage
in
the
digital music plaver industry. Microsoft
has
attempted to
imitate Apple's
competitive strategv
rvith
its
introduction
of
its Zune music player and musíc
store,
but
Microsoft
has
fared no better in its attack
on the
iPod
than any
of
the
other
makers
of
MP3 players. By choosing
a
unique approach
to
providing
value
to customcrs,
Apple
has
achieved
an
enduring brand loyalty that
makes
it difficult
for
others
to
triumph
by merely copying its strate¡;ic approach.
"Me
too"
strategies can
rarely
be expected
to deliver
competitive
advantage and
stellar performance
unless
the
imitator
possesses
resources or competencies
that ailow
it
to
provide greater
value
to customers than
that
offered
by
firms
with
similar strategic
approaches.
Competitive
strategies that
provide distinctive industry positioning
and
competitive advantagc
in
thc
marketplace
involve
choosing between
(1)
a
market target that is either broad
or
narrow, and
(2)
n'hether the company
should pursue a competitive advantage
linked to low costs or product
dif-
ferentiation. Figr-rre
5.1
presents five proven competitive strategies
keyecl
to
I
] ,.
il
í,
il
E
1l
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Irl(]UIlli ¡l.l rhe
Source:
This is
an
author-
expanded
vers on
of ¿
3.strategy
(lass¡tication
d¡srussed
in
lMichael
E PofteL
Competit¡ve
Slro¿egy
(New
York:
Free
Press,
1980),
pp
35-4o
Part One: Section C: Crafting
a
Strategy
five
Generic
Competitiye Strategies
Presence
in
a
Broad
Range
of
Market
Segments
Presence in
a
Limited Number of
Market
Segments
Value Creation Keyed to
0ifferentiating Features
Type of Competitive Advantage Pursued
industry
positioning.r
Thc
gcncral approach to competing and
operating
the
business is notably different for each of the five
competitive
stratcgics.
The
five generic
strategies
are:
|. A lozu-cost
prouider slrnfr:gy-stnving
to achieve lolr-er
overall
costs
than
rivals and appealing
to a
broad spectrum of
customers,
Lrslrally by
r-rnder-
pricing
rír'als.
2. A brond tliffere
nt int ion
sf rnfe,qy-seeking to
differentiate
the company's
prociuct or service from
rivals'in
ways that
rviil
appeal to a broad spec-
trum
of buyers.
3.
Afttcuscd loto-cost
sf
rnf
ecr/-concentrating on
a narrow
buyer segment
(or
market
niche)
and
or-rtcompeting
rivals by having iower
costs
than rivais
and thus being able to
serve
niche members at a lower
prrice.
L
Afocrtsetl differentiation
sf
rn
f
e.gy-concentra tin í on a narrow buver segment
(or
market niche)
and outcompetin¡; rivals by offering niche members
custornizecl attributes that meet their
tastes
and
reouirements
better than
rivals'
products.
3.
A best-cost
prottitler
strntegV
giving
customers
more value for the
money
by satisfvin¡; buyers' expectations on key quaiity
/
featrres
/
Performance
/
service
attributes rvhile beating their price
expectations.
This
option is
a
hybrid
strategy that blencls elements of low-cost provicler
and
dífferentiation strategies;
the
aim is
to
have the lowest
(best)
costs
and prices among
sellers
offering products rvith
comparable
differentiat-
ing attribu tes.
'
This
classification scheme is an
adaptation of
a
narrower
three-strategy classiflcation
presented
in Michael
E.
PotteL
Competitive
Strategy:
Techniques
far
Analyzing lndustr¡es
ond Compet¡tors
(New
York:
Free
Press, 1980), Chapter
z,
especially
pp.
35 40
and
44
46.
For
a d¡scussion
of
the
d¡fferent ways
that
companies can
position
themselves
in
the marketplace, see Michael
E. Porter,
"What
ls
Strategy?"
Harvord
Business Review
74,
no.
6
(Novem
ber-Decem ber
1996),
pp.
65
67.
(,
c¡
(u
o
.)
Il'
E
Vatue
Creation
Keyed
to
Lower
Cost
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Chapter 5
The Five Generic
Competitive
Strateg¡es
Each of these
five generic
competitive
approaches stakes
out a
different
market
position.
The
follo'lr,.ing scctions explore
the ins and outs
of
the five
generic competitive
strategies
and
how they differ.
Low-Cost
Provider
Strategies
Striving to
be
the indust4r's overall
Low-cost
provider is a powerful
com-
petitive
approach
in
markets
with many price-sensitivc
buyers.
A company
achieves
low-cost
Ieadership
u'hen it becomes
the
industry's
lowest-cttst pro-
vider
rather than
just
being one of
perhaps
scrreral
comPetitors
with low costs.
Successf
ul
low-cost providers
boast
mcaningfully krn'er costs than
rivals-but
not necessarily
the
absolutcly
lorvest possible cost. In striving
for
a cost
advan-
tage
over
rivals, managers
must take care to
include features and
services
that
buyers consider
esscn
tial-a
prodtLct offerittg
thnt is too
fr
ills-ft'ee con
lte
aierued by
cotlsuners
ns offering little ulue
e'oen
if it
is priced
lozuer than contpeting
products.
A
company
has
trvo options
for transiating
a lou-cost
advantage ovcr
rivals
into attractive profit
performance. Option
1 is
to
usc
thc
lon'er-cost edge to
underprice
competitors
and attract
price-sensítive
buyers
in
great
enough
numbers to
increase total profits. Option
2 is to maintain the present
price,
be
content
with the present
markct
share,
and use the lower-cost edge
to earn
a
higher
profit margin
on
each
unit
so1d,
thereby raising the
firm's
total
profits
and
overall
return on
investment.
Achieving
Low-Cost
Leadership
A low-cost
edge
over
rír'als
is
best
accomplished
in two
r,r'ays:
(l)
performing
essential
value chain
activities
more
cost-cffcctively
than
rivals
and
(2)
revamp-
ing
the
firm's overall
valuc
chain
to
eliminate
or bypass
some
cost-Producing
activities
altogcthcr.2
Southwest
Airlines
has
reconfigured
the
traditional
"'alue
chain
of
commercial
airlines
to
lower
costs
and thereby
offer
dramaticallv
lower
fares
to
passengers.
South-
Success
in
achieving a
lowcost
edge
over rivals
west does
not
offer
in-flight
meals, assigned
seating,
comes
from
outmanaging
nvals
rn
performing
baggage transfer to connecting
airlines,
or
first-class
essential
activities
and eliminating
or curbing
seating
and service,
thereby eliminating
all thc cost- 'nonessential"
activities.
producing activities
associated
with
these
feafures.
The
company's
superior
performance of
essential activities
also contributes
to
its
cost
advantagc
in
the
airline industry. Its
mastery of
fast
turnarounds
at
thc
gatcs
(about
25
minutes versus
45 minutes
for rivals)
allows
its plancs
to fly
more hours per day.
This translates
into
being
able to schedule
more
flights
per day
with
fewer
aircraft,
allowing
Southrt'est to
generate
more
re\¡enue
per
plane on
average than
ri"'als.
For
a
company
to do a
more cost-efficient
job
of
managing
its value
chain
than
rivals, managers
must
launch a concerted,
ongoing effort
to
ferret out
cost-saving
opportunities
in every part of
the value chain.
No
activity
can
escape cost-saving
scrutiny and all
avenues
for performing
value chain
activi-
ties at a low,er cost than
rivals have
to be explored-
Normallv,
low-cost pro-
ducers work diligently
to
create
cost-conscious
corPorate
cultures
that feature
'
furchael E. Porter, Competitive
Advontoge
(New
York:
Free
Press, 198),
p.
97.
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Part
One: Section C:
Craftlng
a
Strategy
broad
employee
participation
in
contiruous
cost
improvement
efforts and
Iimited
perks and frills
for
executives. They strive to operate r+'ith
exception-
ally
small corporate
staffs
to
keep administrative
costs to a minimum. Many
succcssful lor{'-cost leaders
also use
benchmarking to
keep close tabs on how
their
costs
comparc
with
rivals and firms
performing
comparable
activities in
other industries.
But
while
low-cost
pror.iders
are
champions
of frugality,
they
usually
don't
scrimp on investing in resources that
promisc
to drive
costs out
of
the
busi-
ness.
