Generating Advantage – Strategic Management - Oregon ...

A focused low-cost strategy — concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs than rivals and thus ... Skiptocontent Acompany’scompetitivestrategydealsexclusivelywiththespecificsofmanagement’sgameplanforcompetingsuccessfully—itsspecificeffortstopleasecustomers,itsoffensiveanddefensivemovestocounterthemaneuversofrivals,itsresponsestowhatevermarketconditionsprevailatthemoment,anditsapproachtosecuringacompetitiveadvantagerelativetorivals.Therearecountlessvariationsinthecompetitivestrategiesthatcompaniesemploy,mainlybecauseeachcompany’sstrategicapproachentailscustom-designedactionstofititsowncircumstancesandindustryenvironment.Thecustom-tailorednatureofeachcompany’sstrategyisalsotheresultofmanagement’seffortstouniquelypositionthecompanyinitsmarket. Example5.16AUniqueValueProposition TheiPod’sattractivestyling,easy-to-usecontrols,attention-grabbingads,andextensivecollectionofmusicavailableatApple’siTunesStorehavegivenAppleacompetitiveadvantageinthedigitalmediaplayerindustry.MicrosofthasattemptedtoimitateApple’scompetitivestrategywiththeintroductionofitsZunemusicplayerandstore,butMicrosofthasfarednobetterinitsattackontheiPodthananyoftheothermakersofdigitalmediaplayers. Earncredit,addyourownexample! Companiesaremuchmorelikelytoachievecompetitiveadvantageandearnabove-averageprofitsiftheyfindauniquewayofdeliveringsuperiorvaluetocustomers. Bychoosingauniqueapproachtoprovidingvaluetocustomers,afirmachievesanenduringbrandloyaltythatmakesitdifficultforotherstotriumphbymerelycopyingitsstrategicapproach.“Metoo”strategiescanrarelybeexpectedtodelivercompetitiveadvantageandstellarperformanceunlesstheimitatorpossessesresourcesorcompetenciesthatallowittoprovidegreatervaluetocustomersthanthatofferedbyfirmswithsimilarstrategicapproaches. Competitivestrategiesthatprovidedistinctiveindustrypositioningandcompetitiveadvantageinthemarketplaceinvolvechoosingbetweenamarkettargetthatiseitherbroadornarrow,andwhetherthecompanyshouldpursueacompetitiveadvantagelinkedtolowcostsorproductdifferentiation.Thesetwofactorsgiverisetofivecompetitivestrategyoptions: Alow-costproviderstrategy—strivingtoachieveloweroverallcoststhanrivalsandappealingtoabroadspectrumofcustomers,usuallybyunder-pricingrivals. Abroaddifferentiationstrategy—seekingtodifferentiatethecompany’sproductorservicefromrivals’inwaysthatwillappealtoabroadspectrumofbuyers. Afocusedlow-coststrategy—concentratingonanarrowbuyersegment(ormarketniche)andoutcompetingrivalsbyhavinglowercoststhanrivalsandthusbeingabletoservenichemembersatalowerprice. Afocuseddifferentiationstrategy—concentratingonanarrowbuyersegment(ormarketniche)andoutcompetingrivalsbyofferingnichememberscustomizedattributesthatmeettheirtastesandrequirementsbetterthanrivals’products. Abest-costproviderstrategy—givingcustomersmorevalueforthemoneybysatisfyingbuyers’expectationsonkeyproductattributes(e.g.,quality,features,performance,orservice)whilebeatingtheirpriceexpectations.Alternatively,itmayprovideaproductwithbetterattributesasacomparablepricetocompetitors.Thisoptionisahybridstrategythatblendselementsoflow-costprovideranddifferentiationstrategies. WhenaLow-costProviderStrategyWorksBest Acompetitivestrategypredicatedonlow-costleadershipisparticularlypowerfulwhen: