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The Five

Generic

Com

petitive

Strategies

Chapter Learnlng Obiectives

LOl.

Gain

an understanding

of how

each

of the five

generic

competitive

strategies

go

about

buitding competitive

advantage

and

delivering

suoerior value

to

customers.

LO2. Recognize

why some

of the

five

generic

strategies

work better

in

certain

kinds of industry and competitive

conditions

than in others.

LO3.

Learn

the

maior avenues for achieving a

competltive advantage

based

on

lower costs,

LO4. Learn the

major avenues

for

developing

a

competitive

advantage

based

on

differentiating a

company's

product

or

service

offering

from

the offerings of rivals.



Chapter

5 The

F¡ve Generic

Competitive

Strategies

The¡e are several

basic approaches to competing successfully

and gaining

a

competitive

advantage, but

they all involvc giving buyers

r'r'ha

t they

per-

ceive

as

superior

value compared

to thc offcrings of

rival

sellers. Superior

value

can

mean offering

a good product at a lorver price,

a

superior pr<ld-

uct that

is worth paying more

for,

or

a

best-value

offering

that represents

an

attractivc combination of price,

features,

quality,

service, and other

appealing

attributes.

This chapter describes the five basic competitiue

strate¡ /

options

for

building

competitive

advantage and delivering superior

value

to

customers-\4'hich

of

the

five to employ

is a

company's

first and

foremost

choice

in crafting an over-

all strategy

and

beginnir.rg

its quest for

competitive

advantage.

Competitive

Strategies

and

Industry Positioning

A

company's

cornpetitive strategy deals exclusiaely

zuith the specifics of mnnage-

nrent's

gnnrc

plnn for

competing

*ccessfully-its

specific

efforts

Lo

please

custonters,

its

offensiue nntl

defensiae nnaes to counter

the

nnneuuers

of

riuals,

its responses to tuhoteaer

market

cottditions

preaail

A competitive

strategy

concerns

the

specifrcs

nt

tlrc

ntoment,

nnd

its opproach f.o securing

a

competitiae

of

managemenfs

game

plan

for competing

ndaantnge

uis-i

uis

riaals.

There are countlcss

variations

successfully

and

securing

a competitive

in

thc competitive strategies

that

companies employ,

advantage over

rivals.

mainlv

because

each company's strategic

approach

entails custom-designed actions

to

fit

its own

circumstances

ancl industry

environment.

The

custom-tailored

nature

of

each company's strategy

is

also

the

result

of

management's

efforts to

uniquely position the company

in

its

inciustrv

Companies

are

much more

likely

to achieve competitive

advantagc

and earn above-average

profits

if

they

are

ablc

to

find

a

unique way

of

deliver-

ing

superior

value

to

customers.

For example, the

iPod's attractive styling,

easy-to-use

controls, attcntion-grabbing

ads,

and extensive collection of music

available

at Apple's iTunes Store has

given

Apple a competitive

advantage

in

the

digital music plaver industry. Microsoft

has

attempted to

imitate Apple's

competitive strategv

rvith

its

introduction

of

its Zune music player and musíc

store,

but

Microsoft

has

fared no better in its attack

on the

iPod

than any

of

the

other

makers

of

MP3 players. By choosing

a

unique approach

to

providing

value

to customcrs,

Apple

has

achieved

an

enduring brand loyalty that

makes

it difficult

for

others

to

triumph

by merely copying its strate¡;ic approach.

"Me

too"

strategies can

rarely

be expected

to deliver

competitive

advantage and

stellar performance

unless

the

imitator

possesses

resources or competencies

that ailow

it

to

provide greater

value

to customers than

that

offered

by

firms

with

similar strategic

approaches.

Competitive

strategies that

provide distinctive industry positioning

and

competitive advantagc

in

thc

marketplace

involve

choosing between

(1)

a

market target that is either broad

or

narrow, and

(2)

n'hether the company

should pursue a competitive advantage

linked to low costs or product

dif-

ferentiation. Figr-rre

5.1

presents five proven competitive strategies

keyecl

to

I

] ,.

il

í,

il

E

1l



Irl(]UIlli ¡l.l rhe

Source:

This is

an

author-

expanded

vers on

of ¿

3.strategy

(lass¡tication

d¡srussed

in

lMichael

E PofteL

Competit¡ve

Slro¿egy

(New

York:

Free

Press,

1980),

pp

35-4o

Part One: Section C: Crafting

a

Strategy

five

Generic

Competitiye Strategies

Presence

in

a

Broad

Range

of

Market

Segments

Presence in

a

Limited Number of

Market

Segments

Value Creation Keyed to

0ifferentiating Features

Type of Competitive Advantage Pursued

industry

positioning.r

Thc

gcncral approach to competing and

operating

the

business is notably different for each of the five

competitive

stratcgics.

The

five generic

strategies

are:

|. A lozu-cost

prouider slrnfr:gy-stnving

to achieve lolr-er

overall

costs

than

rivals and appealing

to a

broad spectrum of

customers,

Lrslrally by

r-rnder-

pricing

rír'als.

2. A brond tliffere

nt int ion

sf rnfe,qy-seeking to

differentiate

the company's

prociuct or service from

rivals'in

ways that

rviil

appeal to a broad spec-

trum

of buyers.

3.

Afttcuscd loto-cost

sf

rnf

ecr/-concentrating on

a narrow

buyer segment

(or

market

niche)

and

or-rtcompeting

rivals by having iower

costs

than rivais

and thus being able to

serve

niche members at a lower

prrice.

L

Afocrtsetl differentiation

sf

rn

f

e.gy-concentra tin í on a narrow buver segment

(or

market niche)

and outcompetin¡; rivals by offering niche members

custornizecl attributes that meet their

tastes

and

reouirements

better than

rivals'

products.

3.

A best-cost

prottitler

strntegV

giving

customers

more value for the

money

by satisfvin¡; buyers' expectations on key quaiity

/

featrres

/

Performance

/

service

attributes rvhile beating their price

expectations.

This

option is

a

hybrid

strategy that blencls elements of low-cost provicler

and

dífferentiation strategies;

the

aim is

to

have the lowest

(best)

costs

and prices among

sellers

offering products rvith

comparable

differentiat-

ing attribu tes.

'

This

classification scheme is an

adaptation of

a

narrower

three-strategy classiflcation

presented

in Michael

E.

PotteL

Competitive

Strategy:

Techniques

far

Analyzing lndustr¡es

ond Compet¡tors

(New

York:

Free

Press, 1980), Chapter

z,

especially

pp.

35 40

and

44

46.

For

a d¡scussion

of

the

d¡fferent ways

that

companies can

position

themselves

in

the marketplace, see Michael

E. Porter,

"What

ls

Strategy?"

Harvord

Business Review

74,

no.

6

(Novem

ber-Decem ber

1996),

pp.

65

67.

(,

c¡

(u

o

.)

Il'

E

Vatue

Creation

Keyed

to

Lower

Cost



Chapter 5

The Five Generic

Competitive

Strateg¡es

Each of these

five generic

competitive

approaches stakes

out a

different

market

position.

The

follo'lr,.ing scctions explore

the ins and outs

of

the five

generic competitive

strategies

and

how they differ.

Low-Cost

Provider

Strategies

Striving to

be

the indust4r's overall

Low-cost

provider is a powerful

com-

petitive

approach

in

markets

with many price-sensitivc

buyers.

A company

achieves

low-cost

Ieadership

u'hen it becomes

the

industry's

lowest-cttst pro-

vider

rather than

just

being one of

perhaps

scrreral

comPetitors

with low costs.

Successf

ul

low-cost providers

boast

mcaningfully krn'er costs than

rivals-but

not necessarily

the

absolutcly

lorvest possible cost. In striving

for

a cost

advan-

tage

over

rivals, managers

must take care to

include features and

services

that

buyers consider

esscn

tial-a

prodtLct offerittg

thnt is too

fr

ills-ft'ee con

lte

aierued by

cotlsuners

ns offering little ulue

e'oen

if it

is priced

lozuer than contpeting

products.

A

company

has

trvo options

for transiating

a lou-cost

advantage ovcr

rivals

into attractive profit

performance. Option

1 is

to

usc

thc

lon'er-cost edge to

underprice

competitors

and attract

price-sensítive

buyers

in

great

enough

numbers to

increase total profits. Option

2 is to maintain the present

price,

be

content

with the present

markct

share,

and use the lower-cost edge

to earn

a

higher

profit margin

on

each

unit

so1d,

thereby raising the

firm's

total

profits

and

overall

return on

investment.

