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What is Competitive Advantage? What is Competitive Strategy? Porters original Four Generic Strategies

Porters Generic Strategies

Conclusion

Competitive advantage is defined as the strategic advantage one business entity has over the rival entities within its competitive industry.
Examples

Competitive strategy is concerned with how

a company can gain a competitive advantage

through a distinctive way of competing.

Type of Advantage Sought

Lower Cost Differentiation

Market Target

Broad Range of Buyers

Narrow Buyer Segment

OVERALL LOW-COST BROAD PROVIDER DIFFERENTIATION STRATEGY STRATEGY BEST-COST PROVIDER STRATEGY FOCUSED FOCUSED LOW-COST DIFFERENTIATION STRATEGY STRATEGY

 Low

overall cost leadership means LOW OVERALL COSTS AND NOT JUST MANUFACTURING AND PRODUCTION COSTS up sustainable cost advantage over rivals using lower cost edge as basis to
Earn more profits at going price.

Open

Or Under price rivals and reap market share gains.

1.
2.

Control cost drivers.

Revamp the value chain.

Capture scale economies Capture learning and experience curve effects Manage costs of key resource inputs Find sharing opportunities with other business units Compare vertical integration vs. outsourcing Assess first-mover advantages vs. disadvantages Make prudent strategic choices related to operations

Use direct-to-end-user sales/marketing methods Simplify product design

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

Price competition among rivals is dominant among competitive force. Few ways to achieve differentiation that have value to the buyers

Most buyers have similar needs or requirements

Buyers are large and have significant bargaining powers. Industrys product is a commodity type item readily available.

Being overly aggressive in cutting price Low cost methods are easily imitated by rivals Becoming too and ignoring fixated on reducing costs

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

Find ways to differentiate that create value for buyers and that are not easily matched or cheaply copied by rivals

 Successful differentiation allows the firm to

Command premium price Build brand loyalty

Increase unit sales

Prestige

Value for money

Superior service

Quality

Product attributes & user features

Raise performance the buyer gets

Features to enhance buyer satisfaction

 Provides defenses against competitive forces

Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their well-being Over-differentiating such that product features exceed buyers needs Charging a price premium that buyers perceive is too high Not understanding what buyers want or prefer and differentiating on the wrong things

FOCUS describes the scope over which the company should compete. The firm can choose to compete in the mass market with a broad scope, or in a defined, focused market segment with a narrow scope.
In either case, the basis of competition will still be either cost leadership or differentiation.

In Narrow scope, the firm focuses on a narrow segment or a few target segments within an industry.
These segments should be distinct groups with specialized needs. Ex: Apparel

Ultimate objective: by tailoring its marketing mix to these specialized markets, a firm can better meet the needs of that target market

Firms may choose to follow a narrow focus strategy because: 1. They are more effective at serving a narrow segment rather than industry focused rivals. 2. Segment is too narrow and is avoided by others i.e. good potential. 3. Segment is poorly served by rivals.


1.

2.

The choice of offering low prices or differentiated products/services depends on the needs of the selected segment(s) the resources and capabilities of the firm.
Example: Southwest Airlines, which provides short-haul point-to-point flights in contrast to the hub-and-spoke model of mainstream carriers.

Firms generally target the smallest buyers in an industry (those who purchase in such small quantities that industry-wide competitors cannot serve them at the same low cost).

Ex: IKEA offers low-cost, build it yourself, modular furniture

What they do different: IKEA displays its products in room-like settings Customers also pick up product from the store In-house childcare and extended hours at the shop IKEA Advantage: Cost of production, cost of storage, cost of employees reduced.

1. 2. 3.

Production Emphasis: Continuous cost reduction while adding features desired by the niche members.
Marketing Emphasis: Communicate attractive features of a budget-priced product offering that fits niche buyers expectations.

Companies following focused differentiation strategies produce customised products for small market segments. They can be successful when either Quantities involved are too small for industrywide competitors to handle economically. Extent of customisation requested is beyond the capabilities of the industry-wide differentiator. Ex: Bugatti (Supercar segment): production to maintain snob value. limited

1. 2.

Production Emphasis: Customized products made as per the tastes and requirements of niche members.
Marketing Emphasis: Communicate how products offering does the best job of meeting niche buyers expectations.

Low volume of sales gives high bargaining power to suppliers. Firms pursuing a focused differentiation strategy may be able to charge customers a premium for the absence of substitutes. The firm typically looks to gain a competitive advantage through effectiveness rather than efficiency.


1.

2.
3.

Some risks of focus strategies include Imitation and changes in the target segments. Easy for a broad-market cost leader to adapt its product in order to compete directly. Other focusers may be able to carve out subsegments that they can serve even better.

Changes in industry structure affects sustainability of a generic strategy or the scale of its competitive advantage.
Organization structure and culture depends on the generic strategy. The centerpiece of a firms strategic plan must be its generic strategy.

 Giving customers more value for their money Incorporating good-to-excellent product

attributes at a lower cost than rivals

Have the lowest costs compared to rivals

offering products with comparable attributes.

The target market is value-conscious buyers Low cost provider of an upscale product

A best-cost provider may get squeezed

Low-cost leaders may be able to attract

customers away with a lower price

High-end differentiators may be able to

steal customers away with better product attributes

Design high-performance upscale features comparable in performance/luxury to other high-end models, i.e. Mercedes, BMW Transfer its capabilities in making high-quality Toyota models at low cost to making premium-quality Lexus models at costs below other luxury-car makers Use its relatively lower manufacturing costs to under price comparable Mercedes and BMW models Establish a network of Lexus dealers providing personalized customer service

COST

LUXURY

COMFORT LEVEL
NORMAL

ROUTE

CHEAP

NO FRILLS

FEW ROUTES

EXPENSIVE

FANCY

HIGH

INTERNATIONAL

Deciding which generic strategy to employ is perhaps the most important strategic commitment a company makes
Generic Competitive Strategies are applicable to any industry They affect the organization structure and culture and in turn they are affected by industry structural changes