Generic Competitive Strategy
- Pages: 24
- Word count: 5768
- Category: Strategy
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There are many strategies that organizations can incorporate in today’s business environment. An organization can decide to take on a low-cost provider strategy, a focused low-cost strategy, broad differentiation strategy, focused differentiation strategy, and/or a best-cost provider strategy. While all of them have their own unique features and can offer a competitive advantage over its rivals, Competitive Shoes, Inc. decided to incorporate the best-cost strategy into its organization in order to compete against it rivals. By incorporating the best-cost strategy into its organization, Competitive Shoes Inc. felt that they could stay competitive in the market by giving their customers more value for the money.
The best-cost provider strategy incorporates fundamentals of differentiation and low-cost strategies in a distinctive way. It takes on the middle road tactic by looking for low-cost advantages and differentiation benefits, while making sure to appeal to the broad market as a whole and place some emphasizes in the narrow niche markets that surround them (low-end products and high-end products). Best-Cost provider 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 (Thompson, Strickland, and Gamble, 2012). By doing this, Competitive Shoes is able to focus on value-conscious buyers that are looking for quality products at a discounted price.
The reason why Competitive Shoes elected to take this strategy was because they felt that their rivals were either going to take on the low-cost approach and sell their shoes at a lower price than the rest of the market or they were going to create high end shoes that only a narrow niche market could afford. History has shown us that when start-up companies first try to make their mark in the market, they will either take on a low-cost approach or hit the ground running and try to produce a high quality product that will compete with the major players in the industry. By staying the course and sticking to a middle of the road strategy, Competitive Shoes predicted that it would produce stable numbers throughout the years while letting its competitors compete against themselves instead of Competitive Shoes.
The best-cost provider strategy did not start off very well for Competitive Shoes. Their pricing model was not the best. They took a conservative to moderate approach when most of its rivals decided to offer their product at an extremely low cost or very high cost. For example, Ariste Athletics took a low cost approach and offered their shoes at $62.00. Intense Feet, Inc. took on a high cost approach and offered their shoes at $80.00. The average across the board in the industry for year 11 was $74.78. Competitive Shoes offered their shoes at $76.00 which was the middle of the road. Competitive Shoes saw a huge push in market demand head their rival’s way, because of their pricing model. Because of this fact, Competitive Shoes had to work hard in order to establish a brand name during years 12-14. After a while the market did turn around, as they had predicted, which placed them in a good position to maintain their best-cost strategy of offering a high end product at a relatively low cost. The market exhibited a good external fit with the market conditions, and the internal fit was compatible with Competitive Shoe’s ability to execute its strategy. The strategy helped the organization achieve a sustainable competitive advantage while producing good performance for many years. Competitive Shoes is happy with the results that it produced during that last 8 years of operations.
Strengths and Weaknesses
Competitive Shoes, Inc. considered many factors when drawing up their strategic plan. They considered the macro-environment and looked at demographics, social forces, political factors, natural environment, technological factors, global forces, and general economic conditions. However, Competitive Shoes knew that the factors and forces that would have the biggest impact for them and change their strategic thinking were going to come from their own immediate industry and competitive environment.
In analyzing the market/industry, the company was able to see some things that helped shape their plan. The first was rivalry among competing sellers. Our analyses indicated that there were 9 companies in the shoe industry that Competitive Shoes considered rivals. These companies were relatively new in the industry and produced the same types of shoes as Competitive Shoes. Due to this fact, they knew that the rivalry would be fierce since Competitive Shoes was going to produce a product that was like theirs, and the difference between the products would diminish as the products of industry rivals became strongly differentiated. This indicated to Competitive Shoes that brand loyalty would be minimal and buyers could easily switch brands at will. Competitive Shoes felt that they could produce the same quality shoes as the high-end producers, while at the same time lowering its production cost and offering the product at a lower price. This would make it easy for buyers to switch brands at will.
Another factor that Competitive Shoes took into consideration was the existence of barriers to entry. Competitive Shoes knew that barriers to new entry were very strong. For one thing the high capital requirements of getting into the industry are high. One must think about the high cost of production equipment needed for this industry. Also, the amount of employees that one would need in order to begin production would be costly. A newcomer would need to compete globally in order to compete with the majors and that could be very costly since international boundaries would need to be broken as well. Competitive Shoes determined that the barriers for newcomers in the shoe industry would be too high, and would not produce a big threat from them.
