5 THE FIVE GENERIC COMPETITIVE

chapter
5
THE FIVE
GENERIC
COMPETITIVE
STRATEGIES
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
LO1 Gain an understanding of how each of the five
generic competitive strategies go about building
competitive advantage and delivering superior
value to customers.
LO2 Learn the major avenues for achieving a
competitive advantage based on lower costs.
LO3 Recognize why some generic strategies work
better in certain kinds of industry and competitive
conditions than others.
5-2
(cont’d)
LO4 Gain command of the major avenues for
developing a competitive advantage based on
differentiating a company’s product or service
offering from the offerings of rivals.
LO5 Recognize the required conditions for delivering
superior value to customers through the use of
a hybrid of low-cost provider and differentiation
strategies.
5-3
COMPETITIVE STRATEGIES
AND MARKET POSITIONING

Competitive Strategy
 Deals exclusively with management’s game
plan for competing successfully and securing
a competitive advantage over rivals
 Represents the firm’s specific efforts to provide
superior value to customers by offering:
 An
equally good product at a lower price
A
superior product with unique features perceived
as worth paying more for
 An
attractive overall mix of price, features, quality,
service, and other appealing attributes
5-4
 Core Concept 
A competitive strategy concerns the
specifics of management’s game plan
for competing successfully and securing
a competitive advantage over rivals in
the marketplace.
5-5
FIGURE 5.1
The Five Generic Competitive Strategies
5-6
The Five Generic Competitive Strategies
Low-cost
provider
Broad
differentiation
Striving to achieve lower overall costs than rivals and appealing to a
broad spectrum of customers, usually by underpricing rivals
Seeking to differentiate the firm’s product or service from rivals’ in
ways that will appeal to a broad spectrum of buyers
Focused
low-cost
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
Focused
differentiation
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
Best-cost
provider
Giving customers more value for the money by satisfying buyers’
expectations on key quality/features/performance/service attributes
while beating their price expectations
5-7
Low-Cost Provider Strategies

A powerful competitive approach with pricesensitive buyers when a firm’s offering:
 Has a lower cost than rivals—but not necessarily
the absolutely lowest possible cost.
 Includes features and services that buyers consider
essential.
 Is viewed by consumers as offering equivalent or
higher value even if priced lower than competing
products.
5-8
 Core Concept 
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.
5-9
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
5-10
The Two Major Avenues for Achieving
Low-Cost Leadership
1. Perform essential value chain activities
more cost-effectively than rivals
2. Revamp the firm’s overall value chain to
eliminate or bypass some cost-producing
activities
5-11
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

Pursuing efforts to boost sales
volumes and thus spread outlays
for R&D, advertising, and general
administration over more units

Substituting lower-cost inputs
whenever there’s little or no
sacrifice in product quality or
product performance

Employing advanced production
technology and process design to
improve overall efficiency

Using communication systems and
information technology to achieve
operating efficiencies

Pursuing ways to reduce workforce
size and lower overall
compensation costs

Using the company’s bargaining
power vis-à-vis suppliers to gain
concessions

Being alert to the cost advantages
of outsourcing and vertical
integration
5-12
Revamping the Value Chain
Reengineering the
firm’s value chain
Sell directly to
consumers and cut
out the activities and
costs of distributors
and dealers
Streamline operations
by eliminating low
value-added or
unnecessary work
steps and activities
Reduce materials
handling and shipping
costs by having
suppliers locate plants
or warehouses close to
a firm’s own facilities
5-13
When a Low-Cost Strategy Works Best
1. Price competition among rival sellers is especially vigorous.
2. The products of rival sellers are essentially identical and are
readily available from several sellers.
3. There are few ways to achieve product differentiation that
have value to buyers.
4. Buyers incur low costs in switching their purchases from one
seller to another.
5. The majority of industry sales are made to a few, largevolume buyers.
6. Industry newcomers use introductory low prices to attract
buyers and build a customer base.
5-14
Concepts and Connections 5.1
How Walmart Managed Its Value Chain to Achieve
a Low-Cost Advantage Over Rival Supermarket Chains
5-15
Pitfalls to Avoid in Pursuing
a Low-Cost Provider Strategy
1. Overly aggressive price cutting
 Price cutting results in lower margins, no increase in
sales volume, and lower profitability
2. Reliance on easily imitated cost reductions
3. Becoming too fixated on cost reduction
 Ignoring buyer interest in additional features
 Overlooking declining buyer sensitivity to price
 Denying technological breakthroughs that will nullify
cost advantages
5-16
Broad Differentiation Strategies

