Generic Business Strategies - Lesson 4

GENERIC BUSINESS STRATEGIES Firms tailor their strategies to fit particular circumstances, every firm’s strategy has at least several unique components – in this sense there are countless strategy variation and options, ultimately yielding as many business strategies as there are businesses. However, when one looks at the basic character of the different strategies that firms employ, the amount of fundamental strategy variation narrows considerably. From this more generalized perspective, it is possible to single out three generic approaches to competing in the marketplace: 1. striving to be overall low-cost producer in the industry; 2. seeking to differentiate product offering in one way ore another from rivals’ products; 3. a focused approach via low-cost or differentiation to a narrow portion of the market rather than going after the whole market. Strategy of low-cost producer The impetus for striving to be the industry’s low-cost producer can drive from sizable economies of scale, strong learning and experience curve effects, other cost-cutting and efficiency-enhancing opportunities, and a market comprised of many price-conscious buyers. Trying to be the industry leader in achieving an overall low-cost position typically entails being out in front of rivals in constructing the most efficient-sized plants, in implementing cost-reducing technological advances, in getting the sales and market share needed to capitalize on learning and experience curve effects, in maintaining a tight rein on overhead and other administrative types of fixed costs, and in containing costs in such areas as R&D, advertising, service, and distribution. This strategy is powerful when: •

demand is price elastic;

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all firms in the industry produce essentially the standardized products;

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there are not many ways of achieving product differentiation that have much value to buyers;

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most buyers utilize product in the same way;

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buyer incur few (if any) switching costs in changing from one seller to another and thus are strongly inclined to shop for the best price.

Advantages in pursuing this strategy: •

as concerns competitors, the low-cost company is in the best position to compete offensively on the basis of price;

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as concerns customers, the low-cost company has partial profit margin protection from powerful customers since the latter will rarely be able to bargain prices down past the survival level of the next most efficient firm;

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as concerns suppliers, the low-cost producer can, in some cases, be more insulated than competitors from powerful suppliers if its greater efficiency allows more pricing rooms to cope with increases in the costs of purchased materials;

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as concerns potential entrants, the low-cost producer is in a favorable competitive position because having the lowest costs not only acts as a barrier for a new entrant to hurdle but it also provides the leeway to use price-cutting as a defense against market inroads made by a new competitor;

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as concerns substitutes, the low-cost producer is, compared to its rivals, in a favorable position to use price cuts to defend against competition from attractively priced substitutes.

Risks and disadvantages: •

technological changes can result in cost or process breakthroughs that nullify past investments and efficiency gains;

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rival firms may find it comparatively easy and/or inexpensive to imitate the leader’s low-cost methods;

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heavy investments in cost minimization can lock a firm into both its present technology and present strategy, leaving it vulnerable to new state-of-the-art technologies and to a widening of customer interest in something other than a cheaper price.

Strategic success in trying to be low-cost producer usually requires a firm to be the overall cost leader, not just one of the several firms vying for this position. When there is more than one aspiring low-cost producer, rivalry among them is typically fierce. Strategy of differentiation Forms of differentiating the products from rival firms: a different taste, special features, superior service, spare parts availability, overall value to the customer, engineering design and performance, unusual quality and distinctiveness, product reliability, quality manufacture, technological leadership, convenient payment, a full range of services, a complete line of products, and tope-of-the-line image and reputation. Differentiation strategy is most likely to produce an attractive and lasting competitive edge when it is based on technical superiority, quality, giving customers more support services, and the appeal of more value for the money. Differentiation strategies work best in situations when: •

There are many ways to differentiate the product or service and these differences are perceived by some buyers to have value;

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Buyer needs and uses of the item are diverse; and

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Not many rivals firms are following a differentiation strategy.

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Advantages: •

Provides some insulation against the strategies of rivals because customers establish a preference or loyalty for the brand or model they like best and are often willing to pay a little (perhaps a lot) more for it;

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Erects entry barriers in the form of customer loyalty and uniqueness for new comers to hurdle;

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Mitigates the bargaining power of large buyers since the products of alternative sellers are less attractive to them;

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Puts a firm in a better position to ward off threats from substitutes to the extent that it has built a loyal clientele.

Risks: •

The cost of adding enough product attributes to achieve differentiation can result in such a high selling price that buyers opt for lower-priced brands;

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Over a period of time, buyers may decide that they do not need or want extra features, concluding that a basic or standard model serves just as well;

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Rival firms may imitate the product attributes of the leaders to an extent such that buyers see little meaningful difference from seller to seller.

Focus and specialization strategies The distinguishing feature of a focus strategy is that the firm specializes in serving only a portion of the total market. The underlying premise is that a firm can serve its narrow target market more effectively or more efficiently than rivals that position themselves broadly. The competitive advantage of a focus strategy is earned either by differentiation (better meeting the needs of the target market), achieving lower costs in serving the target market segment, or both. A competitive strategy based on focus or specialization has merit when: •

There are distinctly different groups of buyers who either have different needs or utilize the product in different ways;

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No other rival is attempting to specialize in the same target segment;

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Firm’s resources do not permit it to go after a wide segment of the total market;

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Industry segments differ widely in size, growth rate, profitability, and intensity of the five competitive forces, thereby making some segments more attractive than others.

