Chapter 5: The Five Generic Competitive Strategies: Which One to Employ?

Question 1

What are the five generic competitive strategies?

Answer 1

1) Low-cost provider
2) Broad differentiation
3) Focused low-cost
4) Focused differentiation
5) Best-cost provider

Question 2

Low-cost provider strategies

Answer 2

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

Eg: Poundland, 99cent shop

Question 3

Competitive advantages of low-cost provider strategies

Answer 3

1) Greater total profits and increased market share gained from underpricing competitors
2) Larger profit margins per unit sold (because the company’s costs per unit are below the unit costs of rivals) when selling products at prices comparable to and competitive with rivals

Question 4

Cost drivers (factors that have strong influence on a company’s costs) include:

Answer 4

1) Capturing the benefits of economies of scale
2) Using the company’s bargaining power vis-a-vis suppliers to gain concessions
3) Try to operate facilities at full capacity
4) Often selling “commodity” or essential items
5) Make full use of ICT system
6) Outsource non-valued or costly activities
7) Motivated workforce through recognition and company culture
8) Low cost operation handling: no price tag; private label items; self-kiosk etc.
9) Other CSFs: location (near university city)

Question 5

Other cost saving tactics:

Answer 5

1) Having low cost specification for inputs
2) Stripping extra features
3) Use the most economical delivery methods (even if it means longer delivery times)
4) Selling direct to customers (reduce distribution costs)
5) Managing suppliers (find cheaper supplier like Alibaba/build relationship with supplier to use Just-in-time inventory)

Question 6

When a low-cost provider strategy work best?

Answer 6

1) Price competition among rival sellers is intense
2) Products of rival sellers are essentially identical and readily available from many sellers (commodity)
3) Buyers incur low costs in switching among sellers (Low cost leader is able to use low price to induce its customers not to switch to rival brands or subs)
4) Buyers are large and have significant power to bargain down prices (power buyers are rarely able to bargain price down past the survival level of the next most cost-efficient seller so low-cost provider has some profit-margin protection)
5) Industry newcomers use introductory low prices to attract buyers and build a customer base (low-cost provider can use price cuts of its own to make it harder for a new rival to win customers -> act as barrier for new entrants)

Question 7

Moves to avoid pitfalls in pursuing a low-cost provider strategy:

Answer 7

1) Reducing price is not justified with large sales/sales is inadequate to cover total cost and earn acceptable profit (do not be overly aggressive in price cutting to win sales and market shares)
2) Long term sustainability is a must move (don’t fail to emphasize avenues of cost advantage that can be kept proprietary)
3) Give more values than norms (do not be too focused on cost reduction that the firm’s offering ends up being too features-poor to generate buyer appeal)

Question 8

Broad differentiation strategies

Answer 8

Differentiating the firm’s product offering from rivals with attributes that appeal to a broad spectrum of buyers

Eg: Prestige and distinctiveness (Rolex), Engineering design and performance (Mercedes and BMW)

Question 9

Advantages of differentiation:

Answer 9

1) Command premium prices for the firm’s products
2) Increased unit sales due to attractive differentiation
3) Gain brand loyalty that bonds buyers to the firm’s products

Question 10

Ways that managers can enhance differentiation based on uniqueness drivers include:

Answer 10

1) Striving to create superior product features, design, and performance
2) Improving customer service or adding additional services
3) Pursuing production R&D activities
4) Striving for innovation and technological advances
5) Pursuing continuous quality improvement (ISO 9001 improve reputation)
6) Increase the intensity of marketing and sales activities (brand management activities to support differentiation)

7 Seeking out high-quality inputs

8) Improving employee skill, knowledge, and experience through HRM activities

Through Value Chain System
1) Coordinating with channel allies to enhance customer perceptions of value

2) Coordinating with suppliers to better address customer needs

Question 11

4 ways to offer customers something that rivals cannot (at least in terms of level of satisfaction):

Answer 11

1) Incorporate product attributes and user features that lower the buyer’s overall costs of using the firm’s product (eg: energy-efficient features, lower maintenance cost)
2) Incorporate tangible features (eg: styling) that increase customer satisfaction with the product
3) Incorporate intangible features (eg: buyer image) that enhance buyer satisfaction in non-economic ways
4) Signal the value of the firm’s product (eg: higher price, fancier packaging, placement, advertising) offering to buyers

Question 12

When a differentiation strategy works best?

