Creating and Sustaining Competitive

Advantages
Three Generic Strategies
 Three Generic Strategies
 Overall cost leadership
 Low-cost-position relative to a firm’s peers
 Manage relationships throughout the entire
value chain
 Differentiation
 Create products and/or services that are
unique and valued
 Attributes for which customers will pay a
premium
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 Three Generic Strategies
 Focus strategy
 Narrow product lines, buyer segments, or
targeted geographic markets
 Attain advantages either through
differentiation or cost leadership

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 Example
 Companies pursuing an overall cost
leadership strategy
 McDonalds
 Wal-Mart
 Companies pursuing a differentiation
strategy
 Harley Davison
 Apple
 Companies pursuing a focus strategy
 Rolex
 Lamborghini
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 Overall Cost Leadership
Tight set of interrelated tactics that
includes:
 Tight cost and overhead control
 Avoidance of marginal customer accounts
 Cost minimization in all activities in the firm’s
value chain

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 Overall Cost Leadership
 Experience curve
 refers to how business “learns” to lower
costs as it gains experience with production
processes
 with experience, unit costs of production
decline as output
increases in most
industries

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 Overall Cost Leadership
 Competitive parity
 a firm’s achievement of similarity, or being
“on par,” with competitors with respect to low
cost, differentiation, or other strategic
product characteristic.

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Comparing Experience Curve Effects

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Exhibit 5.4
 Improving Competitive Position
vis-à-vis the Five Forces
An overall low-cost position
 Protects a firm against  Provides substantial entry
rivalry from competitors barriers from economies
 Protects a firm against of scale and cost
powerful buyers advantages
 Provides more flexibility  Puts the firm in a
to cope with demands favorable position with
from powerful suppliers respect to substitute
for input cost increases products

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 Pitfalls of Overall Cost
Leadership Strategies
 Too much focus on one or a few value-chain
activities
 All rivals share a common input or raw material
 The strategy is imitated too easily
 A lack of parity on differentiation
 Erosion of cost advantages when the pricing
information available to customers increases

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 Differentiation
 Differentiation strategy
 a firm’s generic strategy based on creating
differences in the firm’s product or service
offering by creating something that is
perceived industry-wide as unique and
valued by customers.

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 Differentiation
 Prestige or brand image
 Technology
 Innovation
 Features
 Customer service
 Dealer network

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Differentiation: Improving Competitive
Position
 Creates higher entry barriers due to customer
loyalty
 Provides higher margins that enable the firm to
deal with supplier power
 Establishes customer loyalty and hence less
threat from substitutes

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 Potential Pitfalls of
Differentiation Strategies
 Uniqueness that is not valuable
 Too much differentiation
 Too high a price premium
 Differentiation that is easily imitated
 Diffusion of brand identification through
product-line extensions
 Perceptions of differentiation may vary between
buyers and sellers

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 Focus
 Focus is based on the choice of a narrow
competitive scope within an industry
 Firm selects a segment or group of
segments (niche) and tailors its strategy to
serve them
 Firm achieves competitive advantages by
dedicating itself to these segments
exclusively

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 Focus
Cost focus Differentiation
 firm strives to focus
create a cost  firm seeks to
advantage in its differentiate in its
target segment target market

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Focus: Improving Competitive Position
 Focus
 Creates barriers of either cost leadership or
differentiation, or both
 Used to select niches that are least
vulnerable to substitutes or where
competitors are weakest

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 Pitfalls of Focus Strategies
 Erosion of cost advantages within the narrow
segment
 Focused products and services still subject to
competition from new entrants and from
imitation

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