Crafting & Executing Strategy The Quest for Competitive Advantage Concepts and Cases 21st Edition By Arthur A. Thompson Jr -Test Bank

A company’s competitive strategy should be well matched to its internal situation and predicated on leveraging its collection of competitively valuable resources and competencies.

The five generic competitive strategies include: (1) broad differentiation, (2) narrow differentiation, (3) low cost provider, (4) focused low-cost provider, and (5) best-cost. A high-cost strategy is illogical and does not exist.

The primary determinants of a company’s profitability are whether the company chooses to compete on cost advantage or product differentiation and the scope of its target market: narrow or broad. Defining a target market allows a company to create products to suit the target customers and generates the need to devise a strategy that is best suited for generating profitability for customers and the company alike.

There are two ways to gain a competitive edge over rivals: either perform value chain activities more effectively than rivals or revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.

The two biggest factors that distinguish one competitive strategy from another boil down to (1) whether a company’s market target is broad or narrow and (2) whether the company is pursuing a competitive advantage linked to lower costs or differentiation.

The hotelier has used a hybrid of a focused differentiation strategy and focused low cost strategy, known as a best-cost strategy, by outcompeting rivals via upscale rooms and superior service at value prices.

A company’s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully, which gives rise to five competitive strategies: low-cost provider, broad differentiation, focused low-cost, focused differentiation, best-cost provider.

For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

A company’s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully—its specific efforts to please customers, strengthen its market position, counter the maneuvers of rivals, respond to shifting market conditions, and achieve a particular competitive advantage.

A company achieves low-cost leadership when it becomes the industry’s lowest-cost provider rather than just being one of perhaps several competitors with comparatively low costs. Successful low-cost providers boast lower costs than rivals—but not necessarily the absolutely lowest possible cost.

Success in achieving a low-cost edge over rivals comes from eliminating and/or curbing “nonessential” activities and/or bypassing some cost-producing activities, e.g. (1) eliminating and/or curbing “nonessential” activities; (2) out-managing rivals in performing essential activities; (3) achieving efficiencies in supply chain management and (4) scale economies from full capacity utilization. A low-cost provider’s foremost strategic objective is meaningfully lower costs than rivals—butnotnecessarilytheabsolutelylowestpossiblecost.

To achieve a low-cost edge over rivals, a firm’s cumulative costs across its overall value chain must be lower than competitors’ cumulative costs.

Relying on an approach to reduce costs that can be easily copied by rivals is one of the pitfalls to avoid while pursuing a low-cost strategy. If rivals find it relatively easy or inexpensive to imitate the leader’s low-cost methods, then the leader’s advantage will be too short-lived to yield a valuable edge in the marketplace.

A company has two options for translating a low-cost advantage over rivals into attractive profit performance. Option 1 is to use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. Option 2 is to maintain the present price, be content with the present market share, and use the lower-cost edge to earn a higher profit margin on each unit sold, thereby raising the firm’s total profits and overall return on investment.

To achieve product differentiation, a company must incorporate desirable features into its product or service to clearly set itself apart from rivals lacking attributes. A differentiation strategy calls for a customer value proposition that is unique. The strategy achieves its aim when an attractively large number of buyers find the customer value proposition appealing and become strongly attached to a company’s differentiated attributes.

There are two major avenues for achieving a low-cost edge over rivals: 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.

Capturing all available economies of scale allows a company to perform value chain activities more cost-effectively than rivals and build a cost advantage over rivals. Outsourcing all support activities, controlling as much of the industry value chain as possible, and minimized spending on R&D are not sure indicators of cost-relative advantages. Paying low salaries could hurt employee morale and minimal advertising could reduce the reach of the products.

The fast-food restaurant is using just-in-time inventory method to reduce supply chain inefficiency; the products are made-to-order thereby reducing the waste.

A dazzling array of features and options not only drives up product price but also runs the risk that many buyers will conclude that a less deluxe and lower-priced brand is a better value since they have little occasion to use the deluxe attributes.

