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Module 4 Competitive
strategies
Site: AIB Learning Hub Printed
Strategic by:
Course: Management 2023
Date:
Term 4
Module 4 Competitive
Book:
strategies

Description

 Audio version

Table of contents

Introduction

Low-cost provider strategies

Broad differentiation strategies

Focused or market niche strategies and Best-cost (hybrid)

strategies
Activity 4.1 Generic strategies and competitive advantage

Summary, resources and references

Introduction

Strategy provides your organisation with a clear sense of

direction, outlines measurable goals, and helps in achieving
durable competitive advantage. In this week, you will be provided
with an overview of what strategy is, and how strategy is crafted
and executed in the real world to create superior customer value.

01:50

A company's competitive strategy outlines what an organisation

does to position itself, please its customers, reduce competitive
threats, and to achieve competitive advantage. According to
Thompson et al. (2022) the two major factors that distinguish a
competitive strategy are

"(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. These two factors give rise to four distinct
competitive strategy options, plus one hybrid option"
(Thompson et al. 2022, p. 128).

 Watch
In this video (2:28 minutes) our industry partner, Paul
Mirabelle, discusses the use of generic strategies such
as low cost, product/service differentiation, and market
scope. He also talks about evaluating future
opportunities (AIB & Mirabelle 2017).

02:28

Low-cost provider strategies

This strategy aims to reduce costs through the value chain to the
extent that competitors find it difficult to match, whilst still
providing a product or service that buyers will find acceptable.
This means striving for economies of scale in supply, production
and distribution, and looking for ways to keep costs low through
two approaches:

better cost efficiencies within each element of the value-chain,

and/or
by modifying the value chain process itself.

Low-cost strategy: Striving to achieve lower overall

costs than rivals and appealing to a broad spectrum of
customers usually by under pricing rivals. Thompson et al.
(2022, p. 129).

For example, a local salad-making company purchased an

onion peeling machine. After attempting to make the onion
peeling process as efficient as possible, they found it was far
less costly to eliminate the process and outsource the supply
of peeled and chopped onion. Cost drivers need to be controlled
in every organisation, and they are particularly vital at the low-
cost, low-margin end of the industry. Thompson et al. (2022)
mention ten types of cost drivers:

Figure 5.2 Cost drivers: The keys to driving down company costs

Source: Modified from Thomson et al. (2022, p.130).

Economies of scale mean that the larger the size of the operation,
the lower the unit cost of production. If economies of scale are
combined with the effect of years of experience (the learning-
curve effect mentioned in Thompson et al. 2022), the unit cost is
gradually driven lower. Other cost drivers are related to the cost
of resource inputs and efficiencies other companies provide in the
value chain. For example, the onion supplier mentioned above had
its own unique processing knowledge and efficiencies that the
salad maker could not match.

Modifying the value chain is the subject of process re-engineering

activities. However, capital investment in value chain processes is
usually high and companies will prefer to chip away at
improvements until the benefits from a complete re-engineering
of the process can cover the capital expense involved. Parts of
the value chain, such as logistics and supply processes, may offer
considerable potential for improvement, and digitisation,
automation and artificial intelligence provides opportunities to
make these processes more effective than ever. New product
development is another candidate for improvement within the
value chain; for example, modern rapid prototyping processes
reduce the development time for many complex products from
years to months.

 Reflect
Can you identify any limitations to a low-cost
strategy?
Are there industries where this strategy might be
difficult to execute?

Note down your ideas in the spaces provided below. Your

notes will save automatically.

Low-cost strategy limitations 

Industry challenges 

 Copy

Finally, it should be noted that cost leadership is not an

automatic strategy in every industry. It works best in
industries where product differentiation is low and where
buyers are more sensitive to price (price elastic
demand).

 Interact
Compare a fast-food chain to a fine dining restaurant and
recommend a generic strategy approach.

