The Five Generic Competitive
Strategies—Which One to Employ?
Chapter Summary
Chapter5describesthefivebasiccompetitivestrategyoptions—whichofthefivetoemployisacompany’sfirst
and foremost choice in crafting overall strategy and beginning its quest for competitive advantage.
Lecture Outline
I. Introduction
1. There are several basic approaches to competing successfully and gaining a competitive advantage over
rivals, but they all involve delivering more value to the customer than rivals or delivering value more
ecientlythanrivals(orboth).
2. But whatever approach to delivering value the company takes, it nearly always requires performing value
chainactivitiesdifferentlythanrivalsandbuildingcompetitivelyvaluableresourcesandcapabilities
that rivals cannot readily match or trump.
II. The Five Generic Competitive Strategies
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1. 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,
2. Thebiggestandmostimportantdifferencesamongcompetitivestrategiesboildownto:
a. Whether a company’s market target is broad or narrow
3. Five distinct competitive strategy approaches stand out:
a. A low-cost provider strategy: striving to achieve lower overall costs than rivals and appealing to
a broad spectrum of customers, usually by under pricing rivals.
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better than rivals products
e. 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
andpricescomparedtorivalsofferingproductswithcomparableattributes
4. Figure 5.1, The Five Generic Competitive Strategies—Each Stakes Out a Different Position in the
Marketplace, examineshoweachofthefivestrategiesstakeoutadifferentmarketposition.
III. Low-Cost Provider Strategies
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1. 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.
2. In striving for a cost advantage over rivals, managers must take care to include features that buyers
consider essential.
3. Formaximumeffectiveness,companiesemployingalow-costproviderstrategyneedtoachievetheir
costadvantageinwaysdicultforrivalstocopyormatch.
CORE CONCEPT
A low-cost provider’s basis for competitive advantage is lower overall costs than
competitors. Successful low-cost leaders, who have the lowest industry costs, are
exceptionally good at finding ways to drive costs out of their businesses and still
provide a product or service that buyers find acceptable.
A. The Two Major Avenues for Achieving a Cost Advantage
1. Toachievealow-costadvantageoverrivals,afirm’scumulativecostsacrossitsoverallvaluechainare
lower than competitors’ cumulative costs. There are two ways to accomplish this:
CORE CONCEPT
A cost driver is a factor that has a strong influence on a company’s costs.
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2. Figure 5.2, Cost Drivers: The Keys to Driving Down Company Costs, provides an illustration of
each cost driver.
3. Cost-Ecient Management of Value Chain Activities: Managers must launch a concerted, ongoing
efforttoferretoutcost-savingopportunitiesineverypartofthevaluechain.
a. Capturing all available economies of sale
b. Takingfulladvantageoflearning/experiencecurveeffects
j. Motivating employees through incentives and company culture
4. Revamping the Value Chain System to Lower Costs: Dramatic costs advantages can emerge from
findinginnovativewaystoeliminateorbypasscost-producingvaluechainactivities.Theprimaryways
companiescanachieveacostadvantagebyreconfiguringtheirvaluechainsinclude:
a. Selling direct to consumers and bypassing the activities and costs of distributors and dealers
5. Illustration Capsule 5.1 describes the path that Amazon.com, Inc. has followed on the way to becoming
not only the largest online retailer (as measured by revenues) but also the lowest-cost provider in the
industry.
ILLUSTRATION CAPSULE 5.1
Amazon’s Path to Becoming the Low-Cost Provider in E-Commerce
Discussion Question: How has Amazon improved value chain logistics to gain competitive
advantage as the low-cost provider in E-Commerce?
Answer: The student should be able to identify several innovative improvements Amazon has
made to increase efficiency in logistics. These include 1) negotiating for space inside of supplier’s
warehouses to reduce inventory handling and management, 2) an in-house distribution network
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6. Examples of Companies That Revamped Their Value Chains to Reduce Costs:
a. Nucor Corporation drastically revamped the value chain process for manufacturing steel products
by using relatively inexpensive electric arc furnaces
B. The Keys to Success in Achieving Low-Cost Leadership
1. While low-cost providers are champions of frugality, they seldom hesitate to spend aggressively on
resources and capabilities that promise to drive costs out of the business.