Achieving

Low-Cost

Leadership

A low-cost

edge

over

rír'als

is

best

accomplished

in two

r,r'ays:

(l)

performing

essential

value chain

activities

more

cost-cffcctively

than

rivals

and

(2)

revamp-

ing

the

firm's overall

valuc

chain

to

eliminate

or bypass

some

cost-Producing

activities

altogcthcr.2

Southwest

Airlines

has

reconfigured

the

traditional

"'alue

chain

of

commercial

airlines

to

lower

costs

and thereby

offer

dramaticallv

lower

fares

to

passengers.

South-

Success

in

achieving a

lowcost

edge

over rivals

west does

not

offer

in-flight

meals, assigned

seating,

comes

from

outmanaging

nvals

rn

performing

baggage transfer to connecting

airlines,

or

first-class

essential

activities

and eliminating

or curbing

seating

and service,

thereby eliminating

all thc cost- 'nonessential"

activities.

producing activities

associated

with

these

feafures.

The

company's

superior

performance of

essential activities

also contributes

to

its

cost

advantagc

in

the

airline industry. Its

mastery of

fast

turnarounds

at

thc

gatcs

(about

25

minutes versus

45 minutes

for rivals)

allows

its plancs

to fly

more hours per day.

This translates

into

being

able to schedule

more

flights

per day

with

fewer

aircraft,

allowing

Southrt'est to

generate

more

re\¡enue

per

plane on

average than

ri"'als.

For

a

company

to do a

more cost-efficient

job

of

managing

its value

chain

than

rivals, managers

must

launch a concerted,

ongoing effort

to

ferret out

cost-saving

opportunities

in every part of

the value chain.

No

activity

can

escape cost-saving

scrutiny and all

avenues

for performing

value chain

activi-

ties at a low,er cost than

rivals have

to be explored-

Normallv,

low-cost pro-

ducers work diligently

to

create

cost-conscious

corPorate

cultures

that feature

'

furchael E. Porter, Competitive

Advontoge

(New

York:

Free

Press, 198),

p.

97.



Part

One: Section C:

Craftlng

a

Strategy

broad

employee

participation

in

contiruous

cost

improvement

efforts and

Iimited

perks and frills

for

executives. They strive to operate r+'ith

exception-

ally

small corporate

staffs

to

keep administrative

costs to a minimum. Many

succcssful lor{'-cost leaders

also use

benchmarking to

keep close tabs on how

their

costs

comparc

with

rivals and firms

performing

comparable

activities in

other industries.

But

while

low-cost

pror.iders

are

champions

of frugality,

they

usually

don't

scrimp on investing in resources that

promisc

to drive

costs out

of

the

busi-

ness.

Walmart,

one of the foremost practitioners

of

low-cost

leadership,

has

invested in

sta

te-of-the-art

technology throughout its

operations-its

distribu-

tion facilities

are an aLltomated

showcase, it uses online

systems to

order goods

from

suppliers and manage inventories,

it

equips its stores with cutting-edgc

sales-tracking and checkout

systems, and

it

sends dailv

point-of-sale

data to

4,000 vendors. Walmart's information

and

communications

systems

and

capa-

bilities

are

more sophisticated than thosc

of

virtually

any other retail

chain

in

the

world.

Concepts & Corurections

5.1

describes

Walmart's broad

approach

to managing

its

value

chain

in

the retail

grocery

portion

of

its

business to

achieve

a

dramatic

cost

advantage

over

rival

supermarket

chains and

become

the world's

biggest grocery retailer.

Market Conditions

Favoring

a

Low-Cost

Provider

Strategy

A

competitive

strategy preclicated on low-cost leadership

is particularly

pow-

erful

when:

"1.

Price

competition

among riaal

sellers is

especinlly

aigorous-Low-cost

provid-

ers are in the

best

position to

compete

offensively on

the

basis

of

price

and to survive

price

wars.

2.

The

¡trodttcts of

rianl

sellers are

essentially identical

and

are

rendily

auailable

from

seaeral sel/ers-Commoditylike

products

and/or ample supplies

set

the

stage

for

livcly

ptice

competition; in

such

markets,

it is

the less effi-

cient, higher-cost

companics that

are

most

vulnerable.

3.

Tlrcre

nre

ferl

ways to achieue

product dilferentiation

that

hape

pahte

to

but¡ers-

When thc

product

or service differences

between

brands do not matter

much

to buyers, buyers ncarly

alr+'ays

shop

the

market for

the best price.

4.

Buyers inatr

loio

costs

in sutitching

their

purchnses

from

one seller to another

Low switching

costs

give

buyers the flexibility

to

shift purchases to lowe¡-

priced sellers having

cqually good

products. A iow-cost

leader

is

well

positioned

to

use

lon'price

to

induce its customers

not

to

switch

to

r.ival

brands.

5.

The majority

of

industry

snles

are

made to a

feu,

large

aolume

buyers-Low-cost

providers

are

in

the best position

among

sellers

in bargainin¡;

with high-

volume buyers

because

they are

able to beat

rivals'

pricing

to land

a high

volume

sale

while maintaining

an

acceptable

profit margin.

6.

lndustry

neTucomers

use

introcluctory

low

¡trices

to

attrnct buyers nntl

build a

customer

base-The low-cost

lcader

can use

price

cuts of

its

own to make it

harder

fo¡

a new rival

to

wln

cusromers.



Chapter

5

The

Five

Gencr

c

Cornpetitive

Strategies

HOW WALMART

MANAGED ITS VALUE

CHAIN

TO ACHIEVE

A LOW-COST

ADVANTAGE

OVER

RIVAL SUPERMARKET

CHAINS

Walmart

has

achieved

a

very

substantiaL

cost and

pr¡cing

advantage

over

rival supermark€t

chains

by both

revamp'

ing

portions

of the

grocery

reta¡ling value chain

and by

outmanaging

its

rivals

¡n

efflciently

performing

various

value

chain act¡vities.

lts cost advantage

stems from a

series

of

initiatives

and

pract¡ces:

.

Instituting extensive

information sharing

with

vendors

vla online systems

that

relay sates

at

its

checkout

counters

directLy to

suppliers of

the

items,

thereby

providlng

suppLiers

with

real-time

informa

tion

on customer demand

and

preferences

(creating

an est¡mated 6 percent cost

advantage).

.

Pursuing

gLobal

procurement

of some

items and

cen-

traliz¡ng

most

purchasing

activ¡ties so

as to leverage

the

company's buying

power

(creating

an

estimated

2.5

pefcenl

(ost

d

dvan

lage

).

.

Jnvesting

in state-of'the art automation

at

its

d¡s-

lribution

centers,

efficiently

operating a

truck

fleet

that

makes

daily deliveries to

Walmart's

stores,

and

putt¡ng

assorted

other

cost-saving

practices

into

ptace

at

¡ts headquarters, distribution

centers,

and

5tores

(resulting in

an est¡mated ¿

percent

cost

advantage).

.

Striving

to

optimize

the

product mix and

achieve

greater

sales

turnover

(result¡ng

ln about a 2

percent

cost

advantage).

.

Instal[ing

secur¡ty systems

and store

operat¡ng

pro-

cedures that

lower shrinkage

rates

(producing

a

cost

advantage of about o.5

percent).

.

Negotiating

preferred

real

estate rental and

leasing

rates

wlth real

estate

devetopers

and owners

of

its

store

sites

(yietding

a cost advantage

of 2

percent).

.

f\4anag¡ng

and compensating its workforce

¡n

a

man'

ner

that

produces

Lower

labor

costs

(yieldlng

an esti-

mated 5

percent

cost

advantage)

ALtogethet these

value chain

initiatives

give

Watmart

an

approximately

22

percent

cost

advantage

over

Kroger,

Safeway,

and

other

leading supermarket

chains.

With

such a sizable

cost advantage,

WaLmart has been

able

to underprice

its

rivals

and

become

the world's

leading

supermarket

retaiLer

in

little

more

than a

decade.

Source

Devetoped

by the authors

from information at

www.walmart.com and

in

lvlarco

lansiti

and

Roy Levien,

"Strategy

as

Ecology,"

HaNod

Business

Rev¡ew

82,

no.

3

(lMarch

zoo4),

p.

7o.

As

a

rulc, the tnore price-sensitive

Lttryers

are,

the

more

apPcalillt

a

lor'v-cost

strategv

becomes.

A lor,v-cost

comPany's

ability

to sct

the

industry's price

floor

ancl

still earn.r

¡rrofit

el'ects

Protective

barricrs

around its

m.lrket

Posrtiorl.

The

Hazards of a

Low-Cost Provider

Strategy

Pcrhaps the biggest pitfall of

a

lon'-cost

¡rrovider

stratc'gv

is

getting

carr-iec1

arvav n,ith

o¡rcr/, r,g,g/'essi¿v

Ljr¡cc

cltttútii

and ending

up

n'ith lovver;

rather

than

higher,

prof itabiltt\,-.