Compare McDonald's, a multinational fast-food

chain that offers a standardised menu across
stores, to Noma, a three Michelin star, fine dining
restaurant in Denmark that offers a seasonal,
unique and innovative menu.
1. Explain why a cost leadership strategy
approach is suitable for McDonald's, and
why it wouldn't be suitable approach for
Noma.
2. What would be the most appropriate
strategy for Noma to pursue? Why?

 Watch
AirAsia has been highly in implementing a low-cost
strategy in the airline industry and has won the World's
best low-cost carrier airline award for the past 12 years.
In this video, AirAsia CEO Tony Fernandes AirAsia CEO
Tony Fernandes discusses (4:15 minutes) how their new
'airasia Super App' will apply the same low-cost strategy
in the digital app and service industry (CNBC 2022).
What are the key characteristics of the low-cost strategy
Tony Fernandes identifies as key in this discussion?

Watch: airasia Su… 29/7/2023

Click the blue pencil (top left) above to access

the note taking page. If you are using a
smaller screen, you may need to click the full
screen (top right) to view the video and note
taking page simultaneously.

Capital A CEO Tony Fern…

 Read
Low-cost strategies are prevalent, and managers
need to understand the factors and conditions that
support such a strategy. This next textbook reading
describes the generic competitive strategies.

Types of generic competitive strategies and

Broad low-cost strategies from Chapter 5 of
the textbook.

Illustration Capsule 5.1: Vanguard's path to

becoming the low-cost leader in investment
management outlines the strategic approach
Vanguard implemented to succeed in the
investment management industry.

Broad differentiation strategies

Differentiation is about establishing a difference in the market

between what one company and its competitors provide. It is the
key to competitive advantage in a discerning market. A company
can generally outperform its rivals if it establishes an enduring
difference. Differentiation is often why people buy products
because the differences in various products will suit buyers in
different ways. Finding the specific needs of the various groups of
buyers and reacting to these with particular market offerings is
the domain of marketing management. Thus, the study of buyer
behaviour is critical because the differences between products
can be more perceptual than physical.

Broad differentiation strategy: Seeking to differentiate

the company's product/service offering from rivals in
ways that will appeal to a broad spectrum of
buyers. Thompson et al. (2022, p. 129).

The differentiation potential is present in all phases of the

value chain from supply through to customer service, and
many companies pursue the differences with great creativity.
Nevertheless, the objective must be to create differentiation
that creates sustainable competitive advantage, e.g.,
differences that competitors cannot easily copy. Thompson et
al. (2022) mention eight types of value drivers that are key to
generating a differentiation advantage:

Figure 5.3: Value drivers: The keys to creating a differentiation

advantage

Source: Reproduced from Thompson et al. (2022, p.137).

In contrast to the low-cost provider strategy, differentiation

works well in industries characterised by price inelasticity of
demand, i.e., buyers are sensitive to quality, features, and
attributes and less susceptible to price. Examples include
premium cars such as BMW, accessories produced by PRADA,
De Beers jewellers, and high-end electronic goods such as
Bose.

 Read
This next textbook reading goes through the
characteristics of broad differentiation.

Broad differentiation strategies from Chapter

5 of the textbook.

Focused or market niche

strategies and Best-cost (hybrid)
strategies

Focused or market niche strategies: Low-

cost and differentiation
Let's now look at a focused low-cost strategy and a focused
differentiation strategy. The significant common aspect of both
focused strategies is that the company seeks to serve a narrow or
niche market.

Focused low-cost strategy

A focused low-cost strategy seeks competitive advantage
through market segment specialisation. The essence of the
strategy is the narrow customer base. This allows a company to
reduce costs throughout the value chain by focusing skills and
knowledge on just that segment of the industry.

Focused low-cost strategy: Concentrating on a narrow

buyer segment and outcompeting rivals by serving niche
members at a lower cost than rivals (Thompson et al.
2022, p. 129).

Illustration Capsule 5.2: Clinícas del Azúcar’s focused low-cost

strategy from Chapter 5 in Thompson et al. (2022, p. 143) is a
good example of a focused low-cost approach.