2. Having competitive assets of this type and ensuring that they remain competitively superior is essential
for achieving competitive advantage as a low-cost provider.
C. When a Low-Cost Provider Strategy Works Best
1. Price competition among rival sellers is especially vigorous
2. The products of rival sellers are essentially identical and suppliers are readily available from any of
several eager sellers
D. Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy
1. Perhaps the biggest pitfall of a low-cost provider strategy is getting carried away with overly aggressive
pricecuttingandendingupwithlower,ratherthanhigher,profitability.
IV. Broad Differentiation Strategies
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A. Differentiation strategies are attractive whenever buyers’ needs and preferences are too diverse to be fully
satisfiedbyastandardizedproductorbysellerswithidenticalcapabilities.
CORE CONCEPT
The essence of a broad differentiation strategy is to offer unique product attributes
that a wide range of buyers find appealing and worth paying for.
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1. Successfuldifferentiationallowsafirmto:
a. Command a premium price for its product
2. Differentiationenhancesprofitabilitywhenevertheextrapricetheproductcommandsoutweighsthe
addedcostsofachievingthedifferentiation.
B. Managing the Value Chain to Create the Differentiating Attributes
1. Differentiationopportunitiescanoftenbefoundinuniquenessdrivers;possibilitiesincludethefollowing:
2. Figure 5.3, Value Drivers: The Keys to Creating Differentiation Advantage, provides an illustration
of each cost driver.
a. Create product features and performance attributes that appeal to a wide range of buyers
b. Improve customer service add additional service.
h. Emphasize human resource management activities that improve the skills, expertise, and knowledge
of company personnel.
C. Revamping the Value Chain to Increase Differentiation
1. Differentiation opportunities can exist in activities all along an industry’s value chain; possibilities
include the following:
2. Strong relationships with suppliers can also mean that the company’s supply requirements are prioritized
1. Differentiationstrategiesdependonmeetingcustomerneedsinuniquewaysorcreatingnewneedsina
way that rivals can’t. There are four basic routes to achieving this aim.
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2. One route is to incorporate product attributes and user features that lower the buyer’s overall costs of
using the product.
3. A second route is to incorporate tangible features that raise product performance.
6. A differentiator’s basis for competitive advantage is either product/service offering whose attributes
differsignificantlyfromtheofferingofrivalsorasetofcapabilitiesfordeliveringcustomervaluethat
rivals do not have.
E. When a Differentiation Strategy Works Best
1. Differentiationstrategiestendtoworkbestinmarketcircumstancewhere:
a. Buyer needs and uses of the product are diverse
b. There are many ways to differentiate the product or service and many buyers perceive these
differencesashavingvalue
F. The Pitfalls of a Differentiation Strategy
1. Differentiationstrategiescanfailforanyofseveralreasons.
2. Adifferentiationstrategykeyedtoproductorserviceattributesthatareeasilyandquicklycopiedis
always doomed.
3. A second pitfall is that buyers see little value in the unique attributes of a company’s product.
4. Thethirdbigpitfallofadifferentiationstrategyisoverspendingoneffortstodifferentiatethecompany’s
productoffering,thuserodingprofitability
5. Othercommonmistakesincraftingadifferentiationstrategyinclude:
a. Offering only trivial improvements in quality, service, or performance features vis-à-vis rivals’
products.
V. Focused (or Market Niche) Strategies
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Chapter 5 The Five Generic Competitive Strategies—Which One to Employ?
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1. What sets focused strategies apart from low-cost leadership or broad differentiation strategies is
concentrated attention on a narrow piece of the total market.
2. Thetargetsegmentornichecanbedefinedby:
A. A Focused Low-Cost Strategy
1. 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 rival competitors.
2. This strategy has considerable attraction when a firm can lower costs significantly by limiting its
customerbasetoawell-definedbuyersegment.
3. Focused low–cost strategies are fairly common.
4. IllustrationCapsule5.2,ClinícasdelAzúcar’sFocusedLow-CostStrategy,providesdetailsaboutthe
company’sfocuseddifferentiationstrategy.
