The Five Generic Competitive

Strategies

Thompson et. al. 21st Edition (2017-2018)

 Lesson Plan

A. What is Business Level Strategy

B. Types of/Five Generic Competitive Strategies
i. Low-Cost Provider Strategy
ii. Broad Differentiation Strategy
iii. Focused or Market Niche Strategies
iv. Best-Cost Provider Strategy
C. The Contrasting Features of the Five Generic Competitive
Strategies
What is Business Level Strategy
What is Business-Level Strategy Contd..

Industry
Attractiveness Corporat
Which e
business
Rate of Profit should we be
Strategy
Above the Cost in
of Capital We are
here now

Competitive
Advantage Business
How do we Strategy
make money?
What is Business Level Strategy?

• Business strategy is concerned with how the firm

competes within a particular industry or market.
• It entails three decisions:

i. Customer’s need – what is to be satisfied?

ii. Customer Group – Who is to be satisfied?

iii. Distinctive competencies – how customer’s need to be

satisfied?
 Business-Level Strategy contd…

i. Customers’ Need
• desire, wants or cravings – that can be satisfied – by means of goods or
services.
• Two factors determine which product customer choose to satisfy needs
1. The price

2. The way a product is differentiated from other products.

• Differentiation can be achieved in two ways:

1. Physical Characteristics – Quality, Reliability, Performance

2. Product’s appeal

• But proper emphasis should be given on the balance between

Differentiation & Cost
 Business-Level Strategy contd…

ii. Customers’ Group / Choices for Market Segmentations:

▫ Choose
 not to recognize that different groups having different needs rather
serve the average
 to segment different constituencies & develop product for each.
 to recognize that the market is segmented but concentrate on serving
only one of a few market segment or niche.
 Business-Level Strategy contd…

iii. Distinctive Competency:

• There are four main ways to pursue C/A
a) Superior Innovation
b) Superior Quality
c) Superior Efficiency
d) Superior Customer Responsiveness
• In developing Business Strategy Managers must decide which
combination will best utilize their distinctive competencies.
Types of Generic
Competitive Strategies
 Types of Generic Competitive Strategies

• Manager’s Game Plan for competing successfully – its specific efforts to

 Position itself in the market place
 Please customers
 Ward off competitive threats, &
 Achieve a particular kind of competitive advantage.
• Chances are rare that any two co are exactly same in their strategic
approach.
• However, the two biggest factors that distinguish one Competitive Strategy
from another are:
 Whether a co’s market target is broad or narrow and
 Whether the co is pursuing a competitive advantage linked to lower costs or
differentiation.
• These 2 factors give rise to five competitive strategy options
 The Five Generic Competitive Strategies

Type of Competitive Advantage Being

Pursued
Lower Cost Differentiation

A broad
Cross-Section
Overall Broad
of Buyers Low-Cost Differentiation
Provider Strategy Strategy
Market Target

Best-Cost
Provider
Strategy
A Narrow Focused Low- Focused
Buyer
Segment (Or Cost Differentiation
Market Niche) Strategy Strategy
Low-Cost Provider
Strategies
Low-Cost Provider Strategies contd….

• Basic intent is to – outperform the competitors by doing

everything at a lower unit cost than the competitors.
• A co achieves Low-Cost Leadership – when
• it becomes the industry’s lowest cost provider, rather than just
being one of several competitors with comparatively low costs.

• However, in an effort to achieve low-cost leadership the

manager must incorporate features and services that
buyers consider essential.
• Otherwise, consumer might lower down the value about the
product.
Low-Cost Provider Strategies contd….

• Two Options for translating a low cost advantage over rivals

into attractive profit performance:
• 1 – is to use the lower-cost edge to underprice competitors and attract
price-sensitive buyers in great enough numbers to increase total profit
• 2 – is to maintain the present price , be content with the market share,
and use the lower-cost edge to earn a higher profit margin on each
unit sold, thereby raising the firm’s total profit and overall return on
investment.
 Most co r inclined to use option 1; but it might backfire if rivals respond
with retaliatory price cuts to protect their mkt share.
 Thus a rush to price cut can often trigger price war
Low-Cost Provider Strategies contd….

Two Major Avenues for Achieving a Cost Advantage:

• There are two ways to achieve a low-cost edge over rivals,
where the firm’s cumulative costs across over its overall
value chain will be lower than competitors’ cumulative
costs.
A. Perform value chain activities more cost-effectively
than rivals
B. Revamp the firm’s overall value chain to eliminate or
by pass some cost producing activities
Low-Cost Provider Strategies contd….

