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

Wal-Mart Stores: “Every Day Low Prices” In China

Wal-Mart is one the world’s largest retailer, owned by Sam Walton with the first store opened in 1962 in Rogers, Arkansas. On January 31st 2005, Wal-Mart stores reported net sales of US$285 billion, had a presence in nine countries with 5,289 stores and 1,6 million employees worldwide, offered multiple store formats including discount stores, supercentres, warehouse stores and neighbourhood markets, and was not only the largest company in the world but also the most admired company in the US according to Fortune Magazine.

Many attributed Wal-Mart’s success to its well-known model of selling brand-name products for less. Wal-Mart rightly focused on two major value drivers: price and service. The value of “Every Day Low Prices (ELDP)’s objective was to offer the same merchandise as other local stores, but at 20% less. “Roll-back” philosophy is aimed at lowering prices even further when there was an opportunity to do so, for example through price negotiation with supplier. The other value is “Customer is Number One,” which rules such as “exceed your customers’ expectation, ten feet rule, sundown rule.

According to Thompson, there are components of a company’s macro environment. In the outer ring those are general economic conditions, legislation and regulations, population demographics, societal values and lifestyles, and technology; while there are also immediate industry and competitive environment such as substitute products, buyers, new entrants, rival firms, and suppliers. However, the factors and forces in a company’s macro environment having the biggest strategy-shaping impact typically pertain to the company’s immediate industry and competitive environment.
Although Wal-Mart in United States is very successful with its success model: Small town location, relentless cost control, and partnership with supplier, however it did not enjoy the same success in China. By focusing more on the macroenvironment factors mentioned above, the failure of the Wal-Mart can be analyzed as bellow:

a.General economic condition in China is variable due to income disparity. It causes the needs and consumption pattern of the people become so diverse, result in inefficiency for a retailer-business in fulfilling the needs.

b.In term of legislation and regulation in China, it is very stricted and ruled by government. Regulation stated that only three stores were allowed to be launched in one city, and only a handful of cities were open to foreign retailers. Every store opening had to be approved by the central government.

c.Not only in size of land but also the population in China is vast. This actually can be one of the opportunity for business growth. However, this is not ideally happen due to some many factors that are being discussed.

d.Societal values and lifestyles in Chine can be related to the culture and behaviour. In China people consider that going to commercial center as an entertainment, as a result they do many trips but only make little purchase. According to them, the freshness of the food as the most important factor in its quality, and in many cases, fresh mean alive. It becomes additional cost and inefficiency for the retailer due to poor transportation network. Meanwhile, the condition is worsen by the rate of shoplifting (theft) which is higher (up to 5% of sales) compare to an international standard of 0.3%. This also causes the loss of Wal-Mart.

e.Technology in China was not really advance though. Under developed highway network and unconnected transportation are seriously fragmented. As ccnfirmed by Wal-Mart's chief of international operation, John Menzer, "the biggest obstacle Wal-Mart faced in mainland China was the lack of an information technology network with suppliers, making purchasing and distribution difficult." Technology indeed is critical for Wal-Mart success where the web-based system allowed suppliers hourly tracking of sales, inventory and pricing of their goods, and satellites connected the headquarter to every store and supplier for real-time communication. Lack of an information technology network and regulatory ban of satellite usage impaired the retailer's efficiency in communicating with its 15,000 local suppliers who supplied more than 95% of the goods sold in its local stores

In conclusion, competition is always there: substitute products, buyers, new entrants, rival firms, and suppliers. However, the major causes of Wal-Mart’s failure in China is more due to macro environment factors: the highly fragmented market, impaired distribution network and unique consumer behavior in China pushed Wal-Mar's operating cost higher and worked against a straight duplication of its home model.

The lesson learned from the Wal-Mart in China case is that the same business strategy cannot be implemented for all situation, therefore, it needs to be renew and readjust.

Source: Asia Case Research Center

The Impact of the Internet

The Impact of the Internet from the Producers Point of View
One of the key factors that the internet has a hand is reducing the price of inputs for firms. The lowest price at which a firm can sell a good without losing money is the amount of money that it costs to produce it. As a firms input prices decrease; they will be willing to supply more at a lower price.