Pricecompetitionamongrivalsellersisespeciallyvigorous.Low-costprovidersareinthebestpositiontocompeteoffensivelyonthebasisofpriceandtosurvivepricewars. Theproductsofrivalsellersareessentiallyidenticalandarereadilyavailablefromseveralsellers.Commodity-likeproductsand/oramplesuppliessetthestageforlivelypricecompetition;insuchmarkets,itisthelessefficient,higher-costcompaniesthataremostvulnerable. Therearefewwaystoachieveproductdifferentiationthathavevaluetobuyers.Whentheproductorservicedifferencesbetweenbrandsdonotmattermuchtobuyers,buyersnearlyalwaysshopthemarketforthebestprice. Buyersincurlowcostsinswitchingtheirpurchasesfromonesellertoanother.Lowswitchingcostsgivebuyerstheflexibilitytoshiftpurchasestolower-pricedsellershavingequallygoodproducts.Alow-costleaderiswellpositionedtouselowpricetoinduceitscustomersnottoswitchtorivalbrands. Themajorityofindustrysalesaremadetoafew,large-volumebuyers.Low-costprovidersareinthebestpositionamongsellersinbargainingwithhigh-volumebuyersbecausetheyareabletobeatrivals’pricingtolandahigh-volumesalewhilemaintaininganacceptableprofitmargin. Industrynewcomersuseintroductorylowpricestoattractbuyersandbuildacustomerbase.Thelow-costleadercanusepricecutsofitsowntomakeitharderforanewrivaltowincustomers. Asarule,themoreprice-sensitivebuyersare,themoreappealingalow-coststrategybecomes.Alow-costcompany’sabilitytosettheindustry’spricefloorandstillearnaprofiterectsprotectivebarriersarounditsmarketposition. PitfallstoAvoidinPursuingaLow-CostProviderStrategy Perhapsthebiggestpitfallofalow-costproviderstrategyisgettingcarriedawaywithoverlyaggressivepricecuttingandendingupwithlower,ratherthanhigher,profitability.Alow-cost/low-priceadvantageresultsinsuperiorprofitabilityonlyif(1)pricesarecutbylessthanthesizeofthecostadvantageor(2)theaddedvolumeislargeenoughtobringinabiggertotalprofitdespitelowermarginsperunitsold.Thus,acompanywitha5percentcostadvantagecannotcutprices20percent,endupwithavolumegainofonly10percent,andstillexpecttoearnhigherprofits! Asecondbigpitfallisrelyingonanapproachtoreducecoststhatcanbeeasilycopiedbyrivals.Thevalueofacostadvantagedependsonitssustainability.Sustainability,inturn,hingesonwhetherthecompanyachievesitscostadvantageinwaysdifficultforrivalstoreplicateormatch.Ifrivalsfinditrelativelyeasyorinexpensivetoimitatetheleader’slow-costmethods,thentheleader’sadvantagewillbetooshort-livedtoyieldavaluableedgeinthemarketplace. Athirdpitfallisbecomingtoofixatedoncostreduction.Lowcostscannotbepursuedsozealouslythatafirm’sofferingendsupbeingtoofeatures-poortogaintheinterestofbuyers.Furthermore,acompanydrivinghardtopushitscostsdownhastoguardagainstmisreadingorignoringincreasedbuyerpreferencesforaddedfeaturesordecliningbuyerpricesensitivity.Evenifthesemistakesareavoided,alow-costcompetitiveapproachstillcarriesrisk.Cost-savingtechnologicalbreakthroughsorprocessimprovementsbyrivalfirmscannullifyalow-costleader’shard-wonposition. WhenaDifferentiationStrategyWorksBest Differentiationstrategiestendtoworkbestinmarketcircumstanceswhere: Buyerneedsandusesoftheproductarediverse.Diversebuyerpreferencesallowindustryrivalstosetthemselvesapartwithproductattributesthatappealtoparticularbuyers.Forinstance,thediversityofconsumerpreferencesformenuselection,ambience,pricing,andcustomerservicegivesrestaurantsexceptionallywidelatitudeincreatingdifferentiatedconcepts.Otherindustriesofferingopportunitiesfordifferentiationbasedupondiversebuyerneedsandusesincludemagazinepublishing,automobilemanufacturing,footwear,kitchenappliances,andcomputers. Therearemanywaystodifferentiatetheproductorservicethathavevaluetobuyers.Industriesthatallowcompetitorstoaddfeaturestoproductattributesarewellsuitedfordifferentiationstrategies.Forexample,hotelchainscandifferentiateonsuchfeaturesaslocation,sizeofroom,rangeofguestservices,in-hoteldining,andthequalityandluxuriousnessofbeddingandfurnishings.Similarly,cosmeticsproducersareabletodifferentiatebaseduponprestigeandimage,formulationsthatfightthesignsofaging,UVlightprotection,exclusivityofretaillocations,theinclusionofantioxidantsandnaturalingredients,orprohibitionsagainstanimaltesting. Fewrivalfirmsarefollowingasimilardifferentiationapproach.Thebestdifferentiationapproachesinvolvetryingtoappealtobuyersonthebasisofattributesthatrivalsarenotemphasizing.Adifferentiatorencounterslesshead-to-headrivalrywhenitgoesitsownseparatewaytocreateuniquenessanddoesnottrytoout-differentiaterivalsontheverysameattributes.Whenmanyrivalsareallclaiming“ourstastesbetterthantheirs”or“oursgetsyourclothescleanerthantheirs,”competitorstendtoendupchasingthesamebuyerswithverysimilarproductofferings. Technologicalchangeisfast-pacedandcompetitionrevolvesaroundrapidlyevolvingproductfeatures.Rapidproductinnovationandfrequentintroductionsofnext-versionproductsheightenbuyerinterestandprovidespaceforcompaniestopursuedistinctdifferentiatingpaths.Invideogamehardwareandvideogames,golfequipment,PCs,mobilephones,andautomobilenavigationsystems,competitorsarelockedintoanongoingbattletosetthemselvesapartbyintroducingthebestnext-generationproducts;companiesthatfailtocomeupwithnewandimprovedproductsanddistinctiveperformancefeaturesquicklyloseoutinthemarketplace. PitfallstoAvoidinPursuingaDifferentiationStrategy Differentiationstrategiescanfailforanyofseveralreasons.Adifferentiationstrategykeyedtoproductorserviceattributesthatareeasilyandquicklycopiedisalwayssuspect.Rapidimitationmeansthatnorivalachievesmeaningfuldifferentiation,becausewhatevernewfeatureonefirmintroducesthatstrikesthefancyofbuyersisalmostimmediatelyaddedbyrivals.Thisiswhyafirmmustsearchoutsourcesofuniquenessthataretime-consumingorburdensomeforrivalstomatchifithopestousedifferentiationtowinasustainablecompetitiveedgeoverrivals. Differentiationstrategiescanalsofalterwhenbuyersseelittlevalueintheuniqueattributesofacompany’sproduct.Thusevenifacompanysetstheattributesofitsbrandapartfromitsrivals’brands,itsstrategycanfailbecauseoftryingtodifferentiateonthebasisofsomethingthatdoesnotdeliveradequatevaluetobuyers.Anytimemanypotentialbuyerslookatacompany’sdifferentiatedproductofferingandconclude“sowhat,”thecompany’sdifferentiationstrategyisindeeptrouble;buyerswilllikelydecidetheproductisnotworththeextrapriceandsaleswillbedisappointinglylow. Overspendingoneffortstodifferentiateisastrategyflawthatcanerodeprofitability.Companyeffortstoachievedifferentiationnearlyalwaysraisecosts.Thetricktoprofitabledifferentiationiseithertokeepthecostsofachievingdifferentiationbelowthepricepremiumthedifferentiatingattributescancommandinthemarketplaceortooffsetthinnerprofitmarginsbysellingenoughadditionalunitstoincreasetotalprofits.Ifacompanygoesoverboardinpursuingcostlydifferentiation,itcouldbesaddledwithunacceptablythinprofitmarginsorevenlosses.Theneedtocontaindifferentiationcostsiswhymanycompaniesaddlittletouchesofdifferentiationthataddtobuyersatisfactionbutareinexpensivetoinstitute. Othercommonpitfallsandmistakesincraftingadifferentiationstrategyinclude: Over-differentiatingsothatproductqualityorservicelevelsexceedbuyers’needs.Buyersareunlikelytopayextraforfeaturesandattributesthatwillgounused.Forexample,consumersareunlikelytopurchaseprogrammablelargeappliancessuchaswashers,dryers,andovensiftheyaresatisfiedwithmanuallycontrolledappliances. Tryingtochargetoohighofapricepremium.Evenifbuyersviewcertainextrasordeluxefeaturesas“nicetohave,”theymaystillconcludethattheaddedbenefitorluxuryisnotworththepricedifferentialoverthatoflesserdifferentiatedproducts. Beingtimidandnotstrivingtoopenupmeaningfulgapsinqualityorserviceorperformancefeaturesvis-à-vistheproductsofrivals.Tinydifferencesbetweenrivals’productofferingsmaynotbevisibleorimportanttobuyers. Alow-costproviderstrategycanalwaysdefeatadifferentiationstrategywhenbuyersaresatisfiedwithabasicproductanddon’tthink“extra”attributesareworthahigherprice. Focused(orMarketNiche)Strategies Whatsetsfocusedstrategiesapartfromlow-costleadershiporbroaddifferentiationstrategiesisaconcentrationonanarrowpieceofthetotalmarket.Thetargetedsegment,orniche,canbedefinedbygeographicuniquenessorbyspecialproductattributesthatappealonlytonichemembers.Theadvantagesoffocusingacompany’sentirecompetitiveeffortonasinglemarketnicheareconsiderable,especiallyforsmallerandmedium-sizedcompaniesthatmaylackthebreadthanddepthofresourcestotacklegoingafteranationalcustomerbasewitha“somethingforeveryone”lineupofmodels,styles,andproductselection. Example5.17NicheSuccess CommunityCoffee,thelargestfamily-ownedspecialtycoffeeretailerintheUnitedStates,hasageographicfocusonthestateofLouisianaandcommunitiesacrosstheGulfofMexico.Communityholdsonlya1.1percentshareofthenationalcoffeemarket,buthasrecordedsalesinexcessof$100millionandhaswona50percentshareofthecoffeebusinessinthe11-stateregionwhereitisdistributed. Earncredit,addyourownexample! Examplesoffirmsthatconcentrateonawell-definedmarketnichekeyedtoaparticularproductorbuyersegmentincludeDiscoveryChannelandComedyCentral(incableTV),Google(inInternetsearchengines),Porsche(insportscars),andCGA,Inc.(aspecialistinprovidinginsurancetocoverthecostoflucrativehole-in-oneprizesatgolftournaments).Microbreweries,localbakeries,bed-and-breakfastinns,andlocalowner-managedretailboutiquesareallgoodexamplesofenterprisesthathavescaledtheiroperationstoservenarroworlocalcustomersegments. WhenaMarketNicheStrategyIsViable Afocusedstrategyaimedatsecuringacompetitiveedgebasedeitheronlowcostordifferentiationbecomesincreasinglyattractiveasmoreofthefollowingconditionsaremet: Thetargetmarketnicheisbigenoughtobeprofitableandoffersgoodgrowthpotential. Industryleadershavechosennottocompeteintheniche—focuserscanavoidbattlinghead-to-headagainsttheindustry’sbiggestandstrongestcompetitors. Itiscostlyordifficultformulti-segmentcompetitorstomeetthespecializedneedsofnichebuyersandatthesametimesatisfytheexpectationsofmainstreamcustomers. Theindustryhasmanydifferentnichesandsegments,therebyallowingafocusertopickanichesuitedtoitsresourcestrengthsandcapabilities. Few,ifany,rivalsareattemptingtospecializeinthesametargetsegment. TheRisksofaMarketNicheStrategy