Generic Competitive Strategies

VI

Porter’s Generic Strategies

Porter has suggested three competitive strategies to cope with the five competitive forces:

•Overall Cost Leadership•Differentiation•Focus

Factors of Cost Leadership

• Aggressive construction of efficient-scale facilities

• Vigorous pursuit of cost reductions from experience

• Cost minimization in areas such as R&D, services, sales force and advertising

• Tight cost and overhead control

Cost

• Low cost relative to competitors is the main pursuit, not at the cost of quality or service.

• The attained low cost position needs strengthening through reinvesting the high margin in new equipment, machinery etc to further enhance the low cost leadership

Differentiation

• Differentiating a product or service implies creating something that is perceived industry wise as being unique. It can take forms such as - design or brand image- technology- customer service- dealer network- other special features

Differentiation

• Differentiation does not mean total disregard to cost rather cost is not the primary strategic target.

• Differentiation insulates a company from rivalry due to brand loyalty or price insensitivity, supplier power due to high margin, buyer power due to price insensitivity.

Focus

• Relates to targeting a particular buyer group, segment of product line or geographic market.

• The Focus strategy is built on the premises of serving a narrow market so that it can perform more effectively than the competitors who operate more broadly.

Stuck in the Middle

• The situation when a firm cannot develop one of the three strategies.

• The firms lacks the market share, capital investment and resolve to play the low-cost game or the industry wide differentiation to obviate the need for low-cost position or the focus necessary to create a position in a more limited space.

• Not being able to perform in one of the three areas has

other consequential effects such as a blurred corporate culture and a conflicting set of organizational arrangements.

Question

• Does this imply that the largest (low cost) or the smallest (focus, differentiation) are the most profitable generating a U shaped relationship between profitability and market share?

- The mini mills are more profitable than the larger steel mills in a non-differentiated market.

RISKS

• The risks in pursuing generic strategies are mainly two;

- failing to attain or sustain the strategy

- the value provided by the chosen strategy erodes due to industry evolution.

….to Low-cost

• Technology changes to nullify past investment or learning

• Low-cost learning by newcomers through imitation or new investment

• Inability to adopt the required changes in the market

….to Differentiation

• Buyer need falls

• Imitation narrows perceived differentiation

• Cost differential is too wide to hold on to brand loyalty

….to Focus

• Cost differential between broad range and focus widens

• Difference between the broad range & the focused product narrows

• Competitors find submarket within the strategic target

REQUIREMENTS

• The chosen strategy requires differing organization arrangement, control procedures and inventive systems.

….to Low-cost

Skills/resources required Organizational requirement

Capital Tight cost control

Engineering skill Frequent & detailed reports

Close supervision Structured organization

Easy product design Incentives based on target

Low-cost distribution

….to Differentiation

Skills/resources required Organizational requirement Strong marketing Strong coordination

Product engineering Subjective measurement

Creative flair Amenities to attract skilled people

Strong research

Leadership in Quality Technology

….to Focus

• Combination of the other two (Low-cost and Differentiation) policies directed to particular strategic target