One way that this happens is B2B (business to business- when firms trade directly with one another) e-commerce. B2B e-commerce cuts companies’ costs in three ways. First, it reduces procurement costs, making it easier to find the cheapest supplier and cutting the cost of processing transactions. Second, it allows better supply-chain management. And third, it makes possible tighter inventory control, so that firms can reduce their stocks or even eliminate them. Through these three channels B2B e-commerce reduces firms’ production costs, by increasing efficiency or by squeezing suppliers’ profit margins (A Thinkers Guide).

Another way in which the internet reduces the cost of inputs for firms is the degree to which it facilitates outsourcing. For example, a Hollywood studio once employed everyone in-house from the actors to the lighting technicians. Today studios have retreated to their core competencies. For a film, they now assemble the teams of self-employed people and small businesses. The Internet is expected to push other industries in the same direction. Companies will find it easier to outsource and to use communications to develop deeper relations with suppliers, distributors and many others who might once have been vertically integrated into the firm (When Companies Connect).

Another consequence of the Internet is that it enables firms to practice price discrimination, which is when firms charge different prices to different consumers for the same product. Price discrimination is very relevant to High Tech Industries for two reasons: first, due to the cost structures mentioned previously (high fixed costs, low marginal costs) price will often exceed marginal costs, meaning that the profit benefits to practicing price discrimination are very apparent. Second, Information technology allows for fine-grained observation and analysis of consumer behavior. This permits various kinds of marketing strategies that were previously extremely difficult to carry out, at least on a large scale (Varian et al. 12). For example, a seller can offer prices and goods that are differentiated by individual behavior and/or characteristics.

The Impact of the Internet from the Consumers Point of View
One of the major factors impacting demand is the price of the product, which we saw from the previous section, the Internet has a hand in lowering. At lower prices, consumers will demand more. More importantly however, is the impact of the internet in making prices more transparent. In fact, it’s been suggested that the new economy should be called the “nude economy” because the Internet makes it more transparent and exposed, in that it's easier for buyers and sellers to compare prices (A Thinkers Guide).

One of the traditional features of capitalism is information asymmetry, which is that someone (usually an expert) knows more than someone else (usually a consumer). But information asymmetries everywhere have been emaciated by the internet. The Internet is remarkably efficient at shifting information from the hands of those who have it into the hands of those who do not. Whether the case is term life insurance policies, the dealer invoice of autos, or the price of prescription medication the information existed but in a vastly scattered way. The Internet has vastly shrunk the gap between the experts and the public (Levitt and Dubner 61-62). Even in markets where there are relatively few direct online transactions such as auto sales, consumers appear to do quite a bit of information gathering before purchase.
The Impact of the Internet on the Market Itself
As mentioned previously, the economic principles of traditional markets still apply to the internet. Information is the currency of the Internet: it can be transmitted efficiently, conveniently, inexpensively, and is available to anyone. Theoretically, market friction should be reduced when information is more readily available to consumers and/or when consumer search is less costly (Elberse et al. 3). It has been found that internet markets are more efficient than conventional markets with respect to average price levels, menu costs, and price elasticity (Elberse et al. 4).

One consequence of this is a lowering of transaction costs. For instance, it’s been postulated that the potential for transactions cost savings from transition to the Internet is especially high in the health care sector, because it is so large (14 percent of GDP), so information-intensive, and so dependent on paper records (Litan and Rivlin). A lowering of transaction costs benefits both consumers and producers.

Another impact of the Internet is its ability to generate different pricing mechanisms, and in particular to allow price and product comparisons to be made and various kinds of auctions and exchanges to take place. Two things are making these possible. One is that the Internet provides a perfect medium for aggregating buyers and sellers from all around the world. The second is that the Internet offers an excellent way of comparing prices and collecting information, for example on new products, or on recent bids. Once again, to replicate this offline would be costly and time-consuming (In the Great Web Bazaar).

Thus the net effect of the internet is to lower costs for both the supplier and consumer as well as by more efficiently matching up supplies and consumers with each other. This results in a more efficient marketplace. However, despite the positive impact of the internet, internet markets are not nearly as efficient as theories would predict (Elberse et al. 5).


Source: http://www.econport.org.

Impact on the Internet on the Horizontal Boundaries of a Firm

Over these years, internet has been growing so widely. The internet technology opens a new channel for business opportunity, principally because of this enabling the limitless of information exchange with an easy, fast, and low cost. See how we can easily find anything we want to know just by utilizing the internet. The implication of this is that it will promote the political, social, economic, and cultural aspects of a country, heading to globalization. Some people with the entrepreneur sense are just very quick response to the growth of the internet technology, viewing it as the opportunity and as a tool to grow the business across the boundary. Therefore, they switch from the traditional way of doing business to a new way of operating business through the virtual business or e-commerce.

