CHAPTER 5

STRATEGY AND
COMPETITIVE
ADVANTAGE
Screen graphics created by:
Jana F. Kuzmicki, PhD, Mississippi University for Women
 Strategy and Competitive Advantage
• Competitive advantage exists when a firm’s
strategy gives it an edge in
– Defending against competitive forces and
– Securing customers

Key to Gaining a Competitive Advantage

• 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
 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
 Figure 5.1: The Five Generic
Competitive Strategies
Type of Advantage
Sought
Lower Cost Differentiation

Broad Overall Low-Cost Broad

Range of Provider Differentiation
Market Target

Buyers Strategy Strategy

Best-Cost
Provider
Strategy
Narrow Focused Focused
Buyer
Segment
Low-Cost Differentiation
or Niche Strategy Strategy
Distinctive Features of the
Five Generic Competitive
Strategies

8
 Low-Cost Leadership
Keys to Success
• 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-costleadership
Low-cost leadership means
means lowlow
overall costs,
OVERALL costs,not
notjust
justlow
low
manufacturing or
manufacturing or production
production costs!
costs!
 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
 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
 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
 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
 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
 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
 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 that are not easily matched or cheaply
copied by rivals
• Not spending more to achieve differentiation than
the price premium that can be charged
 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
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
 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
 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
 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
 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
Competitive Strategy Principle
A low-cost provider strategy can
A low-cost producer strategy can defeat a
defeat a differentiation strategy
differentiation strategy when buyers are
when buyers are satisfied with
satisfied with a standard product
a standard product and do not and do
not see
seeextra attributes
extra as worth paying
differentiating
additional
attributesmoney to obtain!
as worth
paying for!
 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
 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
 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
 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
 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
 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
 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
 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.
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
 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
 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
 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
 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
 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

Activities,
Costs,
Internally
Activities, & Margins of
Performed Buyer/User
Costs, & Forward
Activities, Value
Margins of Channel
Costs, & Chains
Suppliers Allies &
Margins
Strategic
Partners
Competitive Strategy Principle

A vertical integration strategy

has appeal only if it
significantly strengthens a
firm’s competitive position!
 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
 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
 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.
 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
 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
 Unbundling and Outsourcing Strategies

Concept
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
Internally
Performed
Activities Functional
Suppliers Activities

Support Distributors
Services or Retailers
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
 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
 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