The Five Generic Competitive Strategy

The five distinct competitive strategy are:

1. A low-cost provider strategy – striving to achieve lower overall cost than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals.
2. A broad differentiation strategy – seeking to differentiate the company’s product offering from rivals’ in ways that will appeal to a broad spectrum of buyers.
3. A best cost provider strategy – giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest (best) costs and prices compared to rivals offering products with comparable attributes.
4. A focused (or market niche) strategy based on low costs – concentrating on a narrow buyer segment and outcompeting rivals by having lower cost than rivals and thus being able to serve niche members at a lower price.
5. A focused (or market niche) strategy based on differentiation – concentrating on a narrow buyer segment and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals’ products.

Company should choose which one to apply from those five strategies above.

Key to Success in Low-Cost Provider Strategies : Make achievement of meaningful lower costs than rivals the theme of firm’s strategy, Include features and services in product offering that buyers consider essential, Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match.

Low cost strategy works best when price competition is vigorous, product is standardized or readily available from many suppliers, there are few ways to achieve differentiation that have value to buyers, Most buyers use product in same ways, buyers incur low switching costs, buyers are large and have significant bargaining power, industry newcomers use introductory low prices to attract buyers and build customer base. Differentiation Strategy works best when there are many ways to differentiate a product that have value and please customers, buyer needs and uses are diverse, few rivals are following a similar differentiation approach, technological change and product innovation are fast-paced.

Best-Cost Provider Strategy works best when where buyer diversity makes product differentiation the norm and where many buyers are also sensitive to price and value.

Approaches to define market niche : Geographic uniqueness, Specialized requirements in using product/service, special product attributes appealing only to niche buyers. Market niche is nice to focus when it fulfills these conditions : big enough to be profitable and offers good growth potential, not crucial to success of industry leaders, costly or difficult for multi-segment competitors to meet specialized needs of niche members, focuser has resources and capabilities to effectively serve an attractive niche, few other rivals are specializing in same niche, focuser can defend against challengers via superior ability to serve niche members.

Things to notice when deciding which generic Competitive Strategy to Use are each positions a company differently in its market and competitive environment, each establishes a central theme for how a company will endeavor to outcompete rivals, each creates some boundaries for maneuvering as market circumstances unfold, each points to different ways of experimenting with the basics of the strategy, each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy.

Source: Thompson, Crafting and Executing Strategy, Chapter 5.

Evaluating a Company’s Resources and Competitive Position

How Well is the Company’s Present Strategy Working?

In evaluating how well a company’s present strategy is working, a manager has to start with what the strategy is. While there’s merit in evaluating the strategy from a qualitative standpoint (its completeness, internal consistency, rationale, and relevance), the best quantitative evidence of how well a company’s strategy is working comes from its result. The stronger a company’s current overall performance, the less likely the need for radical changes in strategy.The weaker a company’s financial performance and market standing, the more its current strategy must be questioned.

What Are the Company’s Resource Strength and Weaknesses and Its External Opportunities and Threats?

SWOT analysis provides a good overview of whether the company’s overall situation is
fundamentally healthy or unhealthy. A first-rate SWOT analysis provides the basis for crafting a strategy that capitalizes on the company’s resources, aims squarely at capturing the company’s best opportunities, and defends against the threats to its wll-being.

A resource strengths is something a company is good at doing or an attribute that enhances its competitiveness in the marketplace. Resource strengths can take any of these forms: a skill-an area of specialized expertise, or a competitively important capability, valuable physical assets, valuable human assets and intellectual capital, valuable organizational assets, valuable intangible assets, an achievement or attribute that puts the company in a position of market advantage, competitively
valuable alliances or cooperative ventures.

A competence is an activity that a company has learned to perform well. It is nearly always the product of experience, representing an accumulation of learning and the buildup of proficiency in performing an internal activity. A core competence is a competitively important activity that a company performs better than other internal activities. A distinctive competence is a competitively important activity that a company peroms better than its rivals – it thus represents a competitively
superior resource strength. The competitive power of a resource strength is measured by these four tests: is the resource really competitively valuable? Is the resource strength rare? Is the resource strength hard to copy? Can the resource strength be trumped by substitute resource strengths and competitive capabilities?

Competitively valuable resource strengths and competencies call for the use of a resource based strategy. Core concept of Resource-based strategy is that it uses a company’s valuable resources strengths and competitive capabilities to deliver value to customers in ways rivals find it difficult to match. The core concept of Identifying company resources weaknessess, missing capabilities, and competitive deficiencies is that a company’s resources strengths represent competitive assets; its resource weaknessess represents competitive liabilities. In identifying a company’s external market opportunities, a company is well advised to pass on a particular industry opportunity unless the company has or can acquire the resources to capture it. It is management’s job to identify the threats to the company’s prospects and to evaluate what strategic actions can be taken to neutralize
or lessen their impact.