For a company to do a more cost-efficient job of managing its value chain than rivals, managers must diligently search out cost-saving opportunities in every part of the value chain. No activity can escape cost-saving scrutiny, and all company personnel must be expected to use their talents and ingenuity to come up with innovative and effective ways to keep costs down.

Success in achieving a low-cost edge over rivals comes from eliminating and/or curbing “nonessential” activities and/or out-managing rivals in performing essential activities. Customer service is irrelevant here.

A good corporate culture can substantially improve employee morale and workplace pride, boost productivity, and generate positive working environment thereby contributing indirectly to cost cutting.

Whether a company is able to operate at or near full capacity has a big impact on unit costs when its value chain contains activities associated with substantial fixed costs. Higher rates of capacity utilization allow depreciation and other fixed costs to be spread over a larger unit volume, thereby lowering fixed costs per unit.

Having suppliers locate their plants or warehouses close to a company’s own plant facilitates just-in-time deliveries of parts and components to the exact workstation where they will be used in assembling the company’s product. This not only lowers incoming shipping costs but also curbs or eliminates the company’s need to build and operate storerooms for incoming parts and components and to have plant personnel move the inventories to the workstations as needed for assembly. The other options provide methods of cost-efficient management of value chain activities.

Company B uses the best method to improve its supply chain activities to cut costs. Just-in-time inventories reduce waiting time for producers and consumers.

Integrating into the activities of either suppliers or distribution channel allies can lower costs through greater production efficiencies, reduced transaction costs, or a better bargaining position.

With common user requirements, a standardized product can satisfy buyers’ needs, in which case low price, not features or quality, becomes the dominant factor in causing buyers to choose one seller’s product over another’s.

Low-cost providers are in the best position to compete offensively on the basis of price, to gain market share at the expense of rivals, to win the business of price-sensitive buyers, to remain profitable despite strong price competition, and to survive price wars.

A low-cost strategy works best for entrants who could use low prices based on low costs to attract buyers; it also works when price competition among rival sellers is vigorous, the products of rival sellers are essentially identical and readily available from many eager sellers, and it is difficult to achieve product differentiation in ways that have value to buyers.

A low-cost strategy works best when most buyers use the product or service in the same ways, price competition among rival sellers is vigorous, the products of rival sellers are essentially identical and readily available from many eager sellers, buyers incur low costs in switching their purchases from one seller to another, and it is difficult to achieve product differentiation in ways that have value to buyers.

When the differences between product attributes or brands do not matter much to buyers, buyers are nearly always sensitive to price differences, and industry-leading companies tend to be those with the lowest-priced brands. With common user requirements, a standardized product can satisfy buyers’ needs, in which case low price, not features or quality, becomes the dominant factor in causing buyers to choose one seller’s product over another’s.

Look-alike products and/or overabundant product supply set the stage for lively price competition; in such markets, it is the less efficient, higher-cost companies whose profits get squeezed the most.

Setting the industry’s price ceiling to capture volume gains and achieve economies of scale is a cost cutting method to optimally lower unit costs and increase production to gain profits.

Relying on approaches to reduce costs that can be easily copied is a major pitfall of a low-cost provider strategy; all of the other choices are benefits of a low-cost provider strategy.

All but CNN are mentioned in the chapter as the lowest cost providers in their respective industries. CNN pursues a differentiation strategy of news-only programming, around the clock, and is often the first television network to get to a news story.

The value drivers of a broad differentiation strategy donotinclude just-in-time inventories and made-to-order products contingent upon customer demand. Those drivers may be aspects of a low-cost provider strategy.

The value drivers of a broad differentiation strategy do include: (1) creating product features that appeal to a wide range of buyers, (2) improving customer service or adding extra services, (3) investing in production-related R&D activities, (4) striving for innovation or technological advances, (5) pursuing continuous quality improvement, (6) increasing marketing and brand-building activities, (7) seeking out high-quality inputs, and (8) emphasizing human resource management activities that improve the skills, expertise, and knowledge of company personnel.

