Competitive StrategyCompetitive Strategy

Low-Cost & DifferentiationLow-Cost & Differentiation

The Five GenericThe Five GenericCompetitive StrategiesCompetitive Strategies

Ma

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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

A Low-Cost Leadership A Low-Cost Leadership StrategyStrategy

Open up a sustainable cost advantage Open up a sustainable cost advantage over rivals, using lower-cost edge as a over rivals, using lower-cost edge as a basis either tobasis either to Under-price rivals Under-price rivals andand reap market share reap market share

gains gains OROR Earn higher profit margin selling at going Earn higher profit margin selling at going

priceprice

Objective

Approaches to SecuringApproaches to Securinga Cost Advantagea Cost Advantage

Do a better job than rivals of Do a better job than rivals of

performing value chain activities performing value chain activities

efficiently and cost effectively efficiently and cost effectively

Approach 1

Revamp value chain to bypass

some cost-producing activities

Approach 2 Control costs!

By-pass costs!

Characteristics of aCharacteristics of aLow-Cost ProviderLow-Cost Provider

Cost conscious corporate cultureCost conscious corporate culture Employee participation in cost-control effortsEmployee participation in cost-control efforts Ongoing efforts to benchmark costsOngoing efforts to benchmark costs Intensive scrutiny of budget requestsIntensive scrutiny of budget requests Programs promoting continuous cost improvementPrograms promoting continuous cost improvement

Low-cost producers championFRUGALITY while aggressivelyINVESTING in cost-saving improvements!

Successful low-cost producers championfrugality but wisely and aggressively

invest in cost-saving improvements !

The Competitive Strengths of The Competitive Strengths of Low-Cost LeadershipLow-Cost Leadership

Better positioned than Better positioned than RIVAL COMPETITORS RIVAL COMPETITORS to compete to compete offensively on basis of priceoffensively on basis of price

Low-cost provides some protection from bargaining Low-cost provides some protection from bargaining leverage of powerful leverage of powerful BUYERSBUYERS

Low-cost provides some protection from bargaining Low-cost provides some protection from bargaining leverage of powerful leverage of powerful SUPPLIERSSUPPLIERS

Low-cost provider’s pricing power acts as a significant Low-cost provider’s pricing power acts as a significant barrier for barrier for POTENTIAL ENTRANTS POTENTIAL ENTRANTS

Low cost puts a company in position to use low price as a Low cost puts a company in position to use low price as a defense against defense against SUBSTITUTESSUBSTITUTES

Pitfalls of Low-Cost StrategiesPitfalls of Low-Cost Strategies Being overly aggressive in cutting price (revenue erosion Being overly aggressive in cutting price (revenue erosion

of lower price is not offset by gains in sales volume--of lower price is not offset by gains in sales volume--profits go down,not up)profits go down,not up)

Low cost methods are easily imitated by rivalsLow cost methods are easily imitated by rivals Becoming too fixated on reducing costsBecoming too fixated on reducing costs

and ignoringand ignoring Buyer interest in additional featuresBuyer interest in additional features Declining buyer sensitivity to priceDeclining buyer sensitivity to price Changes in how the product is usedChanges in how the product is used

Technological breakthroughs open up cost reductions for Technological breakthroughs open up cost reductions for rivalsrivals

Differentiation StrategiesDifferentiation Strategies

Incorporate differentiating features that cause buyers to prefer Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivalsfirm’s product or service over the brands of rivals

Find ways to differentiate that Find ways to differentiate that CREATE VALUECREATE VALUE for buyers for buyers andand that are that are NOT EASILY MATCHED NOT EASILY MATCHED oror CHEAPLY CHEAPLY COPIEDCOPIED by rivalsby rivals

Not spending more to achieve differentiation than the price Not spending more to achieve differentiation than the price premium that can be chargedpremium that can be charged

Keys to Success

Objective

The Appeal of Differentiation The Appeal of Differentiation StrategiesStrategies

A powerful competitive approach when A powerful competitive approach when uniqueness uniqueness can be achieved in ways thatcan be achieved in ways that Buyers perceive as Buyers perceive as valuablevaluable Rivals find Rivals find hard to match or copyhard to match or copy Can be incorporated Can be incorporated

at a at a cost well below cost well below thethe price premium price premium that buyers will paythat buyers will pay

Which hat is unique?

The Benefits of Successful The Benefits of Successful DifferentiationDifferentiation

A product / service with unique and

appealing attributes allows a firm to

Command a premium price and/or

Increase unit sales and/or

Build brand loyalty

= Competitive Advantage

Sustaining Differentiation: The Sustaining Differentiation: The Key to Competitive AdvantageKey to Competitive Advantage

Most appealing approaches to differentiation:Most appealing approaches to differentiation: Those hardest for rivals to match or imitateThose hardest for rivals to match or imitate Those buyers will find most appealingThose buyers will find most appealing

Types of Differentiation: Types of Differentiation: Quality – Design is the same but betterQuality – Design is the same but better Design - Technical differencesDesign - Technical differences Service – additional customer servicesService – additional customer services Image – Brand nameImage – Brand name

The Competitive Strengths of a The Competitive Strengths of a

Differentiation StrategyDifferentiation Strategy Buyers develop loyalty to brand they like best--can Buyers develop loyalty to brand they like best--can

beat beat RIVAL COMPETITORSRIVAL COMPETITORS in the marketplace in the marketplace Mitigates bargaining power of large Mitigates bargaining power of large BUYERSBUYERS

since other products are less attractivesince other products are less attractive Buyer loyalty acts as a barrier to Buyer loyalty acts as a barrier to POTENTIAL POTENTIAL

ENTRANTS ENTRANTS Differentiation puts a seller in better position to Differentiation puts a seller in better position to

fend off threats of fend off threats of SUBSTITUTESSUBSTITUTES not having not having comparable featurescomparable features

What Can Make aWhat Can Make aDifferentiation Strategy FailDifferentiation Strategy Fail

Trying to differentiate on a feature buyers do not Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their perceive as lowering their cost or enhancing their well-beingwell-being

Over-differentiating such that product Over-differentiating such that product features exceed buyers’ needsfeatures exceed buyers’ needs

Charging a price premium thatCharging a price premium that buyers perceive is too high buyers perceive is too high

Failing to signal valueFailing to signal value Not understanding what buyers want or prefer and Not understanding what buyers want or prefer and

differentiating on the “wrong” thingsdifferentiating on the “wrong” things

Best Cost Provider StrategiesBest Cost Provider Strategies

Combine a strategic emphasis on Combine a strategic emphasis on low-costlow-cost with a strategic with a strategic emphasis on emphasis on differentiationdifferentiation Make an upscale product at a lower costMake an upscale product at a lower cost Give customers more value for the moneyGive customers more value for the money

Create superior value by Create superior value by MEETING OR EXCEEDINGMEETING OR EXCEEDING buyer buyer expectations on product attributes and expectations on product attributes and BEATINGBEATING their price their price expectationsexpectations

Be the low-cost producer of a product with Be the low-cost producer of a product with GOOD-TO-GOOD-TO-EXCELLENTEXCELLENT product attributes, then use cost advantage to product attributes, then use cost advantage to UNDERPRICEUNDERPRICE comparable brandscomparable brands

Objectives