THE FIVE GENERIC COMPETITIVE STRATEGIES

The biggest and most important differences among competitive strategies boil down to:

1. Whether a company´s market target is broad or narrow.

2. Whether the company is pursuing a competitive advantage linked to low cost or product
differentiation.

5 Distinct competitive strategy approaches:

1. Low-cost provider strategy: striving to achieve lower overall cost than rivals, underpricing
rivals.

2. Broad differentiation strategy: seeking to differentiate company´s product from rivals to

broad spectrum of buyers.

3. Best-cost provider strategy: giving customers more value for the money by incorporating
excellent product attributes at a lower cost than rivals, the target is to have best costs
compared to rivals offering products with comparable attributes.

4. Focused (or market niche) strategy based on low costs: concentrating on a narrow buyer
segment and outcompeting rivals by having lower costs and thus, being able to service
niche members at a lower price.

5. Focused (or market niche) strategy based on differentiation: concentrating on a narrow

buyer segment and outcompeting rivals by offering customized attributes that meet their
tastes and requirements best than rivals.

LOW COST PROVIDER STRATEGIES

Concept: a low-cost leader´s basis for competitive advantage is lower overall costs than
competitors. Successful low-cost leaders are exceptionally good at finding ways to drive costs out
of their business.

 It´s a strategy for markets with many price-sensitive buyers.

 Managers must take care to include features and services that buyers consider essential
even if it is priced lower than competing products, a product offering htat is too frillsfree
sabotages the attractiveness of the company´s product and can turn buyers off.
A company has 2 options for translating a low-cost advantage over rivals into attractive profit
performance:

Option 1: is to use the lower-cost edge to underprice competitors and attract price-sensitive
buyers in great numbers enough to increase total profits.

Option 2: is to maintain the present price, be content with the present market share, and use the
lower-cost edge to earn a higher profit margin on each unit sold, thereby raising the firm´s total
profits and overall return on investment.

The Two Major Avenues for Achieving a Cost Advantage

1. Perform value chain activities more cost-effectively than rivals.

a. Striving to capture all available economies of scale: Economies of scale stem from
an ability to lower unit cost by increasing the scale of operation. Often,
manufacturing economies can be achieved by using common parts and
components in different models, or by cutting back on the number of models
offered and then scheduling longer productions runs for fewer models.

b. Taking full advantage of experience/learning curve effects: The cost of performing

an activity can decline over time as the learning and experience of company
personnel builds. Can stem form debugging and mastering newly introduced
technologies, using the suggestions of workers to install more efficient plant
layouts and assembly procedures, and added speed and effectiveness.

c. Trying to operate facilities at full capacity: Whether a company is able to operate

at or near full capacity has a big impact on unit cost when its value chain contains
activities associated with substancial fixed cost. Higher rates of capacity utilization
allow depreciation and other fixed costs to be spread over a larger unit volume,
thereby lowering fixed costs per unit.

d. Pursuing efforts to boost sales volumes and thus spread such costs as research
and development, advertising and selling and administrative cost out over more
units: The more units a company sells, the more it lowers its unit costs for R&D,
sales and marketing, and administrative overhead. PeppsiCo can afford to spend
$2.7 million on a 30-second Super Bowl ad because the cost of such ad can be
spread out over the nundreds of millions of units they sell, and it wount increase
the unit costs.

e. Improving supply chain efficiency. Partnering with suppliers to streamline the

ordering and purchasing process, to reduce inventory carrying cost via just-in time
inventory practices, to economize on shipping and materials handling.

f. Substituting the use of low-cost for hig-cost raw materials of component parts: if
certain raw materials and parts cost too much, a company can either substitute
lower-cost items or even design the high-cost components out of the product
altogheter.

g. Using online systems and sophisticated software to achieve operating efficiencies:

Sharing data with suppliers, and using enterprise resource planning (ERP), or
 manufacturing execution system (MES) can greatly reduce production times and
labor costs.