Answer 12

Market circumstances favoring differentiation
1) Buyer needs and uses of the product are diverse

2) There are many ways to differentiate the product or service that have value to buyers
3) Few rival firms follow a similar differentiation approach
4) Technological change is fast-paced and competition revolves around rapidly evolving product features

Question 13

Pitfalls to avoid in pursuing a differentiation strategy:

Answer 13

1) Relying on product attributes easily copied by rivals
2) Introducing product attributes that do not evoke an enthusiastic buyer response (buyer say “so what”)
3) Eroding profitability by overspending on efforts to differentiate the firm’s product offering
4) Adding frills and features that add no value to customers (eg. 1-day before luggage check-in)
5) Not striving to open up meaningful gaps in quality, service, or performance features
6) Charging too high a price premium

Question 14

Focused low-cost strategy

Answer 14

Concentrating on a narrow price-sensitive buyer segment and and outcompeting rivals on costs, thus being in position to win buyer favour by means of lower-priced product offering

Eg: AirAsia (budget airline)

Niche or targeted market segments instead of broad (low-cost provider provider)

Question 15

Focused differentiation strategy

Answer 15

Concentrating on a narrow buyer segment and outcompeting rivals with a product offering that meets the specific tastes and requirements of niche members better than the product offerings of rivals

Eg: Limited edition car (Rolls-Royce), watch (Richard Mille); private jet service; limousine service; 7 star hotel

Often offered at a premium price due to being the very finest items

Question 16

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

Answer 16

1) The target market niche is big enough to be profitable and offers good growth potential
2) Industry leaders do not see that having a presence in the niche is crucial to their own success - hence, focusers can avoid head to head competition with them
3) The industry has many different niches and segments (allowing a focuser to pick a competitively attractive niche suited to its most valuable resources and capabilities; also more room for focusers to avoid each other)
4) Rivals have little or not interest in the same target segment
5) Focuser has a reservoir of customer goodwill and loyalty
6) It is costly or difficult for multisegment competitors to put capabilities in place to meet the specialised needs of buyers constituting the target market niche and at the same time satisfy the expectations of their mainstream customers

Question 17

The 3 risks of a focused low-cost or focused differentiation strategy:

Answer 17

1) The chance that competitors will find effective ways to match the focused firm’s capabilities in serving the target niche
2) The potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers
3) The segment may become so attractive that it is soon flooded with rivals, intensifying rivalry and splintering segment profits

Question 18

Best-cost provider strategies

Answer 18

They are a hybrid of low-cost provider and differentiation strategies that aim at providing desired quality/features/performance/service attributes while beating rivals with similar caliber product offerings on price

Eg. Lexus, IKEA, Factory outlet stores

Question 19

What is the difference between a best-cost provider and a low-cost provider?

Answer 19

1) Additional attractive attributes entail additional costs (low-cost provider avoid by offering a basic product)
2) Distinctly different target market: value-conscious buyers (buyers who are looking for appealing extras and functionality at an appealingly low price). They are willing to pay a “fair” price for extra features, but shy away from paying too much for items having all the bells and whistles.

Budget-conscious buyers: they look for a basic product at a bargain price

Question 20

When a best-cost provider strategy works best?

Answer 20

1) Product differentiation is the norm in the market
2) There are a large number of value-conscious buyers who prefer midrange products to cheap, basic products or expensive top-of-the-line products.
3) During bad economic conditions when more buyers become value-conscious and are attracted to economically priced products and services with appealing attributes

Question 21

The big risk of a best-cost provider strategy

Answer 21

Getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies. Low-cost providers 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 (even though their products are more expensive).

Hence, to be successful, a best-cost provider must offer buyers significantly better product attributes to justify a price above what low-cost leaders are charging. Likewise, it has to achieve significantly lower costs in providing upscale features so that it can outcompete high-end differentiators on the basis of significantly lower price