Just as pursuing a cost advantage can involve improving a company’s value chain system, the same is true for firms pursing a differentiation advantage. Activities performed upstream by suppliers or downstream by distributors can have a meaningful effect on customers’ perceptions of a company’s offerings and its value proposition. Two approaches to revamping the value chain system to enhance differentiation include: (1) coordinating with channel allies to enhance customer value, and (2) pursuing closer collaboration and coordination with channel suppliers to better address customer needs.

Differentiation strategies are attractive whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product offering. A company must incorporate distinctive, desirable features into its product or service to clearly set itself apart from rivals lacking attributes.

Successful product differentiation requires careful study to determine what attributes buyers find appealing, valuable, and worth paying for. Then the company must incorporate these desirable features into its product or service to clearly set itself apart from rivals lacking attributes. A differentiation strategy calls for a customer value proposition that is unique.

Successful differentiation allows a firm to do one or more of the following:

• Command a premium price for its product.
• Increase unit sales (because additional buyers are won over by the differentiating features).
• Gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products).

Price-conscious buyers are looking for a basic product at a bargain-basement price.

Differentiation enhances profitability whenever a company’s product can command a sufficiently higher price or produce sufficiently bigger unit sales to more than cover the added costs of achieving the differentiation.

A differentiation strategy calls for a customer value proposition that is unique. The strategy achieves its aim when an attractively large number of buyers find the customer value proposition appealing and become strongly attached to a company’s differentiated attributes. It enhances profitability whenever a company’s product can command a sufficiently higher price or produce sufficiently bigger unit sales to more than cover the added costs of achieving the differentiation.

Differentiation is not something hatched in marketing and advertising departments, nor is it limited to the catchalls of quality and service. Differentiation opportunities can exist in activities all along an industry’s value chain. The most systematic approach that managers can take, however, involves focusing on the value drivers.

Value drivers are a set of factors—analogous to cost drivers—that are particularly effective in creating differentiation.

Differentiation strategies tend to work best when: (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 are following a similar differentiation approach; and (4) technological change is fast-paced and competition revolves around rapidly evolving product features.

A value driver is seeking out high-quality inputs. Input quality can ultimately spill over to affect the performance or quality of the company’s end product.

Marketing and advertising can have a tremendous effect on the value perceived by buyers and therefore their willingness to pay more for the company’s offerings. They can create differentiation even when little tangible differentiation exists otherwise. Brands create customer loyalty, which increases the perceived “cost” of switching to another product.

A company’s incentive system can encourage not only greater worker productivity but also cost-saving innovations that come from worker suggestions.

Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising.

Incorporating important tangible features increases customer satisfaction with the product, such as product specifications, functions, and styling. This can be accomplished by including attributes that add functionality, enhance the design, save time for the user, are more reliable, or make the product cleaner, safer, quieter, simpler to use, more portable, more convenient, or longer-lasting than rival brands.

Superior value could be delivered by signaling the value of the company’s product offering to buyers. Typical signals of value include a high price (in instances where high price implies high quality and performance), more appealing or fancier packaging than competing products, ad content that emphasizes a product’s standout attributes, the quality of brochures and sales presentations, and the luxuriousness and ambience of a seller’s facilities (important for high-end retailers and for offices or other facilities frequented by customers).

Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising. The objective is to offer customers something that rivals can’t—at least in terms of the level of satisfaction. There are four basic routes to achieving this aim: lower the buyer’s overall costs, incorporate tangible features that increase customer satisfaction with the product, incorporate intangible features that enhance buyer satisfaction in noneconomic ways, and signal the value of the company’s product offering to buyers.

Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising. The objective is to offer customers something that rivals can’t—at least in terms of the level of satisfaction. There are four basic routes to achieving this aim: lower the buyer’s overall costs, incorporate tangible features that increase customer satisfaction with the product, incorporate intangible features that enhance buyer satisfaction in noneconomic ways, and signal the value of the company’s product offering to buyers.

The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way in creating value and does not try to out differentiate rivals on the very same attributes.

Marketing and advertising can have a tremendous effect on the value perceived by buyers and therefore their willingness to pay more for the company’s offerings. They can create differentiation even when little tangible differentiation exists otherwise. Signaling value is particularly important (1) when the nature of differentiation is based on intangible features and is therefore subjective or 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, and (4) when buyers are unsophisticated.