h. Adopting labor-saving operating methods: Installing labor-saving technology,

shifting production from geographic areas where labor costs are high, to those
where are low, avoiding the use of union labor where possible, and using incentive
compensation systems that promote high labor productivity help to reduce labor
costs.

i. Using the company´s bargaining power vis-á-vis suppliers to gain concessions:

Having greater buying power than rivals can translate to an important cost
advantage like Wal-Mart who purchase in large volumes to gain buyer power.

j. Bing alert to the cost advantages of outsourcing and vertical integration:

outsourcing the performance of certain value chain activities can be more
economical than performing them in-house if outside specialists can perform the
activities at a lower cost. However, there can be times when integrating into the
activities of suppliers or distribution channel allies can allow to detour suppliers or
buyers who have an adverse impact on costs because of their bargaining power.

2. Revamp the firm´s overall value chain to eliminate or bypass some cost-producing
activities altogether.

Dramatic cost advantages can emerge from finding innovative ways to cut back on or
entirely bypass certain cost-producing value chain activities.

There are 2 primary ways companies can achieve a cost advantage by reconfiguring their
value chains:

a. Bypassing the activities and cost of distributors and dealers by selling direct to
customers. Selling direct can involve:

i. Having the company´s own direct sales force.

ii. Conducting sales operations at the company´s Web site.

Costs in the wholesale/retail portions of the value chain frequently represent 35%-
50% of the final price customers pay. Example: The major airlines now sell most of
their tickets directly to passengers via their Web sites, allowing them to save
hundreds of millions of dollars in commissions once paid to travel agents.

b. Replacing certain value chain activities with faster and cheaper online technology.
Internet technology applications have become powerful and pervasive tools for
conducting business and reengineering company and industry value chains.
Various e-procurement software packages streamline the purchasing process by
eliminating much of the manual handling of data and by substituting electronic
communication for paper documents such as request for quotations, purchase
orders and shipping notices. All this facilitates just-in-time deliveries of parts and
components and matching the production of parts and components to assembly
plant requirements and production schedules, cutting out unnecessary activities
and producing savings for both suppliers and manufacturers.
 c. Streamlining operations by eliminating low-value added or unnecessary work
steps and activities. At Wal-Mart some items supplied by manufacturers are
delivered directly to retail stores rather than being routed through Wal-Mart´s
distribution centers and delivered by Wal-Mart trucks, this reduce costs and avoid
unnecessary work steps. Many supermarket chains have greatly reduced in-store
meat butchering and cutting activities by shifting to meats that are cut and
packaged at the meat-packing plant and then delivered in ready-to-sell form.

d. Relocating facilities so as to curb the need for shipping and handling activities.
Help to curb or eliminate shipping and handling costs.

e. Offering a frills-free product. Deliverately restricting the company´s product

offering to the essentials can help a company cut cost associated with snazzy
attributes and a full lineup of options and extras. Activities and costs can be
eliminated by incorporating fewer performance and quality features into the
product. Example: stripping extras like first-class seating, meals and reserved
seating in Southwest Airlines.

f. Offering a limited product line. Lineup to meet the needs of most buyers, rather
than all buyers can eliminate activities and costs associated with numerous
product versions and wide selection.

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The Keys to Success in Achieving Low-Cost Leadership:

- To succeed with a low cost strategy, managers have to determine what factors cause costs
to be high or low. Then they need to keep the unit cost of each activity low, and pursue
cost efficiencies throughout the value chain.

- They need to be proactive and eliminate nonessential work steps and low value activities;
pretending to work with small corporate staff and keep administrative costs to a
minimum.

- Benchmarking helps to know how the costs are; by comparing with rivals and firms
performing comparable activities in other industries.

- Low cost leaders invest in resource and capabilities that promise to drive cost out of the
business. Example: Wal-Mart has automated showcase, online systems to manage
inventories, tracking and checkout systems that help to reduce costs.

When a low-cost provider strategy works best:

1. Price competition among rival sellers is especially vigorous

2. The products of rival sellers are essentially identical and supplies are readily available from
any of several eager sellers.