A

lou'-cost /

lort'-price

advantage results

jrl

sr-Lperior

frrof-

itabilit¡r only

if

(1)

prices

are

cut by

lcss than

the

size of

the cost

¿111\¡antage

oI

(2)

the added

volume

is largc cnough

kr

bring

in ¿r

Lrigger

total profit

despitc

lorver margins per

unit sold.

Thr.rs, a c()mP¡lrlv

lvith a 5

Percent

cost

advantage

cannot

cut priccs

20 percent, etrcl

rt¡'r lvith

.r voltttne gain

of only

l0

percent,

and still expect to earn

higher profits

A

second

big

pitfall

is

rclr1itlt

()tt

tltt nltprotch

to

rtrlucc cttsts

tlutt cnn ltt

msilll

co¡tied

bry

ri¡r¿zls

The vahte

of

a cc¡st

advautage depends

on

rts

sustainabil

ity.

Sustainabilitri

in tr-rrn,

hinges

on

rvhether

the company

achieves

its

cost

advantage

in

r'vays

difficult for rir'¿ls to

reprlicate

or

r-natch

lf

riv'rls find it



Part

One:

Section

C: Crafting

a

Strategy

relatively

easy or

inexpensive

to imitate

the leade¡'s

lor,v-cost

methods, then

the leader's

advantage

rvill

be

too shorflived

to

yield a valuable

edge in the

rnarketplace.

A

tlrird pitfall

is

becomin¡;

too

fixnted

on cost reductioil.

Lorv

costs

cannot be

pursued

so

zealously

that

a firm's offering

cnds up being

too

features-poor

to gain the interests

of buyers. Furthermore,

a company

driving hard

to push

its

costs

down

has

to guard

against

misreading

or ignoring

increased

buyer

preferences

for

addcd

features

or

declining

br-ryer price

sensitivity. Evcn

if

these

mistakes

are

avoidcd,

a Low-cost

competitive

approach

stiLl carries risk.

Cost-saving

technological brcakthroughs

or

process

improvements

can nullify

a

low-cost

leader's

hard-won

Dosition.

Broad

Differentiation

Strategies

Differentiation

strategies are attractive

whenever buy-

The essence

of

a broad d¡fferentiat¡on

strategy

ers' needs

ancl

preferences

are too

diverse

to

be

fully

is to be unique in ways

that

are valuable

to

a

satisficd by

a

standarclized

product or

service.

A

com_

wide range

of

customers

pany

attempting

to

succeed

through

cliffe¡entiation

rcarnwhatr,.,ye,str.i,,ilü's';iiiJ"::Til;,ii"#,:i*ff

[ffi

;l'ix?li:

the company

must include

these

desirable

features

to clearly set itsclf

apart

from

rivals lacking

such product

or service

attributes.

Successful

differentiation

allows a firm

to:

o

Command

a premium

price,

and/or

'

Increase unit

sales

(because

additional

buyers

are \1,on over

bv the

diffcr-

entiating featurcs),

and/or

.

Cain buver

lovalty

to

its

brand

(because

some

buvers

arc

strongly

attracted to

the differentiatir-rg

features

and

bond with the company

and

its products).

Differentiation

enhances

profitability r,r'henever

the

extra price the prod-

uct

commands

outl,r.eighs

the

added costs

of achieving

the

differentiation.

Company

differer-rtiation

strategies

fail when buycrs

don't value

the brand's

uniqucness

and/or

u4ren a

company's approach to

diffcrcntiation is

easily

copicd or matched

by its

rivals.

Approaches

to

Differentiation

Companies

can pursue

differentiation from

many

angles:

a

unique

taste

(Dr

Pepper,

Listerine);

multiple featurcs

(Microsoft

Windows 7, Micro-

soft

Office); w.rde

selection

and one-stop

shopping

(Horne

Depe¡, d¡¿-

zon.com);

superior

service

(FedEx);

spare

parts

availability

(Caterpiliar

guarantees

¿18-hour

spare parts delivery

to

any customer anyrvhcrc

in

the

world or

else

thc

pa

rt

is furnished

free);

engineering design and

perfor-

mance

(Mercedes,

BMW);

prestige

and

distinctrveness

(Rolex);

product

reliability

(Whirlpool

and

GE

in

large home

appliances);

qualitv

manufac-

turrng

(Michelin

in

tires, l>yota and Honda

in

automobiles);

technologi-

cal leadership

(3M

Corporation in bonding

and

coating products); a fuil



Chapter

5

The Five Generic

Competitive

Strategies

range

of

services

(Charles

Schwab

in

stock brokerage);

a complete

line of

products(Campbell'ssoups);and

toP-of-the-lineimageand

reputation

(Ralph

Lauren and

Starbucks).

The most

appealing

approaches

to differentiation

are those

that are hard or

expensive

fo¡ rivals to

duplicate.

Indeed, resourceful comPetitors

can,

in time,

clone

almost

any

product or

feature

or attribute.

If

Coca-Cola introduces

a

vitamir-r-enhanced

bottled

water,

so can

Pepsi;

if

Canon

introduces

12 megapixel camera, so

can Sony

and

Easy-tocopy

differentiating

features

cannot

Nikon;

if Research

in Motion

(the

maker of the

popular

produce

sustainable

competit¡ve advantage;

Blackberry

models) introduces e-mail

enabled

mobile

differentiation

based on

hard-to-copy competen-

phones, so can Samsung,

Apple, and

LG. As

a

rule, dif-

cies

and

capab¡lities tends

to

be more

ferentiation yields

a longer-lasting

and more

profitable

sustainable.

competitive

edge

when it

is based

on

product

irrnova-

tion,

technical

superiority,

ptoduct quality

and reliability, comprehensive

cus-

tomer service,

and

unique competitive capabilities. Such

differentiating

attributes tend

to be tough for rivals to copy or

offset

profitably and buyers

widely

perceil,e

them as having

vah-re.

Creating Value

for

Customers

through

Differentiation

While it is easy

enough

to

grasp

that

a successful

differentiation

strategy

must

offcr

value in ways unmatched by rivals,

a big issue

in

crafting

a

differentia-

tion strategy

is

deciding what

is

valuable

to customers.

Typically, r'aluc can

be

delivered to customers

i¡

four

basic

tl'ays.

7.

lnclude

product

nttributes and

user

Jeatures

that lower the buycr's

cosfs.

Com-

mercial buyers value

products that

can

reducc their

cost

of

doin¡; busi-

ness. For

example,

making a company's product

more economical

for

a

buyer

to use can be done

by reducing

the

buyer's raw

materiais ll'aste

(providing

cut-to-size components),

reducing a

buyer's inventory

require-

ments

(providing

just-in-time

deliveries),

increasing product

reliability to

lower

a

buyer's repair and maintenance

costs,

and

providing

free

techni-

cal

support. Similarly, consumers

find

value

in differentiating

featurcs

that

will

reduce their

expenses.

Rising

costs

for gasoline

prices

have

spurred

the

efforts of

motor vehicle

manufacturers

worldwide to

introduce models

with

better

fuel economy.

2.

Incorporate

features

that irnprorte

prodttct

performanc¿.3 Commercial

buyers

and consumers

alike value

higher

levels

of

performance

in many types

of

products. Product

reliability, output,

durability, convenience,

ancl ease

of

use are

aspects of

product performance

that different.iate

products

offered

to

buyers. Mobile phone

manufacturers

are

currently

in

a

race

to

improve the performance of

their products

through

the

introduction of

next-generation

phones

with

a more

appealing, trend-sctting

set

of

user

featu¡es and optrons.

3.

Incotporate

features

that

enhance

buyer satisfaction

in noneconotic or

intangible

wnr¡s. Ttlyota's Prius appeals to

environmentally

conscious

motorists who

wish

to

help

reduce global carbon

dioxide

emissions.

Bentley, Ralph

Lauren,

r

lbid.,

pp.

115-1j8.



Part

One: Section C: Crafting

a Strategy

Louís Vuitton, Tiffany,

Cartier, and Rolex have differentiation-based

competitive

advantages

linked

to buyer

desires

for

status, image, pres-

tige, upscale fashion,

superior

craftsmanship, and

the

finer

things in life.

L.L. Bean

makes its mail-order

customers feel

secure

in their purchases

by providing

an unconditional

guarantee

with no

time

limit.

4.

Delioer

aalue to customers

by exploiting

competencies and competitiae

capa-

bilities that

riaals

don't

hat¡e

or

can't afford

to match.a

Core

and/or

distinc-

tive

competencies that

are

unique in the industry

can be

used to help

set a

company apart

from its rivals.

