Generic Competitive Strategies

VII

Generic Competitive Strategies

• Two basic types: - Cost- Differentiation

• Additional generic strategies based on the scope of application :

Cost

- FocusDifferentiation

Generic Competitive Strategies

• COST leadership

promoted by attention to details such as frugality and discipline.

• DIFFERENTIATION

requires a culture of trust that promotes individualism, risk taking and innovation.

Cost

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

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

Factors of Cost Leadership

• Aggressive construction of efficient-scale facilities

• Vigorous pursuit of cost reductions from experience curve

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

• Tight cost and overhead control

Differentiation

• Differentiating a product/service implies creating a perceived uniqueness in the industry through

- design or brand image- technology- customer service- dealer network- other special features

Differentiation

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

• Differentiation insulates a company from rivalry through brand loyalty or price insensitivity.

Cost OR Differentiation

• Depends :

- Toyota competes on cost (price)

- Mercedes competes on differentiation

Toyota is much larger company.

• An organization should choose either of the alternatives,

not both.

• Being all things to all people can be ruinous that Porter calls ‘being stuck in the middle’.

Stuck in the Middle

• Such strategies are not sustainable in the long run because of factors such as a clash of cultures.

• An organizational structure that is supportive of cost leadership can be ruinous for differentiation.

• Conflicts can arise due to policies such as

- tight control system

- pursuit of scale economies

- dedication to learning curve.

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.

Threats to

• Cost : imitation

technology changes proximity to

differentiation

• Differentiation : imitation

loss of attraction of differentiation base

• Focus : imitation

target segment gets unattractive

new focusers arrive

Elements of 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 Strong supply chain

Elements of 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

Elements of Focus

• Combination of the Cost and Differentiation policies directed to particular strategic target

Hindrancesto Low-cost

• Technology changes nullify the past investment or learning

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

• Inability to adopt to the required changes in the market

Hindrancesto Differentiation

• Imitation narrows perceived differentiation

• Buyer need falls

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

Hindrances 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