Walmart,
one of the foremost practitioners
of
low-cost
leadership,
has
invested in
sta
te-of-the-art
technology throughout its
operations-its
distribu-
tion facilities
are an aLltomated
showcase, it uses online
systems to
order goods
from
suppliers and manage inventories,
it
equips its stores with cutting-edgc
sales-tracking and checkout
systems, and
it
sends dailv
point-of-sale
data to
4,000 vendors. Walmart's information
and
communications
systems
and
capa-
bilities
are
more sophisticated than thosc
of
virtually
any other retail
chain
in
the
world.
Concepts & Corurections
5.1
describes
Walmart's broad
approach
to managing
its
value
chain
in
the retail
grocery
portion
of
its
business to
achieve
a
dramatic
cost
advantage
over
rival
supermarket
chains and
become
the world's
biggest grocery retailer.
Market Conditions
Favoring
a
Low-Cost
Provider
Strategy
A
competitive
strategy preclicated on low-cost leadership
is particularly
pow-
erful
when:
"1.
Price
competition
among riaal
sellers is
especinlly
aigorous-Low-cost
provid-
ers are in the
best
position to
compete
offensively on
the
basis
of
price
and to survive
price
wars.
2.
The
¡trodttcts of
rianl
sellers are
essentially identical
and
are
rendily
auailable
from
seaeral sel/ers-Commoditylike
products
and/or ample supplies
set
the
stage
for
livcly
ptice
competition; in
such
markets,
it is
the less effi-
cient, higher-cost
companics that
are
most
vulnerable.
3.
Tlrcre
nre
ferl
ways to achieue
product dilferentiation
that
hape
pahte
to
but¡ers-
When thc
product
or service differences
between
brands do not matter
much
to buyers, buyers ncarly
alr+'ays
shop
the
market for
the best price.
4.
Buyers inatr
loio
costs
in sutitching
their
purchnses
from
one seller to another
Low switching
costs
give
buyers the flexibility
to
shift purchases to lowe¡-
priced sellers having
cqually good
products. A iow-cost
leader
is
well
positioned
to
use
lon'price
to
induce its customers
not
to
switch
to
r.ival
brands.
5.
The majority
of
industry
snles
are
made to a
feu,
large
aolume
buyers-Low-cost
providers
are
in
the best position
among
sellers
in bargainin¡;
with high-
volume buyers
because
they are
able to beat
rivals'
pricing
to land
a high
volume
sale
while maintaining
an
acceptable
profit margin.
6.
lndustry
neTucomers
use
introcluctory
low
¡trices
to
attrnct buyers nntl
build a
customer
base-The low-cost
lcader
can use
price
cuts of
its
own to make it
harder
fo¡
a new rival
to
wln
cusromers.
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Chapter
5
The
Five
Gencr
c
Cornpetitive
Strategies
HOW WALMART
MANAGED ITS VALUE
CHAIN
TO ACHIEVE
A LOW-COST
ADVANTAGE
OVER
RIVAL SUPERMARKET
CHAINS
Walmart
has
achieved
a
very
substantiaL
cost and
pr¡cing
advantage
over
rival supermark€t
chains
by both
revamp'
ing
portions
of the
grocery
reta¡ling value chain
and by
outmanaging
its
rivals
¡n
efflciently
performing
various
value
chain act¡vities.
lts cost advantage
stems from a
series
of
initiatives
and
pract¡ces:
.
Instituting extensive
information sharing
with
vendors
vla online systems
that
relay sates
at
its
checkout
counters
directLy to
suppliers of
the
items,
thereby
providlng
suppLiers
with
real-time
informa
tion
on customer demand
and
preferences
(creating
an est¡mated 6 percent cost
advantage).
.
Pursuing
gLobal
procurement
of some
items and
cen-
traliz¡ng
most
purchasing
activ¡ties so
as to leverage
the
company's buying
power
(creating
an
estimated
2.5
pefcenl
(ost
d
dvan
lage
).
.
Jnvesting
in state-of'the art automation
at
its
d¡s-
lribution
centers,
efficiently
operating a
truck
fleet
that
makes
daily deliveries to
Walmart's
stores,
and
putt¡ng
assorted
other
cost-saving
practices
into
ptace
at
¡ts headquarters, distribution
centers,
and
5tores
(resulting in
an est¡mated ¿
percent
cost
advantage).
.
Striving
to
optimize
the
product mix and
achieve
greater
sales
turnover
(result¡ng
ln about a 2
percent
cost
advantage).
.
Instal[ing
secur¡ty systems
and store
operat¡ng
pro-
cedures that
lower shrinkage
rates
(producing
a
cost
advantage of about o.5
percent).
.
Negotiating
preferred
real
estate rental and
leasing
rates
wlth real
estate
devetopers
and owners
of
its
store
sites
(yietding
a cost advantage
of 2
percent).
.
f\4anag¡ng
and compensating its workforce
¡n
a
man'
ner
that
produces
Lower
labor
costs
(yieldlng
an esti-
mated 5
percent
cost
advantage)
ALtogethet these
value chain
initiatives
give
Watmart
an
approximately
22
percent
cost
advantage
over
Kroger,
Safeway,
and
other
leading supermarket
chains.
With
such a sizable
cost advantage,
WaLmart has been
able
to underprice
its
rivals
and
become
the world's
leading
supermarket
retaiLer
in
little
more
than a
decade.
Source
Devetoped
by the authors
from information at
www.walmart.com and
in
lvlarco
lansiti
and
Roy Levien,
"Strategy
as
Ecology,"
HaNod
Business
Rev¡ew
82,
no.
3
(lMarch
zoo4),
p.
7o.
As
a
rulc, the tnore price-sensitive
Lttryers
are,
the
more
apPcalillt
a
lor'v-cost
strategv
becomes.
A lor,v-cost
comPany's
ability
to sct
the
industry's price
floor
ancl
still earn.r
¡rrofit
el'ects
Protective
barricrs
around its
m.lrket
Posrtiorl.
The
Hazards of a
Low-Cost Provider
Strategy
Pcrhaps the biggest pitfall of
a
lon'-cost
¡rrovider
stratc'gv
is
getting
carr-iec1
arvav n,ith
o¡rcr/, r,g,g/'essi¿v
Ljr¡cc
cltttútii
and ending
up
n'ith lovver;
rather
than
higher,
prof itabiltt\,-.
A
lou'-cost /
lort'-price
advantage results
jrl
sr-Lperior
frrof-
itabilit¡r only
if
(1)
prices
are
cut by
lcss than
the
size of
the cost
¿111\¡antage
oI
(2)
the added
volume
is largc cnough
kr
bring
in ¿r
Lrigger
total profit
despitc
lorver margins per
unit sold.
Thr.rs, a c()mP¡lrlv
lvith a 5
Percent
cost
advantage
cannot
cut priccs
20 percent, etrcl
rt¡'r lvith
.r voltttne gain
of only
l0
percent,
and still expect to earn
higher profits
A
second
big
pitfall
is
rclr1itlt
()tt
tltt nltprotch
to
rtrlucc cttsts
tlutt cnn ltt
msilll
co¡tied
bry
ri¡r¿zls
The vahte
of
a cc¡st
advautage depends
on
rts
sustainabil
ity.
Sustainabilitri
in tr-rrn,
hinges
on
rvhether
the company
achieves
its
cost
advantage
in
r'vays
difficult for rir'¿ls to
reprlicate
or
r-natch
lf
riv'rls find it
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Part
One:
Section
C: Crafting
a
Strategy
relatively
easy or
inexpensive
to imitate
the leade¡'s
lor,v-cost
methods, then
the leader's
advantage
rvill
be
too shorflived
to
yield a valuable
edge in the
rnarketplace.
A
tlrird pitfall
is
becomin¡;
too
fixnted
on cost reductioil.
Lorv
costs
cannot be
pursued
so
zealously
that
a firm's offering
cnds up being
too
features-poor
to gain the interests
of buyers. Furthermore,
a company
driving hard
to push
its
costs
down
has
to guard
against
misreading
or ignoring
increased
buyer
preferences
for
addcd
features
or
declining
br-ryer price
sensitivity. Evcn
if
these
mistakes
are
avoidcd,
a Low-cost
competitive
approach
stiLl carries risk.
Cost-saving
technological brcakthroughs
or
process
improvements
can nullify
a
low-cost
leader's
hard-won
Dosition.
