Block 4 Flashcards
What does a firm’s competitive strategy deal with?
A firm’s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully - its efforts to position itself in the market-place, please customers, ward off competitive threats, and achieve a particular kind of competitive advantage.
Key factors that
distinguish one strategy
from another
- Whether a company’s market target is broad or narrow?
- Whether the company is pursuing a competetive advantage linked to lower costs or differentiation?
What are and explain THE FIVE GENERIC COMPETITIVE STRATEGIES
1 Low-cost provider
Striving to achieve lower overall costs than rivals on
products that attract a broad spectrum of buyers
2 Broad differentiation
Differentiating the firm’s product offering from rivals’ with
attributes that appeal to a broad spectrum of buyers
3 Focused low cost
Concentrating on a narrow price-sensitive buyer segment
and on costs to offer a lower-priced product
4 Focused differentiation
Concentrating on a narrow buyer segment by meeting
specific tastes and requirements of niche members
5 Best-cost provider
Giving customers more value for the money by offering
upscale product attributes at a lower cost than rivals
What should we do to make low-cost approaches effective ? (2)
1 Pursue cost savings that are difficult to imitate
2 Avoid reducing product quality to unacceptable levels
Name 2 Competitive advantages and 2 risks of low-cost strategy
Competitive advantages:
- Greater total profits and increased market share
gained from underpricing competitors - Larger profit margins when selling products at prices
comparable to and competitive with rivals
Risks:
- Low pricing does not attract enough new buyers
- Rival’s retaliatory price-cutting sets off a price war
What are Successful low-cost leaders good at ?
Successful low-cost leaders, who have the lowest industry costs, are exceptionally good at finding ways to drive costs out of their businesses and still provide a product or service that buyers find acceptable.
What is a low cost advantage?
Cumulative costs across the overall value chain must be lower than competitors’ cumulative costs.
How to gain a low-cost advantage ?
- Perform value-chain activities more cost-effectively than rivals
- Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities
What is a cost driver ?
A cost driver is a factor that has a strong influence on a company’s costs.
It can be asset-based or activity-based.
5 ways to secure a cost advantage are?
- Use lower-cost inputs and hold minimal assets
- Offer only “essential” product features or services
- Offer only limited product lines
- Use low-cost distribution channels
- Use the most economical delivery methods
What are the 10 cost drivers/cost cutting methods?
- Capturing all available economies of scale
- Taking full advantage of experience and learning-curve effects
- Operating facilities at full or near-full capacity
- Improving supply chain efficiency
- Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance
- Using the firm’s bargaining power vis-à-vis suppliers or others in the value chain system to gain concessions
- Using online systems and sophisticated software to achieve operating efficiencies
- Improving process design and employing advanced production technology
- Being alert to the cost advantages of outsourcing or vertical integration
- Motivating employees through incentives and company culture
What are the 3 ways to revamping the value chain system to lower costs?
- Selling direct to consumers and bypassing the activities and costs of distributors and dealers by using a direct sales force and a company website
- Streamlining operations to eliminate low value added or unnecessary work steps and activities
- Reduce materials handling and shipping costs by having suppliers locate their plants or warehouses close to the firm’s own facilities
What is the basis and the 3 keys to achieving a low-cost edge over rivals?
Success in achieving a low-cost edge over rivals
comes from out-managing rivals in finding ways to
perform value chain activities faster, more
accurately, and more cost-effectively by:
- Spending aggressively on resources and capabilities that promise to drive costs out of the business
- Carefully estimating the cost savings of new technologies before investing in them
- Constantly reviewing cost-saving resources to ensure they remain competitively superior
When does a low cost provider strategy work best? (5)
- Price competition among rival sellers is vigorous.
- Identical products are available from many sellers.
- There are few ways to differentiate industry products.
- Most buyers use the product in the same ways.
- Buyers incur low costs in switching among sellers.
Pitfalls with a low cost provider strategy (4)
- Engaging in overly aggressive price cutting that does not result in unit sales gains large enough to recoup forgone profits
- Relying on a cost advantage that is not sustainable
because rival firms can easily copy or overcome it - Becoming too fixated on cost reduction such that the firm’s offering is too features-poor to gain the interest of buyers
- Having a rival discover a new lower-cost value chain approach or develop a cost-saving technological breakthrough
What are the 3 effective approaches to initiate differentiation ?
- Carefully study buyer needs and behaviors, values,
and willingness to pay for a unique product or service - Incorporate features that both appeal to buyers and
create a sustainably distinctive product offering - Use higher prices to recoup differentiation costs
What are the 3 advantages of using a differentiation strategy ?