There

are

numerous

examples of

companies that have

differentiated

themselves

on

the

basis of capabili-

ties.

Nintendo is able

to offer

Wii

owners a large

selection of fun-for-all-

ages games because

of

the

strength of its

internal

game development

operations and its extensive network

of

third-party

game developers.

Japanese

automakers

can

adapt faster to changing

consumer preferences

for

one

vehicle

style versus

anothe¡

because

they have the

capabilities

to

bring

new models

to

market faster

than American and European

automakers,

Where

to

Look

for Opportunities

to

Differentiate

Differentiation

is

not necessarily

something hatched

in

marketing and adver-

tising

departments, nor is

it

limited to quality

and

service. Differentiation

opportunities

can exist in all activities

that affect the value

of

a

product

or

service;

possibilities include

the following:

.

Sttpply chain actiz¡ities

that ultimately

spill over to affect

the

performance

or

quality

of

the

company's

end product. Starbucks gets high

ratings

on

its

coffees

partly

because

it

has

very

strict specifications

on

the

coffee

beans

purchased

from suppliers.

c

Product R€tD actiuities

that

aim at improved

product

designs

and perfor-

mance/

expanded end

uses

and

applications, mote frequent

first-to-market

victories,

added user

safety,

greater rcrycling

capabiliry or

enhanced

envi-

ronmental

protection.

.

Production

R&D

and

technology-related

actit¡ities

that permit

the

manufac-

ture

of customized products

at an

efficient

cost;

make production

meth-

ods safer

for

the

environment; or improve

product quality,

reliability,

and

appearance.

Many manufacturers

have

developed flexible rnanufacturing

systems

that

allow

different modeis

and product versions

to be

made on

the

same

assembly

line.

Being able

to

provide

buyers

with

made-to-order

products

can be

a potent

differentiating

capability.

o

Manufacturing

actiuities

that reduce

product

defects,

extend

product

life,

allow

better warranty

coverages,

or

enhance

product

appearance.

The

quality

edge

enjoyed by

lapanese

automakers

stems

partly from their

distinctive

competence in performing

assembly

line activities.

4

For

a more detailed discussion,

see George

Stalk,

Phitip

Evans, and Lawrence

E.

Schulman,

"Compet¡ng

on

Capabil¡t¡es: The New

Rules

of

Corporate

Strategy," Harvard

Bus¡ness

Rev¡ew

70,

no.

z

(March

April

992),

pp.57-ó9-



Chapter

5

The

Five Generic

Competitive

Strateg¡es

Distribution

antl shippittg

actioities

that allow

for fewer warehouse

and

on-the-shelf

stockouts,

quicker

delivery

to customers,

more accurate

order

filling, and/or

lower shipping

costs.

Marketing,

sales,

and cLtstomü

seraice

actiaities that result in superior

technical

assistance

to

buyers,

faster

maintenance and repair

services,

better credit

terms,

quicker order

processing,

or

Eireater

customer

convemence.

Perceived

Value and

the

lmportance

of Signaling

Value

The price premium

commanded

by a

differentiation strategy

reflects

the ttalue

actually

deliueretl

to

the buyer

and

the

aalue

percei-oed

by

the

buyet.

The value

of

certain

differentiating

features

is rather easy

for buyers to

detect,

but in

some

instances buyers may

have trouble

assessing

what

their

experience

with the

product n

ill

be.s

Successful

differentiators

go to

great

lengths to make buyers

knowledgeable

about

a product's

value and

incorporate signals of

value

such

as attractive

packaging, extensive

ad

campaigns,

the

quality

of

brochures and

sales

presentations,

the seller's

list of

customers, the

length of time

the

firm

has

been

in

business,

and the professionalism,

appearance,

and

personality

of

the

sellcr's

employees.

Such

signals

of

value

may be as important

as

actual

value

(1)

when the nature of differentiation

is

subjective

or

hard

to

quantify,

(2)

when buyers are making

a firsttime

purchase,

(3)

when rcpurchase

is infre-

quent,

and

(4)

when

buyers

are

unsophisticated.

Market Conditions

Favoring a

Differentiat¡on

Strategy

Dif

ferentiation strategies

tencl to

work best

in market circumstances

where:

1..

Buyer needs

and

uses

of the

product are

diaerse-Divcrse

buyer

preferences

allow

industry

rivals

to

set

themselves apart

r,r,ith

product attributes that

appeal to

particular buyers.

For

instance,

the diversity

of consumer

pref-

erences

for menu selection,

ambience,

pricing,

and customer

service

gives

restaurants

exceptionally

r¡,ide

latitude in

creating

differentiated

concepts.

Other

industries offering opportunities

for

differentiation

based upon

diverse

buyer needs and uses

include magazine

publishing,

automobile

manufacturing, footwear,

kitchen appliances,

and computers.

2. Tlrcre arc

many wflys

to

dffirentiate

the product

or

seraice

that hnzte ualue

to

buyers-lndusiries

that

allow competitors

to add

features to

product

attributes are well

suited

to differentiation

strategies.

For example,

hotel

chains

can

differentiate

on such features

as

location,

size

of room, range

of

guest

services,

in-hotel dining,

and

the

quality

and luxu¡iousness

of

beddíng and

furnishings. Similarly,

cosmetics

producers

a¡e able

to

differentiate

based upon

prestige

and

image, formulations

that

fiSht the

signs of aging,

UV light protection, exclusivity

of

retail

iocations, the

inclusion of antioxidants and

natural

ingredients, or

prohibitions

against

animal testing.

5

The

relevance of

perceived

value and signaLing is discussed

in

more

detail in Porte\

Compet¡t¡ve

Advantoge: Creoting

and Sustaining

Superior

Performonce,

(New

York: Simon

&

Schuster,

1996),

pp.88-142.



Part

One:

Section C: Crafting

a

Strategy

Fezu riunl

firms

nre

followttg

a similnr differentiation

appronch-The

besi

differentiation

approaches

involve trying to appeal

to buyers

on

the

basis

of attributes

that rivals

are

not emphasizing. A differentiator

encounters

less

head-to-head

rivalry when

it

goes

its own

separate

way

to create uniqueness

and

does

not try to

outdifferentiate rivals

on

the

vcry

same

attributes.

When many

rivals are

all claiming

"ours

tastes

better than

thcirs" or "ours

gets

your

clothes cleaner

than

theirs,"

competitors tend

to

end

up

chasing the

same buyers n'ith

very

similar

product

offerings.

Te.chnological

clnnge

is

fast-paced

and cornpetition

reaolL)es nround

rapidly

eooluing

product

features-Rapid

product innovation

and frequent

intro-

ductions

of

next-version

products heighten

buyer interest

and provide

space

for

companies

to pursue disiinct

differentiating

paths. hr video

game hardware

and

video games, golf equipment, PCs,

mobile phones,

and automobile navigation

systems, cornpetitors are locked into

an

ongoing battle to

set themselves

apart by introducing the best next-

gcncration

products-companies

that

fail

to come

up with

nen'

and

improvcd

products

and distinctive

performance features

quickly

lose

out

in the

marketolace.

The Hazards

of a Differentiation

Strategy

Differentiation

strategies

can fail for any

of

several

reasons.

A drfferentiation

strntegy

keyed to

product

or

seroice

attribules

tlffit are

easily

nnd quickly

copied is

nluoys

suspect.

Rapid imitation

means

thai no rival

achieves meaningful

dif-

fercntiation,

because whateve¡

new feature

one firm introduces that

strikes

the fancy

of buyers

is

almost imrnediately

added

by rivals. This is why a firm

must

search

out

sources

of

uniqueness that are time-consuming

or

burden-

some for rivals to match

if it

hopes

to

use

differentiation

to u.in

a sustainable

competitive

edge

over rivals.

Differentintion

strntegies cnn nlso

falter

uhen

buyers

see

little

aalue

in

the unique

attributes

of

o

cornpany's prodLtct.

Thus

even

if

a

company

sets

the attributes

of

its brand

apart from

its ¡ivals'brands,

its

strategy

can

fail

bccause

of

trying

to

diffcrcntiate

on the basis

of

something that

does

not deliver

adequate

valuc

to

buyers. Any

timc many potential

buyers

look

at a

company's differentiated

product offering and

conclude

"so

u'hat,"

the

company's differentiation

strat-

egy

.is

in

deep

trouble-buyers

will likely

decide

the product

is

not

worth

the

extra price and

sales will be

disappointingly

lonr

Otterspending on efforts to dilferentinte is

a

strotegy

flazu

thnt

can end up

erod-

ing

profitobility.

Company efforts

to

achieve diffe¡entiation

nearly

always

raise

costs.

