[05] Strategies to Achieve
Competitive Advantage
Strategic Management
for Industrial Engineering
Indra Almahdy
Reference
Acknowledgement for following references
• Thompson. Strickland. Gamble. Crafting and Executing Strategy. The
Quest for Competitive Advantage. Concepts and Cases. McGraw-Hill
Companies, Inc. 15e/2007.
• Dess. Lumpkin. Eisner. Strategic Management. McGraw-Hill
Companies, Inc. 3e/2007
• Hitt. Ireland. Hoskisson. Rowe. Sheppard. Strategic Management.
Competitiveness and Globalization. Nelson – Thomson Canada
Limited. 2eCanadian/2006
• Saloner. Shepard. Podolny. Strategic Management. John Wiley &
Sons, Inc. 2001.
• Thompson. Strickland. Strategic Management. Concept and Cases.
McGraw-Hill. 10e/1998. 12e/2001. 13e/2004. 14e/2006.
• Pearce. Robinson. Strategic Management.
“Competitive strategy is about being different. It
means deliberately choosing to perform
activities differently or to perform different
activities than rivals to deliver a unique mix of
value.”
Michael E. Porter
Outline
• The Five Competitive Strategies
• Low-Cost Provider Strategies
• Broad Differentiation Strategies
• Best-Cost Provider Strategies
• Focused (or Market Niche) Strategies
• The Contrasting Features of the Five Generic
Competitive Strategies: A Summary
Strategy and Competitive
Advantage
• Competitive advantage exists when a firm’s strategy
gives it an edge in
– Attracting customers and
– Defending against competitive forces
Key to Gaining a Competitive Advantage
• Convince customers firm’s product / service offers
superior value
– A good product at a low price
– A superior product worth paying more for
– A best-value product
What Is Competitive Strategy?
• Deals exclusively with a company’s business
plans to compete successfully
– Specific efforts to please customers
– Offensive and defensive moves
to counter maneuvers of rivals
– Responses to prevailing market conditions
– Initiatives to strengthen its market position
• Narrower in scope than business strategy
Fig. --- The Five Generic Competitive Strategies
Low-Cost Provider Strategies
Keys to Success
• Make achievement of meaningful lower costs
than rivals the theme of firm’s strategy
• Include features and services in product
offering that buyers consider essential
• Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match
Low-cost leadership means low overall costs, not
just low manufacturing or production costs!
Translating a Low-Cost Advantage
into Higher Profits: Two Options
Option 1: Use lower-cost edge to
under-price competitors and attract
price-sensitive buyers in 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,
thereby increasing total profits
Nucor Corporation’s
Low-Cost Provider Strategy
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Approaches to Securing
a Cost Advantage
Approach 1
Do a better job than rivals of
performing value chain activities
efficiently and cost effectively
Approach 2
Revamp value chain to bypass Control
cost-producing activities that add little costs!
value from the buyer’s perspective
By-pass
costs!
Approach 1: Controlling the
Cost Drivers
• Capture scale economies; avoid scale diseconomies
• Capture learning and experience curve effects
• Control percentage of capacity utilization
• Pursue efforts to boost sales and spread costs such as R&D and
advertising over more units
• Improve supply chain efficiency
• Substitute use of low-cost for high-cost raw materials
• Use online systems and sophisticated software to achieve operating
efficiencies
• Adopt labor-saving operating methods
• Use bargaining power to gain concessions from suppliers
• Compare vertical integration vs. outsourcing
Approach 2: Revamping the
Value Chain
• Use direct-to-end-user sales/marketing methods
• Make greater use of online technology applications
• Streamline operations by eliminating low-value-added or
unnecessary work steps
• Relocate facilities closer to suppliers or customers
• Offer basic, no-frills product/service
• Offer a limited product/service as opposed to a full
product/service line
Keys to Success in Achieving
Low-Cost Leadership
• Scrutinize each cost-creating activity, identifying cost drivers
• Use knowledge about cost drivers to manage
costs of each activity down year after year
• Find ways to restructure value chain to eliminate
nonessential work steps and low-value activities
• Work diligently to create cost-conscious corporate cultures
– Feature broad employee participation in continuous cost-
improvement efforts and limited perks for executives
– Strive to operate with exceptionally small corporate staffs
• Aggressively pursue investments in resources and capabilities that
promise to drive costs out of the business
Characteristics of a Low-Cost
Provider
• Cost conscious corporate culture
• Employee participation in cost-control efforts
• Ongoing efforts to benchmark costs
• Intensive scrutiny of budget requests
• Programs promoting continuous cost
improvement
Successful low-cost producers champion
frugality but wisely and aggressively
invest in cost-saving improvements !
When Does a Low-Cost
Strategy Work Best?
