Block 4

Question 1

What does a firm’s competitive strategy deal with?

Answer 1

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.

Question 2

Key factors that
distinguish one strategy
from another

Answer 2

1. Whether a company’s market target is broad or narrow?
2. Whether the company is pursuing a competetive advantage linked to lower costs or differentiation?

Question 3

What are and explain THE FIVE GENERIC COMPETITIVE STRATEGIES

Answer 3

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

Question 4

What should we do to make low-cost approaches effective ? (2)

Answer 4

1 Pursue cost savings that are difficult to imitate
2 Avoid reducing product quality to unacceptable levels

Question 5

Name 2 Competitive advantages and 2 risks of low-cost strategy

Answer 5

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

Question 6

What are Successful low-cost leaders good at ?

Answer 6

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.

Question 7

What is a low cost advantage?

Answer 7

Cumulative costs across the overall value chain must be lower than competitors’ cumulative costs.

Question 8

How to gain a low-cost advantage ?

Answer 8

• Perform value-chain activities more cost-effectively than rivals
• Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities

Question 9

What is a cost driver ?

Answer 9

A cost driver is a factor that has a strong influence on a company’s costs.
It can be asset-based or activity-based.

Question 10

5 ways to secure a cost advantage are?

Answer 10

• 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

Question 11

What are the 10 cost drivers/cost cutting methods?

Answer 11

1. Capturing all available economies of scale
2. Taking full advantage of experience and learning-curve effects
3. Operating facilities at full or near-full capacity
4. Improving supply chain efficiency
5. Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance
6. Using the firm’s bargaining power vis-à-vis suppliers or others in the value chain system to gain concessions
7. Using online systems and sophisticated software to achieve operating efficiencies
8. Improving process design and employing advanced production technology
9. Being alert to the cost advantages of outsourcing or vertical integration
10. Motivating employees through incentives and company culture

Question 12

What are the 3 ways to revamping the value chain system to lower costs?

Answer 12

• 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

Question 13

What is the basis and the 3 keys to achieving a low-cost edge over rivals?

Answer 13

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

Question 14

When does a low cost provider strategy work best? (5)

Answer 14

1. Price competition among rival sellers is vigorous.
2. Identical products are available from many sellers.
3. There are few ways to differentiate industry products.
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching among sellers.

Question 15

Pitfalls with a low cost provider strategy (4)

Answer 15

• 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

Question 16

What are the 3 effective approaches to initiate differentiation ?

Answer 16

• 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

Question 17

What are the 3 advantages of using a differentiation strategy ?

Answer 17

• 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

Question 18

When is differentiation effective/ enhances profitability ?

Answer 18

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.

Question 19

What is the essence of a broad differentiation strategy ?

Answer 19

Offering unique product attributes that a wide range of buyers find appealing and worth paying for.

Question 20

Describe value drivers and what they can do. (5)

Answer 20

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

Question 21

What are the ways that managers can enhance differentiation based on value drivers? (8)

Answer 21

1. Create product features and performance attributes
   that appeal to a wide range of buyers.
2. Improve customer service or add extra services.
3. Invest in production-related R&D activities.
4. Strive for innovation and technological advances.
5. Pursue continuous quality improvement.
6. Increase marketing and brand-building activities.
7. Seek out high-quality inputs.
8. Emphasize human resource management activities
   that improve the skills, expertise, and knowledge of
   company personnel.

Question 22

Name the 2 approaches to enhancing differentiation through changes in the value chain system.

Answer 22

1. Coordinating with channel allies to enhance customer perceptions of value.
2. Coordinating with suppliers to better address customer needs.

Question 23

Routes to gain a differentiation-based competetive advantage (4)

Answer 23

1. Incorporate product attributes and user features that lower the buyer’s overall costs of using the firm’s product
2. Incorporate tangible features (e.g., styling) that increase customer satisfaction with the product
3. Incorporate intangible features (e.g., buyer image) that enhance buyer satisfaction in noneconomic ways
4. Signal the value of the firm’s product offering to buyers (e.g. price, packaging, placement, advertising)

Question 24

When is signaling value important ?

Answer 24

• 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.

Question 25

4 important points to remember in regards to differentiation

Answer 25

• 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.

