Generic Strategies for Competitive Advantage

Stakeholders

Processes

Resources Organization

Set strategies to satisfy keystakeholders…

…by improving critical businessprocesses…

…and aligning resourcesand organization

The High Performance Business (Arthur D.Little, Inc 1992)

Sources of Profitability

• Increase revenues byincreasing price

• Increase revenue byincreasing volume

• Increase revenue and holdcost constant

• Increase revenues in excessof cost increases

• Lower cost and hold revenueconstant

• Lower costs in excess ofrevenue losses

• Lower costs and increaserevenues (price increases)

Profit = Revenue – Cost

Revenue = Price x Volume

Dr. Deshpande : Primer on Generic strategies

Understanding the Value Chain

InboundLogistics

Operations OutboundLogistics

Marketing& Sales

After-SalesService

M a

rg

in

Primary (Core)Activities

Support(Enabling)Activities

FirmInfrastructure

HumanResourceManagement

TechnologyDevelopment

Procurement

Source: Michael Porter, Competitive Advantage, 1985Dr. Deshpande : Primer on Generic strategies

DuPont(Fibers)

Milliken(Fabric)

Levi’s(Apparel)

Sears(Retail)

Customer

Order

Order

Order

Order

Delivery

Delivery

Delivery

Delivery

Levi Strauss’sValue-Delivery

Network

Competition is between networks,

not companies. The winner is the

company with the better network.

Generic Strategies

OVERALLCOST LEADERSHIPDIFFERENTIATION

Low Cost PositionUniqueness Perceived

by the Customer

Industry wide

ParticularSegment only

STRATEGIC ADVANTAGE

STR

ATE

GIC

TA

RG

ET

Source: Michael Porter, Competitive Strategy, 1980

FOCUS

Dr. Deshpande : Primer on Generic strategies

The typology of Generic Strategies

Cost Leadership Differentiation

Focus

ProductDifferentiation

Low

(Principally

based on price)

High

(Principally by

Uniqueness)

Low or High

(Price or

Uniqueness)

MarketSegmentation

Low

(Mass Market)

High

(Many

segments)

Low

(One of a few

key segments)

CostStructure

Low

(Efficiency)

High

(Value Added)

Low or High

(Efficiency or

Value Added)

DistinctiveCompetency

Manufacturing

and Materials

Management

Research and

Development,

Marketing

Any kind of

distinctive

competency

Dr. Deshpande : Primer on Generic strategies

Mixing low cost and differentiation

$

Industryaverage

competitor

Successfuldifferentiated

competitor

Competitorwithdual

advantage

Successfullow-cost

competitor

Price

Cost

Price per unit

Cost per unit

Dr. Deshpande : Primer on Generic strategies

• This strategy involves striving to be the overall low cost provider of a product

or service that appeals to a broad range of customers

• It is a powerful strategy when the markets contains many price-sensitive

buyers

• The aim of this strategy is to open up a sustainable cost advantage over

competitors and then use the company’s lower cost edge as a basis for either:

- Under-pricing competitors and gaining market share (best choice if strong

economies of scale are prevalent)

- Selling at The “going rate” and earning a higher profit margin (low cost,

therefore, does not always translate into a low price….)

Low cost player

Dr. Deshpande : Primer on Generic strategies

To achieve a cost advantage, a firm’s cumulative costs across its value chain must be

lower than their competitor’s cumulative costs

Alternative methods to accomplish this:

- Do a better job than rivals in performing value chain activities, and therefore

lower their cost

- Revamp the value chain to cut out some elements altogether (b/ward integration,

f/ward integration;simplify product design;cut out all frills,features, options on the

product)

Low cost player

Dr. Deshpande : Primer on Generic strategies

⇒Technological breakthroughs open up cost reductions for rivals

⇒Cost reduction strategy can be copied-advantage becomes short-lived and fixation on costs

can cause failure to react to market changes (increased interest in new features)

Pitfalls of a low cost strategy

Price competition in industry is very vigorous industry product is standardized-commodities

There are few ways to achieve meaningful product differentiation-buyers areonly sensitive to price differences