Two Major Avenues for Achieving a Cost Advantage contd….:

A. Cost-Efficient Management of Value Chain

Activities.
i. Capturing all available economies of scale
ii. Taking full advantage of experience and learning curve
effects
iii. Operating facilities at full capacity
iv. Improving supply chain efficiency
v. Substituting lower cost inputs wherever there is little or
no sacrifice in product quality or performance
 Low-Cost Provider Strategies contd….

Two Major Avenues for Achieving a Cost Advantage contd….:

vi. Using the co’s bargaining power vis-a-vis suppliers or

others in the value chain system to gain concessions.
vii. using online systems and sophisticated software to
achieve operating efficiency
viii. Improving process design and employing advanced
production technology
ix. Being alert to the cost advantage of outsourcing or
vertical integration
x. Motivating employees through incentives and company
culture
 Low-Cost Provider Strategies contd….

Two Major Avenues for Achieving a Cost Advantage contd….:

B. Revamping of the Value Chain Systems to Lower Costs.

i. Selling direct to consumer and bypassing the activities and costs of
distributors and dealers
i. Create its own direct sales force
ii. Conduct sales operation at the co’s website
ii. Streamlining operations by eliminating low-value—added or unnecessary
work steps and activities
iii. Reducing materials handling and shipping costs by having suppliers locate
their plants or warehouse close to the co’s own facilities
Low-Cost Provider Strategies contd….

The Keys to Being a Successful Low-Cost Provider:

• Not hesitating to spend aggressively on R & C that provides to drive
costs out of the business
• Focusing on few activities to lower down costs.
When Low-Cost Provider Strategy works best?
• Price competition among rival sellers is vigorous
• The products of rival sellers are essentially identical and readily
available from many eager sellers
• It is difficult to achieve product differentiation in ways that have value to
buyers
• Most buyers use the product in the same ways
• Buyers incur low costs in switching their purchases from one seller to
another.
Low-Cost Provider Strategies contd….

Pitfalls to Avoid in Pursuing a Low-Cost Provider

Strategy:
• The biggest mistake a low cost provider can make is getting
carried away with overly aggressive price cutting.
• 2nd pitfall is relying on cost reduction approaches that can be
easily copied by rivals
• 3rd pitfall is becoming too fixated on cost reduction
• An innovative rival may discover an even lower-cost value
chain approach; important cost saving technology
Broad Differentiation
Strategies
Broad Differentiation Strategies contd….

• It is attractive whenever buyers’ need and preferences are

too diverse to be fully satisfied by a standardized product.
• Successful product. Differentiation requires careful study
tii determine what attributed buyers will find appealing,
valuable, and worth paying for.
• Successful differentiation allows co to do one or more of
the following
• Command a premium price for its product
• Increase unit sales
• Gain buyers’ loyalty to its brand
Broad Differentiation Strategies contd….

Managing the VC to Create the Differentiation Activities

1. Create product features and performance attributes that appeal to a wide
range of buyers
2. Improve customer service or add extra services
3. Invest in production-related R & D Activities
4. Strive for innovative and technological advances
5. Pursue continuous quality improvement
6. Increase marketing and brand-building activities
7. Seek out high-quality inputs
8. Emphasize HR Mgt activities that improve the skill
Broad Differentiation Strategies contd….

Revamping the VC to Increase Differentiation:

▫ Revamping value chain system can also ensure getting the
advantage of differentiation.
▫ Activities by suppliers or distributors/retailers can have a
meaningful effect on customers’ perception of a co’s offerings
and its value proposition
▫ Approaches to enhancing differentiation through changes in the
VC include
1. Coordinating with channel allies to enhance customer value
2. Coordinating with suppliers to better address customer needs
Broad Differentiation Strategies contd….

Delivering Superior Value via a Broad Differentiation

Strategy
▫ D Strategy depend on meeting customer need in a unique ways or
creating new needs through activities ex: innovation or persuasive
advertising.
▫ The obj – is to – offer customer something that rivals can’t .
▫ There are FOUR basic routes to achieve this aim
 1. To incorporate product attributes & users features that lower the
buyers' overall costs of using co’s pdt.
 2. to incorporate tangible features that increase customers’
satisfaction (four building block)
Broad Differentiation Strategies contd….

▫ There are FOUR basic routes to achieve this aim contd….