Broad
Differentiation
Strategies
Differentiation
strategies are attractive
whenever buy-
The essence
of
a broad d¡fferentiat¡on
strategy
ers' needs
ancl
preferences
are too
diverse
to
be
fully
is to be unique in ways
that
are valuable
to
a
satisficd by
a
standarclized
product or
service.
A
com_
wide range
of
customers
pany
attempting
to
succeed
through
cliffe¡entiation
rcarnwhatr,.,ye,str.i,,ilü's';iiiJ"::Til;,ii"#,:i*ff
[ffi
;l'ix?li:
the company
must include
these
desirable
features
to clearly set itsclf
apart
from
rivals lacking
such product
or service
attributes.
Successful
differentiation
allows a firm
to:
o
Command
a premium
price,
and/or
'
Increase unit
sales
(because
additional
buyers
are \1,on over
bv the
diffcr-
entiating featurcs),
and/or
.
Cain buver
lovalty
to
its
brand
(because
some
buvers
arc
strongly
attracted to
the differentiatir-rg
features
and
bond with the company
and
its products).
Differentiation
enhances
profitability r,r'henever
the
extra price the prod-
uct
commands
outl,r.eighs
the
added costs
of achieving
the
differentiation.
Company
differer-rtiation
strategies
fail when buycrs
don't value
the brand's
uniqucness
and/or
u4ren a
company's approach to
diffcrcntiation is
easily
copicd or matched
by its
rivals.
Approaches
to
Differentiation
Companies
can pursue
differentiation from
many
angles:
a
unique
taste
(Dr
Pepper,
Listerine);
multiple featurcs
(Microsoft
Windows 7, Micro-
soft
Office); w.rde
selection
and one-stop
shopping
(Horne
Depe¡, d¡¿-
zon.com);
superior
service
(FedEx);
spare
parts
availability
(Caterpiliar
guarantees
¿18-hour
spare parts delivery
to
any customer anyrvhcrc
in
the
world or
else
thc
pa
rt
is furnished
free);
engineering design and
perfor-
mance
(Mercedes,
BMW);
prestige
and
distinctrveness
(Rolex);
product
reliability
(Whirlpool
and
GE
in
large home
appliances);
qualitv
manufac-
turrng
(Michelin
in
tires, l>yota and Honda
in
automobiles);
technologi-
cal leadership
(3M
Corporation in bonding
and
coating products); a fuil
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Chapter
5
The Five Generic
Competitive
Strategies
range
of
services
(Charles
Schwab
in
stock brokerage);
a complete
line of
products(Campbell'ssoups);and
toP-of-the-lineimageand
reputation
(Ralph
Lauren and
Starbucks).
The most
appealing
approaches
to differentiation
are those
that are hard or
expensive
fo¡ rivals to
duplicate.
Indeed, resourceful comPetitors
can,
in time,
clone
almost
any
product or
feature
or attribute.
If
Coca-Cola introduces
a
vitamir-r-enhanced
bottled
water,
so can
Pepsi;
if
Canon
introduces
12 megapixel camera, so
can Sony
and
Easy-tocopy
differentiating
features
cannot
Nikon;
if Research
in Motion
(the
maker of the
popular
produce
sustainable
competit¡ve advantage;
Blackberry
models) introduces e-mail
enabled
mobile
differentiation
based on
hard-to-copy competen-
phones, so can Samsung,
Apple, and
LG. As
a
rule, dif-
cies
and
capab¡lities tends
to
be more
ferentiation yields
a longer-lasting
and more
profitable
sustainable.
competitive
edge
when it
is based
on
product
irrnova-
tion,
technical
superiority,
ptoduct quality
and reliability, comprehensive
cus-
tomer service,
and
unique competitive capabilities. Such
differentiating
attributes tend
to be tough for rivals to copy or
offset
profitably and buyers
widely
perceil,e
them as having
vah-re.
Creating Value
for
Customers
through
Differentiation
While it is easy
enough
to
grasp
that
a successful
differentiation
strategy
must
offcr
value in ways unmatched by rivals,
a big issue
in
crafting
a
differentia-
tion strategy
is
deciding what
is
valuable
to customers.
Typically, r'aluc can
be
delivered to customers
i¡
four
basic
tl'ays.
7.
lnclude
product
nttributes and
user
Jeatures
that lower the buycr's
cosfs.
Com-
mercial buyers value
products that
can
reducc their
cost
of
doin¡; busi-
ness. For
example,
making a company's product
more economical
for
a
buyer
to use can be done
by reducing
the
buyer's raw
materiais ll'aste
(providing
cut-to-size components),
reducing a
buyer's inventory
require-
ments
(providing
just-in-time
deliveries),
increasing product
reliability to
lower
a
buyer's repair and maintenance
costs,
and
providing
free
techni-
cal
support. Similarly, consumers
find
value
in differentiating
featurcs
that
will
reduce their
expenses.
Rising
costs
for gasoline
prices
have
spurred
the
efforts of
motor vehicle
manufacturers
worldwide to
introduce models
with
better
fuel economy.
2.
Incorporate
features
that irnprorte
prodttct
performanc¿.3 Commercial
buyers
and consumers
alike value
higher
levels
of
performance
in many types
of
products. Product
reliability, output,
durability, convenience,
ancl ease
of
use are
aspects of
product performance
that different.iate
products
offered
to
buyers. Mobile phone
manufacturers
are
currently
in
a
race
to
improve the performance of
their products
through
the
introduction of
next-generation
phones
with
a more
appealing, trend-sctting
set
of
user
featu¡es and optrons.
3.
Incotporate
features
that
enhance
buyer satisfaction
in noneconotic or
intangible
wnr¡s. Ttlyota's Prius appeals to
environmentally
conscious
motorists who
wish
to
help
reduce global carbon
dioxide
emissions.
Bentley, Ralph
Lauren,
r
lbid.,
pp.
115-1j8.
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Part
One: Section C: Crafting
a Strategy
Louís Vuitton, Tiffany,
Cartier, and Rolex have differentiation-based
competitive
advantages
linked
to buyer
desires
for
status, image, pres-
tige, upscale fashion,
superior
craftsmanship, and
the
finer
things in life.
L.L. Bean
makes its mail-order
customers feel
secure
in their purchases
by providing
an unconditional
guarantee
with no
time
limit.
4.
Delioer
aalue to customers
by exploiting
competencies and competitiae
capa-
bilities that
riaals
don't
hat¡e
or
can't afford
to match.a
Core
and/or
distinc-
tive
competencies that
are
unique in the industry
can be
used to help
set a
company apart
from its rivals.
There
are
numerous
examples of
companies that have
differentiated
themselves
on
the
basis of capabili-
ties.
Nintendo is able
to offer
Wii
owners a large
selection of fun-for-all-
ages games because
of
the
strength of its
internal
game development
operations and its extensive network
of
third-party
game developers.
Japanese
automakers
can
adapt faster to changing
consumer preferences
for
one
vehicle
style versus
anothe¡
because
they have the
capabilities
to
bring
new models
to
market faster
than American and European
automakers,
Where
to
Look
for Opportunities
to
Differentiate
Differentiation
is
not necessarily
something hatched
in
marketing and adver-
tising
departments, nor is
it
limited to quality
and
service. Differentiation
opportunities
can exist in all activities
that affect the value
of
a
product
or
service;
possibilities include
the following:
.
Sttpply chain actiz¡ities
that ultimately
spill over to affect
the
performance
or
quality
of
the
company's
end product. Starbucks gets high
ratings
on
its
coffees
partly
because
it
has
very
strict specifications
on
the
coffee
beans
purchased
from suppliers.
c
Product R€tD actiuities
that
aim at improved
product
designs
and perfor-
mance/
expanded end
uses
and
applications, mote frequent
first-to-market
victories,
added user
safety,
greater rcrycling
capabiliry or
enhanced
envi-
ronmental
protection.
.
Production
R&D
and
technology-related
actit¡ities
that permit
the
manufac-
ture
of customized products
at an
efficient
cost;
make production
meth-
ods safer
for
the
environment; or improve
product quality,
reliability,
and
appearance.
Many manufacturers
have
developed flexible rnanufacturing
systems
that
allow
different modeis
and product versions
to be
made on
the
same
assembly
line.
Being able
to
provide
buyers
with
made-to-order
products
can be
a potent
differentiating
capability.
o
Manufacturing
actiuities
that reduce
product
defects,
extend
product
life,
allow
better warranty
coverages,
or
enhance
product
appearance.