SWOT analysis are drawing conslusions from the SWOT listings about the company’s overall situation, and translating these conslusions into strategic actions to better match the company’s strategy to its resource strengths and market opportunities, to correct the important weaknesses, and to defend against external threats. The final piece of SWOT analysis is to translate the diagnosis of the company’s situation into actions for improving the company’s strategy and business
prospects.

Are the Company’s Prices and Costs Competitive?

The higher a company’s costs are above those of close rivals, the more competitively vulnerable it becomes. Two analytical tools that are particularly useful in determining whether a company’s prices and costs are competitive are value chain analysis and benchmarking. Core concept of value chain is to identify the primary activities that create customer value and the related support activities.

Benchmarking is a potential tool for learning which companies are best at performing particular activities and then using their techniques (or best practice) to improve the cost and effectiveness of a company’s own internal activities.

Is the Company Competitively Stronger or Weaker than Key Rivals?

Step 1 in doing a competitive strength assessment is to make a list of the industry’s key success factors and most telling measures of competitive strength or weakness.
Step 2 is to rate the firm and its rivals on each factor.
Step 3 is to sum the strength ratings on each factgor to get an overall measure of competitive strength for each company being rated.
Step 4 is to use the overall strength ratings to draw conclusions about the size and extent of the company’s net competitive advantage or disadvantage and to take specific note of areas of strength and weakness.

High competitive strength ratings signal a strong competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage. A company’s competitive strength scores pinpoint its strengths and weaknesses against rivals and point directly to the kinds of offensive/defensive actions it can use to exploit its competitive strengths and reduce its competitive vulnerabilities.

What Strategic Issues and Problems Merit Front-Burner Managerial Attention?

The final and most important analytical step is to zero in on exactly what strategic issues that company managers need to address –and resolve- for the company to be more financially and competitively successful in the years ahead. Zeroing in on the strategic issues a company faces and compiling a “worry list” of problems and readblocks creates a strategic agenda of problems that merit prompt managerial attention. Actually decising upon a strategy and what specific actions to take is what comes after developing the list of strategic issues and problems that merit front-burner management attention.

A good strategy must contain ways to deal with all the strategic issues and obstacles that stand in the way of the company’s financial and competitive success in the years ahead.

Source: Thompson, Crafting and Executing Strategy, Chapter 4.

Managerial Process of Crafting and Executing Strategy

Managerial process of crafting and executing a company’s strategy consists of five interrelated and integrated phases:
1. [Phase 1] Developing a strategic vision about the company’s direction and future product/market/customer/technology focus. A strategic vision describes the route a company intends to take in developing and strengthening its business. It points an organization in a particular direction, charts a strategic path, and molds organizational identity.
A strategic vision should not be confused with a mission statement. A strategic vision portrays a company’s future business scope (“where we are going”) whereas a company’s mission typically describes its present business and purpose (“who we are, what we do, and why we are here”).
This managerial step provides long-term direction, infuses the organization with a sense of purposeful action, and communicates mangement’s aspirations to stakeholders.

2. [Phase 2] Setting objectives regarding to organization’s performance targets –the results and outcomes management wants to achieve. Well-stated objectives are quantifiable, or measurable, and contain a deadline for achievement. It functions as yardsticks for measuring how well the organization is doing. The two types of performance yardsticks required are relating to financial performance and strategic performance, where those can be found in Balance Score Card approach.

3. [Phase 3] Crafting a strategy to achieve the objectives and move the company along the strategic course that management has charted. Crafting a strategy is concerned principally with forming responses to changes under way in the external environment, devising competitive moves and market approaches aimed at producing sustainable competitive advantage. In most companies, crafting and exectuing strategy is a team effort in which every manager has a role for the area he or she heads. It is not merely that high level managers obligation. In diversified, multibusiness companies where the strategies of several different businesses have to be managed, the strategy-making task involves four distinct types or levels of strategy: (1) corporate strategy, (2) business strategy, (3) functional-area strategies, (4) operating strategies. Typically, the strategy-making task is more top-down than bottom-up, with higher-level strategies serving as the guide for developing lower-level strategies.

4. [Phase 4] Implementing and executing the chosen strategy efficiently and effectively. Management’s action agenda for implementing and executing the chosen strategy emerges from assessing what the company will have to do differently or better, given its particular operating practices and organizational circumstances, to execute the strategy competently and achieve the targeted financial and strategic performance.

5. [Phase 5] Evaluating performance and initiating corrective adjustments in vision, long-term direction, objectives, strategy, or execution in light of actual experience, changing conditions, new ideas, and new opportunities. It is the trigger point for deciding whether to continue or change the company’s vision, objectives, strategy, or strategy execution methods.

Reference: Thompson, Strickland, Gamble. 2010. Crafting and Executing Strategy. 17th ed., Chapter 2. p. 22-53. McGraw-Hill Inc., New York