Business Policy and Strategy – Week 3 Lecture 1
A
company’s competitive strategy lays out the specific efforts of the company to
position itself in the marketplace, please customers, ward off competitive
threats, and achieve a particular kind of competitive advantage. The biggest
and most important differences among competitive strategies boil down to:
·
Whether a company’s market target is broad or narrow
·
Whether the company is pursuing a competitive advantage
linked to low costs or product differentiation.
Five
distinct competitive strategy approaches stand out:
·
A broad low-cost provider strategy: striving to achieve lower
overall costs than rivals and appealing to a broad spectrum of customers,
usually by underpricing rivals.
·
A broad differentiation strategy: seeking to differentiate
the company’s product/service offering from rivals’ in ways that will appeal to
a broad spectrum of buyers
·
A focused low-cost strategy: concentrating on a narrow buyer
segment and outcompeting rivals by serving niche members at a lower cost than
rivals
·
A focused differentiation strategy: concentrating on a narrow
buyer segment and outcompeting rivals by offering niche members customized
attributes that meet their tastes and requirements better than rivals’ products
·
A best-cost provider strategy: giving customers more value
for the money by incorporating good to-excellent product attributes at a lower
cost than rivals; the target is to have the lowest (best) costs and prices
compared to rivals offering products with comparable attributes.
A
company achieves low-cost leadership when it becomes the industry’s lowest-cost
provider rather than just being one of perhaps several competitors with
comparatively low costs. In striving for a cost advantage over rivals, managers
must take care to include features that buyers consider essential. For maximum
effectiveness, companies employing a low-cost provider strategy need to achieve
their cost advantage in ways difficult for rivals to copy or match.
A
company has two options for translating a low-cost advantage over rivals into
superior profit performance:
·
Option 1 is to use the lower-cost edge to underprice
competitors and attract price-sensitive buyers in great enough numbers to
increase total profits.
·
Option 2 is to maintain the present price, be content with
the present market share, and use the lower-cost edge to raise total profits by
earning a higher profit margin on each unit sold
To
achieve a low-cost advantage over rivals, a firm’s cumulative costs across its
overall value chain are lower than competitors’ cumulative costs. There are two
ways to accomplish this:
·
Perform value chain activities more cost effectively than
rivals.
·
Revamp the firm’s overall value chain to eliminate or bypass
some cost-producing activities
Perhaps
the biggest pitfall of a low-cost provider strategy is getting carried away
with overly aggressive price cutting and ending up with lower, rather than
higher, profitability. A second big pitfall is relying on an approach to reduce
costs that can be easily copied by rivals. A third pitfall is becoming too
fixated on cost reduction. 4. Even if these mistakes are avoided, a low-cost
provider strategy still entails risk.
Differentiation
strategies are attractive whenever buyers’ needs and preferences are too
diverse to be fully satisfied by a standardized product or by sellers with
identical capabilities. Successful differentiation allows a firm to:
·
Command a premium price for its product
·
Increase unit sales
·
Gain buyer loyalty to its brand
Differentiation
enhances profitability whenever the extra price the product commands outweighs
the added costs of achieving the differentiation. Companies can pursue
differentiation from many angles including unique taste, multiple features,
wide selection, superior service, etc.
Differentiation
strategies tend to work best in market circumstance where:
·
Buyer needs and uses of the product are diverse
·
There are many ways to differentiate the product or service
and many buyers perceive these differences as having value
·
Few rival firms are following a similar differentiation
approach
·
Technological change is fast-paced and competition revolves
around rapidly evolving product features
Differentiation
strategies can fail for any of several reasons. A differentiation strategy
keyed to product or service attributes that are easily and quickly copied is
always doomed. A second pitfall is that buyers see little value in the unique
attributes of a company’s product. The third big pitfall of a differentiation
strategy is overspending on efforts to differentiate the company’s product
offering, thus eroding profitability Other common mistakes in crafting a
differentiation strategy include: a. Offering only trivial improvements in
quality, service, or performance features vis-à-vis rivals’ products. b.
Over-differentiating so that product quality, features, or service levels
exceed the needs of most buyers c. Charging too high a price premium.
What
sets focused strategies apart from low-cost leadership or broad differentiation
strategies is concentrated attention on a narrow piece of the total market. The
target segment or niche can be defined by: a. Geographic segment b. Customer
segment c. Product segment
A
focused strategy based on low cost aims at securing a competitive advantage by
serving buyers in the target market niche at a lower cost and lower price than
rival competitors. This strategy has considerable attraction when a firm can
lower costs significantly by limiting its customer base to a well-defined buyer
segment. Focused low-cost strategies are fairly common.
A
focused strategy aimed at securing a competitive edge based either on low cost
or differentiation becomes increasingly attractive as more of the following
conditions are met:
·
The target niche is big enough to be profitable and offers
good growth potential
·
Industry leaders do not see that having a presence in the
niche is crucial to their own success
·
It is costly or difficult for multi-segment competitors to
put capabilities in place to meet specialized needs of the target market niche
and at the same time satisfy the expectations of their mainstream customers
·
The industry has many different niches and segments
·
Few, if any, other rivals are attempting to specialize in the
same target segment
Focusing
carries several risks such as:
·
The chance that competitors will find effective ways to match
the focused firm’s capabilities in serving the target niche
·
The potential for the preferences and needs of niche members
to shift over time toward the product attributes desired by the majority of
buyers
·
The segment may become so attractive it is soon inundated
with competitors, intensifying rivalry and splintering segment profits.
Best-cost
provider strategies stake out a middle ground between pursuing a low-cost
advantage and a differentiation advantage and between appealing to the broad
market as a whole and a narrow market niche. From a competitive positioning
standpoint, best-cost strategies are a hybrid, balancing a strategic emphasis
on low cost against a strategic emphasis on differentiation. To profitably
employ a best-cost provider strategy, a company must have the capability to
incorporate upscale attributes into its product offering at a lower cost than
rivals.
A
best-cost provider strategy is very appealing in markets where product
differentiation is the norm and there is an attractively large number of
value-conscious buyers who prefer midrange products to cheap, basic products or
expensive top-of-the-line products.
The
danger of a best-cost provider strategy is that a company using it will get
squeezed between the strategies of firms using low-cost and differentiation
strategies. To be successful, a best-cost provider must offer buyers
significantly better product attributes in order to justify a price above what
low-cost leaders are charging.
Deciding
which generic competitive strategy should serve as the framework for hanging
the rest of the company’s strategy is not a trivial matter. Each of the five
generic competitive strategies positions the company differently in its market
and competitive environment. Each establishes a central theme for how the
company will endeavor to outcompete rivals. Each creates some boundaries or
guidelines for maneuvering as market circumstances unfold and as ideas for
improving the strategy are debated.
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