chapter

THE FIVE
GENERIC
COMPETITIVE
STRATEGIES

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

LO1 Gain an understanding of how each of the five

generic competitive strategies go about building
competitive advantage and delivering superior
value to customers.
LO2 Learn the major avenues for achieving a
competitive advantage based on lower costs.
LO3 Recognize why some generic strategies work
better in certain kinds of industry and competitive
conditions than others.

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LO4 Gain command of the major avenues for

developing a competitive advantage based on
differentiating a companys product or service
offering from the offerings of rivals.
LO5 Recognize the required conditions for delivering
superior value to customers through the use of
a hybrid of low-cost provider and differentiation
strategies.

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COMPETITIVE STRATEGIES
AND MARKET POSITIONING
Competitive Strategy

Deals exclusively with managements game plan for competing successfully and
securing
a competitive advantage over rivals

Represents the firms specific efforts to provide superior value to customers by
offering:

An equally good product at a lower price

A superior product with unique features perceived
as worth paying more for

An attractive overall mix of price, features, quality, service, and other
appealing attributes

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A competitive strategy concerns the

specifics of managements game plan
for competing successfully and securing
a competitive advantage over rivals in
the marketplace.

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FIGURE 5.1

The Five Generic Competitive Strategies

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THE FIVE GENERIC COMPETITIVE STRATEGIES

Low-cost
provider
Broad
differentiation

Striving to achieve lower overall costs than rivals and appealing to a

broad spectrum of customers, usually by underpricing rivals

Seeking to differentiate the firms product or service from rivals in

ways that will appeal to a broad spectrum of buyers

Focused
low-cost

Concentrating on a narrow buyer segment (or market niche) and

outcompeting rivals by having lower costs than rivals and thus being
able to serve niche members at a lower price

Focused
differentiation

Concentrating on a narrow buyer segment (or market niche) and

outcompeting rivals by offering niche members customized attributes
that meet their tastes and requirements better than rivals products

Best-cost
provider

Giving customers more value for the money by satisfying buyers

expectations on key quality/features/performance/service attributes
while beating their price expectations

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LOW-COST PROVIDER STRATEGIES

A powerful competitive approach with price-sensitive buyers when a firms offering:

Has a lower cost than rivalsbut not necessarily
the absolutely lowest possible cost.

Includes features and services that buyers consider essential.

Is viewed by consumers as offering equivalent or higher value even if priced lower
than competing products.

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A low-cost leaders basis for competitive

advantage is lower overall costs than competitors. Success in achieving a low-cost
edge over rivals comes from eliminating
and/or curbing nonessential activities and/or
outmanaging rivals in performing essential
activities.

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TRANSLATING A LOW-COST STRATEGY INTO

ATTRACTIVE PROFIT PERFORMANCE

Option 1

Use a lower-cost edge to underprice competitors

and attract price-sensitive buyers in great enough
numbers to increase total profits

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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THE TWO MAJOR AVENUES FOR ACHIEVING

LOW-COST LEADERSHIP
1.

Perform essential value chain activities more cost-effectively

than rivals

2.

Revamp the firms overall value chain to eliminate or bypass

some cost-producing activities

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COST-EFFICIENT MANAGEMENT
OF VALUE CHAIN ACTIVITIES
Striving to capture all available
economies of scale
Taking full advantage of experience
and learning curve effects
Trying to operate facilities at full
capacity
Pursuing efforts to boost sales
volumes and thus spread outlays
for R&D, advertising, and
general administration over
more units
Substituting lower-cost inputs
whenever theres little or no
sacrifice in product quality or
product performance

Employing advanced production

technology and process design
to improve overall efficiency
Using communication systems and
information technology to
achieve operating efficiencies
Pursuing ways to reduce workforce
size and lower overall
compensation costs
Using the companys bargaining
power vis--vis suppliers to gain
concessions
Being alert to the cost advantages of
outsourcing and vertical
integration

REVAMPING THE VALUE CHAIN

Reengineering the
firms value chain

Sell directly to
consumers and cut
out the activities and
costs of distributors
and dealers

Streamline operations
by eliminating low
value-added or
unnecessary work
steps and activities

Reduce materials
handling and shipping
costs by having
suppliers locate plants
or warehouses close to
a firms own facilities

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WHEN A LOW-COST STRATEGY WORKS BEST

1. Price competition among rival sellers is especially vigorous.
2. The products of rival sellers are essentially identical and are readily
available from several sellers.
3. There are few ways to achieve product differentiation that have value
to buyers.
4. Buyers incur low costs in switching their purchases from one seller to
another.
5. The majority of industry sales are made to a few, large-volume buyers.
6. Industry newcomers use introductory low prices to attract buyers and
build a customer base.

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Concepts and Connections 5.1

How Walmart Managed Its Value Chain to Achieve
a Low-Cost Advantage Over Rival Supermarket Chains

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PITFALLS TO AVOID IN PURSUING

A LOW-COST PROVIDER STRATEGY
1.

