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