Powerful competitive approaches to use
whenever buyers’ needs and preferences
are too diverse to be fully satisfied by a
standardized product or service.
 Involves incorporating differentiating features that
cause buyers to prefer one firm’s brand, product, or
service over those of its rivals
 Requires not spending more to achieve differentiation
than the price premium that customers are willing to
pay for all the differentiating extras
5-17
 Core Concept 
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.
5-18
Benefits of Successful Differentiation
Successful execution of a
differentiation strategy
allows a firm to:
Command a
premium price
Increase its
unit sales
Gain buyer loyalty
to its brand
5-19
Approaches to Differentiation

Unique taste: Red Bull, Listerine

Multiple features: Microsoft Office, Apple iPhone

Wide selection and one-stop shopping: Home Depot, Amazon.com

Superior service: Ritz-Carlton, Nordstrom

Spare parts availability: Caterpillar

Engineering design and performance: Mercedes-Benz, BMW

Luxury and prestige: Rolex, Gucci, Chanel

Product reliability: Johnson & Johnson

Quality manufacture: Michelin in tires, Honda in automobiles

Technological leadership: 3M Company

Full range of services: Charles Schwab in stock brokerage

Complete line of products: Campbell soups, Frito-Lay snack foods
5-20
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.
5-21
Managing the Value Chain in Ways
That Enhance Differentiation
Manufacturing
activities
Supply chain
activities
Product
R&D
Production R&D
and technologyrelated activities
Activities
that Enhance
Differentiation
Distribution and
shipping activities
Marketing, sales,
and customer
service activities
5-22
Perceived Value and the Importance
of Signaling Value
The price premium commanded by a
differentiation strategy reflects actual value
delivered and value perceived by the buyer.
 Buyers seldom pay for value that is not
perceived.
 Important to signal value when:

 Nature of differentiation is subjective
 Buyers are making first-time purchases
 Repurchase is infrequent
 Buyers are unsophisticated
5-23
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 have 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.
5-24
Pitfalls to Avoid in Pursuing
a Differentiation Strategy

Pursuing a differentiation strategy keyed to product
or service attributes that are easily and quickly
copied.

Incorporating product features or attributes in which
buyers see little value or are easily copied by rivals.

Overspending on efforts to differentiate.

Over-differentiating so that product quality or service
levels exceed buyers’ needs.

Trying to charge too high a price premium.

Not opening up meaningful gaps in quality or service
or performance features over the products of rivals.
5-25
Focused (or Market Niche) Strategies


Reflect a concentration on a narrow piece of the
total market defined by geographic uniqueness or
special product attributes.
Appeal to smaller and medium-sized firms that may
lack the breadth and depth of resources to tackle
going after a whole market customer base.
5-26
A Focused Low-Cost Strategy
A focused strategy based on low cost aims
at securing a competitive advantage by
serving buyers in the target market niche at
a lower cost and a lower price than rival
competitors.
 Avenues to achieving cost advantage are
the same as for low-cost leadership—outmanage rivals in keeping costs low and
bypassing or reducing nonessential
activities.

5-27
Concepts and Connections 5.2
Vizio’s Focused Low-Cost Strategy
5-28
Focused Differentiation Strategy

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).
5-29
Concepts and Connections 5.3
Nestlé Nespresso’s Focused Differentiation Strategy
in the Coffee Industry
Nestlé’s strategy in the gourmet coffee industry has
allowed its Nespresso brand of espresso coffee to
become the fastest-growing billion-dollar brand in its
broad lineup of chocolates and confectionery, bottled
waters, coffee, ready-to-eat cereals, frozen food, dairy
products, ice cream, and baby foods. The Nespresso
concept was developed in 1986 to allow consumers to
create a perfect cup of espresso coffee, equal to that of a
skilled barista, with the use of a proprietary line of
coffeemakers designed to accommodate Nespresso’s
single-serving coffee capsules.
The ease-of-use of the stylish Nespresso coffeemakers
and the high-quality coffee selected by Nestlé for its
single-serving coffee pods allowed coffee drinkers with
little experience in preparing gourmet coffees to
master great-tasting lattes, cappuccinos, and espresso
drinks. Nespresso was sold in more than 50 countries
in 2011 and had averaged annual growth in revenues of
30 percent since 2000 to reach sales of more than $3
billion Swiss francs in 2010.
Nespresso capsules were available in 16 different roasts
and aromatic profiles and could be purchased online at
Nestlé’s Nespresso Club website, in any of Nestlé’s 200
lavish Nespresso boutiques located in the world’s most
exclusive shopping districts, and in select upscale
retailers across the globe. Nespresso coffee machines
were designed for ease-of-use while having advanced
technological features that maximized the aroma of the
coffee and automated the entire process even down to
creating a thick and creamy froth from cold milk for
cappuccinos. Nespresso coffeemakers also set standards
for aesthetics with classic, sleek models, avant-garde
models, and retro-modern models.
• Unsurpassed product quality and proven coffee
expertise.
Nestlé’s focus differentiation strategy for Nespresso
includes the following primary elements:
• Unstoppable drive for innovation and distinctive
design.
• Inspirational, iconic global reputation of the brand.
• Global brand community thanks to direct customer
relationships.
• Exclusive routes to market.
• Expertise in sustainable quality development.
Source: Nestlé press releases, June 9, 2009;
September 21, 2009; and August 11, 2010.
5-30
When a Focused Low-Cost or Focused
Differentiation Strategy Is Viable