The

trick to

profitable

differentiation is

either

to keep

the

costs

of

achiev-

ing

differentiation

below

the

price premium

the

differentiating attributcs

can

command

in the

marketplace

or to

offset thinner profit margins by

selling

enough additional

units to increase

total

profits.

If a

company goes overboard

in pursuing

costly differentiation,

it

could

be

saddled

with

unacceptably

thin

profit

margins

or even

losses.

The need to

contain differentiation

costs is rr,'hy

many

companies add

little

touches

of

diffe¡entiation

that add to

buyer satis-

faction

but

are

inexpensive

to institute.

.f.

1.



Chapter

5

The

Five

Generic

Competitive

Strategies

Other common

pitfalls and

mistakes

in

crafting

a differentiation strateBy

include:6

.

Oaerdifferentiating

so

that

product

qualitq

or seraice leaels

exceed

buvers'

needs.

Buyers

are unlikcly to

pay extra

for features and attributes that

will go

unused.

For

example,

video

game

users are

unlikely

to

purchase

game

consoles

featuring high-rcsolution

graphics

and broadband connectivity

if

they

don't

own

an

HDTV

and

subscribe

to an

Internet

service.

.

Trying

to charge

too

high a

price

Premiutn.

Even

if

buyers

view

certain extras

o¡

deluxe

features

as

"nice

to have," they may still conclude

that thc

added benefit or

luxury

is

not

worth the price differential over

that

of

lesser

differentiated

produc ts.

.

Being

timid

and not stritsing to open up meaningful

gaps

in quality

or

seraice or

performance

features

uis-it-ois

the

products

of riuals-tiny differences

between

rivals' product offerings

may not

be

visible or

important to

buyers.

A lon'-cost provider strategy

can

always

defeat a differentiation strategy

when

buyers

are

satisfied

with

a

basic

product

and

don't think "extra"

attributes

are

worth a

higher price.

Focused

(or

Market

Niche) Strategies

What sets

focused

strategies

apart

from low-cost leadership or broad differen-

tiation

strategies

is a

concentration

on

a

narrow piece of the total

market. The

targeted

segment,

or

niche, can be defined

by

geographic uniqueness or

by

special product attributes that appeal

only

to niche

members. The advaniages

of

focusing a

company's

entire competitive

effort on

a

single

market nichc

are considerable,

especiaily

for

smaller

and

medium-sized companies

that

may lack

the

breadth and

depth of

resources

to

tackle

going after

a

national

customer

base

with a

"something

for

everyone"

lineup of

models, styles, and

product selection. Communify

Coffee,

the largest family-owned specialty

coffee

retailcr in the United States,

has

a geographic focus on

the state

of

Loui-

siana

and communities

across

the

Gulf

of

Mexico. Cornmunity

holds

only

a

1.1

percent

share

of

the national coffee market,

but has recorded sales

in

excess

of

$100

million

and

has

won

a 50

percent

share

of the

coffee

business

in

the

11-state

region

where

it

is

clistributed.

Examples of firms that concentrate

on

a well-defined

market niche keyed

to

a

particular product

or buyer seg-

ment include

Animal

Planet and the History Channel

(in

cable

TV);

Googie

(in

Internet

search

engines); Porsche

(in

sports

cars);

and

Bandag

(a

specialist

in

truck tire

recapping that

promotes

its

recaps

aggressively

at

over

1,000

truck

stops). Microbreweries,

local bakeries, bed-and-breakfast

inns, and

local

owner-managed

retail boutiques

are

all

good

examples

of cntcrprises

that

have

scaled

their operatíons to

serve

narrow or

local

customer

segments.

A Focused

Low-Cost

Strategy

A focused

süategy

bascd on

low

cost

aims at securin¡; a competitive

advan-

tage

by

serving

buyers in the target market niche at

a lower cost

and

a

lower

6

Pofter, Compet¡t¡ve

Advontage,

pp.

160-162.



Part One:

Section C:

Craft¡ng

a

Strategy

prlce

than

rival

competitors. This

strategy has considerable attraction when

a

firm

can

lower costs

significantly by limiting its customer base to a well-

defined buyer

segment. The avenues

to achieving a

cost

advantage over rivals

also serwing

the targei market niche

are

the

same

as for low-cost

leadership-

outmanage

rivals in keeping

the

costs

to

a bare

minimum

and

searching

for

innovative

ways

to bypass

or

reduce nonessential

activities. The

only

real

dif-

ference

between

a

low-cost

provider

strategy and

a

focused

low-cost

strategy

is

the size of the buyer

group

to

which

a company

is

appealing.

Focused low-cost strategies are fairly

common.

Produccrs

of

private-label

goods are able

to achieve low costs in product development, marketing,

distribu-

tion,

and

advertising by

concenhating on

making

generic

items similar to name-

brand merchandise

and

selLing directly to retail

chains

wanting

a low-priced

store brand. The Perrigo

Company

has become

a

leading

manufacturer

of over-

the-counter health

care

products

with 2008

sales of

more

than

$1.8

billion

by

focusing

on producing privateJabel

brands for retailers

such as Walmart,

CVS,

Walgreens, Rite Aid,

and

Safeway.

Even

though Perrigo

doesn't

make

branded

products, a focused low-cost strategy is appropriate for

the makers

of

branded

products

as

well.

Concepts

&

Connections

5.2 describes

how Vizio's

low

costs

and focus

on big box

retailers

has allowed it to become the largest

seller of

flat

panel HDTVs

in the

United States within

six years of

its start-up.

A

Focused

Differentiation

Strategy

Focused

differentiation

strategies are keyed to

offering carefullv

dcsigned

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).

Companies like Four Sea-

sons

Hotels

and

Resorts,

Chanel, Cucci, and Louis Vuitton

employ successful

differentiation-based focuscd

strategies

targeted

at affluent

buyers

wanting

products and services with worldclass

attributes. Indeed, most

markets

con-

tain

a

buyer

segment willing to pay a

price premium

for the vcry

finest items

available,

thus

opening

the

strategic window fo¡ some competitors to

pursue

differentiation-based focused

strategies aimed

at the very top of the market

pvramid. Ferrari ma¡kets

its 1.500

cars

sold

in

North Ame¡ica

each

year

to

a

list

of

just

20,000 highly

affluent

car enthusiasts. Only the highest

echelon

of this

exclusive

group

were

contacted by Ferrari for a

chance

to

put

their

names

on

the

waiting list for

one

of

the

20

$1.1

million

FXX models planned

for

sale

in

North America.

Concepts

&

Connections 5.3 describes Progrcssivc

Insurance's focused

differentiation

strategy.

Conditions

Making

a

Focused

Low-Cost

or

Focused

Differentiation

Strategy Viable

A

focused

strategy aimed at

securing

a

competitive

edge based

either on

low

cost or diffcrentiation becomes

increasingly attractive

as

more

of the following

conditions

are

met:

.

The

target market niche

is

big

enough to

be profitable

and offers

good

growth potential.



rlc

Co

rn

petitive

Strateg¡es rog

VIZIO'5

FOCUSED

LOW-COST

STRATEGY

California-based Vizio, Inc., designs

flat

panel

LCD

and

Plasma TVs

ranging

in

size from

zo

inches

to

55

inches,

which

are

sold onty by big box discount

retailers

such

as

Walmart, Sam's Club, Costco

Wholesale, and Best

Buy.

lf

you've

shopped

[or

a

flat

panel

TV recently,

you've

proba-

bly

noticed

that

Viz¡o

is

among

the

lowest-priced

brands

and that

its

picture

quaLity

is

surprlsingly

good

consider

ing the

price.

The company

is

able to

keep ¡ts cost low

by

only designing

TVs and then

sourcing

production

to

a limited

number of contract

manutacturers

in

Taiwan.

In

fact, 80

percent

of

its

production

ís handied

by AmTran

Technology. Such

a

dependence on a supplier

can

place

a buyer

in

a

precarious

situalion

by making

it

vulnerable

to

price

Increases or

product

shortages,

but

Vizio

has

countered this

possibte

threat by

making

Amlran a

major

stockholder.

Amlran

Technology owns

a 2J

percent

stake

in Vizio and

earns

about

80

percent

of

its revenues [rom

its sales of tetev¡s¡ons

to

Viz¡0. This close

relationship

with

¡ts major supplier

and

its focus on a single

prod'

uct category sold through

limited distribution

channels

aLlows

Vizio to offer

¡ts

customers

deeo

orice

discounts.

Vizio's

first major account was landed

in zoo3 when

it

approached Costco buyers

with a

46-¡nch

plasma

TV

with a whotesale

price

that

was

half

the

price

of

the

n

ext-Lowest-p

rice competitor.