The
quality
edge
enjoyed by
lapanese
automakers
stems
partly from their
distinctive
competence in performing
assembly
line activities.
4
For
a more detailed discussion,
see George
Stalk,
Phitip
Evans, and Lawrence
E.
Schulman,
"Compet¡ng
on
Capabil¡t¡es: The New
Rules
of
Corporate
Strategy," Harvard
Bus¡ness
Rev¡ew
70,
no.
z
(March
April
992),
pp.57-ó9-
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Chapter
5
The
Five Generic
Competitive
Strateg¡es
Distribution
antl shippittg
actioities
that allow
for fewer warehouse
and
on-the-shelf
stockouts,
quicker
delivery
to customers,
more accurate
order
filling, and/or
lower shipping
costs.
Marketing,
sales,
and cLtstomü
seraice
actiaities that result in superior
technical
assistance
to
buyers,
faster
maintenance and repair
services,
better credit
terms,
quicker order
processing,
or
Eireater
customer
convemence.
Perceived
Value and
the
lmportance
of Signaling
Value
The price premium
commanded
by a
differentiation strategy
reflects
the ttalue
actually
deliueretl
to
the buyer
and
the
aalue
percei-oed
by
the
buyet.
The value
of
certain
differentiating
features
is rather easy
for buyers to
detect,
but in
some
instances buyers may
have trouble
assessing
what
their
experience
with the
product n
ill
be.s
Successful
differentiators
go to
great
lengths to make buyers
knowledgeable
about
a product's
value and
incorporate signals of
value
such
as attractive
packaging, extensive
ad
campaigns,
the
quality
of
brochures and
sales
presentations,
the seller's
list of
customers, the
length of time
the
firm
has
been
in
business,
and the professionalism,
appearance,
and
personality
of
the
sellcr's
employees.
Such
signals
of
value
may be as important
as
actual
value
(1)
when the nature of differentiation
is
subjective
or
hard
to
quantify,
(2)
when buyers are making
a firsttime
purchase,
(3)
when rcpurchase
is infre-
quent,
and
(4)
when
buyers
are
unsophisticated.
Market Conditions
Favoring a
Differentiat¡on
Strategy
Dif
ferentiation strategies
tencl to
work best
in market circumstances
where:
1..
Buyer needs
and
uses
of the
product are
diaerse-Divcrse
buyer
preferences
allow
industry
rivals
to
set
themselves apart
r,r,ith
product attributes that
appeal to
particular buyers.
For
instance,
the diversity
of consumer
pref-
erences
for menu selection,
ambience,
pricing,
and customer
service
gives
restaurants
exceptionally
r¡,ide
latitude in
creating
differentiated
concepts.
Other
industries offering opportunities
for
differentiation
based upon
diverse
buyer needs and uses
include magazine
publishing,
automobile
manufacturing, footwear,
kitchen appliances,
and computers.
2. Tlrcre arc
many wflys
to
dffirentiate
the product
or
seraice
that hnzte ualue
to
buyers-lndusiries
that
allow competitors
to add
features to
product
attributes are well
suited
to differentiation
strategies.
For example,
hotel
chains
can
differentiate
on such features
as
location,
size
of room, range
of
guest
services,
in-hotel dining,
and
the
quality
and luxu¡iousness
of
beddíng and
furnishings. Similarly,
cosmetics
producers
a¡e able
to
differentiate
based upon
prestige
and
image, formulations
that
fiSht the
signs of aging,
UV light protection, exclusivity
of
retail
iocations, the
inclusion of antioxidants and
natural
ingredients, or
prohibitions
against
animal testing.
5
The
relevance of
perceived
value and signaLing is discussed
in
more
detail in Porte\
Compet¡t¡ve
Advantoge: Creoting
and Sustaining
Superior
Performonce,
(New
York: Simon
&
Schuster,
1996),
pp.88-142.
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Part
One:
Section C: Crafting
a
Strategy
Fezu riunl
firms
nre
followttg
a similnr differentiation
appronch-The
besi
differentiation
approaches
involve trying to appeal
to buyers
on
the
basis
of attributes
that rivals
are
not emphasizing. A differentiator
encounters
less
head-to-head
rivalry when
it
goes
its own
separate
way
to create uniqueness
and
does
not try to
outdifferentiate rivals
on
the
vcry
same
attributes.
When many
rivals are
all claiming
"ours
tastes
better than
thcirs" or "ours
gets
your
clothes cleaner
than
theirs,"
competitors tend
to
end
up
chasing the
same buyers n'ith
very
similar
product
offerings.
Te.chnological
clnnge
is
fast-paced
and cornpetition
reaolL)es nround
rapidly
eooluing
product
features-Rapid
product innovation
and frequent
intro-
ductions
of
next-version
products heighten
buyer interest
and provide
space
for
companies
to pursue disiinct
differentiating
paths. hr video
game hardware
and
video games, golf equipment, PCs,
mobile phones,
and automobile navigation
systems, cornpetitors are locked into
an
ongoing battle to
set themselves
apart by introducing the best next-
gcncration
products-companies
that
fail
to come
up with
nen'
and
improvcd
products
and distinctive
performance features
quickly
lose
out
in the
marketolace.
The Hazards
of a Differentiation
Strategy
Differentiation
strategies
can fail for any
of
several
reasons.
A drfferentiation
strntegy
keyed to
product
or
seroice
attribules
tlffit are
easily
nnd quickly
copied is
nluoys
suspect.
Rapid imitation
means
thai no rival
achieves meaningful
dif-
fercntiation,
because whateve¡
new feature
one firm introduces that
strikes
the fancy
of buyers
is
almost imrnediately
added
by rivals. This is why a firm
must
search
out
sources
of
uniqueness that are time-consuming
or
burden-
some for rivals to match
if it
hopes
to
use
differentiation
to u.in
a sustainable
competitive
edge
over rivals.
Differentintion
strntegies cnn nlso
falter
uhen
buyers
see
little
aalue
in
the unique
attributes
of
o
cornpany's prodLtct.
Thus
even
if
a
company
sets
the attributes
of
its brand
apart from
its ¡ivals'brands,
its
strategy
can
fail
bccause
of
trying
to
diffcrcntiate
on the basis
of
something that
does
not deliver
adequate
valuc
to
buyers. Any
timc many potential
buyers
look
at a
company's differentiated
product offering and
conclude
"so
u'hat,"
the
company's differentiation
strat-
egy
.is
in
deep
trouble-buyers
will likely
decide
the product
is
not
worth
the
extra price and
sales will be
disappointingly
lonr
Otterspending on efforts to dilferentinte is
a
strotegy
flazu
thnt
can end up
erod-
ing
profitobility.
Company efforts
to
achieve diffe¡entiation
nearly
always
raise
costs.
The
trick to
profitable
differentiation is
either
to keep
the
costs
of
achiev-
ing
differentiation
below
the
price premium
the
differentiating attributcs
can
command
in the
marketplace
or to
offset thinner profit margins by
selling
enough additional
units to increase
total
profits.
If a
company goes overboard
in pursuing
costly differentiation,
it
could
be
saddled
with
unacceptably
thin
profit
margins
or even
losses.
The need to
contain differentiation
costs is rr,'hy
many
companies add
little
touches
of
diffe¡entiation
that add to
buyer satis-
faction
but
are
inexpensive
to institute.
.f.
1.
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Chapter
5
The
Five
Generic
Competitive
Strategies
Other common
pitfalls and
mistakes
in
crafting
a differentiation strateBy
include:6
.
Oaerdifferentiating
so
that
product
qualitq
or seraice leaels
exceed
buvers'
needs.
Buyers
are unlikcly to
pay extra
for features and attributes that
will go
unused.
For
example,
video
game
users are
unlikely
to
purchase
game
consoles
featuring high-rcsolution
graphics
and broadband connectivity
if
they
don't
own
an
HDTV
and
subscribe
to an
Internet
service.
.
Trying
to charge
too
high a
price
Premiutn.
Even
if
buyers
view
certain extras
o¡
deluxe
features
as
"nice
to have," they may still conclude
that thc
added benefit or
luxury
is
not
worth the price differential over
that
of
lesser
differentiated
produc ts.
.
