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© The McGraw-Hill Companies, Inc., 1998
Irwin/McGraw-Hill
1
STRATEGY AND AND COMPETITIVE COMPETITIVE ADVANTAGEADVANTAGE
CHAPTER 5
Screen graphics created by:Jana F. Kuzmicki, PhD, Indiana University Southeast
© The McGraw-Hill Companies, Inc., 1998
Irwin/McGraw-Hill
2
Chapter Outline
Generic Competitive Strategies Low-Cost Leadership Strategy Broad Differentiation Strategies Best-Cost Provider Strategies Focused Low-Cost Strategies Focused Differentiation Strategies
Vertical Integration Strategies Cooperative Strategies Offensive and Defensive Strategies First-Mover Advantages and Disadvantages
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Strategy and Competitive Advantage
COMPETITIVE ADVANTAGE exists when a firm’s strategy gives it an edge in Defending against competitive forces and Securing customers
Convince customers firm’s product / service offers SUPERIOR VALUE Offer buyers a good product at a lower price Use differentiation to provide a better product
buyers think is worth a premium price
Key to Success
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What Is Competitive Strategy?
Consists of business approaches to Attract customers, fulfilling their expectations Withstand competitive pressures Strengthen market position
Includes offensive and defensive moves to Counter actions of key rivals Shift resources to improve long-term market
position Respond to prevailing market conditions
Narrower in scope than business strategy
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Objectives of Competitive Strategy
Build a COMPETITIVE ADVANTAGE
Cultivate clientele of LOYAL CUSTOMERS
Knock the socks off rivals, ethically and honorably
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The Five GenericCompetitive Strategies
Ma
rke
t T
arg
et
Type of Advantage Sought
Overall Low-CostLeadership
Strategy
BroadDifferentiation
Strategy
FocusedLow-CostStrategy
FocusedDifferentiation
Strategy
Best-CostProviderStrategy
Lower Cost Differentiation
Broad Range of Buyers
Narrow Buyer
Segmentor Niche
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A Low-Cost Leadership Strategy
Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to Under-price rivals and reap market
share gains OR Earn higher profit margin selling at
going price
Objective
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Approach 1: Controlling the Cost Drivers
Capture scale economies; avoid scale diseconomies
Capture learning and experience curve effects
Manage costs of key resource inputs
Consider linkages with other activities in value chain
Find sharing opportunities with other business units
Compare vertical integration vs. outsourcing
Assess first-mover advantages vs. disadvantages
Control percentage of capacity utilization
Make prudent strategic choices related to operations
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Approach 2: Revamping the Value Chain
Simplify product design Offer basic, no-frills product/service Shift to a simpler, less capital-intensive, or more
streamlined technological process Find ways to bypass use of high-cost raw materials Use direct-to-end user sales/marketing approaches Relocate facilities closer to suppliers or customers Reengineer core business processes---be creative
in finding ways to eliminate value chain activities Use PC technology to delete works steps, modify
processes, cut out cost-producing activities
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Differentiation Strategies
Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals
Find ways to differentiate that CREATE VALUE for buyers and that are NOT EASILY MATCHED or CHEAPLY COPIED by rivals
Not spending more to achieve differentiation than the price premium that can be charged
Keys to Success
Objective
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Sustaining Differentiation: The Key to Competitive Advantage
Most appealing approaches to differentiation: Those hardest for rivals to match or imitate Those buyers will find most appealing
Best choices for gaining a longer-lasting, more profitable competitive edge: New product innovation Technical superiority Product quality and reliability Comprehensive customer service
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Where to Find Differentiation Opportunities in the Value Chain
Purchasing and procurement activities Product R&D activities Production R&D; technology-related activities Manufacturing activities Outbound logistics and distribution activities Marketing, sales, and customer service
activities
InternallyPerformedActivities, Costs, &Margins
Activities, Costs, &
Margins ofSuppliers
Buyer/UserValue
Chains
Activities, Costs,& Margins of
Forward ChannelAllies &
Strategic Partners
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Signaling Value as Well as Delivering Value
Buyers seldom pay for value that is not perceived
Signals of value may be as important as actual value when Nature of differentiation is hard to
quantify Buyers are making first-time
purchases Repurchase is infrequent Buyers are unsophisticated
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Best Cost Provider Strategies
Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation Make an upscale product at a lower cost Give customers more value for the money
Create superior value by MEETING OR EXCEEDING buyer expectations on product attributes and BEATING their price expectations
Be the low-cost producer of a product with GOOD-TO-EXCELLENT product attributes, then use cost advantage to UNDERPRICE comparable brands
Objectives
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What Makes a NicheAttractive for Focusing?