3. There are few ways to achieve product differentiation that have value to buyers.

4. Most buyers use the product in the same ways

 5. Buyers incur low cost in switching their purchases form one seller to another.

6. Buyers are large and have significant power to bargain down prices.

7. Industry newcomers use introductory low prices to attract buyers and build a customer
base.

The pitfalls of a low cost provider strategy

The biggest pitfalls of a low-cost provider are:

1. Getting carried away with price cutting and ending up with lower, rather than higher
profitability. A low-cost/low-price strategy results if:

a. Prices are cut by less than the size of the cost advantage

b. The added gains in unit sales are large enough to bring a bigger total profit.

2. Not emphasizing avenues of cost advantage that can be kept proprietary or that relegate
rivals to playing catch up. The value of a cost advantage depends on its sustainability,
(whether the company achieves its costs advantage in ways difficult for rivals to copy or
match)

3. Becoming too fixated on cost reduction. Firms offering ends up being too features-poor to
generate buyer appeal. A company has to know the buyer´s interest in added features or
service, declining buyer sensitivity to prior or new developments that start to alter how
buyers use the product.

BROAD DIFFERENTIATION STRATEGIES

- A company attempting to succeed through differentiation must study buyers´ needs and
behavior to learn what buyers consider important, hat they think has value, and what they
are willing to pay for.

- Competitive advantage results once a sufficient number of buyer become strongly

attached to the differentiation attributes.

Successful differentiation allows a firm to:

 Command a premium price for its product

 Increase unit sales

 Gain buyer loyalty to its brand

Company differentiations strategies fails when buyers’ don´t value the brand´s uniqueness or
when a company´s approach to differentiation is easily copied or matched by rivals.
Types of differentiation themes.- Companies pursue differentiation through:

 A unique test.- Dr Pepper, Listerine

 Multiple features.- Microsoft Vista, Office
 Wide Selection and one-stop shopping.- Amazon
 Superior Service.- Fedex
 Spare parts availability.- Caterpillar guarantees 48-hours to deliver spare parts
 Engineering design .- Mercedes
 Prestige and distinctiveness.- Rolex
 Product reliability.- Johnson and Johnson
 Quality manufacture.- Toyota, Honda
 Technological leadership.- 3M
 Full range services.- Charles Schwab
 Complete line of products.- Campbells´soup
 Top of the line image and reputation .- Ralph Lauren, Starbucks

Where along the value chain to create the differentiation attributes

Differentiation opportunities can exist in activities all along an industry´s value chain:

- Supply chain activities.- Affect the performance or quality of the company’s end product.
(Starbucks)

- Product R&D.- Improvements of product design, performance features, expanded uses.

- Product R&D and technology-related activities.- Products made to order

- Manufacturing activities.- Reduction of product defects, prevent product failure, extend

product life, etc.

- Distribution and shipping.- Quicker delivery to customers, lower shipping costs

- Marketing Sales and customer service.- Assistance to buyers, repair services, product
information.

The four best routs to competitive advantage via a broad differentiation strategy

1. To incorporate product attributes and user features that lower the buyer´s overall costs of
using the company´s product. (Raw materials waste, just in time)

2. To incorporate features that raise product performance. (Reliability, durability,

convenience)

3. To incorporate features that enhances buyer satisfaction in noneconomic or intangible

ways. (Toyota´s car for reducing global carbon dioxide emissions)
 4. To deliver value to customers by differentiating on the basis of competencies and
competitive capabilities that rivals don’t have. (Japanese automakers can adapt faster to
changes of the customers than American ones).

The importance of perceived value and signaling value

- The price premium commanded by a differentiation strategy reflects the Value actually
delivered to the buyer and the value perceived by the buyer.

- Signals of value as important as actual value:

1. When the nature of differentiation is subjective

2. When buyers are making a first time purchase

3. When repurchase is infrequent

4. When buyers are unsophisticated.

Differentiation strategy works best; in market circumstances where:

- Buyer needs and uses of the product are diverse

- There are many ways to differentiated the product or service

- Few rival firms are following a similar approach

- Technological change is fast-paced and competition rapidly evolves product features.