Diverse buyer preferences allow industry rivals to set themselves apart with product attributes that appeal to particular buyers. For instance, the diversity of consumer preferences for menu selection, ambience, pricing, and customer service gives restaurants exceptionally wide latitude in creating a differentiated product offering.

A broad differentiation strategy generally works best when at least one of the following conditions are met: (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 are following a similar differentiation approach; or (4) Technological change is fast-paced and competition revolves around rapidly evolving product features.

Differentiation strategies tend to work best when: (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 are following a similar differentiation approach; and (4) technological change is fast-paced and competition revolves around rapidly evolving product features.

The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way in creating value and does not try to out differentiate rivals on the very same attributes.

The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way in creating value and does not try to out differentiate rivals on the very same attributes.

Over-differentiating and over-charging are fatal differentiation mistakes. A low-cost provider can defeat a differentiator when customers are basically satisfied with a product or service and don’t think extra bells and whistles merit a premium price.

Rapid imitation means that no rival achieves differentiation, since whenever one firm introduces some value-creating aspect that strikes the fancy of buyers, fast-following copycats quickly reestablish parity. This is why a firm must seek out sources of value creation that are time-consuming or burdensome for rivals to match if it hopes to use differentiation to win a sustainable competitive edge.

Trivial differences between rivals’ product offerings may not be visible or important to buyers. If a company wants to generate the fiercely loyal customer following needed to earn superior profits and open up a differentiation-based competitive advantage over rivals, then its strategy must result in strong rather than weak product differentiation.

A focused strategy aimed at securing a competitive edge based on differentiation becomes increasingly attractive when the target market niche is big enough to be profitable and offers good growth potential.

What sets focused strategies apart from low-cost provider and broad differentiation strategies is concentrated attention on a narrow piece of the total market. The target segment, or niche, can be in the form of a geographic segment, or a customer segment, or a product segment (such as a class of models or some version of the overall product type).

A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

What sets focused (or market niche) strategies apart from low-cost leadership or broad differentiation strategies is a concentration on a narrow piece of the total market. The targeted segment, or niche, can be defined by geographic uniqueness or by special product attributes that appeal only to niche members. This strategy is most attractive when: (1) the target market niche is big enough to be profitable and offers good growth potential; (2) industry leaders have chosen not to compete in the niche—focusers can avoid battling head-to-head against the industry’s biggest and strongest competitors; (3) it is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customers; (4) the industry has many different niches and segments, thereby allowing a focuser to pick a niche suited to its resource strengths and capabilities; or (5) few, if any, rivals are attempting to specialize in the same target segment.

A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

The only real difference between a low-cost provider strategy and a focused low-cost strategy is the size of the buyer group to which a company is appealing—the former involves a product offering that appeals broadly to almost all buyer groups and market segments, whereas the latter aims at just meeting the needs of buyers in a narrow market segment.

Outsourcing the performance of certain value chain activities can be more economical than performing them in-house if outside specialists, by virtue of their expertise and volume, can perform the activities at lower cost.

There can be times when integrating into the activities of either suppliers or distribution-channel allies can lower costs through greater production efficiencies, reduced transaction costs, or a better bargaining position.

A risk of employing a focused strategy is the potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. An erosion of the differences across buyer segments lowers entry barriers into a focuser’s market niche and provides an open invitation for rivals in adjacent segments to begin competing for the focuser’s customers.

A risk of employing a focused strategy is that the segment may become so attractive that it is soon inundated with competitors, intensifying rivalry and splintering segment profits.

Focused differentiation strategies are keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well-defined group of buyers (as opposed to a broad differentiation strategy aimed at many buyer groups and market segments). The first major risk is the chance that competitors will find effective ways to match the focused firm’s capabilities in serving the target niche. The second risk of employing a focus strategy is the potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers.

Best-cost provider strategies are a hybrid of low-cost provider and differentiation strategies that aim at providing more desirable attributes (quality, features, performance, service) while beating rivals on price.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

To profitably employ a best-cost provider strategy, a company must have the capability to incorporate upscale attributes into its product offering at a lower cost than rivals. When a company can incorporate more appealing features, good to excellent product performance or quality, or more satisfying customer service into its product offering at a lower cost than rivals, then it enjoys “best-cost” status—it is the low-cost provider of a product or service with upscale attributes.