There are many theories from the researcher and expert, claiming that the internet technology is proven to be beneficial in growing a business. In a book by Tawfik Jelassi and Albrecht Enders, titled Strategies for e-Business: Creating Value through Electronic and Mobile Commerce, they point out two concepts that are feasible in e-commerce. The first concept is economies of scale. This means that by increasing the production output, the company decreasing their operation cost. Their second concept is economies of scope. This means that expanding the variety of products sold using the same R&D, production and delivery assets.

We can see the success of e-commerce on eBay, a (virtual) company hosted in California, belongs to Pierre Omidyar, where the company act as a virtual market for transactions of anything, starting from household goods, computers, consumer electronics and other tradables (ticket to sporting events). Also Bertelsmann online company, BoL.de in Germany, a business in selling books through online channel.

Further that that, we can also see the trend begins to spread over in Indonesia. Namely Bhinneka.com, a company owned by Hendrik Tio, which was first operated as a shop, selling computer peripheral which also in 1997 began to operate its online business transactions. The same case also happen in Gramedia book store. It is no longer just a book store that we can find in almost every shopping center, but we also can visit its online shop and make a purchase without having to go to a shopping center.

From the point of view of the writer, she sees that the growth of internet users in Indonesia might not as high as in American or European countries. Just like the case of Bhinneka.com, the profit of the company could not cover the investment cost on the technology (based on the data year 1999-2002, a case study by Pierre Wirawan, http://wirawans.wordpress.com). Therefore, the concept of virtual business in Indonesia still needs to be supported by ‘traditional’ concept of business. However, the writers believes that in the long term the concept of e-commerce will does give higher revenue for the company, considering that the technology has the forcing power over the human and environment. They who do not have the ability to adapt with the new technology will surely be blown away, as the out-dated technology dies.

e-Value Creation Index for automotive business

The automotive world has long recognized that intangible assets such as brand equity, innovation and human capital play a role in determining business success or failure. But measuring and managing those assets and their impact on a company’s market value has never been easy. Therefore, as published in an article, it tells that Dr. Pam Cohen Kalafut developed CGE&Y’s Automotive Value Creation IndexSM (VCI) based on the principles put forth in her book. “This 50 percent is based on intangibles like strategy execution, brand, human capital, innovation and leadership. The reason behind this, according to Kalafut, is lies within the fact that the markets are valuing your intangibles every day, whether you want them to or not. Yet, most companies aren’t able to measure, let alone manage and capitalize on these aspects of their business.”

The Value Creation Index (VCI) that had been developed by CGE&Y are for automotive OEMs and a second VCI specifically for automotive suppliers. The Automotive VCI models create a quantified performance measurement system, allowing intangibles to be linked to firm performance.

The VCI measures three broad categories of intangibles: Management—consisting of leadership, strategy execution, and communication and transparency; Relationships—brand equity, reputation, and alliances and etworks; Organization—technology and processes, human capital, workplace organization and culture, innovation, intellectual capital and adaptability.

The VCI is built using multiple measures for each of the individual intangible driver categories. Data are ollected from a variety of sources: objective and proprietary, academic, other research and publicly available information.

The index scores demonstrate the correlation between a particular company’s intangible assets and its market value. Kalafut points out that the correlation between the overall Value Creation Index score and market value is very strong for automotive manufacturers and suppliers.

CGE&Y’s Automotive VCI methodology creates a detailed performance measurement system through which critical company-specific intangible value drivers are measured and linked to performance. This approach allows businesses to quantify the expected effect of a change in the intangible’s VCI score on financial indicators such as stock price, P/E ratio, EBITDA, cash flow or market share, and to determine which strategic or capital investment decisions will have the most significant return.

The VCI value analysis can quickly identify the operational value drivers that have the biggest impact on a company’s bottom line. With this information, executives can:
• Reallocate capital expenditures to gain higher paybacks.
• Measure the impact of growth and similar initiatives.
• Implement a robust measurement system that correlates non-financial drivers to financial results.
• Create a performance measurement benchmarking system that can be used to track changes across time, and understand a company’s competitive advantages as well as those of their competitors.

In summary, the result of this Value Creation Index enable the companies to make strategic and capital investment decisions based on quantitative values rather than relying on educated guesses.

Source: Cap Gemini (Ernest & Young)