Being
timid
and not stritsing to open up meaningful
gaps
in quality
or
seraice or
performance
features
uis-it-ois
the
products
of riuals-tiny differences
between
rivals' product offerings
may not
be
visible or
important to
buyers.
A lon'-cost provider strategy
can
always
defeat a differentiation strategy
when
buyers
are
satisfied
with
a
basic
product
and
don't think "extra"
attributes
are
worth a
higher price.
Focused
(or
Market
Niche) Strategies
What sets
focused
strategies
apart
from low-cost leadership or broad differen-
tiation
strategies
is a
concentration
on
a
narrow piece of the total
market. The
targeted
segment,
or
niche, can be defined
by
geographic uniqueness or
by
special product attributes that appeal
only
to niche
members. The advaniages
of
focusing a
company's
entire competitive
effort on
a
single
market nichc
are considerable,
especiaily
for
smaller
and
medium-sized companies
that
may lack
the
breadth and
depth of
resources
to
tackle
going after
a
national
customer
base
with a
"something
for
everyone"
lineup of
models, styles, and
product selection. Communify
Coffee,
the largest family-owned specialty
coffee
retailcr in the United States,
has
a geographic focus on
the state
of
Loui-
siana
and communities
across
the
Gulf
of
Mexico. Cornmunity
holds
only
a
1.1
percent
share
of
the national coffee market,
but has recorded sales
in
excess
of
$100
million
and
has
won
a 50
percent
share
of the
coffee
business
in
the
11-state
region
where
it
is
clistributed.
Examples of firms that concentrate
on
a well-defined
market niche keyed
to
a
particular product
or buyer seg-
ment include
Animal
Planet and the History Channel
(in
cable
TV);
Googie
(in
Internet
search
engines); Porsche
(in
sports
cars);
and
Bandag
(a
specialist
in
truck tire
recapping that
promotes
its
recaps
aggressively
at
over
1,000
truck
stops). Microbreweries,
local bakeries, bed-and-breakfast
inns, and
local
owner-managed
retail boutiques
are
all
good
examples
of cntcrprises
that
have
scaled
their operatíons to
serve
narrow or
local
customer
segments.
A Focused
Low-Cost
Strategy
A focused
süategy
bascd on
low
cost
aims at securin¡; a competitive
advan-
tage
by
serving
buyers in the target market niche at
a lower cost
and
a
lower
6
Pofter, Compet¡t¡ve
Advontage,
pp.
160-162.
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Part One:
Section C:
Craft¡ng
a
Strategy
prlce
than
rival
competitors. This
strategy has considerable attraction when
a
firm
can
lower costs
significantly by limiting its customer base to a well-
defined buyer
segment. The avenues
to achieving a
cost
advantage over rivals
also serwing
the targei market niche
are
the
same
as for low-cost
leadership-
outmanage
rivals in keeping
the
costs
to
a bare
minimum
and
searching
for
innovative
ways
to bypass
or
reduce nonessential
activities. The
only
real
dif-
ference
between
a
low-cost
provider
strategy and
a
focused
low-cost
strategy
is
the size of the buyer
group
to
which
a company
is
appealing.
Focused low-cost strategies are fairly
common.
Produccrs
of
private-label
goods are able
to achieve low costs in product development, marketing,
distribu-
tion,
and
advertising by
concenhating on
making
generic
items similar to name-
brand merchandise
and
selLing directly to retail
chains
wanting
a low-priced
store brand. The Perrigo
Company
has become
a
leading
manufacturer
of over-
the-counter health
care
products
with 2008
sales of
more
than
$1.8
billion
by
focusing
on producing privateJabel
brands for retailers
such as Walmart,
CVS,
Walgreens, Rite Aid,
and
Safeway.
Even
though Perrigo
doesn't
make
branded
products, a focused low-cost strategy is appropriate for
the makers
of
branded
products
as
well.
Concepts
&
Connections
5.2 describes
how Vizio's
low
costs
and focus
on big box
retailers
has allowed it to become the largest
seller of
flat
panel HDTVs
in the
United States within
six years of
its start-up.
A
Focused
Differentiation
Strategy
Focused
differentiation
strategies are keyed to
offering carefullv
dcsigned
products
or
services to appeal
to the
unique
preferences
and needs
of a
narrow
well-defined group
of buyers
(as
opposed to a broad differentiation strategy
aimed
at
many
buyer groups
and market
segments).
Companies like Four Sea-
sons
Hotels
and
Resorts,
Chanel, Cucci, and Louis Vuitton
employ successful
differentiation-based focuscd
strategies
targeted
at affluent
buyers
wanting
products and services with worldclass
attributes. Indeed, most
markets
con-
tain
a
buyer
segment willing to pay a
price premium
for the vcry
finest items
available,
thus
opening
the
strategic window fo¡ some competitors to
pursue
differentiation-based focused
strategies aimed
at the very top of the market
pvramid. Ferrari ma¡kets
its 1.500
cars
sold
in
North Ame¡ica
each
year
to
a
list
of
just
20,000 highly
affluent
car enthusiasts. Only the highest
echelon
of this
exclusive
group
were
contacted by Ferrari for a
chance
to
put
their
names
on
the
waiting list for
one
of
the
20
$1.1
million
FXX models planned
for
sale
in
North America.
Concepts
&
Connections 5.3 describes Progrcssivc
Insurance's focused
differentiation
strategy.
Conditions
Making
a
Focused
Low-Cost
or
Focused
Differentiation
Strategy Viable
A
focused
strategy aimed at
securing
a
competitive
edge based
either on
low
cost or diffcrentiation becomes
increasingly attractive
as
more
of the following
conditions
are
met:
.
The
target market niche
is
big
enough to
be profitable
and offers
good
growth potential.
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rlc
Co
rn
petitive
Strateg¡es rog
VIZIO'5
FOCUSED
LOW-COST
STRATEGY
California-based Vizio, Inc., designs
flat
panel
LCD
and
Plasma TVs
ranging
in
size from
zo
inches
to
55
inches,
which
are
sold onty by big box discount
retailers
such
as
Walmart, Sam's Club, Costco
Wholesale, and Best
Buy.
lf
you've
shopped
[or
a
flat
panel
TV recently,
you've
proba-
bly
noticed
that
Viz¡o
is
among
the
lowest-priced
brands
and that
its
picture
quaLity
is
surprlsingly
good
consider
ing the
price.
The company
is
able to
keep ¡ts cost low
by
only designing
TVs and then
sourcing
production
to
a limited
number of contract
manutacturers
in
Taiwan.
In
fact, 80
percent
of
its
production
ís handied
by AmTran
Technology. Such
a
dependence on a supplier
can
place
a buyer
in
a
precarious
situalion
by making
it
vulnerable
to
price
Increases or
product
shortages,
but
Vizio
has
countered this
possibte
threat by
making
Amlran a
major
stockholder.
Amlran
Technology owns
a 2J
percent
stake
in Vizio and
earns
about
80
percent
of
its revenues [rom
its sales of tetev¡s¡ons
to
Viz¡0. This close
relationship
with
¡ts major supplier
and
its focus on a single
prod'
uct category sold through
limited distribution
channels
aLlows
Vizio to offer
¡ts
customers
deeo
orice
discounts.
Vizio's
first major account was landed
in zoo3 when
it
approached Costco buyers
with a
46-¡nch
plasma
TV
with a whotesale
price
that
was
half
the
price
of
the
n
ext-Lowest-p
rice competitor.
Within
two
months,
Costco
was carrying
Vizio flat screen
TVs
in
3zo
of its
ware-
house
stores
in
the United States.
In
October
zoo7,
Vizio
aooroached
buvers
for
Sam's Club
with
a
zo'inch LCD
TV that could be
soLd
at retail
for
under
$35o.
The
price
and
quality
of the
zo-inch TV led Sam's Club
buyers to
place
an order for zo,ooo
TVs
for
a
March
zooS
delivery.
In 2oo9, Viz o was the largest selter of flat
paneL
HDTVs
in
the
United
States
with a market
share
of
zr.6
percent.
Vizio recorded
revenues
of
$z
billion in
2ooZ
and
it
was
the
industrv's most
Drofltable
seller of
TVs.
Sour[€:
Vizio's
rapid
success
was highlighted
¡n
"Pic-
ture
5hift:
U.S
Upstart
Takes
On
TV Giants
in
Price
Wat"
The Wall Street
lout
ol,
April 15, 2008,
p.