- Command premium prices for the firm’s products
- Increased unit sales due to attractive differentiation
- Brand loyalty that bonds buyers to the differentiating
features of the firm’s products
When is differentiation effective/ enhances profitability ?
Differentiation enhances profitability whenever a company’s product can command a sufficiently higher price or produce sufficiently greater unit sales to more than cover the added costs of achieving the differentiation.
What is the essence of a broad differentiation strategy ?
Offering unique product attributes that a wide range of buyers find appealing and worth paying for.
Describe value drivers and what they can do. (5)
A value driver is a factor that can have a strong differentiating effect
- Have a strong differentiating effect
- Be based on physical as well as functional attributes of a firm’s products
- Be the result of superior performance capabilities of the firm’s human capital
- Have an effect on more than one of the firm’s value chain activities
- Create a perception of value (brand loyalty) in buyers where there is little reason for it to exist
What are the ways that managers can enhance differentiation based on value drivers? (8)
- Create product features and performance attributes
that appeal to a wide range of buyers. - Improve customer service or add extra services.
- Invest in production-related R&D activities.
- Strive for innovation and technological advances.
- Pursue continuous quality improvement.
- Increase marketing and brand-building activities.
- Seek out high-quality inputs.
- Emphasize human resource management activities
that improve the skills, expertise, and knowledge of
company personnel.
Name the 2 approaches to enhancing differentiation through changes in the value chain system.
- Coordinating with channel allies to enhance customer perceptions of value.
- Coordinating with suppliers to better address customer needs.
Routes to gain a differentiation-based competetive advantage (4)
- Incorporate product attributes and user features that lower the buyer’s overall costs of using the firm’s product
- Incorporate tangible features (e.g., styling) that increase customer satisfaction with the product
- Incorporate intangible features (e.g., buyer image) that enhance buyer satisfaction in noneconomic ways
- Signal the value of the firm’s product offering to buyers (e.g. price, packaging, placement, advertising)
When is signaling value important ?
- The nature of differentiation is based on intangible
features and is therefore subjective or hard to quantify by the buyer. - Buyers are making a first-time purchase and are
unsure what their experience will be with the product. - Product or service repurchase is infrequent.
- Buyers are unsophisticated.
4 important points to remember in regards to differentiation
- Differentiation can be based on tangible or
intangible attributes. - Easy-to-copy differentiating features cannot
produce a sustainable competitive advantage. - Any differentiating feature that works well is a
magnet for imitators. - Overdifferentiating and overcharging are fatal
strategy mistakes.
What are the 2 successful approaches to sustainable differentiation? Name and explain each (7)
1 Differentiation that is difficult for rivals to
duplicate or imitate
● Company reputation
● Long-standing relationships with buyers
● A unique product or service image
2 Differentiation that creates substantial switching
costs that lock in buyers
● Patent-protected product innovation
● Relationship-based customer service
When does a differentiation strategy work best ? (market circumstances that favour) (4)
- Buyer needs and uses for the product are diverse.
- There are many ways that differentiation can have value to buyers.
- Few rival firms are following a similar differentiation approach.
- There is rapid change in the product’s technology and features.
What are the 6 pitfalls to avoid when pursuing a differentiation strategy?
- Relying on product attributes easily copied by rivals
- Introducing product attributes that do not evoke an enthusiastic buyer response
- Eroding profitability by overspending on efforts to
differentiate the firm’s product offering - Offering only trivial improvements in quality, service, or performance features vis-à-vis the products of rivals
- Over-differentiating the product quality, features, or service levels exceeds the needs of most buyers
- Charging too high a price premium
When is a focused approach most attractive? (5)
- The target market niche is big enough to be profitable and offers good growth potential.
- Industry leaders chose not to compete in the niche; focusers avoid competing against strong competitors.
- It is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers.
- The industry has many different niches and segments.
- Rivals have little or no entry interest in the target
segment.
What are the risks of a focused low cost or focused differentiation strategy?
- Competitors will find ways to match the focused firm’s capabilities in serving the target niche.
- The specialized preferences and needs of niche members shift over time toward the product attributes desired by the majority of buyers.
- As attractiveness of the segment increases, it draws in more competitors, intensifying rivalry and splintering segment profits.
- Segment growth slows down to such a rate that a focuser’s prospects for future sales and profit gains become unacceptably dim.
What are the 2 approaches to a best cost provider strategy and whom does it target ?