Within

two

months,

Costco

was carrying

Vizio flat screen

TVs

in

3zo

of its

ware-

house

stores

in

the United States.

In

October

zoo7,

Vizio

aooroached

buvers

for

Sam's Club

with

a

zo'inch LCD

TV that could be

soLd

at retail

for

under

$35o.

The

price

and

quality

of the

zo-inch TV led Sam's Club

buyers to

place

an order for zo,ooo

TVs

for

a

March

zooS

delivery.

In 2oo9, Viz o was the largest selter of flat

paneL

HDTVs

in

the

United

States

with a market

share

of

zr.6

percent.

Vizio recorded

revenues

of

$z

billion in

2ooZ

and

it

was

the

industrv's most

Drofltable

seller of

TVs.

Sour[€:

Vizio's

rapid

success

was highlighted

¡n

"Pic-

ture

5hift:

U.S

Upstart

Takes

On

TV Giants

in

Price

Wat"

The Wall Street

lout

ol,

April 15, 2008,

p.

Ar;

and

"Vizio

Achieves #1 LCD HDTV Ranking

in

North Ar¡erica and #1

Ranking

in

U.5.

Flat

Panet HDTV

Shipments,"

Vizio Press

Release, May

11,2oo9.

Tndustrv leaders have

chosen

not

to

compete

in

the

niche-in

which case

focusers can

avoicl battling

heacl-to-he.rd

against

the

indtrstrr"s biggcst

.l

nrl

str()n$est

r

r

rr

t r

I'et

iIors.

It

is

costlv

or rlifficr¡lt

for mr:ltisegment competitors to

meet

the s¡reci.rl-

izc.d nc.cds

of

niche buyers and at the same

time satisfy

the

expectations

of mainstream custtlmers.

The indr.rstry

has man1,

different niches and segmelrts,

therclrv

allolving

a

focuser kr

pick a

niche suited

to its resource strengths

antl

capabilities.

Ferri

if any, rivals are attcmpting

to specialize in

the same

target

segmenr.

The Hazards

of a

Focused Low-Cost

or

Focused

Differentiation

Strategy

Focrrsing

carries

ser.cral

risks.

Thc

_lirst

trrtriLtr risk

is

the

chance

that

comPeti-

tors

n'ill

find

cffcctive

wavs to match

the

foctisecl finn's c"rLrabilities

in sen'ing

the target niche. ln the

loclging busrness,

l.-rrge

chains

like Marriott and

Hilton

have launchecl

mnltibrand strategies

that allor.r'them

to

comPctc

cffectivelv

in

sel.eral

lodging

segrnents

sirnttltaneo

trslv.

Marriott has

flagship

hotels

'uvith

a

fr,rl1

complement of

services

and

amenitics that

allor,r'it to

aitract travelers

and



I lo Part

()nc:

Section C: Crafting

a Strategy

PROGRESSIVE INSURANCE's

FOCUSED

DIFFERENT]ATION

STRATEGY IN

AUTO

¡NSURANCE

Progressive

Insurance has

fashioned

a

strategy

in auto

insurance

focused

on oeoole w¡th a record of traffic v¡o

lations

who

drive high-performa

nce cars, drivers

w¡th

accident histories,

motorcyclists, teenagers, and

other

so-calLed

high-risk

categor¡es of drivers that most auto

insurance

companies steer away from. Progressive

dis-

covered that

some

of

these high-risk drivers

are affluent

and

pressed

for time, making

them

less sensit¡ve

to

pay.

ing

premium

rates for the¡r car insurance.

Management

learned that

it could

charge

such drivers high

enough

prem¡ums

to cover

the added

r¡sks,

plus

it

differentiated

Progressive

from other

insurers by

expediting the

process

of

obta¡ning

insurance

and

decreasing

the

annoyance

that such drivers

fared

in

obtaining insurance

cove-age.

Progress¡ve

pioneered

the

[ow-cost

direct sales

model

of alLowing

customers

to

purchase

insurance

online

and

over

the

phone.

Progressive

also

studied

the

market

segrnents

for

insurance carefully

enough to discover

that

some

motor.

cycle

owners

were

not especially risky

(middle-aged

sub.

urban¡tes who sometimes

commuted

to

work

or

used

the¡r

motorcycles

mainly for

recreational

tr¡ps w¡th their

friends).

Progressive's

strategy

allowed

it

to

become

a

Leader

in

the market for

luxury.car insurance for

custom-

ers who

appreciated

Progressive's

strearnLined

approach

to

doin

g

business.

ln

further differentiating

and

promoting

Progressive

poticies,

management

created teams

of

roving

c[aims

adlusters

who

would anive

at accident

scenes

to assess

ctaims

and

issue checks

for repairs

on

the spot.

Progres

sive introduced z4-hour

claims reportlng, now

an indus

try

standard.

ln

addition,

it

developed

a

sophist¡cated

pricing

syslem so

that ¡t

couLd

quickly

and accurateli/

asses each customer's

risk and weed

out

unprofitabLe

customers.

By

being creative and

excelLing

at the nuts and

bolts

of

its

busrness,

Progressive

has won a

2.6

percent

share

of

the

$l5o

biltion market for auto insurance and has

the

highest

underwriting margins

in the

auto-insurance

¡ndustry.

Sourcesi

wwwprogTessive¡nsurance..om;

lan

C.

McNli[a¡,

ALexander

van

Putten,

and

Rita

Gunther l\4ccral¡,

"Clobal

Gamesmanship,"

Horvard

BLts¡ness

Revicw

81,

no.

5

(May

2ool),

p.

68i

FarLune, May 16,

2oo5,

p

34;

ard

"[4otor-

cyctists Age,

Affluence

lfending

llpward,"

8es¡ Vir"e,

july

24,

2OA7,

vacationers

going to

major

resorts; it has

J.lV.

l\4arriott

and Ritz-Carltol1

hotels

that

¡-rror,ic-le

c'leluxe

comfort ¿rnd

service

to

busincss atrd lcisurc.

travelers;

it

has

Courtvard by N{arriott

ancl

SpringHill

Suites

brands for

business

travcl-

crs

boking

for

rloderately

pricecl loclging; it

has

I\4arriott

l{esidence lnns and

Torvnc.l)lace

Suites clesigned

as

a

"horne

an ¿rv

from lrr¡me"

for travelers stay-

ing fivc

or

more

nights;

ar-rcl

rt

has

more

than 590 Fairfielcl lnn

krc¿itions

that

cater to travelerrs

looking for

quality

lodgrng

at an

"affoldable"

pricc,

Sirnilarl1,,

Hilton

has

a lineup

of

brands

(I\hldorf

Astoria,

Corrracl

Hotels,

Dor-rlrletree

Hotels,

Ernbassl,

Sr,rites

Hotels, Hampton

Inns, Hilton Hotels, Hilton

Carden

Imrs,

rrncl

Homelvoocl

Sr-rites) ihat

enable

it to

compctc

in

nrrr

ltiple

segmerlts

and

comFrete head-l.o-hcac1

against lodging

chains that

op()ratc

onlv

irr a

singlc.

segment.

\{ultibrand

str:rtegtes ¿tre

attractive

to large compallies likc l\4arriott

and Flilton

precisely

because

they

enalrle

a

companv

to enter a market niche

and siphon busincss a

r'r,,r

v

from

companies that

emplov

a

focus

str¿rtegv.

A

sccorrrT r-lsk

oi empkiying a

focrrs

strategy

is

the

potential for

the

¡rrefererrces

and neeLls

of

niche lnembers to

shift ovcr time. tor,r'ard

the oroduct attnbutes



Chapter

5

The Five Gener¡c

Competitive

Strategies

desired

by the

majority

of

bLlyers.

An

enrsion

of

the ciifferences

across

buyer

segments

lor+'ers entry

barriers

into a focuser's

market

niche and provides

all open

invitation

for

rivals in

adjacent segments

to begin

competing

for thc

focuser's

customers.

A

third

risk

is that the segment

may

become

so attractivc

it

is

soon

inundated

with competitors,

intensifying

rivalry and splintering

segment

profits.

Best-Cost

Provider Strategies

As

Figure 5.1 indicates, best-cost

provider strategies

stake

out a

middle

ground

between

pursuing

a low-cost

advantage

and

a

differentiation

advan-

ta¡;e and

between appealing

to

the

broad

market as a rvhole

and a

narron'

market

niche. Such

a middle

ground

allorn's a com-

panv

to aim squarely

at

the sometimes

great mass of

value-consciotts

buyers

Looking

for a good-to-verv-

good

product or service

at an

economical

price. Value-

conscious

buyers

frequcntly

shy

awav from both cheap

low-end

products and

very expensive

high-end prod-

ucts,

but thcy

are

quite

n,illing to

pay

a

"fair" price

for

extra

features

and functionality they

find

appealing

and useful.