Competitive pressure from substitute products being sold was a factor that Competitive Shoes considered to not be a threat. Alternatives for athletic shoes are very low. Usually a customer will seek out athletic shoes because of their performance needs during periods of physical activity and movement. The same benefits provided by an athletic shoe cannot be duplicated by work boots or dress shoes. You also have the fact that a lot of individuals will put on athletic shoes for the pure comfort of them. Therefore, we believed that substitute products in the athletic industry were very low. However, Competitive Shoes did not rule out how consumer demand might be persuaded to purchase other shoe types (such as dress shoes, casual shoes, kid’s shoes, etc.). They knew that these types of shoes would be a factor for consumers when making a decision to purchase shoes. Though Competitive Shoes considered this a factor, they came to the conclusion that this was not an element that carried risk for them. They realized that customers would not necessary be switching to these alternatives, but are simply buying these type of shoes along with their athletic shoes.
The competitive force of suppliers in the athletic industry was considered to be weak. Competitive Shoes predicted that the rest of its rivals would either want to produce a high-end product or low-end product. Since most of its rivals would go in opposite directions of each other, Competitive Shoes predicted that supplier demand would be weak since not all the high-end material would be purchased (as well as the low-end material). This meant that the suppliers of items would not have pricing power and bargaining leverage for the first few years. Competitive Shoes also realized that the industry was not dominated by a large company. Most of its rivals were relatively new to the industry and had not set themselves apart from each other. This meant that a strong market share has not been established and a strong bargaining power had not been established between the companies and the suppliers in the industry. This favored Competitive Shoes and that is the reason why they considered supplier demand to be weak.
When Competitive Shoes analyzed buyer bargaining power, they determined that it was strong. As mentioned before, most of the companies in the industry were relatively new and no one had set themselves apart yet (brand wise). Competitive Shoes saw that brand loyalty had not been established, which meant that buyers cost to switching to competing products was low. They also saw that buyer bargaining power was low because they would not be well informed about the sellers’ products, prices, and costs. All of the companies in the industry new, which meant that not much would be known about them. This factor would provide little information for buyers to go off of when conducting their research on each company. Information such as price comparison and features gives buyers leverage in the industry. Due to these factors, bargaining power for buyers was considered low in Competition Shoes investigation.
Competitive Shoes analyses and strategic plan proved to be relatively successful. Since they predicted that their rivals would quickly try to differentiate themselves, Competitive Shoes elected to take a middle of the road approach in the beginning. They provided an average quality shoe at an average quality price. They began their pricing model at $76 during their first year of operations (standard industry average was $74). They then elected to lower their price the next year to $74 but still want to maintain the quality of shoe that their customers were used to. As the next few years went on, they begin raising their prices while at the same time increasing their features. Prices during year 15 increased to $76, and increased a dollar every year after that ending in $78. As mention before the quality of shoe was increased slightly but Competitive Shoes made sure they stayed close to the average industry as possible. They did not feel the need to offer a top end item when demand for that particular product was not there.
Competitive Shoes did not begin expanding their production facilities right away like the rest of their rivals. They waited until year 16 before expanding their production to Latin America and in year 18 they expanded their production to Europe-Africa. The addition of production facilities right away would be a costly venture to explore, especially since they did not know how successful they would be in the industry. By delaying this decision and developing a brand name for themselves first, they would insure that demand for their product was there. By creating a need for their product they could make sure that the product being produced at those facilities would be distributed to the appropriate areas which in turn would help increase profit. The downside to this particular strategy is that inventory shortfall was around 2200 units. This meant that supply could not keep up with demand, which resulted in loss profits. Competitive Shoes had to take on a reactive approach during this time before sustaining production levels during years 18 & 19.
When analyzing the last 9 years of the industry, there was one clear organization that did a great job on sustaining a dominant competitive advantage. Ariste Athletics was able to meet customer demand more efficiently and was able to convert that into being able to charge lower prices and reach higher sales volumes. Because of the strategy that they used, they were constantly in the Top 3 of our marketing report in regards to investor expectation, earnings per share (EPS), return on equity (ROA), and stock price. Ariste Athletics strategy was to be the low-cost provider, thereby aiming for a cost-based competitive advantage over its rivals. Their ability to underprice their competitors helped them earn a strong market position. Here is an analyses of what they did.
