Generic Business StrategiesGeneric Business Strategies

Cost-based and Differentiation-based

Competitive Strategies

Competitive Advantages

(Sources of Rates of Profit in Excess of the Competitive Level)

AvoidCompetitors

Be Better ThanCompetition

AttractiveIndustry

AttractiveNiche Cost

AdvantageDifferentiation

Advantage

AttractiveStrategic

Group

Entry Barriers

Mobility Barriers

Isolating Mechanisms

Sources of Competitive AdvantageSources of Competitive Advantage

Competitive Advantages as the Source of Superior ProfitabilityCompetitive Advantages as the Source of Superior Profitability

• Competitive advantages work in two basic ways

• avoiding competitors (ie. lock-outs/valuable resources)

• outperforming competitors (ie. productivity and efficiency/distinctive competencies)

• Best-practice and empirical research has identified two internally-consistent competitive business strategies:

• Low Cost Leadership

• Differentiation

• Successful businesses use their competitive advantages and resources to develop one of these generic business strategies

Sources of Superior Profitability

Sources of Superior Profitability

• A business can achieve a higher rate of profit (or potential profit) over a rival in one of two ways:

• supplying an identical product/service at a lower cost (cost-based advantage)

• supplying a differentiated product/service in such a way that the customer is willing to pay a price premium that exceeds the cost of the differentiation (differentiation-based advantage)

• These two sources of competitive superiority define fundamentally different approaches to business strategy

• A firm that attempts to achieve both or attains neither is “stuck in the middle”.

Market Share (Quantity)

Low High

Pro

fita

bil

ity

Low

High

Differentiation-based Strategies

Low Cost Leadership Strategies

Stuck-in-the-Middle

Market Share-Profitability Relationship:“Porter’s Bucket”

Market Share-Profitability Relationship:“Porter’s Bucket”

Strategic Advantage

Uniqueness Perceived by the Customer

Low Cost Position

Industrywide

Str

ateg

ic T

arg

et

DIFFERENTIATION OVERALL COST LEADERSHIP

FOCUSParticular Segment Only

Target and Advantage of Porter’s Generic StrategiesTarget and Advantage of

Porter’s Generic Strategies

Source: Porter (1980)

Cost-based Competitive Strategies

Cost-based Competitive Strategies

The Sources of Cost Advantages

• Scale• Experience• Capacity Utilization• Product Design/Process Fit• Location• Integration/Purchasing• Organizational Skills

Drivers of Cost Advantages

ECONOMIES OF SCALE -Indivisibilities-Specialization & division of labor

ECONOMIES OF LEARNING -Increased dexterity-Improved

coordination/organization CAPACITY UTIIZATION -Ratio of fixed to variable costs

PRODUCTION TECHNIQUES -Mechanization and automation-Efficient utilization of materials

-Increased precisionPRODUCT DESIGN -Design for automation

-Designs to economize on materials INPUT COSTS -Location advantages -Ownership of low-cost inputs -Bargaining power -Supplier cooperation

MANAGERIAL EFFICIENCY -Organizational slack

Differentiation-based Competitive Strategies

Differentiation-based Competitive Strategies

Products in the Differentiation Hall of Fame

Ford Mustang VW Beetle Honda Accord Dodge Caravan Sony Walkman McDonalds restaurants Apple Macintosh IBM PC Lotus 123 IBM 370 series Federal Express Timex watches Louis Vuitton bags Holiday Inns hotels Disneyland Boeing 747 Polaroid Land camera Alcort Sunfish sailboat Xerox photocopier American Express credit cards and travelers checks Numbered Swiss bank accounts

Products in the Differentiation Hall of Fame

Products in the Differentiation Hall of Fame

• Understanding customer needs and preferences • Commitment to customers • Knowledge of company's capabilities • Innovation

Source: Robert M. Grant, Contemporary Strategy Analysis , Basil Blackwell, 1991.

Keys to Successful Differentiation

Keys to Successful Differentiation

TANGIBLE DIFFERENTIATION

Observable product characteristics:

• size, color, materials, etc.

• performance

• packaging

• complementary services

INTANGIBLE DIFFERENTIATION

Unobservable and subjective characteristics relating to image status, exclusively, identity.

TOTAL CUSTOMER RESPONSIVENESS: Differentiation not just about the product, it embraces the whole relationship between the supplier and the customer.

The Nature of DifferentiationThe Nature of Differentiation

“Differentiation means providing something unique that is valuable to the buyer beyond simply offering a low price.” (M. Porter)

THE KEY IS CREATING VALUE FOR THE CUSTOMER

Achieving Differentiation Advantage

Achieving Differentiation Advantage

• Observable Goods: the buyers can easily form accurate judgments about the quality of a product.

• Experience Goods: the buyers finds it difficult and/or costly to determine the quality of the product prior to purchase and use.

• Communication Goods: the value to the buyer rises as the number of buyers and users increases.

How one goes about obtaining a differentiation advantage depends upon whether or not a product is an observable good, an experience good, or a communication good.