Competitive Strategies

• Is the ability of an organisation to add more

value for its customers than its rivals and
therefore attain a position of relative advantage

• Is what gives a firm an edge over its rivals

• Arises from the selection of the generic strategy

that best fits the organisation’s competitive
environment
 Generic Competitive Strategies

• Overall cost leadership

• Differentiation
• Focus
Generic Strategies
 Generic strategies at a glance

Low cost Differentiation Focus

Low cost culture Adding value Niche markets
Economies of scale through Targeting
Eliminate -product features Limited territory
unnecessary costs -product quality Focus on a specific
Enjoy high profits -distinctive offering group of customers
through cost Offer something Either cost leader or
advantage new or different differentiation with
High costs but in the segment
charge premium
price
 Overall cost leadership
• Efficient-scale facilities
• Pursuit of cost reductions
• Tight cost and overhead control and
avoidance of marginal customer accounts
• Cost minimization in areas like R& D, sales
force (South Korea in seventies)
• Low cost position protects the firm
against all five competitive forces
 Overall cost leadership
• Defends against powerful buyer as the
cost can be reduced up to the next
efficient producer and against powerful
supplier by having more flexibility to cope
up with increased cost.
• Creates entry barrier by having cost
advantage and relatively safe form
substitute products
 But this requires some of the
following
• High market share, favorable excess to
raw material
• Easy to manufacture products
• Maintaining a wide line of related products
to spread the cost and serving all major
group of customer to build volumes
• Heavy capital investment, aggressive
pricing, start-up losses to build market
share (Cab aggregators, e-commerce ,
networking externalities)
• Examples are Du Pont, Texas Instrument,
Black and Decker, Indigo, Mahindra
Tractors, Nirma, Reliance JIO
• Quote from Hydraulic Equipment Division
of a company
“We did not set out to develop a machine
significantly better than anyone else but
we did want to develop one that was truly
simple to manufactured and priced ,
intentionally at a low price”
 Requirement of Cost leadership strategy

Commonly required skills Common organizational

requirements

Access to capital, Process Tight cost control, structured

engineering skills organizations and
responsibilities
Intense supervision of Incentive based on meeting
labour. Product designed strict quantitative targets
for ease of manufacture
Low cost distribution Frequent detailed control
reports
 Five forces and cost leadership
The five forces The cost leader is

Entry barriers Able to cut prices to discourage potential

entrants to the market
Buyer power Able to offer a competitive price to buyers
with power
Supplier power Protected from a powerful buyer by low
costs
Threat of Able to make use of low price as defence
substitution against substitutes
Rivalry Is better able to compete on price
 Differentiation
• A differentiation strategy calls for the
development of a product or service that
offers attributes that are both unique and
are valued by customers
• Customers perceive the product to be
different and better than that of rivals
• As a result the value added by the
uniqueness of the product may allow the
firm to charge a premium price for it
 Differentiation
• Differentiating the product or service
offering of the firm
• Design or brand image (Mercedes)
Technology(Boss in sound system),
features (iphone), customer service
(Maruti), dealer network (Hero, Hindustan
Lever, ITC)
• Can be done on more than one dimension,
if product demands
Caterpillar is not only known for dealer
network but also for high spare parts
availability and durable products
• Insulates against competition rivalry by
building brand loyalty, this also acts as
entry barrier. Safeguards against supplier
power because the company enjoys
higher margin. Buyers do not have
alternatives so not in a position to
threaten the company and are less price
sensitive. Better protected against
substitute as a result of loyal customer
• May preclude high market share as a
result of exclusivity
• May be a trade off with cost position as
product designing, servicing, research and
high quality material may cost more.
• Does not ignore cost but it is not the
primary strategic target.
Requirement of Differentiation Strategy
Commonly required skills Common organizational
requirements
Strong marketing abilities, Strong coordination among
product engineering, function in R& D, product
creative flair development and marketing