Overly aggressive price cutting

Price cutting results in lower margins, no increase in sales volume, and lower
profitability
2.

Reliance on easily imitated cost reductions

3.

Becoming too fixated on cost reduction

Ignoring buyer interest in additional features

Overlooking declining buyer sensitivity to price

Denying technological breakthroughs that will nullify cost advantages

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BROAD DIFFERENTIATION STRATEGIES

Powerful competitive approaches to use whenever buyers needs and
preferences
are too diverse to be fully satisfied by a standardized product or service.

Involves incorporating differentiating features that cause buyers to prefer
one firms brand, product, or service over those of its rivals

Requires 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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The essence of a broad differentiation

strategy is to offer unique product or
service attributes that a wide range of
buyers find appealing and worth paying for.

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BENEFITS OF SUCCESSFUL DIFFERENTIATION

Successful execution of a
differentiation strategy
allows a firm to:

Command a
premium price

Increase its
unit sales

Gain buyer loyalty

to its brand

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APPROACHES TO DIFFERENTIATION
Unique taste: Red Bull, Listerine
Multiple features: Microsoft Office, Apple iPhone
Wide selection and one-stop shopping: Home Depot, Amazon.com
Superior service: Ritz-Carlton, Nordstrom
Spare parts availability: Caterpillar
Engineering design and performance: Mercedes-Benz, BMW
Luxury and prestige: Rolex, Gucci, Chanel
Product reliability: Johnson & Johnson
Quality manufacture: Michelin in tires, Honda in automobiles
Technological leadership: 3M Company
Full range of services: Charles Schwab in stock brokerage
Complete line of products: Campbell soups, Frito-Lay snack foods

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DELIVERING SUPERIOR VALUE VIA

A DIFFERENTIATION STRATEGY
1.

Include product attributes and user features that lower the buyers costs.

2.

Incorporate tangible features that improve product performance.

3.

Incorporate intangible features that enhance buyer satisfaction in noneconomic

ways.

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MANAGING THE VALUE CHAIN IN WAYS

THAT ENHANCE DIFFERENTIATION

Manufacturing
activities

Supply chain
activities

Product
R&D

Production R&D
and technologyrelated activities

Activities
that Enhance
Differentiation

Distribution and
shipping activities

Marketing, sales,
and customer
service activities

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PERCEIVED VALUE AND THE IMPORTANCE

OF SIGNALING VALUE
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.
Important to signal value when:

Nature of differentiation is subjective

Buyers are making first-time purchases

Repurchase is infrequent

Buyers are unsophisticated

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WHEN A DIFFERENTIATION STRATEGY

WORKS BEST
1. Buyer needs and uses of the product are diverse.
2. There are many ways to differentiate the product or
service that have value to buyers.
3. Few rival firms are following a similar differentiation
approach.
4. Technological change is fast-paced and competition
revolves around rapidly evolving product features.

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PITFALLS TO AVOID IN PURSUING

A DIFFERENTIATION STRATEGY
Pursuing a differentiation strategy keyed to product or service
attributes that are easily and quickly copied.
Incorporating product features or attributes in which buyers see
little value or are easily copied by rivals.
Overspending on efforts to differentiate.
Over-differentiating so that product quality or service levels
exceed buyers needs.
Trying to charge too high a price premium.
Not opening up meaningful gaps in quality or service or
performance features over the products of rivals.

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FOCUSED (OR MARKET NICHE) STRATEGIES

Reflect a concentration on a narrow piece of the total
market defined by geographic uniqueness or special
product attributes.
Appeal to smaller and medium-sized firms that may lack
the breadth and depth of resources to tackle going
after a whole market customer base.

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A FOCUSED LOW-COST STRATEGY

A focused strategy based on low cost aims at securing a competitive
advantage by serving buyers in the target market niche at a lower cost
and a lower price than rival competitors.
Avenues to achieving cost advantage are the same as for low-cost
leadershipout-manage rivals in keeping costs low and bypassing or
reducing nonessential activities.

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Concepts and Connections 5.2

Vizios Focused Low-Cost Strategy

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FOCUSED DIFFERENTIATION STRATEGY

Keyed to offering carefully designed 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).

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Concepts and Connections 5.3

Nestl Nespressos Focused Differentiation Strategy
in the Coffee Industry
Nestls strategy in the gourmet coffee industry has
allowed its Nespresso brand of espresso coffee to
become the fastest-growing billion-dollar brand in its
broad lineup of chocolates and confectionery, bottled
waters, coffee, ready-to-eat cereals, frozen food, dairy
products, ice cream, and baby foods. The Nespresso
concept was developed in 1986 to allow consumers to
create a perfect cup of espresso coffee, equal to that of a
skilled barista, with the use of a proprietary line of
coffeemakers designed to accommodate Nespressos
single-serving coffee capsules.