Focused differentiation strategy

A focused differentiation strategy relies on the satisfaction of the
buyer needs within a niche segment of the market. The
specialised requirements of such segments will not usually appeal
to large companies in the industry, and niche operators become
skilled at providing products or services that meet the specific
needs of these buyers.

Focused differentiation strategy: Concentrating on a

narrow buyer segment and outcompeting rivals by
offering niche members customsied attributes that meet
their tastes and requirements better than rival products
(Thompson et al, 2022, p. 129).

For example, in Australia, BCF (Boating Camping Fishing) offers a

wide range of boating, camping, and fishing equipment, which is
a good example of focused differentiation strategy. This is often
seen in companies supplying and servicing specialised scientific
equipment to the engineering industry or to health laboratories.
Illustration Capsule 5.3: Canada Goose's focused differentiation
strategy from Chapter 5 in Thompson et al. 2022 (p.145) is
another example of how niche differentiation occurs.

 Watch
In this industry view video on product differentiation
(2:01 minutes) the General Manager of Coriole Wines,
Mark Lloyd, discusses how Coriole Wines achieves its
focused differentiation strategy in a highly competitive
market (AIB & Lloyd 2018).

02:00

 Read
This next textbook reading describes the
characteristics of focused strategies.

Focused (or market niche strategies) from

Chapter 5 of the textbook.

Best-cost (hybrid) strategies

A best-cost strategy seeks to capitalise on the advantages of
low-cost and differentiation in the market relative to competitors.

Best-cost producer 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.
Thompson et al. (2022, p. 129).

This is a way of providing a differentiated product at a price that

competitors find hard to match. To see how a best-cost strategy
works, consider the following diagram showing the interaction of
price and quality in the market, where ‘quality’ refers to attributes
and features of the product rather than the absence of defects.

Price/quality relationships in the market

Source: Developed by AIB 2022.

In traditional markets, a natural balance between price and

quality tends to follow the area of the diagram indicated by the
arrow from A to B to C—from low-price/low-quality to high-
price/high-quality. Increasing quality, by providing more
attributes, features or models, increases costs, and prices rise
accordingly.

However, as product design and process technology for both

physical goods and services has improved to the point where it
has reduced some fixed production costs, thus allowing quality to
be maintained and costs lowered even with much lower output
volumes. Areas D,E and F of the above diagram, which were at
one time almost logical impossibilities for companies, are now in
the realm of strategic possibility for many organisations and are
current sources of powerful strategic advantage.

The key to understanding a best-cost strategy is to think of

segments in a market. The best-cost strategy aims at market
segments that do have differentiation aspects, but that the very
highly differentiated products do not aim at. This strategy has
both lower costs compared to other businesses that may be
aiming at the segment and broadly appealing strong customer
value propositions. IKEA provides a good example of best-cost or
hybrid strategy as the company offers high-quality products at
affordable prices through combining low-cost and differentiation
strategies. Illustration Capsule 5.4: Trader Joe’s Focused Best-
Cost Strategy from chapter 5 in Thompson et al. (2022, p. 148)
provides another example.

 Read
It is important to understand which generic strategy
will be most appropriate for an organisation to
pursue. This next textbook reading has a useful
table that compares the features of each strategy
against each other.

The contrasting features of the generic

competitive strategies from Chapter 5 of the
textbook.

Blue Ocean strategy

In addition to the key generic competitive strategies discussed in
this module, we should also mention Blue Ocean Strategy, a
newer approach coined by Kim and Mauborgne in 2004. This
approach involves the pursuit of an unsaturated market for a
product or service where competition is irrelevant (i.e., there are
only a few competitors), and offers the potential for higher returns
(Kim & Mauborgne 2014). Companies that have adopted a blue
ocean strategy include Netflix, Tesla motors and Airbnb.