The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

A best-cost provider 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. A best-cost provider needs to position itself near the middle of the market with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price.

A company’s biggest vulnerability in employing a best-cost provider strategy is 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 carry a higher price tag).

A company’s biggest vulnerability in employing a best-cost provider strategy is 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 carry a higher price tag).

To be successful, a best-cost provider must achieve significantly lower costs in providing upscale features so that it can out-compete high-end differentiators on the basis of a significantly lower price. Likewise, 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.

For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

The production emphasis of a company pursuing a broad differentiation strategy usually involves building whatever differentiating features buyers are willing to pay for and striving for product superiority.

The marketing emphasis of a company pursuing a broad differentiation strategy usually is to tout differentiating features and to charge a premium price to cover the extra costs of differentiating features.

The keys to maintaining a broad differentiation strategy are stressing constant innovation to stay ahead of imitative competitors and concentrating on a few key differentiating features.

The marketing emphasis of a company pursuing a focused low-cost provider strategy usually is to communicate attractive features of a budget-priced product offering that fits niche buyers’ expectations.

The basis of competitive strategy of a best-cost provider strategy is usually found in the ability of a company to offer better goods at attractive prices.

The production emphasis in a low-cost provider strategy usually requires a company to strive for a continuous search for cost reduction without sacrificing acceptable quality and essential features.

To succeed in employing a low-cost provider strategy, a company must have the resources and capabilities to keep its costs below those of its competitors. This means having the expertise to cost-effectively manage value chain activities better than rivals, leveraging the cost drivers effectively, and/or having the innovative capability to bypass certain value chain activities being performed by rivals.

The five generic competitive strategies and their individual competitive advantage are as follows:

• Alow-costproviderstrategy—striving to achieve lower overall costs than rivals on comparable products that attract a broad spectrum of buyers, usually by underpricing rivals.
• Abroaddifferentiationstrategy—seeking to differentiate the company’s product offering from rivals’ products by offering superior attributes that will appeal to a broad spectrum of buyers.
• Afocusedlow-coststrategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals on costs, thus being able to serve niche members at a lower price.
• Afocuseddifferentiationstrategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals’ products.
• Abest-costproviderstrategy—giving customers morevaluefortheirmoney by satisfying buyers’ expectations on key quality, features, performance, and/or service attributes while beating their price expectations. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best) costs and prices among sellers offering products with comparable differentiating attributes.

A cost driver is a factor having a strong effect on the cost of a company’s value chain activities and cost structure. These can support a firm’s pursuit of low-cost leadership strategy by: (1) striving to capture all available economies of scale; (2) taking full advantage of experience and learning curve effects; (3) trying to operate facilities at full capacity; (4) substituting lower-cost inputs whenever there’s little or no sacrifice in product quality or product performance; (5) employing advanced production technology and process design to improve overall efficiency; (6) using communication systems and information technology to achieve operating efficiencies; (7) using the company’s bargaining power vis-à-vis suppliers to gain concessions; (8) being alert to the cost advantages of outsourcing and vertical integration; and (9) pursuing ways to boost labor productivity and lower overall compensation costs.

A uniqueness driver is a value chain activity or factor that can have a strong impact on customer value and creating differentiation. Uniqueness drivers include: (1) high quality inputs; (2) innovation and technological advances; (3) superior product features; (4) production-related R&D investments; (5) continuous quality improvement; (6) improving skills of personnel, marketing and brand-building; and (7) enhanced customer service.