Strong capability in Amenities to attract highly

research, reputation for skilled labour, creative
quality/ technology people
leadership
Unique combination of Subjective measurements
skills, strong cooperation and incentive instead of
from channels quantitative measures
 The five forces and differentiation

Five forces A firm pursuing a differentiation strategy…

Entry barriers Benefits from customer loyalty which discourages
potential entrants
Buyer power Enjoys some protection since large buyers have
less power to negotiate because of the absence
of close alternatives
Supplier power Is better able to pass on supplier price increases
to customers

Threat of substitution Is protected from the threat of substitutes by

customer loyalty
Rivalry Benefits from brand loyalty to keep customers
from rivals
 Focus
• Focusing on a particular buyer group,
segment of the product line, or
geographic market

Industry wide Differentiation Overall cost

leadership

Focus
Particular
segment only
 Advantage Advantage
Target Scope
(Low Cost) (Product Uniqueness)

Broad Cost Leadership Differentiation

(Industry wide)

Narrow Focus Strategy Focus Strategy

(Market wide) (low cost) (differentiation)
• It implies some limitation over market share
achievable
• Involves a trade off between sales volume and
profitability (more vol will erode profitability as
the market is limited)
• Like differentiation strategy, it may or may not
involve a trade off with over all cost position.
• Example may be Mumbai Dabba Walas,e-
choupal of ITC, Paramount airline-operates only
in south, Nirma during early years
 The five forces and a focus strategy

The five forces A firm pursuing a focus strategy…

Entry barriers Develops core competencies that can act as an entry
barrier

Buyer power Enjoys some insulation since large buyers have less
power to negotiate because few alternatives are
available
Supplier power Is better able to pass on supplier price rises thereby
reducing the impact of supplier power

Threat of substitution Enjoys some protection against substitutes by

specialised products and core competencies

Rivalry Enjoys some protection because rivals cannot meet

differentiation focused customer needs
 Stuck in the Middle
• Firm is in extremely poor situation lacking in investment,
market share and resolve to play low cost game.
• The firm is guaranteed to earn low profit
• Suffers from a blurred corporate culture and conflicting
sets of organisational structure and motivating system.
• Tend to flip back and forth over time among generic
strategies.
• Indian IT industry: Offering cost advantage earlier then
focused on service as differentiator. Now post Sikka,
focusing on value added services (ITES, Cloud
Computing)
 Risk of Generic Strategies
Two risks:
• Failing to attain or sustain the strategy
• Value of strategy advantage to erode with
industry evaluation
 Risk of overall cost leadership
• Technological change that nullifies past investments or
learning (Cement- Horizontal Kiln V/S Vertical Kiln,
Indian IT- from BPO-KPO)
• Low-cost learning by industry newcomers through
imitation or through ability to invest in state art
facilities(South Korea, China took away manufacturing
advantages of west and USA, Reluctance of
manufacturer to share tech know how with China)
• Inability to see required product or marketing change
because of the attention placed on cost (Ford in early
90’s)
• Inflation in costs that narrows the firm’s ability to
maintain enough of price differential to offset brand
advantage(China losing as manufacturing hub, Indian
BPOs)
• Examples: Ford in 1920 and Sharp
Electronics (another Japanese company)
when they could not face General motor
and Sony/ Panasonic
 Risk of differentiation
• The cost differential between low-cost
competitors and the differentiated firm
becomes too great for differentiation to
hold brand loyalty (German Cars in India,
Harley V/S Honda, Kawasaki)
• Imitation narrows perceived differentiation
a common occurrence as industries
matures (Mobile Handset, New launch of I
phone 8 on 12.9.17)
 Risk of Focus
• The cost differential between broad- range
competitors and the focused firm widens
to eliminate cost advantage of serving a
narrow target or offset the differentiation
achieved by focus (Pharma Industry-
Biocon V/S others)
• The differences in products between the
strategic target and the market narrows
down
• Competitors find sub markets within the