Competitive Strategy

STRATEGY AND COMPETITIVE ADVANTAGE Jojo Thairon G. Tacumba Lecturer, Southwestern MBA WATERFRONT HOTEL Lahug, Cebu City September 2, 2006 “Competitive strategy is is about being being different. different. It means deliberately deliberately choosing a different set of activities to deliver a unique mix of value.” Seminar Roadmap  Five Generic Competitive Strategies Low-Cost Leadership Strategy   Broad Differentiation Strategies  Best-Cost Provider Strategies  Focused Low-Cost Strategies  Focused Differentiation Strategies Vertical Integration Strategies   Merger and Acquisition Strategies  Cooperative Strategies  Offensive and Defensive Strategies  First-Mover Advantages and Disadvantages Strategy and Competitive Competitive Advantage Advantage  Competitive advantage exists when a firm’s strategy gives it an edge in  Defending against competitive forces and  Securing customers  Convince customers firm’s product / service offers superior value  Offer buyers a good product at a lower price  Use differentiation to provide a better product buyers think is worth a premium price 

What is “Competitive Strategy”? 

Consists of a company’s market approaches to  Attract and please customers

initiatives and business

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Withstand competitive pressures Strengthen market position   Includes offensive and defensive moves to  Counter actions of key rivals  Shift resources to improve long-term market position  Respond to prevailing market conditions  Narrower in scope than business strategy Objectives of Competitive Strategy competitive advantage Build a competitive  Cultivate clientele of loyal customers  Knock the socks off rivals , ethically and honorably  Figure 5.1: The Five Generic Competitive Strategies Table 5-1: Distinctive Features of the Five Generic Competitive Strategies Low-Cost Leadership 

Make achievement of low-cost relative to rivals the theme of firm’s business strategy  Find ways to drive costs out of business year-after-year Options: Achieving a Low-Cost Low-Cost Strategy  Open up a sustainable cost advantage over rivals, using lower-cost edge to either Under-price rivals and reap market market share gains  or Earn higher profit margin selling at going price 

Figure 5.2: Reconfiguring Value Chain Systems to Lower Costs -- Software Industry Figure 5.2: Reconfiguring Value Chain Systems to Lower Costs -- Software Industry Approaches to Securing a Cost Advantage Do a better job than rivals of performing value chain activities efficiently and cost effectively Approach 1: Controlling the Cost Drivers







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Find sharing opportunities with other business units Compare vertical integration vs. outsourcing Assess first-mover advantages vs. disadvantages Control percentage of capacity utilization Make prudent strategic choices related to operations

Approach 2: Revamping the Value Chain Abandon traditional business methods and shift to e-business  technologies and use of Internet Use direct-to-end-user sales/marketing methods   Simplify product design Offer basic, no-frills product/service  Shift to a simpler, less capital-intensive, or more flexible  technological process Find ways to bypass use of high-cost raw materials   Relocate facilities closer to suppliers or customers Drop “something for everyone” approach and focus on a limited  product/service Reengineer core business processes  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 reengineer how activities are performed and coordinated—eliminate the costs of unnecessary work steps  Be creative in cutting low value-added activities out of value chain system—re-invent the industry value chain 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







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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  Differentiation Strategies 

Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals

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Find ways to differentiate that create value for buyers and that are not easily matched or cheaply copied by rivals  Not spending more to achieve differentiation than the price premium that can be charged

Appeal of Differentiation Strategies  A powerful competitive approach when uniqueness can be achieved in ways that  Buyers perceive as valuable and are willing to pay for  Rivals find hard to match or copy  Can be incorporated at a cost well below the price the price premium that buyers will pay Benefits of Successful Differentiation







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Wide selection and one-stop shopping -- Home Depot and Amazon.com  Superior service -- FedEx, Ritz-Carlton  Spare parts availability -availability -- Caterpillar  More for your money -money -- McDonald’s, Wal-Mart  Prestige -- Rolex  Quality manufacture -- Honda, Toyota  Technological leadership -- 3M Corporation, Intel  Top-of-the-line image -- Ralph Lauren, Chanel Sustaining Differentiation: Differentiation: The Key to Competitive Competitive Advantage  Most appealing approaches to differentiation  Those hardest for rivals to match or imitate  Those buyers will find most appealing  longer-lasting, more profitable Best choices for gaining a longer-lasting, 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 How to Achieve a Differentiation-Based Advantage Incorporate product features/attributes that lower buyer’s overall costs of using product Signaling Value as Well as Delivering Value  Buyers seldom pay for value that is not perceived  Signals of value may be as important as actual value when Nature of differentiation is hard to quantify   Buyers are making first-time purchases