• Price competition is vigorous
• Product is standardized or readily available
from many suppliers
• There are few ways to achieve
differentiation that have value to buyers
• Most buyers use product in same ways
• 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
Pitfalls of Low-Cost Strategies
• Being overly aggressive in cutting price
• Low cost methods are easily imitated by rivals
• Becoming too fixated on reducing costs
and ignoring
– Buyer interest in additional features
– Declining buyer sensitivity to price
– Changes in how the product is used
• Technological breakthroughs open up cost reductions
for rivals
Test Your Knowledge
Striving to be the industry’s low-cost provider and achieving lower
costs than rivals entails
A. doing a better job than rivals of performing value chain activities
more cost-effectively.
B. having a smaller labor force than rivals, paying lower wages than
rivals, locating all facilities in countries where labor costs are low,
and outsourcing many value chain activities to suppliers with world-
class technological capabilities.
C. revamping the firm’s overall value chain to eliminate or bypass
cost-producing activities that produce little value added insofar as
customers are concerned.
D. adopting activity-based costing, utilizing more best practices than
rivals, and having a narrower product line than rivals.
E. Both A and C.
Differentiation Strategies
Objective
• Incorporate differentiating features that cause
buyers to prefer firm’s product or service over
brands of rivals
Keys to Success
• Find ways to differentiate that create value for
buyers and are not easily matched or cheaply
copied by rivals
• Not spending more to achieve differentiation
than the price premium that can be charged
Benefits of Successful
Differentiation
A product / service with unique,
appealing attributes allows a firm to
Command a premium price and/or
Which
Increase unit sales and/or hat is
unique?
Build brand loyalty
= Competitive Advantage
Types of Differentiation
Themes
• Multiple features – Microsoft Windows and Office
• Spare parts availability – Caterpillar
• Engineering design and performance – Mercedes, BMW
• Prestige – Rolex
• Product reliability – Johnson & Johnson
• Quality manufacture – Karastan, Michelin, Toyota
• Technological leadership – 3M Corporation
• Top-of-line image – Ralph Lauren, Starbucks, Chanel
• Unique taste – Dr. Pepper
• Wide selection and one-stop shopping – Home Depot,
Amazon.com (Distribution)
• Superior service -- FedEx, Ritz-Carlton (Services)
Sustaining Differentiation:
Keys to Competitive Advantage
• Most appealing approaches to differentiation
– Those hardest for rivals to match or imitate
– Those buyers will find most appealing
• Best choices to gain a longer-lasting, more profitable
competitive edge
– New product innovation
– Technical superiority
– Product quality and reliability
– Comprehensive customer service
– Unique competitive capabilities
Where to Find Differentiation
Opportunities in the Value Chain
• Purchasing and procurement activities
• Product R&D and product design activities
• Production process / technology-related activities
• Manufacturing / production activities
• Distribution-related activities
• Marketing, sales, and customer service activities
Internally Activities, Costs,
Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins Strategic Partners
How to Achieve a
Differentiation-Based Advantage
Approach 1
Incorporate product features/attributes that
lower buyer’s overall costs of using product
Approach 2
Incorporate features/attributes that raise the
performance a buyer gets out of the product
Approach 3
Incorporate features/attributes that enhance buyer
satisfaction in non-economic or intangible ways
Approach 4
Compete on the basis of superior capabilities
Test Your Knowledge
Which of the following is not one of the four basic routes to
achieving a differentiation-based competitive advantage?
A. Appealing to high-income buyers who are willing and able to pay
a premium price for a high-performing, multi-featured product
B. Incorporating features that raise product performance
C. Incorporating product attributes and user features that lower the
buyer’s overall costs of using the company’s product
D. Delivering value to customers via competencies and competitive
capabilities that rivals don’t have or can’t afford to match
E. Incorporating features that enhance buyer satisfaction in
intangible or non-economic ways
Importance of Perceived Value
• Buyers seldom pay for value that is not perceived
• Price premium of a differentiation strategy reflects
– Value actually delivered to the buyer
and
– Value perceived by the buyer
• Actual and perceived value can differ when buyers are
unable to assess their experience with a product
Signaling Value as Well
as Delivering Value
• Incomplete knowledge of buyers causes them to
judge value based on such signals as
– Price
– Attractive packaging
– Extensive ad campaigns
– Ad content and image
– Seller facilities or professionalism and
personality of employees
– Having a list of prestigious customers
• Signals of value may be as important as
actual value when
– Nature of differentiation is hard to quantify
– Buyers are making first-time purchases
– Repurchase is infrequent
– Buyers are unsophisticated
When Does a Differentiation
Strategy Work Best?
