1/6/2009

Chapter Roadmap
Generic Strategies
Porter’sfive forces model

Types of generic strategies

Chapter 5
Cost leadership

Differentiation

Focus strategies – cost
leadership and differentiation
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Porter’s five forces model Types of strategies

Frequently used to assess competitive
environment

Competitive strategy is positioned so that the BROAD MARKET: BROAD MARKET:
five forces do the firm most good or least COST LEADERSHIP DIFFERENTIATION
harm

Firm need to choose one of five basic
strategies
FOCUS: COST FOCUS:
LEADERSHIP DIFFERENTIATION

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Low-Cost Provider Strategies Achieving Low-Cost Leadership

Build efficient-scale facilities

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
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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

Aggressively pursue investments in resources and
capabilities that promise to drive costs out of the
5-6 business

1

IKEA: Good Quality at Low
Price

Most furniture store have elaborate
showrooms with extensive displays, several
salespeople and third party manufacturers (8
weeks to deliver)

IKEA

Self-service model based on clear, in-store
displays

Does not rely on third party manufacturers – own
design of low-cost, modular, ready-to-assemble
furniture
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Two Approaches

Controlling cost drivers

Capture scale economies; avoid scale diseconomies

Capture learning and experience curve effects

Manage costs of key resource inputs

Consider linkages with other activities in value chain

Find sharing opportunities with other business units

Compare vertical integration vs. outsourcing

Control percentage of capacity utilization

Make prudent strategic choices related to operations
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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
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IKEA

All furniture displayed in room-like settings

Next to the store is the warehouse where
products are in palettes

Customers do own pick-up and delivery

Prices are cheap – but furniture quality is not
cheap

Prices 30-50% below competitors
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Revamping Value Chain

Make greater use of Internet technology applications

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
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Dangers of Too Much Cost-
cutting

Food Lion – “Lowest Price in North
Carolina”

Embarked on a cost cutting mission

Practices

Repackaged rotten meat to save money

Child labor

Forced employees to work after hours without
pay

Extremely unsanitary conditions
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Ruthless cost-cutting backfired
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Cost Leadership: Experience

Value-Chain Application Curve

Food Lion’s reduced cost in upstream
Scale is primary driver of competitive

activities

Logistics, warehousing, outbound logistics

However, cost cutting spilled into
downstream activities

Marketing, sales and customer service

Not all markets require cost cutting

Some markets may demand more product
variety and more customer service
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advantage

E-curve theory: predictable costs decline as
production increases

Eg., cement, ICs – cost per unit declines by 20-
25% for doubling of industry output

Different industries have different curves
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Example: Auto Industry Can you go too far?

Key driver of profitability: common car
Yes
platforms

VW – VW Passat and Audi 6 (premium

The bigger the share of platform, the greater sedan) share more that 75% of parts
the return on sales

Ex: VW reduced its platforms to four
Why would customers want to pay $15,000

Audi TT is much cheaper than the comparable more than VW?
Porsche Boxster

Tine to market reduced from 36 to 22 months

Ford

Explorer and Expedition share the same platform

Jaguar S Type and Lincoln LS
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Sustaining Differentiation: Keys to

Differentiation Strategies

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

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
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Competitive Advantage

Most appealing approaches to differentiation

Those hardest for rivals to match or imitate

Those buyers will find most appealing

Ways

New product innovation

Technical superiority

Product quality and reliability

Comprehensive customer service

Unique competitive capabilities
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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
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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
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Pitfalls

Over-differentiating such that product
features exceed buyers’ needs

Charging a price premium buyers perceive is
too high

Ex: Duracell charged too high a price for their
batteries

AA – Energizer - $2.99 vs. $4.50 for Duracell

Lost 2% market share in two years
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Ex: Airlines Industry

Differentiation based on price

Fact: Business travelers are less price sensitive than
tourists

Price structure that differentiate between the two

Saturday night stay requirement: for tourists as most
tourists stay for the weekend

This allows the airline to charge business people
higher prices within economy

As much as ten times differences in price for the
same seat!
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Pitfalls of Differentiation
Strategies

Buyers see little value in unique attributes of product

Ex: Gibson’s Dobro bass guitar

Guitar had sufficient sound volume so that amplification
was not necessary

Customers still prefer regular amplifiers

Appealing product features are easily copied by rivals

Ex: LA Gear – product was too easy to imitate

Differentiating on a feature buyers do not perceive as
lowering their cost or enhancing their well-being
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The New Commodities

NOW: PCs, Hotel Rooms, Bandwidth,
Network hosting, Manufacturing capacity

NEXT?

Servers

Car rentals

Insurance

Pharmacy services

Data storage capacity
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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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Porsche

Nearly filed for bankruptcy in 1990s

One manufacturing plant in Stuttgart – 8200
employees

Secret: extreme focus on market niche

Sales: 40,000 cars pale compared to Big
Three

However, it breaks even at 12,000-14,000
cars

Company has been able to position the
company as a producer of highly-sought after
5-27 luxury cars -
Porter’s five forces and Focus
:Porsche

Rivalry among competing sellers

Lower as it is competing in only a small niche

Bargaining power of buyers

Very low because of branding

Substitutes product

Very low – high reputation, brand image and
customer loyalty

Threat of new entrants – difficult

Bargaining power of suppliers - depends
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Approaches to Defining a
Market Niche

Geographic uniqueness

Specialized requirements in using
product/service

Special product attributes
appealing only to niche buyers
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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
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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
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Competitive Strength of a Best-Cost

Provider Strategy “Stuck in the middle?”

JC Penney – tried to do both at the same

A best-cost provider’s competitive advantage
comes from matching close rivals on key product time
attributes and beating them on price
“its fashions are tired, its prices unreasonable”

Success depends on having the skills and
Tried achieve differentiation and cost
capabilities to provide attractive performance and
features at a lower cost than rivals leadership at the same time

A best-cost producer can often out-compete both
Struggled to fend off discounters like WalMart
a low-cost provider and a differentiator when and upscale stores

Standardized features/attributes
won’t meet diverse needs of buyers
Need to have a clear identity and pursue that

Many buyers are price and value sensitive route passionately
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Example: Auto Industry Other Variants

Applying generic strategic principles of low
U-Haul – remains the most profitable
cost leadership to manufacture cars consumer rental company (margin of 10% vs.

However, adopting the differentiator theme only 3% for industry)
from a marketer’s standpoint
How?

Focuses beyond rental

Massive investments in R&D results in
Trucks are rented at very low profit margins
cheaper cars (low cost) with more features
Most profits come from accessories: boxes,
(differentiation) insurance, rental of trailers, and all ancillary products

Once a consumer signs a rental agreement, he/she
is a captive market

No other recourse
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Deciding Which Generic

Some Generalizations Competitive Strategy to Use
Stage Introduction Growth Maturity Decline
Each positions a company differently in its market
and competitive environment
Strategies Differentiate Differentiate Differentiate Low cost
Each establishes a central theme for how a company
/Low cost focus will endeavor to outcompete rivals
Objective Increase Create Defend Consolidate
Each creates some boundaries for maneuvering as
market customer market , maintain, market circumstances unfold
awareness demand share harvest
Each points to different ways of experimenting with
Functional R&D Sales/Marke Production GM and the basics of the strategy
areas ting finance
Each entails differences in product line, production
Emphasis Very High High Low to Low emphasis, marketing emphasis, and means to
on product Moderate sustainthe strategy
design
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