Chapter 5

• competing to successfully gain a competitive advantage involves giving buyers what they perceive as a superior value proposition by offering:

  • a good product at a lower price
  • a superior product that is worth paying more for
  • a best-value product that represents an attractive combination of price, features, quality, service, and other appealing attributes
• competitive strategy: deals exclusively with the specifics of management's game plan for competing successfully in securing a particular competitive advantage over rivals that offers superior value to customers, strengthens its market position, and counters the maneuvers of its rivals.
• the two principal factors that distinguish one competitive strategy from another are:

  • whether a firm's market target is broad or narrow
  • whether the firm is pursuing a competitive advantage linked to lower costs or differentiation
• a competitive strategy concerns the specifics of management's game plan for competing successfully and securing a competitive advantage over rivals in the marketplace.
• a low-cost provider strategy- striving to achieve lower costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals.
• a broad differentiation strategy- seeking to differentiate the firm's product or service from rivals' in ways that will appeal to a broad spectrum of buyers
• a focused low-cost strategy- concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs than rivals and thus being able to serve niche members at a lower price.
• a focused differentiation strategy- concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals' products.
• a best-cost provider strategy- giving customers more value for the money by satisfying buyers' expectations on key quality/features/performance/service attributes while beating their price expectations. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best) costs and prices among sellers offering products with comparable differentiating attributes.
• A powerful competitive approach with price-sensitive buyers when a firm's offering:

  • has meaningfully lower costs than rivals- but not necessarily the absolutely lowest possible cost
  • includes features and services that buyers consider essential
  • is viewed by buyers as offering equivalent or higher value even if priced lower than competing products
• a low-cost leader's basis for competitive advantage is lower overall costs than competitors. success in achieving a low-cost edge over rivals comes from eliminating and/or curbing "nonessential" activities and/or outmanaging rivals in performing essential activities.
• translating a low-cost strategy into attractive profit performance

  OPTION 1-use a lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits

  OPTION 2-maintain present price, be content with present market share, and use lower-cost edge to earn a higher profit margin on each unit sold
• the two major avenues for achieving low-cost leadership

  1. performing essential value chain activities more cost-effectively than rivals
  2. revamping the firm's overall value chain to eliminate or bypass some cost-producing activities altogether
• a cost driver is a factor having a strong effect on the cost of a company's value chain activities and cost structure
• cost-efficient management of value chain activities

  • striving to capture all available economies of scale
  • taking full advantage of experience and learning curve effects
  • trying to operate facilities at full capacity
  • substituting lower-cost inputs whenever there is little or no sacrifice in product quality or product performance
  • employing advanced production technology and process design to improve overall efficiency
• cost-efficient management of value chain activities

  • using communication systems and information technology to achieve operating efficiencies
  • using the company's bargaining power vis-à-vis suppliers to gain concessions
  • being alert to the cost advantages of outsourcing and vertical integration
  • pursuing ways to boost labor productivity and lower overall compensation costs
• Reengineering the firm's value chain by:

  • selling directly to consumers and cutting out the activities and costs of distributors and dealers
  • streamlining operations by eliminating low value-added or unnecessary work steps and activities
  • collaborating with suppliers to improve supply chain efficiency by reducing materials handling, shipping, and inventory costs
• when a low-cost strategy works best

  1. price competition among rival sellers is especially vigorous
  2. the commodity-like products of rival sellers are essentially identical and are readily available from several sellers
  3. there are a few ways to achieve product differentiation that have value to buyers
  4. price-sensitive buyers incur low costs in switching their purchases from one seller to another
  5. industry newcomers successfully use introductory low prices to attract buyers and build a customer base
• success in achieving a low-cost edge over rivals comes from outmanaging rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively by:

  • spending aggressively on resources and capabilities that promise to drive costs out of the business
  • carefully estimating the cost savings of new technologies before investing in them
  • constantly reviewing cost-saving resources to ensure they remain competitively superior
• overall aggressive price cutting:

  • price cutting results in lower margins, no increase in sales volume, and lower profitability
• relying on easily imitated cost reductions:

  • the value of a cost advantage depends on its sustainability
• becoming too fixated on cost reduction:

  • buyer interest in additional features might be ignored
  • declining buyer sensitivity to price might be overlooked
  • technological breakthroughs might nullify cost advantages
• attractive competition approaches to use whenever buyers' needs and preferences are too diverse to be fully satisfied by a standardized product or service.
• successful execution of a differentiation strategy:

  • involves offering differentiating features that clearly set the firm's products or services apart from rivals, allowing the firm to command a premium price
  • enhances profitability whenever the extra price the product commands outweighs the added costs of achieving differentiation that is not easily copied or matched by rivals
  • gains buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products)
• the essence of a broad differentiation strategy is to offer unique product or service attributes that a wide range of buyers find appealing and worth paying for.
• a value driver is a value chain activity or factor that can have a strogn effect on customer value and create differentiation.
• easy-to-copy differentiating features cannot produce sustainable competitive advantage; differentiation based on hard-to-copy competencies and capabilities tends to be more sustainable.
• differentiation can be based on tangible or intangible features and attributes.
• activities that enhance differentiation

  • seeking out high-quality inputs
  • striving for innovation and technological advances
  • creating superior product features, design, and performance
  • production-related research and development activities
  • pursuing continuous quality improvement
  • emphasizing human resource management activities
  • emphasizing marketing and brand-building activites
  • improving customer service or adding additional services
• approaches to enhancing differentiation through changes in the value chain system

  • coordinating with downstream channel allies to enhance customer
  • coordinating with upstream suppliers to better address customer needs
• delivering superior value via a differentiation strategy

  1. include product attributes and user features that lower the buyer's costs
  2. incorporate tangible features that improve product performance
  3. incorporate intangible features that enhance buyer satisfaction in noneconomic ways
• a differentiation strategy's price premium reflects the value actually delivered to the buyer and the value perceived by the buyer.
• it is important to signal value:

  • the nature of differentiation is subjective
  • buyers are making a first-time purchase
  • repurchase is infrequent
  • buyers are unsophisticated
• when a differentiation strategy works best:

  1. buyer needs and uses of the product are diverse
  2. there are many ways to differentiate the product or service that has value to buyers
  3. few rival firms are following a similar differentiation approach
  4. technological change is fast-paced and competition revolves around rapidly evolving product features
• focused strategies are developed especially for competing in a narrow piece of the total market as defined by geographic uniqueness or special product attributes.

  focused strategies are appealing to smaller and medium-sized firms that may lack the breadth and depth of resources to tackle going after a whole market customer base.
• a strategy that aims at securing a competitive advantage by serving buyers in the market nice at lower cost and a lower price than rival competitors.

  a strategy that achieves its cost advantage in the same way as for low-cost leadership- by outmanaging rivals in keeping costs low and bypassing or reducing nonessential activities.
• Focused differentiation strategy is keyed to offering carefully designed 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).
• when a focused low-cost or focused differentiation strategy is 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- focusers can avoid battling head-to-head against the biggest and strongest competitors
• • it is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customers
  • the industry has many different niches and segments, allowing a focuser to pick a niche suited to its strengths and capabilities
  • few rivals attempt to specialize in the same target segment
• the risks of a focused low-cost or focused differentiation strategy

  • competitors will find effective ways to match a focuser's capabilities in serving the target niche
  • the preferences and need of niche members to shift over time toward the product attributes desired by the majority of buyers
  • the segment may become so attractive it is soon inundated with competitors, intensifying rivalry, and splintering segment profits.