- Differentiation:
Providing desired quality, features, performance, service attributes - Low Cost Provider:
Charging a lower price than rivals with similar caliber product offerings
Target : Value-Conscious Buyer
When does a best cost provider strategy work best? (4)
- Product differentiation is the market norm.
- There are a large number of value-conscious
buyers who prefer mid-range products. - There is competitive space near the middle of
the market for a competitor with either a
medium-quality product at a below-average
price or a high-quality product at an average or
slightly higher price. - Recessionary times have caused more buyers
to become value-conscious.
What is the risk of a best cost provider strategy?
Getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies
What are the contrasting features of the 5 generic strategies ? (4)
Each generic strategy:
- Positions the firm differently in its market
- Establishes a central theme for how the firm intends to outcompete rivals
- Creates boundaries or guidelines for strategic change as market circumstances unfold
- Entails different ways and means of
maintaining the basic strategy
Explain each strategy in regards to strategic target and basis for strategy (10)
1= Low cost
2= broad differentiation
3= focused low-cost
4= focused differentiation
5= best cost
Strategic target:
- A broad crosssection of the market
- A broad crosssection of the market
- A narrow market niche where buyer needs
and preferences are distinctively different - A narrow market niche where buyer needs and preferences are distinctively different
- Value-conscious buyers. Or, a middlemarket range
Basis of competitive strategy:
- Lower overall costs than competitors
- Ability to offer buyers something attractively different from competitors’ offerings
- Lower overall cost than rivals in serving niche members
- Attributes that appeal specifically to niche members
- Ability to offer better goods at attractive prices
Explain each strategy in regards to product line and production emphasis: (10)
1= Low cost
2= broad differentiation
3= focused low-cost
4= focused differentiation
5= best cost
Product line:
- A good basic product with few frills (acceptable quality and limited selection)
- Many product variations, wide selection, emphasis on differentiating features
- Features and attributes tailored to the tastes and requirements of niche members
- Features and attributes tailored to the tastes and requirements of niche members
- Items with appealing attributes and assorted features; better quality, not best
Production emphasis:
- A continuous search for cost reduction without
sacrificing acceptable quality and essential features - Build in whatever differentiating features buyers are willing to pay for; strive for product superiority
- A continuous search for cost reduction for products that meet basic needs of niche members
- Small-scale production or custom-made products that match the tastes and requirements of niche members
- Build in appealing features and better quality at lower cost than rivals
Explain each strategy in regards to marketing emphasis and keys to maintaining the strategy: (10)
1= Low cost
2= broad differentiation
3= focused low-cost
4= focused differentiation
5= best cost
Marketing emphasis:
- Low prices, good value Also, try to make a virtue out of product features that lead to low cost
- Tout differentiating features. Also, charge a premium price to cover the extra costs of differentiating features
- Communicate attractive features of a budget priced product offering that fits niche buyers’ expectations
- Communicate how product offering does the best job of meeting niche buyers’ expectations
- Emphasize delivery of best value for the money
Keys to maintaining the strategy:
- Economical prices, good value Also, strive to manage costs down, year after year, in every area of the business
- Stress constant innovation to stay ahead of imitative competitors Also, concentrate on a few key differentiating features.
- Stay committed to serving the niche at the lowest overall cost; don’t blur the firm’s image by entering other market segments or adding other products
to widen market appeal - Stay committed to serving the niche better than rivals; don’t blur the firm’s image by entering other market segments or adding other products to widen market appeal.
- Unique expertise in simultaneously managing costs down while incorporating upscale features and attributes
Explain each strategy in regards to recourses and capabilities required: (5)
1= Low cost
2= broad differentiation
3= focused low-cost
4= focused differentiation
5= best cost
Resources and capabilities required:
- Capabilities for driving costs out of the value chain system. Examples: large-scale automated plants, an efficiency-oriented culture, bargaining power
- Capabilities concerning quality, design, intangibles, and innovation Examples: marketing
capabilities, R&D teams, technology - Capabilities to lower costs on niche goods Examples: Lower input costs for the specific product desired by the niche, batch production capabilities
- Capabilities to meet the highly specific needs of niche members Examples: custom production, close customer relations.
- Capabilities to simultaneously deliver lower cost
and higher-quality or differentiated feature
Examples: TQM practices, mass customization
How does a firms strategy link to its resources ? (2)
- A firm’s competitive strategy is most likely to
succeed if it is predicated on leveraging a
competitively valuable collection of resources
and capabilities that match the strategy. - Sustaining a firm’s competitive advantage
depends on its resources, capabilities, and
competences that are difficult for rivals to
duplicate and have no good substitutes.
