Generic StrategiesBy

Anand

BUSINESS STRATEGY

FOCUSES ON IMPROVING THE COMPETITIVE POSITION OF A COMPANY’S OR BUSINESS UNIT’S PRODUCTS OR SERVICES WITHIN THE SPECIFIC INDUSTRY OR MARKET SEGMENT THAT THE COMPANY OR BUSINESS UNIT SERVES

• The central role of competitive advantage in the study of strategic management.

• The generic study of

strategic management.

• tradeoff bet. cost leadership & differentiation

The generic strategies

overall cost leadership, differentiation, focus and best cost positions.

Tasks for the strategist

• How firms can effectively combine the generic strategies of overall cost leadership and differentiation.

• The role of functional strategies in relation to business level strategies and need for internal consistency

• The pitfalls managers must avoid in striving to attain generic strategies

Questions to be answered

• Should the firm compete on the basis of low cost or differentiate its products or services on some basis other than costs?

• Should the firm compete head to head with the major competitors or should it focus on a niche?

Ways of Generating Competitive Advantage

• Prices Charged• Value Delivered

Ways of Generating Competitive

• Cost Leadership• Differentiation

Ways of Generating Competitive Advantage

Concepts

• Lower cost strategy: the ability of a company or a business unit to design. Produce, and market a comparable product more efficiently than competitors

• Differentiation Strategy: Ability of a firm to provide unique and superior value to the buyer in terms of product quality, special features, or after sale service

INDUSTRY LIFE CYCLE

Cost Leadership

Characteristics• Become Industry’s lowest-

cost provider rather than just a low cost provider

• Aim for average customer/ Large MS

• Lower production costs• Few unique/new features

that buyers consider essential

• Difficult for rivals to copy or match

Calls for

• Leveraging Scale economies

• Marketing: Wide product line/Aggressive

• Pricing/Start-up Losses• Aggressive construction of

efficient scale facilities• Vigorous pursuit of cost

reduction

Organizational Requirements

• Efficient organizational systems & structures

• Tight Cost & Overhead Controls

• Incentives based on quantitative targets

• Low cost distribution systems

When Does a Low Cost Strategy Work

Best?• Price competition is

vigorous • Product

standardized/readily available with many suppliers

• Most buyers use product in same ways

• Buyers incur low switching costs

• Large buyers have significant bargaining power

• Industry newcomers use low prices to attract buyers and build customer base buyers and build customer base

Examples

• WALMART• SOUTHWEST AIRLINES• TIMEX

Differentiation

Characteristics• Perceived

Uniqueness/Quality/Service Based on

• Design/Brand/Technology/Features/ Service

Calls for

• Strong marketing abilities• Product design skills/

Creative flair• Strong cooperation from

channels• Eschewing market share,

being exclusive

Organizational resources

• Strong coordination skills• Subjective measurement

incentives• Amenities to attract

creative talent

When Does a Differentiation

Strategy Work Best? • There exist many ways to

differentiate a product• Buyer needs and uses are

diverse • Few rivals are following a

similar differentiation approach

• Technological change and product innovation are fast paced

Types of Differentiation

Themes

• Multiple features -- Microsoft Windows and Office

• Superior service -- FedEx, Ritz-Carlton

• Spare parts availability – Caterpillar

• Prestige – Rolex• Quality manufacture -- Honda,

Toyota• Technological leadership -- 3M

Corporation, Intel• Top-of-the-line image -- Ralph

Lauren, Chanel

Focus

• Characteristics• Small overall share of

market• Serves chosen/well defined

mkt segment• Either a cost

leader/differentiator or both

Calls for

• Choice of buyer group/ product

• segment/geographic market

• Strong marketing abilities• Product design skills/

Creative flair

What Makes a Niche Attractive for

Focusing?• Potentially profitable,

offers 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 superior ability to serve niche members

Generic Strategies - Risks

Overall Cost leadership• Technological change can

nullify past investment & learning

• Low-cost learning by new comers/followers

• High attention on cost >> inability to foresee product-market changes

• Inflation in costs can narrow price advtg.

• Inflation in costs may increase attractiveness of differentiators

Differentiation

• Uniqueness that is not valuable • Too high a price premium • Differentiation that is easily

imitated • Dilution of brand identification

through product line extension• Perceptions of differentiation

may vary between buyers and sellers

• As buyers become more sophisticated fall in buyers need for differentiating factor

• Imitation narrows perceived diffrtn.

Focus

• Narrowing prodt. Differences between niche and market as a whole

• High cost differential compared to low cost may erode brand loyalty

• Erosion of cost advantages within the narrow segment

• Focused products and services still subject to competition from new entrants and from imitation.

• Focusers can become too focused to satisfy buyer needs

STUCK IN THE MIDDLE: HP’s PC

DIVISION• A NICHE PLAYER• DIFFERENTIATION FOCUS• COMPETE IN BROAD TARGET

MARKET DECIDED IN 1990• REDUCED PRICES• RESULTED IN 40% SALES

GROWTH• BUT ONLY 4.6% OPERATING

MARGINCOULD NOT KEEP UP ITS

QUALITY IMAGE

Competitive Positioning

CORPORATE STRATEGY

• FIRM’S OVERALL ORIENTATION TOWARDS GROWTH, STABILITY, OR RETRENCHMENT DIRECTIONAL STRATEGY

• INDUSTRIES OR MARKETS IN WHICH FIRM COMPETES PORTFOLIO STRATEGY

• MANNER IN WHICH MANAGEMENT CO ORDINATES ACTIVITIES, TRANSFERS RESOURCES, AND CULTIVATE CAPABILITIES AMONG PRODUCT LINES AND BUSINESS UNITS PARENTING STRATEGY