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TheChapter
Five Generic
Title
Competitive
Strategies
Michael E. Porter
5-2
Chapter Roadmap
The Five Competitive Strategies
The
Contrasting Features of the Five Generic
Competitive Strategies: A Summary
5-3
Strategy and Competitive Advantage
5-6
Low-Cost Provider Strategies
Keys to Success
Make achievement of meaningful lower costs
than rivals the theme of firm’s strategy
Strive
Strivehard
hardfor
forcontinuous
continuousimprovement
improvementin inthe
theefficiency
efficiencyof
ofits
itsplants
plantsand
and
frequently invest in state-of-the art equipment to reduce unit costs
frequently invest in state-of-the art equipment to reduce unit costs
Carefully
Carefullyselect
selectplan
plansites
sitesto
tominimize
minimizeinbound
inboundandandoutbound
outboundshipping
shipping
costs
costsand
andtototake
takeadvantage
advantageofoflow
lowrates
ratesfor
forelectricity
electricity
Hire
Hireaanonunion
nonunionworkforce
workforcethat
thatuses
usesteam-based
team-basedincentive
incentivecompensation
compensation
systems
systems
Heavily
Heavilyemphasize
emphasizeconsistent
consistentproduct
productquality
qualityand
andmaintain
maintainrigorous
rigorousquality
quality
systems
systems
Minimize
Minimizegeneral
generaland
andadministrative
administrativeexpenses
expensesby bymaintaining
maintainingaalean
leanstaff
staffat
at
corporate
corporateheadquarters
headquartersand
andallowing
allowingonly
only44levels
levelsof
ofmanagement
management
5-9
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
Control
Revamp value chain to bypass costs!
cost-producing activities that add little
By-pass
value from the buyer’s perspective costs!
5-10
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
5-11
Approach 2: Revamping the Value Chain
Strive
Strivetotooptimize
optimizethe
theproduct
productmix
mixand
andachieve
achievegreater
greatersales
sales
turnover
turnover
Install
Installsecurity
securitysystems
systemsand
andstore
storeoperating
operatingprocedures
proceduresthat
thatlower
lower
shrinkage
shrinkagerates
rates
Negotiate
Negotiatepreferred
preferredreal
realestate
estaterental
rentaland
andleasing
leasingrates
rateswith
withreal
real
estate
estatedevelopers
developersand
andowners
ownersofofits
itsstore
storesites
sites
Manage
Manageand andcompensate
compensateitsitsworkforce
workforcein inaamanner
mannertotoyield
yieldlower
lower
labor
laborcosts
costs
5-13
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
5-14
Characteristics of a Low-Cost Provider
Objective
Incorporate differentiating features that cause
buyers to prefer firm’s product or service over
brands of rivals
Keys to Success
Findways 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
5-19
Benefits of Successful Differentiation
= Competitive Advantage
5-20
Types of Differentiation Themes
Unique taste – Dr. Pepper
Multiple features – Microsoft Windows and Office
Wide selection and one-stop shopping – Home Depot,
Amazon.com
Superior service -- FedEx, Ritz-Carlton
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
5-21
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
5-22
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
5-23
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
5-24
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
5-25
Importance of Perceived Value
and
5-27
When Does a Differentiation
Strategy Work Best?
There are many ways to differentiate a product
that have value and please customers
5-30
Best-Cost Provider Strategies
5-33
Risk of a Best-Cost Provider Strategy
5-34
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 5.1)?
5-35
Focus / Niche Strategies
Geographic uniqueness
Specializedrequirements in
using product/service
5-37
Examples of Focus Strategies
Approach 1
Achieve lower costs than rivals in
serving a well-defined buyer segment –
Focused low-cost strategy
Which
Approach 2 hat is
unique?
Amazon.com
Avon Products
5-42
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!
5-43
5-44