Chapter 5

Question 1

The 2 biggest factors that distinguish one competitive strategy from another boils down to?

Answer 1

1 – whether a company’s market target is broad or narrow

2 – whether the company is pursuing a competitive advantage linked to lower costs or differentiation.

Question 2

What are the 5 generic competitive strategies?

Answer 2

1 - A broad, low-cost strategy

2 - A broad, differentiation strategy

3 - A focused low-cost strategy

4 - A focused differentiation strategy

5 - A best-cost strategy

Question 3

What is low-cost leadership?

Answer 3

Low-cost leadership – A company achieves low-cost leadership when it becomes the industry’s lowest-cost producer rather than just being one of perhaps several competitors with comparatively low costs.

Question 4

A company has 2 options for translating a low-cost advantage over rivals into superior profit performance.

Answer 4

1 - Use the lower-cost edge to under-price competitors and attract price-sensitive buyers in great enough numbers to increase total profits.

2 – Maintain the present price, be content with the present market share, using the lower-cost edge to raise profits by earning a higher profit margin on each unit sold.

Question 5

There are 2 major avenues for achieving a cost advantage.

What are they?

Answer 5

1 – Cost-Efficient Management of Value Chain Activities. (Focus on cost drivers)

2 – Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.

Question 6

When does a low-cost strategy work best?

Answer 6

1 – Price competition among rival sellers is vigorous

2 – The products of rival sellers are essentially identical and readily available from many eager sellers.

3 – It is difficult to achieve product differentiation in ways that have value to buyers.

4 – Most buyers use the product in the same ways.

5 – Buyers incur low costs in switching their purchases from one seller to another.

Question 7

What are Pitfalls to avoid in pursing a low-cost strategy?

Answer 7

1 – Getting carried away with overly aggressive price cutting, where increases in sales don’t make up for the lower profit margins.

2 – Relying on cost reduction approaches that can be easily copied by rivals.

3 – Becoming too fixated on cost reduction.

Question 8

What’s the essence of a broad differentiation strategy?

Answer 8

The essence of a broad differentiation strategy is to offer unique product attributes that a wide range of buyers find appealing and worth paying for.

Question 9

Companies manage the value chain to create differentiating attributes.

The ways that managers can enhance differentiation based on value drivers include the following:

Answer 9

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 innovating and technological advances.

5 – Purse 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 10

What’s a value driver?

Answer 10

Value driver – A value driver is a factor that can have a strong differentiating effect.

Question 11

Company’s revamp the value chain system to increase differentiation.

What approaches are there to enhance differentiation through changes in the value chain system?

Answer 11

1 – Coordinating with downstream channel allies to enhance customer value – Coordinating with downstream partners such as distributors, dealers, brokers and retailers can contribute to differentiation in a variety of ways. This includes setting standards for downstream partners to follow, training channel personnel, cosponsoring promotions and advertising campaigns, example is Coke with bottle-distributors.

2 – Coordinating with suppliers to better address customer needs – Collaborating with suppliers can improve many dimensions such as product features and quality, examples include Dell in PCs. Enhancing differentiation through faster product development cycles or speeding delivery to end customers.

Question 12

What are the 4 basic routes to achieving a broad differentiation strategy?

Answer 12

1 – Incorporate product attributes and user features that lower the buyer’s overall costs of using the company’s product.

2 – Incorporate tangible features that increase customer satisfaction with product such as product specifications, functions, and styling.

3 – Incorporate intangible features that enhance buyer satisfaction in noneconomic ways.

4 – Signal the value of the company’s product offering to buyers.

Question 13

When is signaling value particularly important?

Answer 13

1 – the nature of differentiation is based on intangible features and is therefore subject / hard to quantify

2 – when buyers are making a first-time purchase and are unsure what their experience with the product will be

3 – when repurchase is infrequent

4 – when buyers are unsophisticated

Question 14

When do differentiation strategies work best?

Answer 14

1 – Buyers needs and uses of the product are diverse. Example – restaurants can differentiate since consumers have diverse preferences.

2 – There are many ways to differentiate the product or service that have value to buyers. Example – Hotels can differentiate themselves based on size, size of room, range of guest services.