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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 s imilar differentiation approach  Technological change and product innovation are fast-paced  Pitfalls of Differentiation Strategies  Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their well-being Over-differentiating Over-differentiating such that product  features exceed buyers’ needs  Charging a price premium that buyers perceive is too high  Failing to signal value  Not understanding what buyers want or prefer and differentiating on the “wrong” things

Competitive Strategy Principle A low-cost producer strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra attributes as worth paying additional money to obtain! 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

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 How a Best-Cost Strategy Differs from a Low-Cost Strategy  Achieve lower costs than any Aim of a low-cost strategy-- Achieve other competitor in the industry  Intent of a best-cost strategy--Make a more upscale product at lower costs than the makers of other brands with 









that the low-cost leader’s product doesn’t have Competitive Strength of a Best-Cost Provider Strategy  A best-cost provider’s competitive advantage comes from matching close rivals on key product attributes and beating them on price  Success depends on having the skills and capabilities to provide attractive performance performance and features at a lower cost than rivals A best-cost producer can often out-compete both a low-cost  provider and a differentiator when  Standardized features/attributes won’t meet the diverse needs of buyers  Many buyers are price and value sensitive Risk of a Best-Cost Provider Strategy  Risk – 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 Focus / Niche Strategies Involve concentrated attention on a narrow piece of the total  market Serve niche buyers better than rivals 

Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs  Develop unique capabilities to serve needs of target buyer segment







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Maintenance for motor vehicles  Bandag  Specialist in truck tire recapping 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 Cooperative Strategies Companies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives and strengthen their competitiveness. competitiveness. Such cooperative cooperative strategies go beyond normal company-to-company dealings but fall short of merger or formal joint venture. Why Cooperative Strategies Are Integral to a Firm’s







Collaborative arrangements with foreign partners can be very helpful in pursuing opportunities in unfamiliar national markets

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Competitive Value of Strategic Alliances to the Partners  Capacity of partners to defuse organizational frictions  Ability to collaborate effectively over time and work through challenges  Technological and competitive surprises  New market developments  Changes in their own priorities and competitive circumstances  Competitive advantage emerges when a company acquires valuable capabilities via alliances it could not obtain on its own, providing an edge over rivals Why are Strategic Alliances Formed?  To collaborate on technology development or new product development  To fill gaps in technical or manufacturing expertise  To acquire new competencies  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 Potential Benefits of Alliances to Achieve Global and Industry Leadership Get into critical country markets quickly to accelerate process of  building a global presence  Gain inside knowledge about unfamiliar unfa miliar markets and cultures Access valuable skills and competencies concentrated in 







Diverging objectives and priorities of partners Inability of partners to work well together  Emergence of more attractive technological paths   Marketplace rivalry between one or more allies Merger and Acquisition Strategies  Merger - Combination and pooling of equals, with newly created firm often taking on a new name  Acquisition - One firm, the acquirer, purchases and absorbs operations of another, the acquired  Merger-acquisition  Much-used strategic option Especially suited for situations where alliances do not  provide a firm with needed capabilities or cost-reducing opportunities Ownership allows for tightly integrated operations, creating more  control and autonomy than alliances Benefits of Mergers and Acquisitions  Combining operations may result in  More or better competitive capabilities  More attractive line-up of products / services s ervices  Wider geographic coverage  Greater financial resources to invest in R&D, add capacity, or expand  Cost-saving opportunities  Filling in of resource or technological gaps  Stronger technological skills  Greater ability to launch next-wave products / services Pitfalls of Mergers and Acquisitions Combining operations may result in  Resistance from rank-and-file employees   Hard-to-resolve conflicts in management styles and corporate cultures 