 Optional reading
Read the Literature Review section of the article by
Islami, Mustafa and Latkovikj (2020) that discusses
whether a company can employ a differentiation
strategy and low-cost strategy at the same time.
The article also offers important insights into the
potential performance benefits from blue ocean
strategy and its relationship with low-cost strategy
and differentiation strategy.

Islami, X, Mustafa, N & Topuzovska Latkovikj, M

2020, 'Linking Porter’s generic strategies to
firm performance', Future Business Journal, vol.
6, no. 1, p. 3, DOI:10.1186/s43093-020-0009-1.

 Watch
In Blue Ocean Strategy (4:10 minutes), Dr Mamun Ala
discusses the key aspects of this strategy and provides
some examples in practice (AIB & Ala 2022).

04:08

 Interact
Match the definition to the corresponding generic
strategy.

Pursuing a cost-based advantage over competitors.

Appealing to a broad segment of consumers and

offering superior qualities.
Targeting a narrow consumer segment and offering
extra features to meet customer needs.

Combining both low-cost provider and differentiation

strategies.

 Tools
If you are interested in reading further about these
topics, our librarians have created a ‘saved search’that
will return the full-text for the most recent and relevant
peer-reviewed academic material from the library’s
collection. Click the linked search string below to view
these materials.

Porter's Generic Strategies

competitive strateg* AND (generic OR
porter*)

Blue Ocean Strategies

blue ocean strateg*

Best-cost or hybrid strategies

("best cost" OR hybrid) AND strateg*

To access the data sources required to undertake this

analysis refer to Searching for credible market and
industry sources (Secondary data).

Activity 4.1 Generic strategies and

competitive advantage

Investigate generic strategies and their application in creating a

competitive advantage. Share your thoughts on the forum.

Why
The ability to identify the most appropriate generic strategy an
organisation should pursue means an organisation can focus their
efforts where it will be most effective and stand out in an ever-
increasing crowded marketplace. This activity relates to
Assessment 2 and this week's learning outcome:

evaluate their (competitive strategies) usefulness in different

competitive conditions.

How
1. Choose one generic strategy, and provide an example of it
being applied successfully or unsuccessfully by an
organisation in your region. Explain why.
2. Think about your own organisation. What is the generic
strategy it is pursuing? Do you think understanding the
generic strategy approach affects the decisions you make
in your position?
3. How would you apply generic strategies to not-for-profit
and non-governmental organisations? Where would you
focus your efforts to make effective change?
4. Add your responses to the Activity 4.1 Generic strategies
and competitive advantage forum. By sharing with your
classmates, not only will they be able to give you feedback,
but you will be able to see how other have approached the
task.
5. Respond to a post with a question, affirmation, or feedback.

This activity will form the basis of a discussion in this week's

webinar. Refer to the Webinar Hub for a complete list of webinars.

Summary, resources and

references

In this module we looked at the key generic competitive strategies

that a company can employ to gain a competitive advantage over
its rivals. It was argued that there are three broad overarching
strategies an organisation can employ to be competitive within
Porter’s Five Forces. These are cost leadership, differentiation
and focus. Each strategy should be considered in terms of the
conditions under which it is attractive for the business.
Essentially, the decision comes from careful industry analysis, as
the strengths of the competitive forces in the industry tend to
dictate which of the generic strategies is likely to be most
appropriate. A company also needs to check that it has the key
strengths to engage the strategy successfully. The module also
provided a detailed discussion on low-cost provider strategies,
broad differentiation strategies and focussed or market niche
strategies. The module ended with a discussion of best-cost
(hybrid) strategies. The key to understanding a hybrid strategy is
to think of segments in a market. This strategy has the potential
to offer lower costs and strong customer value propositions.

 Module 4: Knowledge Check

Match the definition to the key concept

Bargaining power, supply chain, capacity utilisation are

all examples of .
Economies of scale can be leveraged most effectively
in which generic strategy?
is often used where
customers are more interested in quality and features
over purchase price.
Insomnia cookies is a US bakery chain that specialise
in delivery cookies to customers. The shops are