• 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
Pitfalls of Differentiation
Strategies
• Appealing product features are easily copied by rivals
• Buyers see little value in unique attributes of product
• Overspending on efforts to differentiate the product offering,
thus eroding profitability
• Over-differentiating such that product
features exceed buyers’ needs
• Charging a price premium
buyers perceive is too high
• Not striving to open up meaningful gaps in quality, service, or
performance features vis-à-vis rivals’ products
For Discussion: Your Opinion
A low-cost provider strategy can defeat a
differentiation strategy when buyers are
satisfied with a basic product and don’t think
“extra” attributes are worth a higher price.
True or false? Explain.
Best-Cost Provider Strategies
• Combine a strategic emphasis on low-cost with a
strategic emphasis on differentiation
– Make an upscale product at a lower cost
– Give customers more value for the money
Objectives
• Deliver superior value by meeting or exceeding buyer
expectations on product attributes and beating their price
expectations
• Be the low-cost provider of a product with good-to-
excellent product attributes, then use cost advantage to
underprice comparable brands
Competitive Strength of a
Best-Cost Provider Strategy
• A best-cost provider’s competitive advantage is based
on its capability to include upscale attributes at a lower
cost than rivals’ comparable products
• To achieve competitive advantage,
a company must be able to
– Incorporate attractive features at a lower cost than rivals
– Manufacture a good-to-excellent quality product at a lower cost
than rivals
– Develop a product that delivers good-to-excellent performance
at a lower cost than rivals
– Provide attractive customer
service at a lower cost than rivals
When Does a Best-Cost
Provider Strategy Work Best?
• Where buyer diversity makes
product differentiation the norm and
• Where many buyers are also
sensitive to price and value
Risk of a Best-Cost Provider
Strategy
• A best-cost provider may get squeezed
between strategies of firms using low-cost and
differentiation strategies
– Low-cost leaders may be able to siphon
customers away with a lower price
– High-end differentiators may be able to
steal customers away with better product attributes
Test Your Knowledge
Which of the following are distinguishing features of a best-cost
provider strategy (based on the comparisons of the five generic
competitive strategies shown in Figure ---)?
A. The strategic target is price-conscious buyers
B. A marketing emphasis on charging a slightly higher price than
rival brands having comparable features and attributes
C. A product line that stresses wide selection, many product
variations, and emphasis on differentiating features
D. A competitive advantage based on more value for the money
E. Using constant product innovation, excellent R&D skills, and
periodic technological breakthroughs to sustain the strategy
Focus / Niche Strategies
• Involve concentrated attention on a narrow piece of the
total market
Objective
Serve niche buyers better than rivals
Keys to Success
• Choose a market niche where buyers
have distinctive preferences, special
requirements, or unique needs
• Develop unique capabilities to serve
needs of target buyer segment
Approaches to Defining a
Market Niche
• Geographic uniqueness
• Specialized requirements in
using product/service
• Special product attributes
appealing only to niche buyers
Examples of Focus Strategies
• Porsche
– Sports cars
• Cannondale
– Top-of-the line mountain bikes
• Bandag
– Specialist in truck tire recapping
• Animal Planet and History Channel
– Cable TV (Services)
• Google
– Internet search engines (Services)
• Enterprise Rent-a-Car
– Provides rental cars to repair garage customers (Services)
Focus / Niche Strategies
and Competitive Advantage
Approach 1
• Achieve lower costs than rivals in
serving a well-defined buyer segment –
Focused low-cost strategy
Which
Approach 2 hat is
unique?
• Offer a product appealing to unique
preferences of a well-defined buyer segment –
Focused differentiation strategy
What Makes a Niche
Attractive for Focusing?
• Big enough to be profitable and offers good growth
potential
• Not crucial to success of industry leaders
• Costly or difficult for multi-segment competitors
to meet specialized needs of niche members
• Focuser has resources and capabilities
to effectively serve an attractive niche
• Few other rivals are specializing in same niche
• Focuser can defend against challengers via superior
ability to serve niche members
Risks of a Focus 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 – niche
becomes part of overall market
• Segment becomes so attractive it becomes crowded
with rivals, causing segment profits to be splintered
For Discussion: Your Opinion
Which of the five generic competitive strategies do you
think the following companies are employing:
– The Saturn division of General Motors
– Abercrombie & Fitch
– Avon Products
– Amazon.com (Services)
Deciding Which Generic
Competitive Strategy to Use
• Each positions a company differently in its market and
competitive environment
• Each establishes a central theme for how a company will
endeavor to outcompete rivals
• Each creates some boundaries for maneuvering as
market circumstances unfold
• Each points to different ways of experimenting with the
basics of the strategy
• Each entails differences in product line, production
emphasis, marketing emphasis, and means to sustain
the strategy
The big risk – Selecting a “stuck in the middle” strategy!
This rarely produces a sustainable competitive
advantage or a distinctive competitive position!
NON-MANUFACTURING
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