The

essence

of

a

bcst-cost provider

strategy

is git ing customers

morc anluc

lór

the

noney bv

satisfying

buyer

desires

for appealing

features

/pcrformance/

quality

/

service

and charging

a lower price

for these

attributcs compared

to rivals rt'ith similar

caliber

product offerings./

To

profitably

employ

a

bcst-cost provider

strategy,

a

comPany

mttst

Jnxe tlrc

cnpnbility

to

incor¡tornte

nttractiuie or upscale nttributes

nt

n

louer

cost

tlwt riznls.This

capability

is

contingent

on

(1)

a superior

value chain

configuration

that

elimi-

nates

or

minimizes aciivities

that do not add value,

(2)

unmatched

cfficiency

in

managing

essential value chain

activities,

and

(3)

resourcc strengths

and

core

competencies

that allow

differenhating

attributes

to

be incorporated at a

low

cost.

When

a

company

can

hrcorporate

appealing

features, good-to-excellent

product performance

or

quality, or

more satisfying

customer sen'ice

into

its

prodr-rct

offerir-rg

nf n lower

cost

tlnn riaals, then it enjoys

"best

cost"

status-it

is

the

lorv-cost provider of

a

product or

service with

trpscnle

aÍtributcs

A

best-cost

provider can

use

its lorv-cost advantage to

underprice

rivals

whose products or

sen

ices have similar upscale

attributes

and still

earn

attractive

profits.

Concepts & Connections

5.4

describes

how

Toyota

has applied

the principles

of

a best-cost provider

strategv

in producing

and marketing

its

Lexus

brand.

The

Danger of an

Unsound

Best-Cost

Provider

Strategy

A company's

biggest

vulnerability in employing

a

best-cost provider

strat-

egy

is

not having the requisite core

comPetencies

and cfficiencies

in

manag-

ing

value chain activities

to sLrPPort

the

addition of

differentiating

featr.Lres

/

For

an

excetlent discussion

of best cost

prov¡der

Strateg¡es,

see

Peter

I

Williamson and

Ming

Zeng,

"Value-for-Money Strategies

for

Recess¡onary

Times,"

Horvard Business

Review 87,

no.

3

(March

2oo9),

pp.

66-74.

Best-cost

prov¡der

strategies

are a hybrid

o'f

lowcost

provider

and

differentiation

strategies

that

aim

at

satisfying

buyer

expectations

on

key

quality/eatures,/perf

orma

ncelservice attri

butes

and beating

customer

expectatrons

on

price.



I l9

Part

()ne:

Section C: Crafting

a Strategy

TOYOTA'S

BEST.COST

PRODUCER

STRATEGY

FOR

ITS TEXUS IINE

Toyota Motor

Company

is widety

regarded

as

a

low.cost

producer

among

the wortd's motor vehicle

manufactur-

ers. Despite its

emphasis

on

product quality,

Toyota

has

ach¡eved

low'cost

leadership

because it has

developed

considerable

skllts in

efficient

supply chain

manage-

ment

and

low-cost assembly

capabilities,

and because

its

models

are

posit¡oned

in the low-to.medium

end of

the

pr¡ce

spectrum, where

high

production

volumes

are

conducive

to low

un¡t costs.

But

when

Toyota

decided

to

¡ntroduce

its new

Lexus

models

to comoete in the luxurv-

car

market, it

employed

a ctassic

best-cost

provider

strat

egy. Toyota

took the

folLowing

four steps in crafting

and

implementing

its

Lexus strategy:

.

Designing

an array of

h igh

-performa

nce

character¡s-

tics and

upscale featui.es

into

the

Lexus

models

so as

to make

them comparable

in

performance

and

luxury

to other h¡gh-end

models

and attractive

to Mercedes,

BMW,

Audi,

Jaguar,

Cadillac,

and Lincoln

buyers.

.

Transferring ¡ts

capabilit¡es

in making

high-quality

Toyota

models

at low cost to making

premium-quality

Lexus

models

at costs below

other

luxury-car mak-

ers.

Toyota's

suppLy chain capabilities

and

low-cost

assembly

know how allowed

it

to

incorporate

h¡gh.

tech

perforrnance

features

and

upscale

quality

into

Lexus

models

at

substantially

less

cost

than

compa

rable

Mercedes

and

BMW modets.

.

Us¡ng

its

relativeLy

Lower

manufactur¡ng

costs

to

underprice comparable

Mercedes

and

BMW models.

Toyota

believed

that with its

cost

advantage

it

could

price

attractiveLy

equipped

Lexus cars

Low

enough

to

draw

price-conscious

buyers

away from

Mercedes

and

BMW. Toyota's

pricing

pol¡cy

also allowed it

to

induce Toyota,

Honda,

Ford,

or

GIM

owners

desiring

more

luxury

to switch to a Lexus. Lexus's

pricing

advantage

over

Mercedes

and

BMW was

somet

mes

quite

significant. For example, in 2oo9

the

Lexus

RX

35o,

a mid-sized

SUV carr¡ed

a sticker

price

in

the

$36,ooo

$48,ooo

range

(depending

on how

it

was

equipped),

whereas

variously

equipped

N4ercedes

ML

35o

SUVs

had

price

tags in

the $44,ooo

$9o,ooo

range

and a

BMW X5 SUV

could

range

anywhere

from

$47,5oo

to

$86,000,

depending

on the optional

equipment

ch

osen.

.

Establishing

a new network of Lexus dealers,

sepa-

rate

from Toyota dealers,

dedicated

to

providing

a level of

personalized,

attent¡ve

customer serv¡ce

unmatched in the industry.

Lexus' best-cost

strategy

allowed

¡t

to

become

the

number-one.selling

luxury

car brand worldwide

in

zooo

a d¡stinction it

has

hetd

through

zoo8.

n'ithout

significantlv

increasing costs. A

coltrparlv

r.r'ith

a

moc'lest

degree

of

r--lifferen

tia lion

.r ucl no rea

I cos t

¿lcl\'antagc rvt ll

nt

c]st

likeL\¡

find i

tsclf

squeezed

betr,r'een

the firnrs

Lrstng

l(r\

/-c()st

strategics

arrcl those

using

diife.r.entia-

tion

strategies

Low-cost

providers

m¿tv

be

able to si¡rhon

cr¡stotlters a \'ay

r.r,ith

thc

appcal

of

a

lorver

price

(des¡:ite

having marginallv

less irp¡rc.aling

product attribrrtcs).

l{igh-end

drffererr

t

ia

tors rnav

be

able

to

steal customcrs

aw'¡rv

rvith the appcal

of appreciably

better

proclr-rct.rttributes

(even

thor-rgh

their

proclucts

c¿rrry a some\\'hat higJrc.r

price tag).

Thtrs,

a

successfr.rl

best-

cost

Lr1'o\¡iLler

rnust

offer br-ryers slgrrllicnnlhT

better

prodLtct attrilrtrles

in

orrler

tc¡

justifv

a

¡rricc

above

lvhat low-cost lcadcrs

arc charging. Likewise,

it

has tc¡

achie\.e

signifrcantly

1or,r,'er

costs

in

providirrg Llpscalc fcatures

scr

tlrat it

carr outcompctc high-end

differentiators

on the basis

cti

a sigtti.fittt

ttt lry

lor'r

er orice.



Chapter

5 The

Five

Gener¡c

Competitive

Strategies

The

Peril of

Adopting a

"Stuck

in

the

Middle"

Strategy

Each of

the

five gencric competitive

strategies

positions

the

company

differ-

ently

in its market

and competitive

ent

ironment. Each establishes

a central

theme

for how

the company

will

endeavor

to

otltcomPete

rivals. Each cre-

ates some

boundaries or guidelines

for maneuvering

as

market circumstances

unfold

and as ideas for improving

the

strategy

are debated.

Thus, settling

on

which generic strategy

to

employ

is

perhaps the most imPortant

sttategic

commitment a company

makes-rt

tends

to

drive the

rcst

of

a

comPanv's

stra-

tegrc actrons.

One

of

the big dangers

in crafting

a

compctitive

strategy

is that

manag-

ers,

torn between

the pros

and cons

of

the

-",arious

generic

strategies,

will

opt

for

"stuck

in the

nüddle" strategies

that

represent

compromises

between

lower

costs

and grcater

differentiation and between

broad and

narrow market

appcal. Compromise

or middle-ground strategies

rarely produce sustainable

competitive

advantage or

a

distinctive competitive

position. Usuallv

comPa-

nies n'ith compromise strategies end

up

with

a middle-of-the-pack

industry

ranking-thev

have average

costs,

some

but

not

a

lot

of

product

differentia-

tion

¡elative to

rivals, an average

image and

rcputation, and

little

prospect

of

industrv

leadership.