Low or no switching costs are incurred by buyers

Buyers are large, and have significant power to drive down prices

When does low cost differentiation work

Dr. Deshpande : Primer on Generic strategies

The essence of this strategy is to be

unique in ways that are valuable to the

buyer, and that can be sustained

It is an attractive approach whenever

buyers needs are too diverse to be

satisfied by a standardized product

Differentiation strategy

• command a premium price for

their product

• sell more of their product at the

“going rate” and increase market

share

Dr. Deshpande : Primer on Generic strategies

• Different taste of product-Dr. Pepper

• Special features- Trinitron Technology -

Sony

• Superior service-Dell

• Spare parts availability- Caterpillar

• Engineering design and performance-

Mercedes

• Prestige and distinctiveness - Rolex

• Product reliability-Johnson & Johnson

• Technological leadership - 3M

• Full range of services-Merrill Lynch

• Quality manufacture - Toyota

Types of differentiation

• Buyers will not pay extra for valuethey don’t perceive, no matter how realthe unique extras may be

• Actual and perceived value can differwhenever buyers have troubleassessing what their experience withthe product may be

• Incomplete knowledge from buyersoften causes them to judge value basedon signals

Signal differentiation

Failure to signal value, where customers cannot adequately evaluate theirpotential experience with the product is a serious, and is a common cause

of failure for differentiators

Failure to signal value, where customers cannot adequately evaluate theirpotential experience with the product is a serious, and is a common cause

of failure for differentiators

Dr. Deshpande : Primer on Generic strategies

Differentiation strategy . . .

• Attempts to achieve differentiation usually raise costs

• These costs must not be so high that they require a price most buyers are not willing to

pay-or eat up all your expected returns

• Differentiation clearly develops brand power and generates repeat purchase

Differentiation and Impact on the five forces

Dr. Deshpande : Primer on Generic strategies

There are many ways to differentiate a

product or service and many buyers perceive

these differences to have value

Buyers needs and uses for your product are

diverse

Few rival firms are following a similar

differentiation approach

“Point” of differentiation cannot easily be

copied by competitors

⇒ Trying to differentiate on the basis of

something that does not lower a buyer’s

cost or enhance a buyer’s well-being- as

perceived by the buyer

⇒ Over-differentiating so that the price is

too high relative to competitors, or product

quality or service levels exceed buyer needs

⇒ Trying to charge too high a price

premium ignoring the need to signal value

⇒ Not understanding what buyers value

When does it work ? What are the risks ?

Dr. Deshpande : Primer on Generic strategies

Pros and Cons of differentiation

This strategy sets a focus on a narrow piece

of the total market

The target segment can be defined by:

- geographic uniqueness

- special product attributes that

appeal only to niche members

When it is costly or difficult for broad

market players to meet the needs of the

segment

When no other rival is attempting to

specialize in the market niche

When the firm doesn’t have the resources to

go after a wider part of the total market

When the industry has many different

segments, allowing the focuser to pick the

one most suited to its strengths and

capabilities

Focus strategy

Dr. Deshpande : Primer on Generic strategies

• Rolls Royce

• Omega - underwater watches

• Rolex

• MUL - 800 for the physically handicapped

(low cost focus)

The segment is big enough to be

profitable -the segment has good growth

potential

The segment is not crucial to the success

of major competitors

The focusing firm has the skills and

resources necessary to serve the

segment

The focuser can defend against

challengers based on loyalty and the

goodwill it has built

Focus attractiveness

Focus examples

Dr. Deshpande : Primer on Generic strategies

Focus strategy

Types of Focus strategies

– End-use specialist• Specialises in one type of end user customer (Iodex for joint pains)

– Vertical-level specialist• Specialises at some level of production or distribution cycle. (Diamond polishing in India)

– Customer-size specialist• Concentrates on selling to small, medium or large customers (Reliance Power billing)

– Specific-customer specialist• Limits selling to one or a few large customers (Debeers sells roughs to “sight holders”

across the world)

– Geographical specialist• Specific region or locality (Roohafza a drink is sold in North)

– Product or feature specialist• Produces specific product or product line (IBM specialised in Main Frames for several

years)

– Quality-price specialist• Operates at the low or high end of the market (Akai TV was the first low end offering in

India)

– Service specialist• Offers services not available from other firms.

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