Question 26

What are the 2 successful approaches to sustainable differentiation? Name and explain each (7)

Answer 26

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

Question 27

When does a differentiation strategy work best ? (market circumstances that favour) (4)

Answer 27

• 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.

Question 28

What are the 6 pitfalls to avoid when pursuing a differentiation strategy?

Answer 28

• 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

Question 29

When is a focused approach most attractive? (5)

Answer 29

• 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.

Question 30

What are the risks of a focused low cost or focused differentiation strategy?

Answer 30

1. Competitors will find ways to match the focused firm’s capabilities in serving the target niche.
2. The specialized preferences and needs of niche members shift over time toward the product attributes desired by the majority of buyers.
3. As attractiveness of the segment increases, it draws in more competitors, intensifying rivalry and splintering segment profits.
4. Segment growth slows down to such a rate that a focuser’s prospects for future sales and profit gains become unacceptably dim.

Question 31

What are the 2 approaches to a best cost provider strategy and whom does it target ?

Answer 31

1. Differentiation:
   Providing desired quality, features, performance, service attributes
2. Low Cost Provider:
   Charging a lower price than rivals with similar caliber product offerings

Target : Value-Conscious Buyer

Question 32

When does a best cost provider strategy work best? (4)

Answer 32

• 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.

Question 33

What is the risk of a best cost provider strategy?

Answer 33

Getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies

Question 34

What are the contrasting features of the 5 generic strategies ? (4)

Answer 34

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

Question 35

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

Answer 35

Strategic target:

1. A broad crosssection of the market
2. A broad crosssection of the market
3. A narrow market niche where buyer needs
   and preferences are distinctively different
4. A narrow market niche where buyer needs and preferences are distinctively different
5. Value-conscious buyers. Or, a middlemarket range

Basis of competitive strategy:

1. Lower overall costs than competitors
2. Ability to offer buyers something attractively different from competitors’ offerings
3. Lower overall cost than rivals in serving niche members
4. Attributes that appeal specifically to niche members
5. Ability to offer better goods at attractive prices

Question 36

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

Answer 36

Product line:

1. A good basic product with few frills (acceptable quality and limited selection)
2. Many product variations, wide selection, emphasis on differentiating features
3. Features and attributes tailored to the tastes and requirements of niche members
4. Features and attributes tailored to the tastes and requirements of niche members
5. Items with appealing attributes and assorted features; better quality, not best

Production emphasis:

1. A continuous search for cost reduction without
   sacrificing acceptable quality and essential features
2. Build in whatever differentiating features buyers are willing to pay for; strive for product superiority
3. A continuous search for cost reduction for products that meet basic needs of niche members
4. Small-scale production or custom-made products that match the tastes and requirements of niche members
5. Build in appealing features and better quality at lower cost than rivals

Question 37

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

Answer 37

Marketing emphasis:

1. Low prices, good value Also, try to make a virtue out of product features that lead to low cost
2. Tout differentiating features. Also, charge a premium price to cover the extra costs of differentiating features
3. Communicate attractive features of a budget priced product offering that fits niche buyers’ expectations
4. Communicate how product offering does the best job of meeting niche buyers’ expectations
5. Emphasize delivery of best value for the money

Keys to maintaining the strategy:

1. Economical prices, good value Also, strive to manage costs down, year after year, in every area of the business
2. Stress constant innovation to stay ahead of imitative competitors Also, concentrate on a few key differentiating features.
3. 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
4. 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.
5. Unique expertise in simultaneously managing costs down while incorporating upscale features and attributes

Question 38

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

Answer 38

Resources and capabilities required:

1. Capabilities for driving costs out of the value chain system. Examples: large-scale automated plants, an efficiency-oriented culture, bargaining power
2. Capabilities concerning quality, design, intangibles, and innovation Examples: marketing
   capabilities, R&D teams, technology
3. Capabilities to lower costs on niche goods Examples: Lower input costs for the specific product desired by the niche, batch production capabilities
4. Capabilities to meet the highly specific needs of niche members Examples: custom production, close customer relations.
5. Capabilities to simultaneously deliver lower cost
   and higher-quality or differentiated feature
   Examples: TQM practices, mass customization

Question 39

How does a firms strategy link to its resources ? (2)

Answer 39

• 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.