Successful

Com

petitive

Strategies

Are

Well-Matched

to

a Company's

Resources

and Capabilities

For a positioning-based

competitive

stategy

to

succeed

in delivering

good

performance

and thc

intended

competitive

edge over

rivals, it

has to

be well-

matched to

a

company's

internal situation and underpinned

by

an

appropri-

ate

set

of resources, know-how, and competitive

capabilitíes.

To

succccd

in

employing a

low-cost provider strategy,

a

comPany

has

to

have the

resource strengths

and capabilities

to

A

company's

positioning-based

competitive

keep its

costs

below

those

of

its

competitors;

this

means

strategy

should be

well-matched to

its

internal

having the expertise

to

cost-effectively

manage

value

sifuation

and

predicated

on

leveraging competi-

chain

aciivities

better than

rivals and/or the

innova-

tively

valuable resource

strengths

and core

tive

capability

to

bVpass

certain

value chain

activities

competenc¡es.

being performed

by rivals. To succeecl

in

strongLy

dif-

ferentiating its product in wavs that

are appealirg

to buyers, a comPany

must

have

the

resource

capabilities (like better

technology,

strong skills

in

product

innovation,

expertise

il

customer

service)

to incorporate

unique attributes

into its product offering that

a broad

range

of

buyers

will find

appealing

and

worth

paying

for. Stratcgies

focusing on a narrow

segment

of

the

market

rcquire the

capability

to do an outstanding

job

of satisfying

the

needs and

expectations

of niche buyers. Success

in

employing

a strategy

keycd

to a

best-value offering

requires the resource

capabilities

to

incorporate

upscale

oroduct or se¡vice attributes

at a lor+'er cost

than

rivals.

i

ll

I

I



Kev Points

Early in the process

of

crafting a

strategy, company managers

have to decide

which

of the five

basic competitive

strategies to

employ---overall low-cost, broad

differentiation, focused

low-cost, focused

differentiation,

or best-cost

provider.

In employing

a

low-cost

provider

strategy,

a

company

must

do

a

better iob

than

rivals of cost-effectively

managing internal

activities and/or

it

must

find i¡nova-

tive

ways

to eliminate

or

bypass

cost-producing

activities. Low-cost

provider

shategies work particularly

well

when price

competition is

strong and

the

prod-

ucts of

rival sellers

are

very

weakly differenfiated.

Other

conditioru

favoring

a

low-cost

provider

strategy are

when

supplies are readily

available from eager

sellers, when there

are not many ways

to differentiate that have value

to

buyers,

when

the majority

of

industry

sales are made to

a

few large buyers, when buyer

switching

costs are low, and when

industry newcomers are likely to use

a

low

introductory

price

to build market

share.

B¡oad

differentiation

shategies

seek to

produce

a competitive

edge by incorpo-

rating attributes

and features that

set a

company's

product/service offering apart

from rivals in ways

that buyers

consider valuable

and

worth

paying

for.

Success-

ful

differentiation

allows a

firm to

(l)

com¡nand a premium price

for its

product,

(2)

increase

unit

sales

(because

addiüonal buyers

are

won over by

the

differenti-

ating features),

and/or

(3)

gain

buyer

loyalty

to its

brand

(because

some buyers

are strongly attracted

to the

differentiating

features and bond

with

the company

and its products).

Differentiation

strategies work

best

in

markets

with

diverse

buyer preferences

where

the¡e are big windows

of

opportunity

to strongly dif-

ferentiate

a

company's

product

offering from

those of

rival

brands,

in situations

where

few

other rivals are pursuing

a

similar differentiation approach, and

in

circumstances

where technological

change is

fast-paced

and competition centers

on

rapidly

evolving product

features.

A differentiation

strategy is doomed when

competitors

are

able to

quickly

copy most

or all

of

the

appealing

product

attri-

butes a

company comes up with,

when a

company's differentiation efforts meet

with

a

ho-hum

or

so-what market reception,

or

when

a company

erodes profit-

ability

by

overspending

on

efforts to differentiate its

product

offering.

A focus strategy

delivers competitive

advantage

either

by

achieving lower costs

than rivals in

serving buyers

comprising the target market

niche or by offering

niche

buyers an appealingly

differentiated

product or

service that

meets

their

needs

better than

rival

brands. A focused

strategy becomes increasingly

attrac-

tive when

the target market

niche

is

big

enough to be

profitable

and

offers

good

growth potential,

when

it

is

costly or difficult for

multisegment

competitors to

put

capabilities in place

to

meet

the

specialized needs

of

the

target

market

niche

and at

the same

time

satisfy

the

expectations of

their

mainstream customers,

when

the¡e are one

or

more

niches that present

a good match

with

a

focuser's

resource

strengths

and capabilities,

and when few

other

rivals

are

attempting to

specialize in

the same target

segment.

Best-cost

provider

strategies

stake out

a

middle

ground between pursuing

a

low-

cost advantage and

a

differentiation-based

advantage and

between

appealing

to the broad

market as

a

whole

and a narrow

market niche. The

aim

is to create

competitive advantage

by giving buyers more

value for

the money-satisfying

buyer

expec

tations

on

key

qua

I

ity

/

features

/

performance,/

service attributes

while

beating customer

expectations on price. To

profitably

employ

a

best-cost

J.

5.



provicler

strateg\',

a

cornpanv

tlutst lnir tllrr

cnpnltility

to

ittcorporntt

rttroctitte or

Lt¡tscnlc

nttrilwtas

tt

¡ lo¡ttr

cosl

lltntt rr¿,rtl.s.

This

ca¡rability

is contingent on

(1)

a

superior

value

chain

configuratiorr,

(2)

Lrnrriatchet-l efficit'nc1

in nranagrng

essen-

tial valuc chain actir.ities,

ancl

(3)

resource

strengths

altcl

c¡-¡te

conlpetencics

that

allor.,"

diffcrcntiating attributes

to

be

incorporutecl ¿rt

¿r

lor¡'ctlst- A best-cost

pro-

vider stratcgy rvorks

best

in markets

where op¡rttrtunities

to tlifferentiate exist

and

rvhere many buycrs are sensitive

kr

price

ancl

value.

6.

Dcciding which

ger-reric straiegv

to emplov

is

¡rerhaps

tlre

most ir-uportant stra

tcgrc

commitment

a

c()mpany

makes-it tends

to tlrive

the rest

of thc strategic

¿ctions a compan)'

decicles to ttndertake

¿ncl

it

sets

the

rvhole

lol.re

for thc pursuit

of

a compctrtive

advantauc

over

rivals

l.

Best Br-ry

is the

largest consumer elect¡onics

retailer

in thc United States

with

2009

sales

of

more than

$45

billion.

The

cornpany

competcs

aggressively on

Price

rvith

rivals

such

as

Costc()

Wholesale, Sam's

Club,

Walmart, and Target, but is

also

known by consume¡s

for its first-rate

customer service.

Bcst Buy customets

have

commented

that

the

retailer's

sales

staff

is

exceptionally

knorvledgeable

about thc products they sell

and can

direct them

to the exact

location

of

difficult

to find iiems.

Best Buy customers

also appreciate

that demonstration

modcls of

PC monitors, MP3

players, and other

electronics

are

fully

powered

and ready

for rn

store use.

Best Bu¡r's Geek Squad

tech support

and

installation scrvices are

additional customer service

featlrres

that are

valued by many customers.

Horv

rvoulcl

vou

characterize

Best Buy's comPetitive strategy?

Should

it

be

classified

as a low-cost

¡.trovider

str.r

tegy? a differentiation strategy?

a

best-cost

strategy?

Explain

your

answer.

txplore

BMW's Web sitc at wn'rv.bmwgrouP.com

and see

if you can identify

at least three

n'ays

in r,vhich thc company

seeks

to differentiate

itself from

rival

automakers.

Is

lhere reason to

bchcve that

BMW's differentiation

strategy

has

been successful

in prot-luciug a competitivc

advantage?

Why

or

why not?

2.

tVhich onc of the five

generic

competitive

strategies

best characterize

your

c(nnpanv's

stratcglc approach to competing

successfullv?

Which rir,¿l companies appear to be

employing

a low-cost

provider strategy?

Which rival companies

appear

to

be

employing

a broad differentiation strategy?

Whrch

rival

companies appear to

be

emploving

a

best-cost

provider

strategy?

Which rival companies

appear to be

emp)oying some

type

of focus strategy?

Assurance

of

Learning

Exercises

Exercises

for

Simulation

Participants

1.

2.

3.

1.

5.

chapter 5 the five generic ... strategies

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