 3. to incorporate intangible features that enhance buyers’

satisfaction in noneconomic ways.
 Toyota’s Prius – env .friendly

 4. to signal the value of the co’s product offering to buyers.

 Typical signals of value include a high price (in instances where
high price implies high quality and performance), more appealing
or fancier packaging than competing products, ad content that
emphasizes a pdt’s standout attributes,, the quality of the
brochures and sales presentations, and the luxuriousness and
ambience of a seller’s facilities. Etc.
Broad Differentiation Strategies contd….

▫ Regardless of the approach taken, among the four discussed previously,

achieving successful Differentiation Strategy Requires:
▫ 1st that the co have capabilities in areas such as customer service, marketing,
brand mgt., & tech that can create and support D.
 i.e. The R & competencies and VC Activities of the co must be well matched
to the requirement of the strategy.
▫ 2nd Co’s competencies must also be sufficiently unique in delivering value to
buyers that help set its product offering apart from those of rivals
▫ 3rd Co’s competencies must be competitively superior –i.e to achieve
distinctive competency.
▫ 4th D that creates switching costs that lock in buyers also provides route to
sustainable advantage. For ex: if a buyer makes a substantial investment in learning
to use one type pof system, that buyer is less likely to switch
Broad Differentiation Strategies contd….

When a Differentiation Strategy Works Best

1. Buyer needs & uses of the products are diverse
2. There are many ways to differentiate the products and services
that have value to buyers
3. Few rivals firms are following a similar differentiation
approach
4. Technological change is fast-[aced and competition revolves
around rapidly evolving product features
Broad Differentiation Strategies contd….

Pitfalls to Avoid in Pursuing a Differentiation Strategy

1. A D strategy keyed to product or service attributes that ar eeasily
and quickly imitable
2. D strategy can also falter when buyers see little value in the
unique attributes of a co’s product or services
3. Overspending on efforts to differentiate the co’s pdt offering,
thus eroding profitability
4. Other common mistakes in crafting D strategy include:
 Offering only trivial improvements in quality, service or
performance features vis-à-vis rivals products
Broad Differentiation Strategies contd….

Other common mistakes in crafting D strategy include contd….:

 Over differentiating so that product quality, features or service

levels exceed the needs of most buyers
 Charging to high a price premium
Focused (or Market Niche)
Strategies
Focused (or Market Niche) Strategies contd….

 Concentrated Attention on a narrow piece of Total Market –

this strategy makes it different than any other.
 The Target segment/Niche can be in the form of geographic
segment, customer segment, product segment,
A Focused Low Cost Strategy
 It aims at securing CA by serving buyers in the target market
niche at a lower cost and lower price than those of rivals
competitors.
 This strategy is feasible when a firm can lower costs
significantly by limiting its customer-base to a well-defined
buyer segment.
 Ex: Budget motel chain
Focused (or Market Niche) Strategies contd….
A Focused Low Cost Strategy contd….

 The avenues to achieving cost advantage over rivals also

serving the target market niche are the same as those for
low-cost leadership.
 They use the cost drivers to perform value chain activities more
efficiently than rivals and search for innovative ways to bypass
nonessential value chain activities.

 The only real difference between a low-cost provider and

a focused low-cost strategy is:
 The size of the buyer group to which a company is appealing.

 Low-cost providers involves a pdt offering that appeals to broadly

to almost all buyer groups and mkt seg; whereas focused cost
leader aims at just meeting the needs of the buyers in a narrow seg.
Focused (or Market Niche) Strategies contd….

A Focused Differentiation Strategy

 Involves offering superior products or services tailored to
the unique preferences and needs of a narrow, well-
defined group of buyers.
 Success depends on:
 The existence of a buyer segment that is looking for
special product attributes or seller capabilities and
 A firm’s ability to create a pdt or service offering that
stands apart from that of rivals competing in the same
target mkt niche.
 Ex: Rolls-Royce; Ritz-Carlton
Focused (or Market Niche) Strategies contd….

When A Focused Low-Cost or Focused Differentiation

Strategy is Attractive?
 The target market niche is big enough to be profitable and
offers good growth potential
 Industry leaders have chosen not to compete in the niche
 It is costly or difficult for multi segments competitors to
meet the specialized needs of niche buyers and at the same
time satisfy the expectations of their mainstream
customers.
 Few if any rivals are attempting to specialize in the same
target segment – a condition that reduce the risk of
segment overcrowding.
Focused (or Market Niche) Strategies contd….