Focusingcarriesseveralrisks.Thefirstmajorriskisthechancethatcompetitorswillfindeffectivewaystomatchthefocusedfirm’scapabilitiesinservingthetargetniche.Inthelodgingbusiness,largechainssuchasMarriottandHiltonhavelaunchedmulti-brandstrategiesthatallowthemtocompeteeffectivelyinseverallodgingsegmentssimultaneously.Marriotthasflagshiphotelswithafullcomplementofservicesandamenitiesthatallowittoattracttravelersandvacationersgoingtomajorresorts;ithasJ.W.MarriottandRitz-Carltonhotelsthatprovidedeluxecomfortandservicetobusinessandleisuretravelers;ithasCourtyardbyMarriottandSpringHillSuitesbrandsforbusinesstravelerslookingformoderatelypricedlodging;ithasMarriottResidenceInnsandTownePlaceSuitesdesignedasa“homeawayfromhome”fortravelersstayingfiveormorenights;andithasmorethan650FairfieldInnlocationsthatcatertotravelerslookingforqualitylodgingatan“affordable”price. Similarly,Hiltonhasalineupofbrands(WaldorfAstoria,ConradHotels,DoubletreeHotels,EmbassySuitesHotels,HamptonInns,HiltonHotels,HiltonGardenInns,andHomewoodSuites)thatenableittocompeteinmultiplesegmentsandcompetehead-to-headagainstlodgingchainsthatoperateonlyinasinglesegment.Multi-brandstrategiesareattractivetolargecompaniessuchasMarriottandHiltonpreciselybecausetheyenableacompanytoenteramarketnicheandsiphonbusinessawayfromcompaniesthatemployafocusstrategy. Example5.18ShiftingMarketFocus ThepopularCampbellSoupCompanyisshiftingitsmarketingfocusfrom“Millennials”to“GenerationX.” Todothis,itwillbeginfocusingonsnacksandsimplemealsandbeverages.Theirmarketingwillemphasizeeasy,affordable,andtastymealsolutions.Theywillmakepackagere-designstomaketheproductsmoreconvenientandadduniqueandadventurousflavors.Tosupporttheirexistingchunkysoupfranchise,newmarketingeffortswillfocusontheconvenienceoftheseproductsaswell. Source:MediaPost,CampbellSoupBrandToShiftFocusFromMillennialsToGenX,2018Fa Asecondriskofemployingafocusstrategyisthepotentialforthepreferencesandneedsofnichememberstoshiftovertimetowardtheproductattributesdesiredbythemajorityofbuyers.Anerosionofthedifferencesacrossbuyersegmentslowersentrybarriersintoafocusedmarketnicheandprovidesanopeninvitationforrivalsinadjacentsegmentstobegincompetingforthefocuser’scustomers.Athirdriskisthatthesegmentmaybecomesoattractiveitissooninundatedwithcompetitors,intensifyingrivalryandsplinteringsegmentprofits. Best-costProviderStrategy Best-costproviderstrategiesareahybridoflow-costprovideranddifferentiationstrategiesthataimatsatisfyingbuyerexpectationsonkeyquality/features/performance/serviceattributesandbeatingcustomerexpectationsonprice.Companiespursuingbest-coststrategiesaimsquarelyatthesometimesgreatmassofvalue-consciousbuyerslookingforagood-to-very-goodproductorserviceataneconomicalprice.Theessenceofabest-costproviderstrategyisgivingcustomersmorevalueforthemoneybysatisfyingbuyerdesiresforappealingproductattributesintermsoffeatures,performance,quality,service,orrelatedcharacteristicsandchargingalowerpricefortheseattributescomparedtorivalswithsimilarcaliberproductofferings.Alternatively,thefirmcouldprovideasuperiorproductatacomparableprice.Eitherapproachyieldsacomparablebest-costproduct. WhenaBest-CostProviderStrategyWorksBest