In their first year of operations they priced their pair of shoes at the lowest end of the market ($62) and at the same time they took their S/Q rating to 2 stars. They also put $15K towards advertising to get help build brand recognition. The average price in the industry this year was $74.78, the average S/Q rating was 4.6, and the average advertising spent by others was $8,111. There EPS, ROE, and stock price were at 5.86, 32.3, and 117.90 (respectively). Ariste was able to capture 20.4% of the market share in North America this year. The average market share for the industry was 11.1%. These figures were on the top of the marketing list that Competitive Shoes was able to obtain for this particular year.
During their second year, Ariste kept their prices, S/Q rating, and advertising spending the same as year 11. The average price per pair in the industry was $72.11. The average S/Q rating was at 5 stars, and the average advertising spent by rivals was at $11,028. Their EPS, ROE, and stock price was still on top of the industry at 6.14, 26.5, and 114.18. While others adjusted their prices and spending, Ariste kept everything the same and still was able to dominate the industry. They were able to capture 14.8% of the market share when the industry average was 11.1%.
In their third year, Ariste was still able to keep their price, S/Q rating, and advertising spending the same as year 1. The average price per pair of shoes was $73.33. The average S/Q rating was at 5.1 and advertising spending was stagnate at $11,189. Their EPS was at 6.36, ROE was at 23.8, and stock price dropped a little to 108.28. While these figures were still good, it appears that this year they dropped from the top spot to 2nd place in the industry. Their market share stayed the same at 14.1% while the industry average was still at 11.1%.
In their 4th year of operations, Ariste stayed strong to their strategy and did not make any adjustments on price per pair, S/Q rating, and advertising costs. The average price per pair stayed that same as before at $73.61, average S/Q in the industry was at 5.2 stars and average advertising in the industry declined to 10,800. Their market share increased to 15.6%, while the industry average stayed at 11.1%. Part of the reason for this slight increase in market share was because of the fact that they obtained celebrity indorsement during this year. Their EPS was at 5.88, ROE was at 20.2, and stock price fell to 75.57. While they did decline on all categories, they still remained in the top 3 of the industry on performance.
During their 5th year of operations, Ariste did some adjustments to their price per shoe. They increased their price per shoe to $63.21. The industry average went up to $74.97. Their S/Q rating decreased to 1 star, while the industry average stayed the same at 5.2 stars. Advertising figures for Ariste did not get adjusted and market share remained stagnate at 15.0%. For year 5 their EPS increased to 7.56, ROE increased to 23.4, and their stock price increased to 101.44.
During their 6th year, they did not make significant changes to their figures (like before). Their price per pair was at $63.77. The industry average increased to $75.42. Their S/Q rating and advertising stayed the same. Industry average for S/Q was at 5.4 stars, a slight increase from prior years. Average advertising spending increased to $12,556. This allowed them to capture a market share of 13.9% which dropped to 3rd place in this category. Their EPS, ROE, and stock price was at 10.60, 28.0, and 164.1 (respectively). Again they remained as one of the leaders in the industry for this year.
For the 7th year of operations they again increased their price per pair to $63.99 and adjusted their S/Q rating to 2 stars, while keeping advertising cost down at $15K. The industry average for price per pair was $74.11, S/Q rating was at 5.4 stars, and average advertising cost were at $12,278. This allowed them to capture 13.2% of the market share. The average market share stayed at 11.1%. Even though their part of the market share placed them in 4th place for this category, they were still able to put on good figures on their EPS, ROE, and stock price. They achieved 10.78 on EPS, 24.7 on ROE, and 167.56 on stock price. They still remained in the top 3 in the industry for year 7.
During their 8th year of operations, Ariste was able to increase their price per pair to $64.10 (industry average was at $73.56). Their S/Q stayed at 2 stars (industry average stayed the same as the prior year). Advertising costs stayed that same for Ariste at $15k, while industry average went up to $12,833. Their market share declined to 10.7% which was below the industry average of 11.1%. Part of the reason this happened is because Ariste elect to not renew their celebrity endorsement contract. Their EPS was at 11.58. Their ROE came out to be 23.0 and their stock price was at 185.37. Even though they did not perform their best this last year, they were still in the top 3 in market performance across the industry.
