Chapter 5: The 5 Generic Competitive Strategies

Question 1

What are the 5 generic competitive strategies?

Answer 1

Broad low-cost, broad differentiation, focused differentiation, focused low-cost, best-cost strategy

Question 2

What is the broad differentiation strategy?

Answer 2

Seeking to differentiate the company’s product offering with attributes that will appeal to a broad spectrum of buyers

Question 3

What is the focused low-cost strategy?

Answer 3

Concentrating on the needs of a narrow buyer segment and striving to meet them at low costs

Question 4

What is the broad low-cost strategy?

Answer 4

Striving to achieve broad lower overall costs than rivals on comparable products that attract a broad spectrum of buyers

Question 5

What is a focused differentiation strategy?

Answer 5

Concentrating on a narrow buyer segment and offering niche members customized attributes that meet their tastes better than rivals’ products

Question 6

What is the best-cost strategy?

Answer 6

Hybrid strategy that blends the elements of all 4 other options. Give customers more value by underpricing rivals whose products have similar upscale multifeatured attributes

Question 7

When does a company achieve low-cost leadership?

Answer 7

When it becomes the industry’s lowest-cost producer.

Question 8

What are the 2 options for translating a low-cost advantage into superior profit performance?

Answer 8

1. Use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great numbers to increase profits
2. Maintain the present price, be content with the market share, and use the lower-cost edge to raise total profits by earning a higher profit margin on each unit sold

Question 9

When might a strategy to underprice competitors to gain market share fail?

Answer 9

If rivals respond with retaliatory price cuts in order to protect their customer base and defend against the loss of sales.

Question 10

What are the 2 major avenues for achieving a cost advantage?

Answer 10

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

Question 11

What are cost drivers?

Answer 11

Factors that have a strong effect on a company’s costs and can be used as levers to lower costs.

Question 12

List (10) important cost drivers

Answer 12

• Incentive systems and culture
• Economies of scale
• Learning and experience
• Capacity utilization
• Supply chain efficiencies
• Input costs (substituting lower cost inputs)
• Production technology and design
• Communication systems and IT
• Bargaining power
• Outsourcing or vertical integration

Question 13

What are some ways of revamping the value chain system to lower costs? (3)

Answer 13

1. Selling direct to customers and bypassing activities and costs of distributors and dealers
2. Streamlining operations by eliminating low-value-added or unnecessary work steps and activities
3. Reducing materials-handling and shipping costs by having suppliers locate their plants or warehouses close to the company’s own facilities

Question 14

When does a low-cost strategy work best?

Answer 14

Price competition among rivals is vigorous, products of rivals are essentially identical, it is difficult to achieve product differentiation in a way that will have value, most buyers use the same product in the same ways, buyers incur low costs in switching their purchases from one seller to another.

Question 15

What are 3 pitfalls to avoid in pursuing a low-cost strategy?

Answer 15

1. Higher unit sales and market shares do not automatically translate into higher profits
2. Relying on cost reduction approaches that can be easily copied
3. Becoming too fixated on cost reduction

Question 16

What are value drivers?

Answer 16

Factors that can have a strong differentiating effect.

Question 17

List 8 value drivers.

Answer 17

• Quality control processes
• Product features and performance
• Customer services
• Production R&D
• Technology and innovation
• Input quality
• Employee skill, training, experience
• Sales and marketing

Question 18

How can companies revamp the value chain system to increase differentiation?

Answer 18

Coordinating with upstream suppliers to better address customer needs. Coordinating with downstream channel partners such as distributors, dealers, brokers, retailers, to enhance customer value.

Question 19

What are the 4 basic routes to achieve differentiation?

Answer 19

1. Incorporate attributes and features that lower the buyer’s overall costs of using the company’s product (energy saving appliances for example)
2. Incorporate tangible features that increase customer satisfaction with the product
3. Incorporate intangible features (status, image, prestige, etc.)
4. Signal the value of product offering to buyers. Help customers become more knowledgeable about a product’s value (fancier packaging, high price, etc.)

Question 20

When does a differentiation strategy work best?

Answer 20

• Buyer needs and uses of the product are diverse
• There are many ways to differentiate products
• Few rival firms are following a similar differentiation approach
• Technological change is fast-paced and competition revolves around rapidly evolving product features

Question 21

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

Answer 21

• Differentiation strategy keyed easily copied product/service attributes
• If buyers see little value in the attributes of the product
• Overspending on efforts to differentiate products

Question 22

When can a low-cost strategy defeat a differentiation strategy?

Answer 22

When buyers are satisfied with the basic product and don’t think extra attributes are worth a higher price.

Question 23

When is a focused strategy attractive? (5 factors)

Answer 23

• Target market niche is big enough to be profitable with good growth potential
• Industry leaders have chosen not to compete in the niche
• It is costly or difficult for multisegment competitors to meet the specialized needs of niche buyers and at the same time satisfy expectations of mainstream customers
• Industry has many different niches and segments
• Few rivals are attempting to specialize in the same target segment

Question 24

What must a company have to profitably employ a best-cost strategy?

Answer 24

The capability to incorporate upscale attributes into its product offering at a lower cost than rivals

Question 25

Do best-cost strategies address a broad or focused customer base?

Answer 25

May address either a broad or focused customer base.

Question 26

How is a best-cost strategy different from a low-cost strategy?

Answer 26

Additional attractive attributes entail additional costs. Low-cost providers avoid this by offering products with few frills.

Question 27

How is a best-cost strategy different from a differentiation strategy?

Answer 27

Entails the ability to produce upscale features at a lower cost than other high-end producers.

Question 28

Which type of buyers does a best-cost strategy attract?

Answer 28

Value-conscious buyers.

Question 29

What is the biggest risk in employing a best-cost strategy?

Answer 29

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

Question 30

What is the difference between V - C?

Answer 30

Value to the consumer minus cost = economic value produced by the company.