Transcript Pitfalls of Overall Cost Leadership Strategies

Chapter 6
Business-Level Strategy
Learning Objectives
After reading this chapter, you should have a good
understanding of:
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The central role of competitive advantage in the study of
strategic management.
The three generic strategies: overall cost leadership,
differentiation, and focus.
How the successful attainment of generic strategies can
improve a firm’s relative power vis-à-vis the five forces that
determine an industry’s average profitability.
The pitfalls managers must avoid in striving to attain
generic strategies.
How firms can effectively combine the generic strategies of
overall cost leadership and differentiation.
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Types of Competitive Advantage
and Sustainability
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Three generic strategies
1. Overall cost leadership
 Low-cost-position relative to a firm’s peers
 Manage relationships throughout the entire value chain
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Types of Competitive Advantage
and Sustainability
2. Differentiation
 Create products and/or services that are unique and valued
 Non-price attributes for which customers will pay a
premium
3. Focus strategy
 Narrow product lines, buyer segments, or targeted
geographic markets
 Attain advantages either through differentiation or cost
leadership
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Example
1.
Companies pursuing an overall cost
leadership strategy
 McDonalds
 Wal-Mart
2.
Companies pursuing a differentiation strategy
 Harley Davison
 Apple
3.
Companies pursuing a focus strategy
 Rolex
 Lamborghini
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Overall Cost Leadership
 Integrated tactics
Aggressive construction of efficient-scale
facilities
Vigorous pursuit of cost reductions from
experience
Tight cost and overhead control
Avoidance of marginal customer accounts
Cost minimization in all activities in the firm’s
value chain, such as R&D, service, sales force,
and advertising
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Overall Cost Leadership
 Experience Curve
How business “learns” to lower costs as it
gains experience with production
processes
With experience, unit costs of production
decline as output increases in most
industries
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Pitfalls of Overall Cost
Leadership Strategies
 Too much focus on one or a few value-chain
activities
Too often managers make big cuts in operating
expenses, but don’t question year-to-year spending on
capital projects
Should explore all value-chain activities as candidates
for cost reductions
 All rivals share a common input or raw material
Vulnerable to price increases
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Differentiation
 Differentiation can take many forms
Prestige or brand image
Technology
Innovation
Features
Customer service
Dealer network
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Differentiation
 Firms may differentiate along several dimensions
at once
 Firms achieve and sustain differentiation and
above-average profits when price premiums
exceed extra costs of being unique
 Requires integration with all parts of a firm’s
value chain
 Important aspect is speed or quick response
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Potential Pitfalls of
Differentiation Strategies
 Uniqueness that is not valuable
Must be unique and possess high customer value
 Too much differentiation
Firms may strive for too much quality
 Too high a price premium
Customers may desire product, but repelled by price
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Potential Pitfalls of
Differentiation Strategies
 Differentiation that is easily imitated
 Dilution of brand identification through productline extensions
Increase short-term revenues, detrimental in long run
 Perceptions of differentiation may vary between
buyers and sellers
“Beauty is in the eye of the beholder”
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Focus
 Focus is based on the choice of a
narrow competitive scope within an
industry
Firm selects a segment or group of
segments (niche) and tailors its strategy
to serve them
Firm achieves competitive advantages
by dedicating itself to these segments
exclusively
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Focus
 Two variants
Cost focus
Strives to create a cost advantage in its target segment
Differentiation focus
Seeks differentiate in target market
Both rely on providing better service than broad-based
competitors who are trying to serve the focuser’s target
segment
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Pitfalls of Focus Strategies
 Erosion of cost advantages within the narrow
segment
 Focused products and services still subject to
competition from new entrants and from
imitation
 Focusers can become too focused to satisfy
buyer needs
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Example: Expensive Golf Gear
 "For as long as golf has been played, golfers
have been trying to buy a better game," says
Steve Pike
 Designer business with highest-end equipment
from manufacturers such as Callaway,
TaylorMade, and Titleist
 Showing up with top-notch gear is like bringing a
platinum-covered bazooka to a knife fight
 Consumers think the higher the price, the better
the equipment
www.forbes.com/sport/2005/08/23/callaway-luxurygolf-lifestyle-cx_ns_0823feat_ls.html
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Combination Strategies: Integrating
Overall Low Cost and Differentiation
 Primary benefit of successful integration of lowcost and differentiation strategies is difficulty it
poses for competitors to duplicate or imitate
strategy
 Goal of combination strategy is to provide
unique value in an efficient manner
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Combination Strategies: Integrating
Overall Low Cost and Differentiation
 Two types of value to customers
Differentiated attributes
High quality
Brand identification
Reputation
Lower prices
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Combination Strategies: Improving
Competitive Position vis-à-vis the Five Forces
 Obtain advantages of competition from both
approaches
High entry barriers
Bargaining power over suppliers
Reduces power of buyers (fewer competitors)
Value position reduces threat from substitute products
Reduces the possibility of head-to-head rivalry
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Pitfalls of Combination Strategies
 Firms that fail to attain both strategies may end
up with neither and become “stuck in the middle”
 Underestimating the challenges and expenses
associated with coordinating value-creating
activities in the extended value chain
 Miscalculating sources of revenue and profit
pools in the firm’s industry
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