A cost driver is a factor having a strong effect on the cost of a company’s value chain activities and ability to become a low-cost provider, whereas uniqueness driver is a value chain activity or factor that can have a strong impact on customer value and creating differentiation.
Cost drivers include: (1) striving to capture all available economies of scale; (2) taking full advantage of experience and learning curve effects; (3) trying to operate facilities at full capacity; (4) substituting lower-cost inputs whenever there’s little or no sacrifice in product quality or product performance; (5) employing advanced production technology and process design to improve overall efficiency; (6) using communication systems and information technology to achieve operating efficiencies; (7) using the company’s bargaining power vis-à-vis suppliers to gain concessions; (8) being alert to the cost advantages of outsourcing and vertical integration; and (9) pursuing ways to boost labor productivity and lower overall compensation costs.
Uniqueness drivers, on the other hand, include: (1) high quality inputs; (2) innovation and technological advances; (3) superior product features; (4) production-related R&D investments; (5) continuous quality improvement; (6) improving skills of personnel, marketing and brand-building; and (7) enhanced customer service.

The strategy of striving to be the industry’s overall low-cost provider involves offering comparable products that attract a broad spectrum of buyers, usually by underpricing rivals. To achieve a low-cost provider status, a company must incorporate features and services that buyers consider essential, keeping the frills down to a minimum. A company has two options for translating a low-cost advantage over rivals into attractive profit performance. Option 1 is to use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. Option 2 is to maintain the present price, be content with the present market share, and use the lower-cost edge to earn a higher profit margin on each unit sold, thereby raising the firm’s total profits and overall return on investment.

The two basic cost-reducing approaches a company can take to become a low-cost provider in its industry are:

1. Perform value chain activities more cost-effectively than rivals. You may do this by:

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

2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities. You may do this by:

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

A low-cost provider strategy tends to work best when the products of rival sellers are essentially identical and are readily available from several sellers. Commodity-like products and/or ample supplies set the stage for lively price competition; in such markets, it is the less efficient, higher-cost companies that are most vulnerable.

Market conditions and circumstances that make a low-cost provider strategy attractive are:

• Price competition among rival sellers is vigorous.
• The products of rival sellers are essentially identical and readily available from many eager sellers.
• It is difficult to achieve product differentiation in ways that have value to buyers.
• Most buyers use the product in the same ways.
• Buyers incur low costs in switching their purchases from one seller to another.

The pitfalls in pursuing a low-cost provider strategy are:

• Being overly aggressive in price cutting, as higher unit sales and market shares do not automatically translate into higher profits
• Relying on an approach to reduce costs that can be easily copied by rivals, as the advantage you gain will be too short-lived to yield a valuable edge in the marketplace
• Oversimplifying the product to the point of devaluation, as your offering ends up being too feature-poor to generate buyer appeal

Differentiation strategies are attractive whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product offering. It allows a firm to do one or more of the following:

• Command a premium price for its product.
• Increase unit sales (because additional buyers are won over by the differentiating features).
• Gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products).

Differentiation strategies are most appealing under the following circumstances:

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

Following are the pitfalls in pursuing a broad differentiation strategy:

• focusing on product or service attributes that are easily and quickly copied
• buyers seeing little value in the unique attributes of a company’s product
• overspending on efforts to differentiate the company’s product offering, thus eroding profitability
• offering only trivial improvements in quality, service, or performance features vis-à-vis rivals’ products
• over-differentiating so that product quality, features, or service levels exceed the needs of most buyers
• charging too high a price premium

Best-cost provider strategies stake out a middle ground between pursuing a low-cost advantage and a differentiation advantage and between appealing to the broad market as a whole and a narrow market niche. The essence of a best-cost provider strategy is giving customers more value for the money by satisfying buyer desires for appealing features and charging a lower price for these attributes compared to rivals with similar-caliber product offerings.

A best-cost provider 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. Best-cost provider strategies also work well in recessionary times, when masses of buyers become value-conscious and are attracted to economically priced products and services with more appealing attributes.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals. A best-cost provider strategy works best in markets with large numbers of value-conscious buyers desirous of purchasing better products and services for less money.

The strategic target of a low-cost provider are buyers looking for a basic product with few frills and thus at a low cost, while the target of best-cost providers are the value-conscious buyers willing to pay for additional attractive attributes, appealing extras and functionalities, at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

A focused low-cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment. The avenues to achieving a cost advantage over rivals also serving the target market niche are the same as those for low-cost leadership—use the cost drivers to keep the costs of value chain activities to a bare minimum and search for innovative ways to bypass nonessential activities. The only real difference between a low-cost provider strategy and a focused low-cost strategy is the size of the buyer group to which a company is appealing—the former involves a product offering that appeals broadly to almost all buyer groups and market segments, whereas the latter aims at just meeting the needs of buyers in a narrow market segment.