Abest-costproviderstrategyworksbestinmarketswhereproductdifferentiationisthenormandattractivelylargenumbersofvalue-consciousbuyerscanbeinducedtopurchasemidrangeproductsratherthanthebasicproductsoflow-costproducersortheexpensiveproductsoftop-of-the-linedifferentiators.Abest-costproviderusuallyneedstopositionitselfinthemiddleofthemarketwitheitheramedium-qualityproductatabelow-averagepriceorahigh-qualityproductatanaverageorslightlyhigher-than-averageprice.Best-costproviderstrategiesalsoworkwellinrecessionarytimeswhengreatmassesofbuyersbecomevalue-consciousandareattractedtoeconomicallypricedproductsandserviceswithespeciallyappealingattributes. TheDangerofanUnsoundBest-CostProviderStrategy Acompany’sbiggestvulnerabilityinemployingabest-costproviderstrategyisnothavingtherequisitecorecompetenciesandefficienciesinmanagingvaluechainactivitiestosupporttheadditionofdifferentiatingfeatureswithoutsignificantlyincreasingcosts.Acompanywithamodestdegreeofdifferentiationandnorealcostadvantagewillmostlikelyfinditselfsqueezedbetweenthefirmsusinglow-coststrategiesandthoseusingdifferentiationstrategies.Low-costprovidersmaybeabletosiphoncustomersawaywiththeappealofalowerprice(despitehavingmarginallylessappealingproductattributes).High-enddifferentiatorsmaybeabletostealcustomersawaywiththeappealofappreciablybetterproductattributes(eventhoughtheirproductscarryasomewhathigherpricetag).Thus,asuccessfulbest-costprovidermustofferbuyerssignificantlybetterproductattributestojustifyapriceabovewhatlow-costleadersarecharging.Likewise,ithastoachievesignificantlylowercostsinprovidingupscalefeaturessothatitcanoutcompetehigh-enddifferentiatorsonthebasisofasignificantlylowerprice. SuccessfulStrategiesareResource-based Foracompany’scompetitivestrategytosucceedindeliveringgoodperformanceandtheintendedcompetitiveedgeoverrivals,ithastobewell-matchedtoacompany’sinternalsituationandunderpinnedbyanappropriatesetofresources,know-how,andcompetitivecapabilities.Tosucceedinemployingalow-costproviderstrategy,acompanyhastohavetheresourcesandcapabilitiestokeepitscostsbelowthoseofitscompetitors;thismeanshavingtheexpertisetocost-effectivelymanagevaluechainactivitiesbetterthanrivalsand/ortheinnovativecapabilitytobypasscertainvaluechainactivitiesbeingperformedbyrivals. Tosucceedinstronglydifferentiatingitsproductinwaysthatareappealingtobuyers,acompanymusthavetheresourcesandcapabilities(suchasbettertechnology,strongskillsinproductinnovation,expertiseincustomerservice)toincorporateuniqueattributesintoitsproductofferingthatabroadrangeofbuyerswillfindappealingandworthpayingfor. Strategiesfocusingonanarrowsegmentofthemarketrequirethecapabilitytodoanoutstandingjobofsatisfyingtheneedsandexpectationsofnichebuyers.Successinemployingastrategykeyedtoabestvalueofferingrequirestheresourcesandcapabilitiestoincorporateupscaleproductorserviceattributesatalowercostthanrivals. Previous/nextnavigation Previous:StrategyasDiscipline Next:KEYTAKEAWAY Backtotop License StrategicManagementbyJohnMorrisislicensedunderaCreativeCommonsAttribution-NonCommercial4.0InternationalLicense,exceptwhereotherwisenoted. ShareThisBook ShareonTwitter