ILLUSTRATION CAPSULE 5.2
Clinícas del Azúcar’s Focused Low-Cost Strategy
Discussion Question: Discuss the advantages this organization achieves from its focused low-
cost provider strategy.
Answer: Through utilization of this type of strategy, the company has developed proprietary
B. A Focused Differentiation Strategy
1. Focused differentiation strategies involve offering superior products or services tailored to the
uniquepreferencesandneedsofanarrow,well-definedgroupofbuyers.Successfuluseofafocused
differentiationstrategydependstwofactors.
2. IllustrationCapsule5.3,CanadaGoose’sFocusedDifferentiationStrategy,providesdetailsaboutthe
company’sfocuseddifferentiationstrategy.
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ILLUSTRATION CAPSULE 5.3
Canada Goose’s Focused Differentiation Strategy
Discussion Question 1: How does Canada Goose’s choice of strategy differentiate it from other
luxury outerwear companies in the marketplace?
Answer: Canada Goose chose to cease production of private-label products as well as non-
outerwear products in order to focus on its luxury outerwear market. The company further
ACTIVITY
Consider adding a File Attachment assignment requiring the student to fully explore and explain the
Focused Differentiation Strategy employed by Canada Goose in the Luxury Outerwear market. The
analysis could include not only their current strategy, but also a description of how it evolved and was
implemented. The student can find more information at http://www.canadagoose.com and specifically
the “Our History” link.
C. When a Focused Low-Cost or Focused Differentiation Strategy is Attractive
1. A focusedstrategy aimed at securing a competitive edgebased eitheron low cost or differentiation
becomes increasingly attractive as more of the following conditions are met:
a. Thetargetnicheisbigenoughtobeprofitableandoffersgoodgrowthpotential
b. Industry leaders do not see that having a presence in the niche is crucial to their own success
D. The Risks of a Focused Low-Cost or Focused Differentiation Strategy
1. Focusing carries several risks such as:
a. Thechance thatcompetitors willfind effectiveways tomatch thefocused firm’s capabilitiesin
serving the target niche
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VI. Best-Cost Provider Strategies
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CORE CONCEPT
Best-cost strategies are a hybrid of low-cost provider and differentiation strategies that
aim at providing desired quality/features/performance/service attributes while beating
rivals on price.
1. Best-cost provider strategies stake out a middle ground between pursuing a low-cost advantage and a
differentiationadvantageandbetweenappealingtothebroadmarketasawholeandanarrowmarket
niche
2. From a competitive positioning standpoint, best-cost strategies are a hybrid, balancing a strategic
A. When a Best-Cost Provider Strategy Works Best
1. Abest-costproviderstrategyisveryappealinginmarketswhereproductdifferentiationisthenormand
there is an attractively large number of value-conscious buyers who prefer midrange products to cheap,
basic products or expensive top-of-the-line products.
2. Illustration Capsule 5.4, American Giant’s Best Cost Provider Strategy, describes how the company
has used a best-cost approach with its clothing lines..
ILLUSTRATION CAPSULE 5.4
American Giant’s Best Cost Provider Strategy
Discussion Question: Discuss how American Giant has been able to achieve its best-cost leader-
ship status in the industry.
Answer: American Giant has combined the use of high quality material and production processes
with strong cost controls in production and logistics to provide a higher quality fitted Hoodie
B. The Risk of a Best-Cost Provider Strategy
1. The danger of a best-cost provider strategy is that a company using it will get squeezed between the
strategiesoffirmsusinglow-costanddifferentiationstrategies.
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VII. The Contrasting Features of the Five Generic Competitive Strategies: A Summary
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1. Deciding which generic competitive strategy should serve as the framework for hanging the rest of the
company’s strategy is not a trivial matter.
2. Each of the five generic competitive strategies positions the company differently in its market and
competitive environment.
3. Each establishes a central theme for how the company will endeavor to outcompete rivals.
6. Successful Competitive Strategies are Resource Based – For a company’s competitive strategy to
succeed in delivering good performance and the intended competitive edge over rivals, it has to be:
a. Well-matched to a company’s internal situation
b. Supported by an appropriate set of resources
c. Powered by know-how and competitive capabilities.
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