As one can see, Ariste stayed true to their strategy of being the low-cost provider in the shoe industry. They were able to capture a large market share while keeping prices down for the consumer. Their tactic shows that they could produce the same product results for many years to come.
Criteria of a Winning Strategy
There are different methods of determining if a strategy a person creates will be a winner or not. According to Farida Shaikh (2013), three questions can be used to test the merit of one strategy versus another and distinguish a winning strategy from a losing or mediocre strategy. The three questions are: How well does the strategy fit the company’s situation? Is the strategy helping the company achieve a sustainable competitive advantage? Is the strategy resulting in a better company performance? These three questions are also known as the Fit Test, Competitive Advantage Test, and Performance Test.
The Fit Test
In order to pass this test a company must be well matched to its business and competitive conditions. They must have a good market opportunity in the industry as well as a favorable external environment. The internal environment is just as important. The company must have the resources and capabilities in order to support consumer/suppler demand that will come from the product. The internal environment must be able to support the strategy that was created in a proficient manner. The fit test should be applied to both the external and internal environment in order to pass. If one falls short, then more than likely the company will underperform and will not meet the results that executives were looking for.
Competitive shoes performed this test on themselves and determined that it was a good fit for them to enter the market. They saw that the industry was still very young and that no particular company stood out from the rest in the beginning. Brand recognition had not been established which meant that buyers could easily be swayed to come over to Competitive Shoes (by price and quality). Competitive Shoes felt that brand differentiation was going to be weak in the beginning, giving them a chance to enter the market successfully and make a name for themselves. Competitive Shoes also had the capabilities to be able to support demand for their products. With warehouses in North America, Europe-Africa, Asia-Pacific, and Latin America, they could easily transport their products globally if needed. This would be a huge capability for Competitive Shoes to utilize since they were not going to open up shop in other regions in the beginning. Once demand increased enough, Competitive Shoes would look at the market and determine what maneuvers they should perform next. It’s important to note that a winning strategy will be an evolving unit and must change over time to stay current with industry changes.
The Competitive Advantage Test
The competitive advantage test basically asks if the strategy that is created will help the company sustain the competitive advantage that it has created. Will the competitive advantage last only a cycle or will it last for many years, making the company produce at a superior performance level. The bigger the competitive edge that the strategy helps build, the more powerful and effective it is (Barnat, 2014).
Competitive Shoes believed that they were able to create a strategy that passed the competitive advantage test. Their best-cost provider strategy placed the company in the middle of the market where others were looking to offer low quality/priced shoes or high quality/priced shoes. By sticking to their strategy, Competitive Shoes knew that they could offer a middle of the road price and offer a higher than expected quality shoe which would appeal to the masses (or both sides of the price and quality spectrum). For example, not really knowing what price range Competitive Shoes’ rivals would put their products at, Competitive Shoes had to take a guess.
The market analysis that they purchased showed them that most consumers would stick to the price range of $60-$80. They were also able to see that the average starting price would fall around $75. Competitive Shoes elected to not shy away from this price and set their starting price of $76. Their competitors hit price ranges of $62 to $80. Throughout the years Competitive Shoes stayed within the price range of $74 – $77. They did, however, increase their S/Q rating slightly every year. This made them a medium priced shoe company with a higher than expected quality product. By doing this, they were able to sustain a standard market share throughout the years. The market share they experienced was the following:
During the first year their market share was pretty much in line with the industry. All of them were seeing around 8-9% market share. However in years 13-18, they began to set themselves apart. Competitive Shoes market share increased significantly in year 13 and most of their rivals share began to decline. This trend continued to be seen for the rest of the years. It appears that only 4 companies really became strong contenders in the industry while others were beginning to fail. Competitive Shoes was definitely one of the top 4 contenders.
The Performance Test
This test will look at the performance of the company. They will look at the profitability and financial strength. The test will also examine the competitive strength and market standings. A good strategy boosts company performance. Two kinds of performance improvements are the most telling: gains in profitability and gains in the company’s long-term business strength and competitive position (Barnat, 2014). When numbers in these items are higher than the industry norm, it means that they have a winning strategy.