3 – Few rival firms are following a similar differentiation approach. The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing.

4 – Technological change is fast-paced and competition revolves around rapidly evolving product features. Example: In smartphones and wearable technology, rivals have opportunities to differentiate themselves by introducing the best next-generation products.

Question 15

What are the pitfalls to avoid in pursing a differentiation strategy?

Answer 15

• A differentiation strategy keyed to product or service attributes that are easily imitated means no one achieves differentiation.
• Differentiation can falter when buyers see little value in the unique attributes of a company’s product.
• Overspending on efforts to differentiate the company’s product offering, thus eroding profitability.

Other pitfalls include:

• Offering only trivial improvements in quality, service, or performance features compared to rivals’ products.
• Over-differentiating so that product quality, features, or service levels exceed the needs of most buyers.
• Charging too high a price premium.

Question 16

What’s a focused low-cost strategy?

Answer 16

A focused low-cost strategy aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost (and usually lower price) than those of rival competitors.

Question 17

What’s a focused differentiation strategy?

Answer 17

Focused differentiation strategies involve offering superior products or services tailored to unique preferences and needs of a narrow, well-defined group of buyers.

Question 18

What does successful use of a focused differentiation strategy depend on?

Answer 18

1 – the existence of a buyer segment that is looking for special product or service attributes.

2 – a firm’s ability to create a product or service offering that stands apart from that of rivals competing in the same target market niche.

Question 19

When is a focused low-cost or focused differentiation strategy attractive?

Answer 19

• The target market niche is big enough to be profitable and offers good growth potential.
• Industry leaders have chosen not to compete in the niche – in which case focusers can avoid battling head to head against the industry’s biggest and strongest competitors.
• It is costly or difficult for multisegment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of their mainstream customers.
• The industry has many different niches and segments, thereby allowing a focuser to pick the niche best suited to its resources and capabilities. Also, with more niches there is room for focusers to concentrate on different market segments and avoid competing in the same niche for the same customers.
• Few if any rivals are attempting to specialize in the same target segment – a condition that reduces the risk of segment overcrowding

Question 20

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

Answer 20

1 – The chance that competitors outside the niche will find effective ways to match the focused firm’s capabilities in serving the target niche – perhaps by coming up with products or brands specifically designed to appeal to buyers in the target niche or by developing expertise and capabilities that offset the focuser’s strength.

2 – The potential for preferences and needs of niche members to shift over time toward the product attributes desired by buyers in the mainstream portion of the market.

3 – The segment may become so attractive that it is soon inundated with competitors, intensifying rivalry and splintering segment profits.

4 – Segment growth is at such a small rate that a focuser’s prospects for future sales and profit gains become unacceptably dim.

Question 21

What must a company do to employ a best-cost strategy?

Answer 21

To profitably employ a best-cost strategy, a company must have the capability to incorporate upscale attributes into its product offering at a lower cost than rivals.

Question 22

What are best-cost strategies?

Answer 22

Best-cost strategies – Best-cost strategies are a hybrid of low-cost and differentiation strategies, incorporating features of both simultaneously.

Question 23

Who’s the target market for best-cost producers?

Answer 23

Value-conscious buyers

Question 24

When does a best-cost strategy work best?

Answer 24

A best-cost strategy works best in markets where product differentiation is the norm and an attractively large number of value-conscious buyers can be induced to purchase midrange products rather than cheap, basic products or expensive, top-of-the-line products.

Question 25

What are the risks of a best-cost strategy?

Answer 25

A company’s biggest vulnerability in employing a best-cost strategy is getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies.

Low-cost producers may be able to siphon customers away with the appeal of a lower price (despite less appealing product attributes). High-end differentiators may be able to steal customers away with the appeal of better product attributes.

Question 26

What must a firm employing a best-cost strategy do?

Answer 26

1 – achieve significantly lower costs in providing upscale features so that it can outcompete high-end differentiators on the basis of a significantly lower price.

2 – it must offer buyers significantly better product attributes to justify a price above what low-cost leaders are charging. In other words, it must offer buyers a more attractive customer value proposition.