Chapter 3

Competitive Strategy
and Advantage in
the Marketplace

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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Competitive Strategy

 Deals exclusively with a company’s

business plans for securing a competitive
advantage in the marketplace
Specific efforts to give customers
superior value
– A good product at a lower price
– A superior product worth paying more for
– An attractive mix of price, features,
quality, service, and other appealing
attributes

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Competitive Strategies and Industry
Positioning

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Competitive Advantages of a Low
Cost Strategy

 Advantage Option 1:
Use lower-cost edge
to under-price
competitors and
increase market share

 Advantage Option 2: Maintain present

price, be content with present market
share, and use lower-cost edge to earn a
higher profit margin on each unit sold

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Approaches to Achieving Low Costs

1. Do a better job than

rivals of controlling the
costs of performing
critical activities

2. Eliminate cost-producing
activities that add little
value from the buyer’s
perspective

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When a Low Cost Strategy Works
Best

 Price competition is vigorous

 Product is standardized
 There are few ways to achieve
differentiation
 Buyers incur low switching costs
 Buyers are large and have significant
bargaining power
 Industry newcomers use introductory low
prices to attract buyers and build customer
base

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Hazards of a Low-Cost Strategy

 Cutting price by an amount greater than

size of cost advantage
 Low cost methods are easily imitated
 Becoming too fixated on reducing costs
and ignoring
 Buyer interest in additional features
 Declining buyer sensitivity to price
 Technological breakthroughs open up
cost reductions for rivals

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Differentiation Strategies

 Incorporate differentiating features that

cause buyers to prefer firm’s
product or service over brands of
rivals
 Not spending more to achieve
differentiation than the price
premium that customers are
willing to pay for all
the differentiating extras

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Types of Differentiation Themes

 Unique taste – Dr. Pepper

 Multiple features – Microsoft Windows and
Office
 Wide selection – Amazon.com
 Superior service – Ritz-Carlton
 Spare parts availability – Caterpillar
 Engineering design and performance – BMW
 Prestige – Rolex
 Product reliability – Johnson & Johnson
 Quality manufacture – Toyota
 Top-of-line image – Ralph Lauren, Starbucks,
Chanel

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Benefits of Successful
Differentiation
Successfully executed
differentiation strategies
allow a company to:

 Command a premium
price, and/or
 Increase unit sales,
and/or
 Gain buyer loyalty to its
brand

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Creating Value for Customers
through Differentiation

 Incorporate product features/attributes

that lower buyer’s overall costs of
using product
 Incorporate features/attributes that raise
the performance a buyer gets out of
the product
 Incorporate features/attributes that
enhance buyer satisfaction in non-
economic or intangible ways

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Where to Find Opportunities to
Differentiate

 Supply chain activities

 Product R&D and product
design activities
 Production R&D and
technology-related activities
 Manufacturing activities
 Distribution-related activities
 Marketing, sales, and customer service
activities

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Market Conditions Favoring a
Differentiation Strategy

 There are many ways to differentiate a

product that have value and please
customers
 Buyer needs and uses are diverse
 Few rivals are following a similar
differentiation approach
 Technological change and
product innovation are fast-paced

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Perceived Value and Signaling

 The price premium commanded by

a differentiation strategy reflects
actual value delivered and value
perceived by the buyer.
 Buyers seldom pay
for value that is
not perceived

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Perceived Value and Signaling

 Important to signal
value when:
 Nature of differentiation is
subjective
 When buyers are making
first-time purchases
 When repurchase is
infrequent
 When buyers are
unsophisticated

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Hazards of a Differentiation Strategy

 Buyers see little value in a product’s

unique attributes
 Appealing product features are easily
copied by rivals
 Overspending on efforts to differentiate

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Hazards of a Differentiation Strategy

 Over differentiating such

that product
features exceed buyers’
needs
 Charging a price premium
buyers perceive is too high
 Failing to open up
meaningful gaps in product
or service attributes

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When is a Niche an Attractive Market

 Big enough to be
profitable and offers
good growth potential
 Not crucial to success
of industry leaders
 It is costly or difficult for multi-segment
competitors to meet the specialized needs of
niche buyers
 The industry has many different niches and
segments
 Few other rivals are specializing in same niche

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Hazards of a Focused Strategy

 Competitors find effective ways to match

a focuser’s capabilities in serving niche
 Niche buyers’ preferences shift towards
product attributes desired by majority of
buyers
 Segment becomes so attractive it
becomes crowded with rivals, causing
segment profits to be splintered

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Resource- and Competence-
Based Approaches to
Competitive Advantage
 Competitive strategy elements used
to supplement strategies keyed
to unique industry positioning.
 Utilizes a company’s resources
and competitive capabilities to
achieve a cost-based advantage or
differentiation.

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Resources, Capabilities, and
Competencies as the Basis for
Competitive Advantage
 A competence represents real proficiency
in performing an internal activity
 A core competence is a well-performed
internal activity central to a company’s
competitiveness
and profitability

 A distinctive competence is a
competitively valuable activity a
company performs better than its rivals

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Determining the Competitive
Value of a Resource Strength

 Is the resource strength really

competitively valuable?
 Is the resource strength rare and
something rivals lack?
 Is the resource hard to copy?
 Can the resource strength be trumped
by the substitute resource strengths
and competitive capabilities of rivals?

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Strategies for Addressing Resource
Deficiencies

 Companies lacking stand-alone

resource strengths may develop a
distinctive competence through
bundled resource strengths.
 Companies may be able to develop
substitute resources to offset
resource weaknesses or
deficiencies in performing
competitively critical activities.

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Supplementing Resources and
Competencies through Strategic
Alliances
 Strategic alliances involve
formal agreements between
two or more companies
engage in strategically-
relevant collaboration.
 Allows partners to add to
their collections of
resources and
competencies.

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Factors Making Collaborative
Partnerships “Strategic”

 It is critical to a
company’s achievement
of an important objective
 It helps build, sustain, or enhance a
core competence or competitive
advantage

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Factors Making Collaborative
Partnerships “Strategic”

 It helps block a
competitive threat
 It helps open up
important
market opportunities
 It mitigates a
significant risk
to a company’s
business

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How Collaborative Partnerships
Build Resource Strengths and Core
Competencies
 Expedite the development of new
technologies or products
 Overcome deficits in technical or
manufacturing expertise
 To create new skill sets and capabilities by
bringing together personnel of each partner
 To improve supply chain efficiency
 To gain economies of scale in
production and/or marketing
 To acquire or improve market access
via joint marketing agreements

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Why Strategic Alliances and
Collaborative Partnerships Fail

 Diverging objectives and priorities of

partners
 Inability of partners to work well
together
 Changing conditions rendering
purpose of alliance obsolete
 Emergence of more attractive
technological paths
 Marketplace rivalry between one or
more allies

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