Competitive Shoes performance in the industry (financially speaking) was not as they would have hoped. They saw a lot of fluctuation in their stock price and net profit figures.
As you can see for the tables above the stock price and net profit were not very stable throughout the years. When comparing these figures to the top leaders in the industry (such as Ariste Athletics, and Johns) Competitive Shoes inconsistency stands out. The top leaders stayed top of the leader board each year and it appears that their EPS and ROE remained pretty stagnate as well. Ariste Athletics EPS stayed within the range of 5.86 – 11.58 and their ROE was in the range of 20.2 – 32.3. Competitive Shoes EPS and ROE were in the ranges of 1.40 – 9.20 and 6.2 – 29.2 respectively. As you can see Competitive Shoes covered a lot of ground in the figures provided. Even though they were still profitable through those years, they still could have done a lot better in increasing their performance efficiency.
We truly believe that part of the reason why the company did not have a high performance during some of those years was because the management team elected to not open other facilities in other regions soon enough. They waited until demand was needed, but they waited too long which caused the company to not be able to keep up with demand. This caused some lost revenue to occur and possible lost some customers in the process. In hind sight, Competitive Shoes should have looked at expanding to other regions earlier in the game. This would have allowed them to produce enough products as needed, which in turn would have increased sales for the year.
Value Chain Analysis
A value chain analysis is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation (Strategic Management, 2013). This analytical tool helps organizations determine whether they are competitive in the current market (in regards to price, cost, and proposition). As mention before, Competitive Shoes considered long and hard on how they wanted to position themselves in the market in regards to price. Price, after all, is a main driver that could either steer customer towards you and/or away from you. A good example of this would be in the automobile industry. Toyota is well known for their production of vehicles that the medium income earner can afford.
These would be your Camry’s and Avalon’s. Toyota, however, is also the producer of Lexus vehicles. Lexus is known for their luxury model cars and fall just short of Mercedes and BMW vehicles (in regards to luxury). Even though both the Camry’s and Lexus vehicles are being made by the same producer, their price ranges are extremely far apart. Lexus vehicles cost a lot more than Camry’s. The reason for this is because of the added features and higher quality materials that go into a Lexus. Customers have come to expect the exclusiveness that come from a Lexus and will pay more to have it.
In the athletic shoe industry, we experience the same thing. Prices play a big role in regards to gaining new customers and the company’s bottom line profits. Competitive Shoes marketing analysis revealed that the prices other companies were charging ranged from $62 – $80 (Most stayed in the range of the $70-$80 mark). Competitive Shoes took the middle road but wanted to offer a better quality shoe than their rivals, thus giving the market a good quality shoe at an affordable price. This strategy seemed to work well for them in the long run. They started off a little rocky on their internet segment and began their prices at $76 while the average medium was around $74.78. They did however, began their S/Q rating at 5 stars when the rest were at 4 stars (average 4.6). Competitive Shoes Wholesale segment started their prices in the middle as well at $49.50 (average in the industry was $49.39). Both pricing models allowed Competitive Shoes to introduce their biggest product lines to the masses at an affordable price to attract more customers. This would allow the company to maximize prices and not lose sales due to sales campaigns that rivals might have. This worked well for Competitive Shoes and they had to constantly monitor their price range every year (and adjust if necessary) if market conditions warranted the change.
The cost associated with a production of athletic shoes was a little harder to control. There were constant variables that changed. One has to consider quality standards a company wants, rejection rates being seen, bonuses that needed to be paid out, and features that a company could either add or subtract. Competitive Shoes did an average job in controlling their cost in comparison to the industry. As seen in the table shown earlier, there were some years where Competitive Shoes was able to control cost, thus producing high net profits. There were also years where they did not do an efficient job of controlling costs, thus producing fewer profits. The constant variables came into play which resulting in purchasing lower quality materials in the beginning. It wasn’t until year 15 when Competitive Shoes started to add more quality materials to their products, thus increasing their S/Q rating to 6 stars.