In a focused differentiation strategy the strategic target is a narrow market niche where buyer needs and preferences are distinctively different. Through small-scale production or custom-made products, it focuses on product features and attributes that appeal specifically to niche members. Its marketing emphasis is on communicating how product offering does the best job of meeting niche buyers’ expectations. So it calls for staying committed to serving the niche better than rivals without blurring the firm’s image by entering other market segments or adding other products to widen market appeal.
In a broad differentiation strategy the strategic target is a broad cross-section of the market to which it offers something attractively different from competitors’ offerings with many product variations, wide selection, and emphasis on differentiating features. It involves building in whatever differentiating features buyers are willing to pay for. Constantly innovating and concentrating on a few key differentiating features, it helps stay ahead of imitative competitors.

A focused low-cost strategy or a focused differentiation strategy would be best. The advantages of focusing a company’s entire competitive effort on a single market niche are considerable, especially for smaller and medium-sized companies that may lack the breadth and depth of resources to tackle going after a broader customer base with a more complex set of needs.

The best-cost provider strategy gives customers more value for their money by satisfying buyers’ expectations on key quality, features, performance, and/or service attributes while beating their price expectations. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best) costs and prices among sellers offering products with comparable differentiating attributes.

Focused low-cost and focused differentiation strategies are attractive under the following conditions:

• 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 more room for focusers to avoid competing 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.

However, focused low-cost and focused differentiation strategies become unattractive when:

• competitors find effective ways to match the focused firm’s capabilities in serving the target niche.
• preferences and needs of niche members shift over time with respect to the product attributes desired by the majority of buyers.
• differences across buyer segments erodes and lowers entry barriers into a focuser’s market niche, thereby providing an open invitation for rivals in adjacent segments to begin competing for the focuser’s customers.
• the segment becomes so attractive it is soon inundated with competitors, intensifying rivalry and splintering segment profits.

The marketing emphasis of a low cost provider is on low prices and good value while trying to make a virtue out of product features that lead to low cost. The marketing emphasis of a best cost provider is on delivery of best value for the money.

Being a best-cost provider is different from being a low-cost provider because the additional attractive attributes entail additional costs (which a low-cost provider can avoid by offering buyers a basic product with few frills). Moreover, the two strategies aim at a distinguishably different market target. The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

The keys to sustaining a broad differentiation strategy are an emphasis on constant innovation to stay ahead of imitative competitors and a focus on a few key differentiating features. The key to sustaining best-cost producer strategy is a unique expertise in simultaneously managing costs down while incorporating upscale features and attributes. For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

The keys to sustaining a focused low-cost strategy are staying committed to serving the niche at the lowest overall cost and making the effort not to blur the firm’s image by entering other market segments or adding other products to widen market appeal. A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

The statement is false. That managers would go for a mix of the various generic strategies is not to be seen as a danger at all. With changing markets it is important for companies to change their strategies and this may involve a hybrid of two or more strategies. The wise approach would be to respond to the market and the opportunities present in it rather than to be straitjacketed by “pure” strategies.

The statement is true. To succeed in employing a low-cost provider strategy, a company must have the resources and capabilities to keep its costs below those of its competitors. This means having the expertise to cost-effectively manage value chain activities better than rivals, leveraging the cost drivers effectively, and/or having the innovative capability to bypass certain value chain activities being performed by rivals. To succeed in a differentiation strategy, a company must have the resources and capabilities to leverage value drivers effectively and incorporate attributes into its product offering that a broad range of buyers will find appealing. Successful focused strategies (both low cost and differentiation) require the capability to do an outstanding job of satisfying the needs and expectations of niche buyers. Success in employing a best cost strategy requires the resources and capabilities to incorporate upscale product or service attributes at a lower cost than rivals. For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.