The Risks of a Focused Low-Cost or Focused

Differentiation Strategy
 One, when competitors outside the niche will find effective
ways to match the focused firm’s capabilities in serving the
target niche
 Second, is the potential for the preferences and needs of
niche members to shift overtime toward the product
attributes desired by buyers mainstream portion of the
market.
 Third, the segment may become so attractive that it is soon
submerged with competitors, intensify rivalry and
splintering segment profits.
Best-Cost Provider
Strategies
Best-Cost Provider Strategies contd….

Best Cost Provider Strategy cont…

 Hybrid of low-cost provider and differentiation strategies.
 Aims at providing more desirable attributes (quality,
features, performance, service) while beating rivals on
price.
 It permits co to aim squarely at the sometimes great
mass of value-conscious buyers looking for a better
product/service at an economical price.
Best-Cost Provider Strategies contd….
Who are these
Best Cost Provider Strategy cont… Value-
Conscious
 It permits co to aim squarely at the sometimes great mass
Buyers?
of value-conscious buyers looking for a better
product/service at an economical price.

Value-Conscious Buyers are those who

frequently shy away from BOTH cheap low-
end products and expensive high-end
products

But they are quite willing to pay a “fair” price

for extra features and functionality they find
useful.
Best-Cost Provider Strategies contd….

Best Cost Provider Strategy cont…

 The essence of a best-cost provider strategy is
 giving customers more value for the money
 by satisfying buyer desires for appealing features
 and charging lower price for these attributes compared
to rivals with similar caliber product offerings.
Best-Cost Provider Strategies contd….

Best Cost Provider Strategy cont…

 To Profitably employ a best-cost provider strategy, a co must
have:
 The capability to incorporate upscale attributes into its
product offering at a lower cost than rivals.
 When a co can incorporate more appealing features, good
to excellent (product performance or quality, or more satisfying
customer service into its product offering) at a lower cost than rivals
than it enjoys, “best-cost” status.
 They can use its “low-cost advantage” to under price rivals
whose products/services have similar upscale attributes and it
still earns attractive profits.
Best-Cost Provider Strategies contd….

Best Cost Provider Strategy cont…

 To Profitably employ a best-cost provider strategy, a co must
have:
 The capability to incorporate upscale attributes into its
product offering at a lower cost than rivals.
 When a co can incorporate more appealing features, good
to excellent (product performance or quality, or more satisfying
customer service into its product offering) at a lower cost than rivals
than it enjoys, “best-cost” status.
 They can use its “low-cost advantage” to under price rivals
whose products/services have similar upscale attributes and it
still earns attractive profits.
Best-Cost Provider Strategies contd….

Best Cost Provider Strategy cont…

 When a best-cost provider strategy works best?
 In market where product differentiation is the norm
and
 An attractively large number of value-conscious buyers
can be induced - to purchase midrange products rather
than cheap, basic products or expensive, top-o-the-line
products.
Best-Cost Provider Strategies contd….

When a best-cost provider strategy works best contd…

 A best-cost provider needs to position itself near the middle

of the market with.
 either a medium-quality product at a below average price
 or a high quality product at an average or slightly higher
price
 A best-cost provider also works best in recessionary times
when
 masses of buyers become value-conscious
 and are attracted to economically priced products/services
 with more appealing attributes.
Best-Cost Provider Strategies contd….

 Unless a co has the Resources, know-how &

capabilities to incorporate upscale
products/services attributes at a lower cost than
rivals, adopting a best strategy is ill-advised
Best-Cost Provider Strategies contd….

 Risks of a best-cost provider strategy

 Squeezed between the strategies of firms low-cosr and high-end
differentiation strategies.
 Low-cost providers may be able to drain-off customers away with
the appeal of a lower-price (despite less appealing product
attributes).
 High-end differentiators may be able to steal customers away with
the appeal of better product attributes (even though their products
carry high price tag).
 Thus to be successful, a best-cost provider must achieve significantly
lower costs in providing upscale features so that it can outcompete
differentiators on the basis of a significantly lower proce
Best-Cost Provider Strategies contd….

 Thus, to be Successful a best-cost provider

strategy
 must achieve significantly lower costs in providing
upscale features - so that it can outcompete
differentiators on the basis of a significantly lower
price.
Or
 Must offer significantly better product attributes to
justify a price above what low-cost leaders are
charging.
The Contrasting Features of
the Five Generic
Competitive Strategies
The Contrasting Features of the Five Generic Competitive Strategies

 See Table in book