LAS POSIBLES TRAMPAS EN LAS QUE UNA ESTRATEGIA DE DIFERENCIACION PUEDE CAER (THE
PITFALLS OF A DIFFERENTIATION STRATEGY)

Las estrategias de diferenciación pueden fracasar por varias razones:

1) Una estrategia de diferenciación estará siempre condenada cuando los competidores

pueden rápidamente copiar los atributos de un producto que atraen a los consumidores

2) Una estrategia de diferenciación puede ocasionar poco interés del comprador cuando éste
ve poco valor en los atributos

3) Cuando se gasta demasiado tiempo en diferenciar la oferta del producto de la compañía,

haciéndola poco rentable. La clave para la diferenciación de la rentabilidad es que puede
lograrse 1) manteniendo los costos de lograr la diferenciación abajo del precio máximo
que dicta el mercado, o 2) incrementar número de unidades de venta para compensar las
ganancias dado el poco margen de utilidad

Otras razones de fracaso (trampas en donde se puede caer al intentar lograr una diferenciación):
  Sobrediferenciar el producto de tal manera que la calidad y el nivel de servicio excede las
necesidades del consumidor

 Establecer un precio demasiado alto

 No hacer un esfuerzo para lograr competir contra las características de los productos
rivales en calidad, servicio o desempeño

Una estrategia de Bajo Costo puede derrotar a una estrategia de diferenciación cuando los
compradores están satisfechos con un producto básico y no piensan que algún atributo extra valga
un mayor precio.

ESTRATEGIAS DE PROVEEDOR DEL MEJOR COSTO (BEST-COST PROVIDER

STRATEGIES)
Una estrategia de Mejor Costo tiene como propósito dar al cliente más valor por su dinero. El
objetivo es satisfacer las expectativas en calidad, características, desempeño y cumplir con el
precio que en mente.

Una compañía logra un estatus de “mejor costo” cuando tiene la habilidad de incorporar mejoras
en sus atributos a un costo menor que los competidores. Para lograrlo, se debe ser capaz de:

1) Incorporar atributos atractivos a un costo menor que los competidores cuyos productos
tienen similares características

2) Manufacturar un producto con un desempeño de bueno a excelente a un costo menor

que la competencia

3) Desarrollar un producto que brinda un desempeño de bueno a excelente a un menor

costo que los rivales

4) Brindar un servicio al cliente atractivo a un menor costo que la competencia

El mercado meta de un proveedor de Mejor Costo son los compradores que tienen conciencia del
valor (value-conscious buyers), que son los compradores que buscan un atractivo valor agregado a
un atractivo bajo costo.

CUANDO UNA ESTRATEGIA DE MEJOR COSTO ES ATRACTIVA (When a Best-Cost Provider Is

Appealing)

Una estrategia de este tipo funciona mejor donde:

- La diversidad de compradores hace a la diferenciación de productos una norma

- Los compradores son sensibles al precio y al valor

Una compañía puede situarse en un punto medio en el mercado con un producto de mediana
calidad a un precio menor que el promedio ó bien, un producto de alta calidad a precio promedio
o inclusive un ligeramente mayor.

Ejemplo: La marca de lujo LEXUS de Toyota dirigida a un mercado donde compite que otras
marcas de lujo como BMW, Audi y Mercedes. Se utilizaron los conocimientos de manufactura y
bajos costos de los modelos de Toyota para desarrollar autos de lujo, resultando todo un éxito.

EL GRAN RIESGO DE UNA ESTRATEGIA DE MEJOR COSTO (The Big Risk of a Best-Cost Provider
Strategy)

Existe un punto vulnerable cuando se corre el riesgo de ser “aplastado” por las compañías de bajo
costo (con precios más bajos) y aquellas de alta calidad (con mejores atributos). Por esta razón un
proveedor de Mejor Costo debe de ofrecer un producto Significativamente mejor que justifique el
precio más alto que las compañías de bajo costo ofrecen.