Ar;
and
"Vizio
Achieves #1 LCD HDTV Ranking
in
North Ar¡erica and #1
Ranking
in
U.5.
Flat
Panet HDTV
Shipments,"
Vizio Press
Release, May
11,2oo9.
Tndustrv leaders have
chosen
not
to
compete
in
the
niche-in
which case
focusers can
avoicl battling
heacl-to-he.rd
against
the
indtrstrr"s biggcst
.l
nrl
str()n$est
r
r
rr
t r
I'et
iIors.
It
is
costlv
or rlifficr¡lt
for mr:ltisegment competitors to
meet
the s¡reci.rl-
izc.d nc.cds
of
niche buyers and at the same
time satisfy
the
expectations
of mainstream custtlmers.
The indr.rstry
has man1,
different niches and segmelrts,
therclrv
allolving
a
focuser kr
pick a
niche suited
to its resource strengths
antl
capabilities.
Ferri
if any, rivals are attcmpting
to specialize in
the same
target
segmenr.
The Hazards
of a
Focused Low-Cost
or
Focused
Differentiation
Strategy
Focrrsing
carries
ser.cral
risks.
Thc
_lirst
trrtriLtr risk
is
the
chance
that
comPeti-
tors
n'ill
find
cffcctive
wavs to match
the
foctisecl finn's c"rLrabilities
in sen'ing
the target niche. ln the
loclging busrness,
l.-rrge
chains
like Marriott and
Hilton
have launchecl
mnltibrand strategies
that allor.r'them
to
comPctc
cffectivelv
in
sel.eral
lodging
segrnents
sirnttltaneo
trslv.
Marriott has
flagship
hotels
'uvith
a
fr,rl1
complement of
services
and
amenitics that
allor,r'it to
aitract travelers
and
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I lo Part
()nc:
Section C: Crafting
a Strategy
PROGRESSIVE INSURANCE's
FOCUSED
DIFFERENT]ATION
STRATEGY IN
AUTO
¡NSURANCE
Progressive
Insurance has
fashioned
a
strategy
in auto
insurance
focused
on oeoole w¡th a record of traffic v¡o
lations
who
drive high-performa
nce cars, drivers
w¡th
accident histories,
motorcyclists, teenagers, and
other
so-calLed
high-risk
categor¡es of drivers that most auto
insurance
companies steer away from. Progressive
dis-
covered that
some
of
these high-risk drivers
are affluent
and
pressed
for time, making
them
less sensit¡ve
to
pay.
ing
premium
rates for the¡r car insurance.
Management
learned that
it could
charge
such drivers high
enough
prem¡ums
to cover
the added
r¡sks,
plus
it
differentiated
Progressive
from other
insurers by
expediting the
process
of
obta¡ning
insurance
and
decreasing
the
annoyance
that such drivers
fared
in
obtaining insurance
cove-age.
Progress¡ve
pioneered
the
[ow-cost
direct sales
model
of alLowing
customers
to
purchase
insurance
online
and
over
the
phone.
Progressive
also
studied
the
market
segrnents
for
insurance carefully
enough to discover
that
some
motor.
cycle
owners
were
not especially risky
(middle-aged
sub.
urban¡tes who sometimes
commuted
to
work
or
used
the¡r
motorcycles
mainly for
recreational
tr¡ps w¡th their
friends).
Progressive's
strategy
allowed
it
to
become
a
Leader
in
the market for
luxury.car insurance for
custom-
ers who
appreciated
Progressive's
strearnLined
approach
to
doin
g
business.
ln
further differentiating
and
promoting
Progressive
poticies,
management
created teams
of
roving
c[aims
adlusters
who
would anive
at accident
scenes
to assess
ctaims
and
issue checks
for repairs
on
the spot.
Progres
sive introduced z4-hour
claims reportlng, now
an indus
try
standard.
ln
addition,
it
developed
a
sophist¡cated
pricing
syslem so
that ¡t
couLd
quickly
and accurateli/
asses each customer's
risk and weed
out
unprofitabLe
customers.
By
being creative and
excelLing
at the nuts and
bolts
of
its
busrness,
Progressive
has won a
2.6
percent
share
of
the
$l5o
biltion market for auto insurance and has
the
highest
underwriting margins
in the
auto-insurance
¡ndustry.
Sourcesi
wwwprogTessive¡nsurance..om;
lan
C.
McNli[a¡,
ALexander
van
Putten,
and
Rita
Gunther l\4ccral¡,
"Clobal
Gamesmanship,"
Horvard
BLts¡ness
Revicw
81,
no.
5
(May
2ool),
p.
68i
FarLune, May 16,
2oo5,
p
34;
ard
"[4otor-
cyctists Age,
Affluence
lfending
llpward,"
8es¡ Vir"e,
july
24,
2OA7,
vacationers
going to
major
resorts; it has
J.lV.
l\4arriott
and Ritz-Carltol1
hotels
that
¡-rror,ic-le
c'leluxe
comfort ¿rnd
service
to
busincss atrd lcisurc.
travelers;
it
has
Courtvard by N{arriott
ancl
SpringHill
Suites
brands for
business
travcl-
crs
boking
for
rloderately
pricecl loclging; it
has
I\4arriott
l{esidence lnns and
Torvnc.l)lace
Suites clesigned
as
a
"horne
an ¿rv
from lrr¡me"
for travelers stay-
ing fivc
or
more
nights;
ar-rcl
rt
has
more
than 590 Fairfielcl lnn
krc¿itions
that
cater to travelerrs
looking for
quality
lodgrng
at an
"affoldable"
pricc,
Sirnilarl1,,
Hilton
has
a lineup
of
brands
(I\hldorf
Astoria,
Corrracl
Hotels,
Dor-rlrletree
Hotels,
Ernbassl,
Sr,rites
Hotels, Hampton
Inns, Hilton Hotels, Hilton
Carden
Imrs,
rrncl
Homelvoocl
Sr-rites) ihat
enable
it to
compctc
in
nrrr
ltiple
segmerlts
and
comFrete head-l.o-hcac1
against lodging
chains that
op()ratc
onlv
irr a
singlc.
segment.
\{ultibrand
str:rtegtes ¿tre
attractive
to large compallies likc l\4arriott
and Flilton
precisely
because
they
enalrle
a
companv
to enter a market niche
and siphon busincss a
r'r,,r
v
from
companies that
emplov
a
focus
str¿rtegv.
A
sccorrrT r-lsk
oi empkiying a
focrrs
strategy
is
the
potential for
the
¡rrefererrces
and neeLls
of
niche lnembers to
shift ovcr time. tor,r'ard
the oroduct attnbutes
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Chapter
5
The Five Gener¡c
Competitive
Strategies
desired
by the
majority
of
bLlyers.
An
enrsion
of
the ciifferences
across
buyer
segments
lor+'ers entry
barriers
into a focuser's
market
niche and provides
all open
invitation
for
rivals in
adjacent segments
to begin
competing
for thc
focuser's
customers.
A
third
risk
is that the segment
may
become
so attractivc
it
is
soon
inundated
with competitors,
intensifying
rivalry and splintering
segment
profits.
Best-Cost
Provider Strategies
As
Figure 5.1 indicates, best-cost
provider strategies
stake
out a
middle
ground
between
pursuing
a low-cost
advantage
and
a
differentiation
advan-
ta¡;e and
between appealing
to
the
broad
market as a rvhole
and a
narron'
market
niche. Such
a middle
ground
allorn's a com-
panv
to aim squarely
at
the sometimes
great mass of
value-consciotts
buyers
Looking
for a good-to-verv-
good
product or service
at an
economical
price. Value-
conscious
buyers
frequcntly
shy
awav from both cheap
low-end
products and
very expensive
high-end prod-
ucts,
but thcy
are
quite
n,illing to
pay
a
"fair" price
for
extra
features
and functionality they
find
appealing
and useful.
The
essence
of
a
bcst-cost provider
strategy
is git ing customers
morc anluc
lór
the
noney bv
satisfying
buyer
desires
for appealing
features
/pcrformance/
quality
/
service
and charging
a lower price
for these
attributcs compared
to rivals rt'ith similar
caliber
product offerings./
To
profitably
employ
a
bcst-cost provider
strategy,
a
comPany
mttst
Jnxe tlrc
cnpnbility
to
incor¡tornte
nttractiuie or upscale nttributes
nt
n
louer
cost
tlwt riznls.This
capability
is
contingent
on
(1)
a superior
value chain
configuration
that
elimi-
nates
or
minimizes aciivities
that do not add value,
(2)
unmatched
cfficiency
in
managing
essential value chain
activities,
and
(3)
resourcc strengths
and
core
competencies
that allow
differenhating
attributes
to
be incorporated at a
low
cost.