The ease-of-use of the stylish Nespresso coffeemakers

and the high-quality coffee selected by Nestl for its
single-serving coffee pods allowed coffee drinkers with
little experience in preparing gourmet coffees to
master great-tasting lattes, cappuccinos, and espresso
drinks. Nespresso was sold in more than 50 countries
in 2011 and had averaged annual growth in revenues of
30 percent since 2000 to reach sales of more than $3
billion Swiss francs in 2010.

Nespresso capsules were available in 16 different roasts

and aromatic profiles and could be purchased online at
Nestls Nespresso Club website, in any of Nestls 200
lavish Nespresso boutiques located in the worlds most
exclusive shopping districts, and in select upscale
retailers across the globe. Nespresso coffee machines
were designed for ease-of-use while having advanced
technological features that maximized the aroma of the
coffee and automated the entire process even down to
creating a thick and creamy froth from cold milk for
cappuccinos. Nespresso coffeemakers also set standards
for aesthetics with classic, sleek models, avant-garde
models, and retro-modern models.

Unsurpassed product quality and proven coffee

expertise.

Nestls focus differentiation strategy for Nespresso

includes the following primary elements:

Unstoppable drive for innovation and distinctive

design.
Inspirational, iconic global reputation of the brand.
Global brand community thanks to direct customer
relationships.
Exclusive routes to market.
Expertise in sustainable quality development.
Source: Nestl press releases, June 9, 2009;
September 21, 2009; and August 11, 2010.

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WHEN A FOCUSED LOW-COST OR FOCUSED

DIFFERENTIATION STRATEGY IS VIABLE
The target market niche is big enough to be profitable and offers good growth
potential.
Industry leaders have chosen not to compete in the nichefocusers can avoid
battling head-to-head against the industrys biggest and strongest
competitors.
It is costly or difficult for multisegment competitors to meet the specialized
needs of niche buyers and at the same time satisfy the expectations of
mainstream customers.
The industry has many different niches and segments, thereby allowing a
focuser to pick a niche suited to its resource strengths and capabilities.
Few, if any, rivals are attempting to specialize in the same target segment.

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THE RISKS OF A FOCUSED LOW-COST OR

FOCUSED DIFFERENTIATION STRATEGY
1. Competitors find effective ways to match a focusers
capabilities in serving the target niche.
2. The preferences and needs of niche members 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.

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BEST-COST PROVIDER STRATEGIES

Are a hybrid of low-cost provider and differentiation strategies that:

Involves giving customers more value for money by satisfying buyer expectations on key
quality/features/ performance/service attributes and beating customer expectations on
price.

Is a powerful competitive approach with value-conscious buyers looking for a good-tovery-good product or service at an economical price.

Creates a best-cost status as the low-cost provider of a product or service with upscale
attributes.

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Best-cost provider strategies are

a hybrid of low-cost provider and
differentiation strategies that aim at
satisfying buyer expectations
on key quality/features/performance/
service attributes and beating
customer expectations on price.

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Concepts and Connections 5.4

Toyotas Best-Cost Producer Strategy for Its Lexus Line

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EMPLOYING BEST-COST STRATEGIES

Best-cost strategies are contingent on:
1.

A superior value chain configuration that eliminates or minimizes activities

that do not add value

2.

Unmatched efficiency in managing essential value chain activities

3.

Core competencies that allow differentiating attributes to be incorporated at

a low cost

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WHEN A BEST-COST PROVIDER STRATEGY

WORKS BEST
A best-cost provider strategy works best in markets where:

Product differentiation is the norm.

The market is comprised of large numbers of value-conscious buyers
attracted to economically priced midrange products and services,
especially during recessionary times.

A provider can offer either a medium-quality product at a below-average
price or a high-quality product at an average or slightly higher-thanaverage price.

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THE DANGER OF AN UNSOUND

BEST-COST PROVIDER STRATEGY
Vulnerability to both low-cost providers and high-end differentiators
in not having the requisite core competencies and efficiencies in
managing value chain activities to offer significantly
differentiating product attributes or features at attractive lower
prices without significantly increasing costs.

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SUCCESSFUL COMPETITIVE STRATEGIES

ARE RESOURCE BASED
Low-Cost Providers

Must have the resources and capabilities to keep costs below those of
competitors

Must have expertise to cost-effectively manage value chain activities
better than rivals
Differentiators

Must have the resources and capabilities to incorporate unique attributes
that a broad range of buyers will find appealing and worth paying for

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SUCCESSFUL COMPETITIVE STRATEGIES

ARE RESOURCE BASED (CONTD)
Narrow Segment Focusers

Must have the capability to do an outstanding job of satisfying the needs
and expectations of niche buyers
Best-Cost Providers

Must have the resources and capabilities to incorporate upscale product
or service attributes at a lower cost than rivals

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PERILS OF A STUCK IN THE MIDDLE STRATEGY

Compromise strategies can result in middle-of-the-pack industry rankings
and, at best, average performance due to:

An average cost structure

Minimal product differentiation relative to rivals

An average image and reputation

Limited prospect of industry leadership
Compromise or middle-ground strategies rarely produce sustainable
competitive advantage

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