ESTRATEGIAS DE ENFOQUE EN UN NICHO DE MERCADO (FOCUSED or

MARKET NICHE STRATEGIES)
Lo que hace diferente a una estrategia de Enfoque de una de bajo costo o de diferenciación
amplia, es que se concentra en una pequeña parte del mercado total. El segmento o nicho de
mercado puede ser definido por la ubicación geográfica, requerimientos especializados o por las
características especiales del producto que podrían atraer solamente a los miembros de ese
segmento. Ejemplos: Canales de TV Animal Planet, History Channel o los autos Porsche.

ESTRATEGIA DE ENFOQUE DE BAJO COSTO (A Focused Low-Cost Strategy)

El objetivo en esta estrategia es asegurar una ventaja competitiva de servir a los compradores a un
menor costo u a menor precio que los competidores. Es muy similar a la estrategia de Bajo Costo,
solo que la diferencia es el tamaño del mercado, ya que en la de Enfoque es mucho menor.

ESTRATEGIA DE ENFOQUE DE DIFERECIACIÓN (A Focused Differentation Strategy)

El objetivo es asegurar una ventaja competitiva con un producto cuidadosamente diseñado para
atraer las preferencias únicas de un segmento del mercado bien definido. Esto se puede identificar
en los productos de lujo, ejemplo: Chanel, Gucci, Rolls Royce.
When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive

A focused Strategy aimed at securing a competitive edge based on either low cost or
differentiation becomes increasingly as more of the following conditions are met:

- The target market niche is big enough to be profitable and offers good growth potential.

- Industry leaders do not see that having a presence in the niche is crucial to their own
success.

- Its costly or difficult for multisegment competitors to put capabilities in place to meet the
specialized needs of buyers comprising the target market niche and the same time satisfy
the expectation of their mainstream customers.

- The industry has many different niches and segments, thereby allowing a focuser to pick a
competitively attractive niche suited to its resource strengths and capabilities.

- Few if any, other rivals are attempting to specialize in the same target segment – a
condition that reduces the risk of segment overcrowding.

- The focuser has a reservoir of customer goodwill and loyalty that it can draw on to help
stave off the ambitious challengers looking to horn in on its business.

The advantages of focusing a company´s entires competitive effort on a single market niche are
considerable, especially for small and medium-sized companies that may lack the breadth and
depth of resources to tackle going after a broad customer base with a something-for everyone
lineup of models ,styles and product selection.

The Risk of a Focused Low-Cost or Focused Differentiation Strategy

1. Is the chance that competitors will find effective ways to match the focused firm´s
capabilities in serving the target niche- perhaps by coming up with products or brands
specifically designed to appeal to buyers in the target niche or by developing expertise and
capabilities that offset the focuser´s strenghts.

2. Employ focus strategy in the potential for the preferences ad needs of niche members to
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.

The contrasting features of the five generic competitive strategies: a summary.

Chossing the generic competitive strategy to serve as the framework on which to build the rest of
the company´s stratregy is not a trivial matter. Each of the five generic competitive strategies
positions the company differently in its market and competitive enviroment. Each establishes a
central theme for how the company will endeavor to outcompete rivals.
Each points to different ways of experimenting and tinkering with the basic strategy-for example,
employing a low-cost provider strategy means experimenting with ways that cost can be cut and
value chain activities can be streamlined, whereas a broad differentiation strategy means
exploring ways to add new differentiating features or to perform value chain activities differently.

Thus, a choice of which generic strategy to employ spills over to affect several aspects of how the
business will be operated and the manner in which value chain activities must be managed.
Deciding which generic strategy to employ is perhaps the most important strategy makes- it tends
to drive the rest of the company´s strategic actions. One of the big dangers in crafting a
competitive strategy is that the managers, torn between the pros and cons of the various generic
strategies, will opt for stuck-in-the-middle strategies that represent compromises between lower
costs and greater differentiation and between broad and narrow market appeal.