When
a
company
can
hrcorporate
appealing
features, good-to-excellent
product performance
or
quality, or
more satisfying
customer sen'ice
into
its
prodr-rct
offerir-rg
nf n lower
cost
tlnn riaals, then it enjoys
"best
cost"
status-it
is
the
lorv-cost provider of
a
product or
service with
trpscnle
aÍtributcs
A
best-cost
provider can
use
its lorv-cost advantage to
underprice
rivals
whose products or
sen
ices have similar upscale
attributes
and still
earn
attractive
profits.
Concepts & Connections
5.4
describes
how
Toyota
has applied
the principles
of
a best-cost provider
strategv
in producing
and marketing
its
Lexus
brand.
The
Danger of an
Unsound
Best-Cost
Provider
Strategy
A company's
biggest
vulnerability in employing
a
best-cost provider
strat-
egy
is
not having the requisite core
comPetencies
and cfficiencies
in
manag-
ing
value chain activities
to sLrPPort
the
addition of
differentiating
featr.Lres
/
For
an
excetlent discussion
of best cost
prov¡der
Strateg¡es,
see
Peter
I
Williamson and
Ming
Zeng,
"Value-for-Money Strategies
for
Recess¡onary
Times,"
Horvard Business
Review 87,
no.
3
(March
2oo9),
pp.
66-74.
Best-cost
prov¡der
strategies
are a hybrid
o'f
lowcost
provider
and
differentiation
strategies
that
aim
at
satisfying
buyer
expectations
on
key
quality/eatures,/perf
orma
ncelservice attri
butes
and beating
customer
expectatrons
on
price.
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I l9
Part
()ne:
Section C: Crafting
a Strategy
TOYOTA'S
BEST.COST
PRODUCER
STRATEGY
FOR
ITS TEXUS IINE
Toyota Motor
Company
is widety
regarded
as
a
low.cost
producer
among
the wortd's motor vehicle
manufactur-
ers. Despite its
emphasis
on
product quality,
Toyota
has
ach¡eved
low'cost
leadership
because it has
developed
considerable
skllts in
efficient
supply chain
manage-
ment
and
low-cost assembly
capabilities,
and because
its
models
are
posit¡oned
in the low-to.medium
end of
the
pr¡ce
spectrum, where
high
production
volumes
are
conducive
to low
un¡t costs.
But
when
Toyota
decided
to
¡ntroduce
its new
Lexus
models
to comoete in the luxurv-
car
market, it
employed
a ctassic
best-cost
provider
strat
egy. Toyota
took the
folLowing
four steps in crafting
and
implementing
its
Lexus strategy:
.
Designing
an array of
h igh
-performa
nce
character¡s-
tics and
upscale featui.es
into
the
Lexus
models
so as
to make
them comparable
in
performance
and
luxury
to other h¡gh-end
models
and attractive
to Mercedes,
BMW,
Audi,
Jaguar,
Cadillac,
and Lincoln
buyers.
.
Transferring ¡ts
capabilit¡es
in making
high-quality
Toyota
models
at low cost to making
premium-quality
Lexus
models
at costs below
other
luxury-car mak-
ers.
Toyota's
suppLy chain capabilities
and
low-cost
assembly
know how allowed
it
to
incorporate
h¡gh.
tech
perforrnance
features
and
upscale
quality
into
Lexus
models
at
substantially
less
cost
than
compa
rable
Mercedes
and
BMW modets.
.
Us¡ng
its
relativeLy
Lower
manufactur¡ng
costs
to
underprice comparable
Mercedes
and
BMW models.
Toyota
believed
that with its
cost
advantage
it
could
price
attractiveLy
equipped
Lexus cars
Low
enough
to
draw
price-conscious
buyers
away from
Mercedes
and
BMW. Toyota's
pricing
pol¡cy
also allowed it
to
induce Toyota,
Honda,
Ford,
or
GIM
owners
desiring
more
luxury
to switch to a Lexus. Lexus's
pricing
advantage
over
Mercedes
and
BMW was
somet
mes
quite
significant. For example, in 2oo9
the
Lexus
RX
35o,
a mid-sized
SUV carr¡ed
a sticker
price
in
the
$36,ooo
$48,ooo
range
(depending
on how
it
was
equipped),
whereas
variously
equipped
N4ercedes
ML
35o
SUVs
had
price
tags in
the $44,ooo
$9o,ooo
range
and a
BMW X5 SUV
could
range
anywhere
from
$47,5oo
to
$86,000,
depending
on the optional
equipment
ch
osen.
.
Establishing
a new network of Lexus dealers,
sepa-
rate
from Toyota dealers,
dedicated
to
providing
a level of
personalized,
attent¡ve
customer serv¡ce
unmatched in the industry.
Lexus' best-cost
strategy
allowed
¡t
to
become
the
number-one.selling
luxury
car brand worldwide
in
zooo
a d¡stinction it
has
hetd
through
zoo8.
n'ithout
significantlv
increasing costs. A
coltrparlv
r.r'ith
a
moc'lest
degree
of
r--lifferen
tia lion
.r ucl no rea
I cos t
¿lcl\'antagc rvt ll
nt
c]st
likeL\¡
find i
tsclf
squeezed
betr,r'een
the firnrs
Lrstng
l(r\
/-c()st
strategics
arrcl those
using
diife.r.entia-
tion
strategies
Low-cost
providers
m¿tv
be
able to si¡rhon
cr¡stotlters a \'ay
r.r,ith
thc
appcal
of
a
lorver
price
(des¡:ite
having marginallv
less irp¡rc.aling
product attribrrtcs).
l{igh-end
drffererr
t
ia
tors rnav
be
able
to
steal customcrs
aw'¡rv
rvith the appcal
of appreciably
better
proclr-rct.rttributes
(even
thor-rgh
their
proclucts
c¿rrry a some\\'hat higJrc.r
price tag).
Thtrs,
a
successfr.rl
best-
cost
Lr1'o\¡iLler
rnust
offer br-ryers slgrrllicnnlhT
better
prodLtct attrilrtrles
in
orrler
tc¡
justifv
a
¡rricc
above
lvhat low-cost lcadcrs
arc charging. Likewise,
it
has tc¡
achie\.e
signifrcantly
1or,r,'er
costs
in
providirrg Llpscalc fcatures
scr
tlrat it
carr outcompctc high-end
differentiators
on the basis
cti
a sigtti.fittt
ttt lry
lor'r
er orice.
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Chapter
5 The
Five
Gener¡c
Competitive
Strategies
The
Peril of
Adopting a
"Stuck
in
the
Middle"
Strategy
Each of
the
five gencric competitive
strategies
positions
the
company
differ-
ently
in its market
and competitive
ent
ironment. Each establishes
a central
theme
for how
the company
will
endeavor
to
otltcomPete
rivals. Each cre-
ates some
boundaries or guidelines
for maneuvering
as
market circumstances
unfold
and as ideas for improving
the
strategy
are debated.
Thus, settling
on
which generic strategy
to
employ
is
perhaps the most imPortant
sttategic
commitment a company
makes-rt
tends
to
drive the
rcst
of
a
comPanv's
stra-
tegrc actrons.
One
of
the big dangers
in crafting
a
compctitive
strategy
is that
manag-
ers,
torn between
the pros
and cons
of
the
-",arious
generic
strategies,
will
opt
for
"stuck
in the
nüddle" strategies
that
represent
compromises
between
lower
costs
and grcater
differentiation and between
broad and
narrow market
appcal. Compromise
or middle-ground strategies
rarely produce sustainable
competitive
advantage or
a
distinctive competitive
position. Usuallv
comPa-
nies n'ith compromise strategies end
up
with
a middle-of-the-pack
industry
ranking-thev
have average
costs,
some
but
not
a
lot
of
product
differentia-
tion
¡elative to
rivals, an average
image and
rcputation, and
little
prospect
of
industrv
leadership.