Other variables that came into play were payroll issues, advertisement, the image rating of the company, and the decreasing of rejection rates being seen. Competitive Shoes tried to stay consistent with the market and offer a decent wage. They fell right in the middle during all 8 years. For example during one of Competitive Shoes best years (year 16), their wage was right in the middle for all regions. This allowed them to stay competitive in the market without having to pay outrages wages.
Europe – Africa
Asia – Pacific
Image rating was important as well, since most consumers today want to make sure they are dealing with an ethical business. This is why Competitive Shoes elected to spend quite few dollars of its revenues for social responsibility. Competitive Shoes ended up spending $6,330, $2,578, $4,148, $7,966, $13,592 during years 14-18 respectively. Although they never really got the top award on social responsibility, they did get 2nd place during years 14-18. Competitive Shoes, for the most part did a good job in their image rating scores. In the beginning they started off slow with a score of 66. This was because they did not spend much time or energy on this factor. This is evident during their 2nd year of operations when they were rated at the bottom of the list with a score of 61. However as the years went by, they started to realize how important this was for customer perception and started contributing more and added more options such as recycled boxing, ethic training, and a workforce diversity program. Competitive shoes saw a direct correlation with increased image rating and increased profit margins.
As you can see, increased ratings did produce great figures in profit (other factors effected year 15-16 which produced lower results). Even though, the company’s management team did not put all their energy on the company’s image, they realized that it was important in the end.
One important issue that Competitive Shoes took into consideration in achieving competitive and financial success was whether or not they were going to really put a lot of time, money, and energy towards social responsibility. They knew it was going to be a factor, but they honestly felt that it was an unnecessary expense. So in the beginning their charitable contribution was only $2,232 which was only 3% of their net cash balance. As mention before, Competitive Shoes starting seeing a slight trend in regards to their image rating and their profit margin. However, they did not elect to contribute more funds until Year 14 when they gave $6,330 which was 13% of their net cash balance. From this point forward they started to contribute more and more money towards it, even when their net cash balance was at zero (like in year 17).
Competitive Shoes not only contributed to charities, but they also added ethics training and a workforce diversity program. Competitive Shoes did begin using “Green” footwear materials from the beginning and stayed consistent throughout the process. Recycled packaging was not added until the last few years (year 15-18). Even though Competitive shoes did increase its image rating over the 8 years by spending money, the made sure not to spend too much as these items since it would affect the company’s bottom line. As a result of their efforts, Competitive Shoes was one of the top 3 companies in social responsibility for 4 out of the 8 years of operation.
Another issue that Competitive Shoes declared as important towards achieving competitive and financial success, was its pricing and number of models they were going to offer. In the beginning, the company offered over 180 models in all four regions. This proved to be too much and differentiation between models became a problem. During years 12-14 they dropped the number of models offered to 100. In those years, Competitive Shoes was still trying to get a good handle on operations (which some of the set back during year 11 was still being seen). Then during years 15-18 they increased their models to 132, 150, 158, and 120 respectively. By controlling the models offered and producing less, they were able to focus more on their products thus improving the shoe lines quality to 6 stars. Competitive Shoes pricing model stay pretty much in the price range of $74-$77 dollars. This helped to make them a leader in the market place by capturing 20-24% of market share for their wholesale and internet segments. This allowed Competitive Shoes to gain (and maintain) a strong market share in the industry and help them sustain good profits during their 8 year time span.
The third important issue the helped Competitive Shoes achieve competitive and financial success was production. This factor was not an easy one to control since other variables, such as capacity, rejections, brand versus private-labels, and incentive pay, came into play. Competitive Shoes honestly did not do a good job in this category.
As shown in the table above, the company was all over the place in regards to having surplus inventory. Competitive Shoes strategy was to keep enough inventory in shop to not only meet demand but account for surges in market demand. They were not able to do this at all and had a bad trend during years 14-17 when negative figures were produced. Part of the reason this happened was because they delayed opening up additional operations in other regions. This impacted them significantly in a negative way. Competitive Shoes elected to stay out of the private-label area, which proved to be a smart idea since inventory could not be controlled in the area that they were participating in. Even though Competitive Shoes elected to not open up shop in Europe-Africa and Latin America until late in their years of operations, they were able to still produce some nice profits and not have a major negative hit with their decision to add infrastructure their organization. The production process was something that Competitive Shoes could have done a lot better and worked on a bit more.