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Can aim at either full or partial integration Competitive Strategy Principle Strategic Advantages of Backward Integration  Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers  Potential to reduce costs exists when  Suppliers have sizable profit margins  Item supplied is a major cost component  Resource requirements are easily met met Can produce a differentiation-based competitive advantage  when it results in a better quality part  Reduces risk of depending on suppliers of crucial raw materials / parts / components Strategic Advantages of Forward Integration  Advantageous for a firm to establish its own distribution network if  Undependable distribution channels undermine steady production operations  Lacking a broad enough product line to justify integrating forward into stand-alone distributorships or retail outlets, a firm may sell directly to end users  Direct sales and Internet retailing may  Lower distribution costs  Produce a relative cost advantage over rivals  Enable lower selling prices to end users us ers Strategic Disadvantages of Vertical Integration  Boosts resource requirements









How much it can lower cost, build expertise, increase differentiation, or otherwise enhance performance of strategycritical activities Its impact on investment cost, flexibility,  and administrative overhead The contribution it makes to strengthening  a company market position or helping it competitive advantage create competitive de-integrating, unbundling, Many companies are finding that de-integrating,  and out-sourcing value chain activities are a better strategic option when it comes to lowering cost, improving their competitiveness, or gaining added operating flexibility Unbundling and Outsourcing Strategies De-Integration or unbundling involves narrowing the scope of the firm’s operations, focusing on performing certain “core” value chain activities and relying on outsiders to perform the remaining value chain activities When Does Outsourcing Make Strategic Sense? Activity can be performed better or more cheaply by outside  specialists Activity is not crucial to achieve a sustainable competitive  advantage 







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Hollowing out its capabilities Losing touch with activities and expertise that determine its  overall long-term success Offensive and Defensive Strategies build new or stronger market position and/or create Used to build new competitive competitive advantage Used to protect competitive advantage (rarely are they the basis for creating advantage) Figure 5.3: The Building and Eroding of Competitive Advantage Competitive Strategy Principle Any competitive advantage currently held will eventually be eroded by eroded by the actions of competent, resourceful competitors ! Options for Mounting Strategic Offensives 1. Initiatives to match or exceed competitor strengths 2. Initiatives to capitalize on competitor weaknesses 3. Simultaneous initiatives on many fronts 4. End-run offensives 5. Guerrilla warfare tactics 6. Preemptive strikes Attacking Competitor Strengths







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Splinter their attention  Force them to use substantial resources to defend their position End-Run Offensives  Dodge head-to-head confrontations confrontations that escalate competitive intensity or risk cutthroat competition  Attempt to maneuver around strong competitors— concentrate on areas of market where competition is weakest Optional Approaches for End-Run Offensives  Introduce new products that redefine market and terms of competition  Build presence in geographic areas where rivals have little presence Create new segments by introducing products with different  features to better meet buyer needs  Introduce next-generation technologies to leapfrog rivals Guerrilla Offenses Use principles of surprise and hit-and-run to attack in locations and at times where conditions are most favorable to initiator Options for Guerrilla Offenses  Make random, scattered raids on leaders’ customers







Choosing Who to Attack  Four types of firms can be the target of an fresh offensive  Market leaders  Runner-up firms  Struggling rivals on verge of going under  Small local or regional firms not doing a good job for their customers Offensive Strategy and Competitive Advantage  Strategic offensive offering strongest basis for competitive advantage usually entail Developing lower-cost product design  Making changes in production operations that lower costs or  enhance differentiation Developing product features that deliver superior performance or  lower users’ costs Giving more responsive customer service  Escalating marketing effort  Pioneering a new distribution 







Offer free training and support services  Reduce delivery times for spare parts Make early announcements about new products or price  changes Challenge quality or safety of rivals’ products using legal  tactics  Sign exclusive agreements with distributors Signal Challengers Retaliation Is Likely  Publicly announce management’s strong commitment to maintain present market share  Publicly announce plans to put adequate capacity in place to meet forecasted demand  Give out advance information about new products, technological breakthroughs, and other moves  Publicly commit firm to policy of matching prices and terms offered by rivals  Maintain war chest of cash reserves  Make occasional counter-response to moves of weaker rivals First-Mover Advantages When to make a strategic move is often as crucial as what  move to make  First-mover advantages arise when 

Competitive Strategy

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