Successful
Com
petitive
Strategies
Are
Well-Matched
to
a Company's
Resources
and Capabilities
For a positioning-based
competitive
stategy
to
succeed
in delivering
good
performance
and thc
intended
competitive
edge over
rivals, it
has to
be well-
matched to
a
company's
internal situation and underpinned
by
an
appropri-
ate
set
of resources, know-how, and competitive
capabilitíes.
To
succccd
in
employing a
low-cost provider strategy,
a
comPany
has
to
have the
resource strengths
and capabilities
to
A
company's
positioning-based
competitive
keep its
costs
below
those
of
its
competitors;
this
means
strategy
should be
well-matched to
its
internal
having the expertise
to
cost-effectively
manage
value
sifuation
and
predicated
on
leveraging competi-
chain
aciivities
better than
rivals and/or the
innova-
tively
valuable resource
strengths
and core
tive
capability
to
bVpass
certain
value chain
activities
competenc¡es.
being performed
by rivals. To succeecl
in
strongLy
dif-
ferentiating its product in wavs that
are appealirg
to buyers, a comPany
must
have
the
resource
capabilities (like better
technology,
strong skills
in
product
innovation,
expertise
il
customer
service)
to incorporate
unique attributes
into its product offering that
a broad
range
of
buyers
will find
appealing
and
worth
paying
for. Stratcgies
focusing on a narrow
segment
of
the
market
rcquire the
capability
to do an outstanding
job
of satisfying
the
needs and
expectations
of niche buyers. Success
in
employing
a strategy
keycd
to a
best-value offering
requires the resource
capabilities
to
incorporate
upscale
oroduct or se¡vice attributes
at a lor+'er cost
than
rivals.
i
ll
I
I
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Kev Points
Early in the process
of
crafting a
strategy, company managers
have to decide
which
of the five
basic competitive
strategies to
employ---overall low-cost, broad
differentiation, focused
low-cost, focused
differentiation,
or best-cost
provider.
In employing
a
low-cost
provider
strategy,
a
company
must
do
a
better iob
than
rivals of cost-effectively
managing internal
activities and/or
it
must
find i¡nova-
tive
ways
to eliminate
or
bypass
cost-producing
activities. Low-cost
provider
shategies work particularly
well
when price
competition is
strong and
the
prod-
ucts of
rival sellers
are
very
weakly differenfiated.
Other
conditioru
favoring
a
low-cost
provider
strategy are
when
supplies are readily
available from eager
sellers, when there
are not many ways
to differentiate that have value
to
buyers,
when
the majority
of
industry
sales are made to
a
few large buyers, when buyer
switching
costs are low, and when
industry newcomers are likely to use
a
low
introductory
price
to build market
share.
B¡oad
differentiation
shategies
seek to
produce
a competitive
edge by incorpo-
rating attributes
and features that
set a
company's
product/service offering apart
from rivals in ways
that buyers
consider valuable
and
worth
paying
for.
Success-
ful
differentiation
allows a
firm to
(l)
com¡nand a premium price
for its
product,
(2)
increase
unit
sales
(because
addiüonal buyers
are
won over by
the
differenti-
ating features),
and/or
(3)
gain
buyer
loyalty
to its
brand
(because
some buyers
are strongly attracted
to the
differentiating
features and bond
with
the company
and its products).
Differentiation
strategies work
best
in
markets
with
diverse
buyer preferences
where
the¡e are big windows
of
opportunity
to strongly dif-
ferentiate
a
company's
product
offering from
those of
rival
brands,
in situations
where
few
other rivals are pursuing
a
similar differentiation approach, and
in
circumstances
where technological
change is
fast-paced
and competition centers
on
rapidly
evolving product
features.
A differentiation
strategy is doomed when
competitors
are
able to
quickly
copy most
or all
of
the
appealing
product
attri-
butes a
company comes up with,
when a
company's differentiation efforts meet
with
a
ho-hum
or
so-what market reception,
or
when
a company
erodes profit-
ability
by
overspending
on
efforts to differentiate its
product
offering.
A focus strategy
delivers competitive
advantage
either
by
achieving lower costs
than rivals in
serving buyers
comprising the target market
niche or by offering
niche
buyers an appealingly
differentiated
product or
service that
meets
their
needs
better than
rival
brands. A focused
strategy becomes increasingly
attrac-
tive when
the target market
niche
is
big
enough to be
profitable
and
offers
good
growth potential,
when
it
is
costly or difficult for
multisegment
competitors to
put
capabilities in place
to
meet
the
specialized needs
of
the
target
market
niche
and at
the same
time
satisfy
the
expectations of
their
mainstream customers,
when
the¡e are one
or
more
niches that present
a good match
with
a
focuser's
resource
strengths
and capabilities,
and when few
other
rivals
are
attempting to
specialize in
the same target
segment.
Best-cost
provider
strategies
stake out
a
middle
ground between pursuing
a
low-
cost advantage and
a
differentiation-based
advantage and
between
appealing
to the broad
market as
a
whole
and a narrow
market niche. The
aim
is to create
competitive advantage
by giving buyers more
value for
the money-satisfying
buyer
expec
tations
on
key
qua
I
ity
/
features
/
performance,/
service attributes
while
beating customer
expectations on price. To
profitably
employ
a
best-cost
J.
5.
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provicler
strateg\',
a
cornpanv
tlutst lnir tllrr
cnpnltility
to
ittcorporntt
rttroctitte or
Lt¡tscnlc
nttrilwtas
tt
¡ lo¡ttr
cosl
lltntt rr¿,rtl.s.
This
ca¡rability
is contingent on
(1)
a
superior
value
chain
configuratiorr,
(2)
Lrnrriatchet-l efficit'nc1
in nranagrng
essen-
tial valuc chain actir.ities,
ancl
(3)
resource
strengths
altcl
c¡-¡te
conlpetencics
that
allor.,"
diffcrcntiating attributes
to
be
incorporutecl ¿rt
¿r
lor¡'ctlst- A best-cost
pro-
vider stratcgy rvorks
best
in markets
where op¡rttrtunities
to tlifferentiate exist
and
rvhere many buycrs are sensitive
kr
price
ancl
value.
6.
Dcciding which
ger-reric straiegv
to emplov
is
¡rerhaps
tlre
most ir-uportant stra
tcgrc
commitment
a
c()mpany
makes-it tends
to tlrive
the rest
of thc strategic
¿ctions a compan)'
decicles to ttndertake
¿ncl
it
sets
the
rvhole
lol.re
for thc pursuit
of
a compctrtive
advantauc
over
rivals
l.
Best Br-ry
is the
largest consumer elect¡onics
retailer
in thc United States
with
2009
sales
of
more than
$45
billion.
The
cornpany
competcs
aggressively on
Price
rvith
rivals
such
as
Costc()
Wholesale, Sam's
Club,
Walmart, and Target, but is
also
known by consume¡s
for its first-rate
customer service.
Bcst Buy customets
have
commented
that
the
retailer's
sales
staff
is
exceptionally
knorvledgeable
about thc products they sell
and can
direct them
to the exact
location
of
difficult
to find iiems.
Best Buy customers
also appreciate
that demonstration
modcls of
PC monitors, MP3
players, and other
electronics
are
fully
powered
and ready
for rn
store use.
Best Bu¡r's Geek Squad
tech support
and
installation scrvices are
additional customer service
featlrres
that are
valued by many customers.
Horv
rvoulcl
vou
characterize
Best Buy's comPetitive strategy?
Should
it
be
classified
as a low-cost
¡.trovider
str.r
tegy? a differentiation strategy?
a
best-cost
strategy?
Explain
your
answer.
txplore
BMW's Web sitc at wn'rv.bmwgrouP.com
and see
if you can identify
at least three
n'ays
in r,vhich thc company
seeks
to differentiate
itself from
rival
automakers.
Is
lhere reason to
bchcve that
BMW's differentiation
strategy
has
been successful
in prot-luciug a competitivc
advantage?
Why
or
why not?
2.
tVhich onc of the five
generic
competitive
strategies
best characterize
your
c(nnpanv's
stratcglc approach to competing
successfullv?
Which rir,¿l companies appear to be
employing
a low-cost
provider strategy?
Which rival companies
appear
to
be
employing
a broad differentiation strategy?
Whrch
rival
companies appear to
be
emploving
a
best-cost
provider
strategy?
Which rival companies
appear to be
emp)oying some
type
of focus strategy?
Assurance
of
Learning
Exercises
Exercises
for
Simulation
Participants
1.
2.
3.
1.
5.