Big enough to be profitable Good growth potential Not crucial to success of major competitors
(making it unlikely they will compete hard in niche)
Focuser has resources to effectively serve segment
Focuser can defend against challengers via superior ability to serve buyers in segment and customer goodwill
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The Competitive Strength ofFocus / Niche Strategies
RIVAL COMPETITORS do not have matching capabilities to meet specialized needs of niche members
Focuser’s competencies/capabilities act as a barrier to POTENTIAL ENTRANTS
Focuser’s competencies/capabilities pose obstacle to sellers of SUBSTITUTES
Focuser’s unique ability to meet niche buyers’ needs can blunt bargaining leverage of powerful BUYERS
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Vertical Integration Strategies
Vertical integration extends a firm’s competitive scope within same industry Backward into sources of supply Forward toward end-users of final
product Can aim at either full or partial integration
InternallyPerformedActivities, Costs, &Margins
Activities, Costs, &
Margins ofSuppliers
Buyer/UserValue
Chains
Activities, Costs,& Margins of
Forward ChannelAllies &
Strategic Partners
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Unbundling andOutsourcing Strategies
Involves not performing certain value chain activities internally and relying on
outside vendors to perform needed activities and services
Concept
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Pros and Cons of Vertical Integration
The appeal of a vertical integration strategy depends on Its ability to enhance performance of
strategy-critical activities by Lowering costs or Increasing differentiation
Its impact on Resource requirements Flexibility and response times Administrative overhead of coordination
Its ability to create a competitive advantage
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Cooperative Strategies
Companies sometimes use strategic alliances or strategic partnerships or collaborative
agreements to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-to-company dealings but fall short of
merger or formal joint venture
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The Building and Eroding of Competitive Advantage
Siz
e o
f C
om
pet
itiv
e A
dva
nta
ge
Time
Benefit Period Erosion PeriodBuildup Period
StrategicMovesProduceCompetitiveAdvantage
Moves byRivalsReduceCompetitiveAdvantage
Size ofCompetitiveAdvantageAchieved
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Attacking Competitor Strengths
Appeal Gain market share by
out-matching strengths of weaker rivals
Whittle away at a rival’s competitive advantage
Challenging strong competitors with a lower price is foolhardy unless the aggressor has a COST
ADVANTAGE or advantage of GREATER FINANCIAL STRENGTH!
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Options for Attackinga Competitor’s Strengths
Offer equally good product at a lower price
Offer a better product at the same price
Leapfrog into next-generation technologies
Add appealing new features
Run comparison ads
Construct new plant capacity
Offer a wider product line
Develop better customer service capabilities
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Attacking Competitor Weaknesses
Basic ApproachConcentrate company strengths and resources
directly against a rival’s weaknesses
Weaknesses to Attack Geographic regions where rival is weak Segments rival is neglecting Go after those customers a rival
is least equipped to serve Rivals with weaker marketing skills Introduce new models exploiting gaps in rivals’
product lines
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Preemptive Strikes
Approach
Involves moving first to secure an advantageous
position that rivals
are foreclosed or discouraged
from duplicating!
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Preemptive Strike Options
Expand capacity ahead of demand in hopes of discouraging rivals from following suit
Tie up best or cheapest sources of essential raw materials
Move to secure best geographic locations Obtain business of prestigious customers Build an image in buyers’ minds that is unique &
hard to copy Secure exclusive or dominant access to best
distributors Acquire desirable, but struggling, competitor
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Choosing Whom to Attack
Four types of firms can be the target of an offensive: Market leaders Runner-up firms Struggling rivals on verge
of going under Small local or regional
firms not doing a good jobfor their customers
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Offensive Strategy andCompetitive Advantage
STRATEGIC OFFENSIVE options offering strongest basis for COMPETITIVE ADVANTAGE Develop lower-cost product design Make changes in production operations that
lower costs or enhance differentiation Develop product features that deliver superior
performance or lower users’ costs Give more responsive customer service Escalate marketing effort Pioneer new distribution channel Sell direct to end-users
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Offensive Strategy Principle
The chances for a successful offensive initiative are improved when it is based on a company’s resource strengths and strongest competencies and capabilities.
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Defensive Strategy
Objectives Fortify firm’s present position Help sustain any competitive advantage
held Lessen risk of being attacked Blunt impact of any attack that occurs Influence challengers to aim attacks at
other rivals
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Defensive Strategies: Approaches
Approach 1
Block avenues challengers can take in mounting offensive attacks
Approach 2
Make it clear any challenge will
be met with strong counterattack
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