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—
focusers can avoid battling head-to-head against the
industry’s biggest and strongest competitors.

It is costly or difficult for multisegment 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, thereby
allowing a focuser to pick a niche suited to its resource
strengths and capabilities.

Few, if any, rivals are attempting to specialize in the same
target segment.
5-31
The Risks of a Focused Low-Cost or
Focused Differentiation Strategy
1. Competitors find effective ways to match a
focuser’s capabilities in serving the target niche.
2. The preferences and needs of niche members shift
over time toward the product attributes desired by
the majority of buyers.
3. The segment may become so attractive it is soon
inundated with competitors, intensifying rivalry and
splintering segment profits.
5-32
Best-Cost Provider Strategies

Are a hybrid of low-cost provider and
differentiation strategies that:
 Involves giving customers more value for money by
satisfying buyer expectations on key quality/features/
performance/service attributes and beating customer
expectations on price.
 Is a powerful competitive approach with value-
conscious buyers looking for a good-to-very-good
product or service at an economical price.
 Creates a “best-cost” status as the low-cost provider
of a product or service with upscale attributes.
5-33
 Core Concept 
Best-cost provider strategies are
a hybrid of low-cost provider and
differentiation strategies that aim at
satisfying buyer expectations
on key quality/features/performance/
service attributes and beating
customer expectations on price.
5-34
Concepts and Connections 5.4
Toyota’s Best-Cost Producer Strategy for Its Lexus Line
5-35
Employing Best-Cost Strategies

Best-cost strategies are contingent on:
1. A superior value chain configuration that eliminates
or minimizes activities that do not add value
2. Unmatched efficiency in managing essential value
chain activities
3. Core competencies that allow differentiating
attributes to be incorporated at a low cost
5-36
When a Best-Cost Provider Strategy
Works Best

A best-cost provider strategy works best in
markets where:
 Product differentiation is the norm.
 The market is comprised of large numbers of value-
conscious buyers attracted to economically priced
midrange products and services, especially during
recessionary times.
 A provider can offer either a medium-quality product
at a below-average price or a high-quality product at
an average or slightly higher-than-average price.
5-37
The Danger of an Unsound
Best-Cost Provider Strategy

Vulnerability to both low-cost providers and
high-end differentiators in not having the
requisite core competencies and
efficiencies in managing value chain
activities to offer significantly differentiating
product attributes or features at attractive
lower prices without significantly increasing
costs.
5-38
Successful Competitive Strategies
Are Resource Based

Low-Cost Providers
 Must have the resources and capabilities to keep
costs below those of competitors
 Must have expertise to cost-effectively manage value
chain activities better than rivals

Differentiators
 Must have the resources and capabilities to
incorporate unique attributes that a broad range of
buyers will find appealing and worth paying for
5-39
Successful Competitive Strategies
Are Resource Based (cont’d)

Narrow Segment Focusers
 Must have the capability to do an outstanding job of
satisfying the needs and expectations of niche buyers

Best-Cost Providers
 Must have the resources and capabilities to
incorporate upscale product or service attributes at a
lower cost than rivals
5-40
Perils of a “Stuck in the Middle” Strategy

Compromise strategies can result in middleof-the-pack industry rankings and, at best,
average performance due to:
 An average cost structure
 Minimal product differentiation relative to rivals
 An average image and reputation
 Limited prospect of industry leadership

Compromise or middle-ground strategies
rarely produce sustainable competitive
advantage
5-41