Advantages: •

Rivals do not have the same ability to serve the focused firm’s target clientele; 3

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Entry into the focused firm’s market niche is made harder by the competitive edge generated by the focused firm’s distinctive competence;

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Distinctive competence also acts as a hurdle that producers of substitutes must overcome;

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Focusers are partially shielded from the bargaining leverage of powerful customers by the latter’s unwillingness to shift their business to firms with lesser capabilities to serve their needs.

Risks: •

The possibility that broad-range competitors will find effective ways to match the focused firm in serving the narrow target market;

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Shifts in buyer preferences and needs away from the focuser’s special product attributes toward more generally available features desired by the target segment;

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The chance that competitors will find smaller segments within the target segment and “outfocus” the focuser.

Combinations of generic business strategies for different competitive situations 1. Competitive strategies for leaders and dominant firms Competitive position of leaders and dominant firms normally range from stronger-thanaverage to powerful. The main competitive strategy issue for a leader is how best to sustain what has been achieved and how to become or remain the leader. At least three different competitive postures are open to industry leaders and dominant firms: ♦ Stay-on-the-offensive strategy. This strategy is based on the principle that the best defense is a good offense. The key factors for success in offensive strategies are constant innovation and the launching of initiatives that keep rivals guessing and off-balance to respond. The innovative goal is to be the source of innovative products, special performance features, quality enhancements, improve customer services, ways to cut production costs, use of different distribution channels, discovering new ways of using products, attracting new users of the product, and promoting more frequent usage of the product. Aggressive leaders try to be “first-movers”, the aim being to translate “being first” into a sustainable competitive advantage as well as into solidifying their reputation as the leader. ♦ Hold and maintain strategy. The essence of this strategy is a good defense, which makes it harder for new firms to enter and for challengers to gain ground, lowers the probability of attack, lessens the intensity of attack, or diverts attack to less threatening arenas. The idea behind this strategy is to protect the competitive advantage through defensive actions such as: − Attempting to raise entry barriers via increased spending for advertising, customer services, and production capacity;

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− Introducing more of the company’s own brands to match the product attributes that challenger brands have or could employ; − Figuring out ways to increase the costs for customers who switch to rival products; − Broadening the product line to close off possible vacant niches for competitors to slip into; − Keeping prices reasonable and quality attractive; − Preserving or even raising the level of customer service; − Investing enough to remain cost competitive, to stay technologically progressive, and to maintain the firm’s existing market share of new market growth; − Signing exclusive contracts with the best suppliers. ♦ Competitive harassment strategy. With this strategy the leader sends clear messages to rivals that any moves to cut into the leader’s business will be “punished” and will provoke heavy revenge. Actions include: − Being quick to meet all competitive price cuts with even larger cuts; − Being ready to counter with large-scale promotional campaigns if lesser-sized firms boost their advertising budgets in a market-share-increasing attempt of their own; − Sending aggressive signals regarding who should lead and who should follow by pressuring distributors not to carry rivals’ products, having salespersons “bad-mouth” the products of aggressive rivals, trying to hire away the better executives of firms that “get out of line”; 2. Competitive strategies for runner-up firms Runner-up firms occupy weaker market positions than industry leaders. Some of them could be challengers willing to fight one another and the leader(s) for a bigger market share and a stronger market position. Other runner-up firms play simply the role of followers unwilling to take offensive actions against leader(s), reacting and responding rather than initiating and attacking. The practical competitive strategies for runner-up firms are: ♦ Vacant niche strategy. The principle underlying this competitive approach is to concentrate on those customers or end-use applications that major firms have bypassed or neglected. An ideal vacant niche is of sufficient size and scope to be profitable, has some growth potential, and is well suited to a firm’s own capabilities and skills, as well as being outside the domain of interest of leading firms. ♦ Specialist strategy. A specialist firm focuses its competitive efforts on a few carefully chosen segments and does not try to compete with a full product line appealing to all different needs and functions. Stress is placed only on those differentiating variables where the company has or can develop special expertise and where such expertise will be highly valued by customers.

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♦ “Ours-is-better-than-theirs” strategy. The approach here is to use a combination focusdifferentiation strategy of the product quality. Sales and marketing efforts are focused on quality-conscious and performance buyers.

3. Competitive strategies for declining firms A firm in a declining competitive position has the following basic options: ♦

Grow-and-build strategy. If enough resources are available this strategy is based on either low-cost production or “new” differentiation themes.

♦ Hold-and-maintain strategy continuing the present strategy (if the firm earn healthy profits and enjoy good reputation with customers) and scrounging up enough resources to keep sales, market share, profitability, and competitive position at survival levels. ♦ Abandonment strategy and get out of the business, either by selling out to another firm or by closing down operations if a buyer cannot be found. ♦ Harvest strategy whereby reinvestment in the business is held to minimum and the dominant short-run objective is to harvest short-term profits and/or maximize short-term cash flow and the long-run objective being a market exit. ♦ Turnaround strategies. Turnaround strategies come into place when a business has fallen into a crisis situation. The goal is to arrest and reverse the sources of competitive and financial weakness as quickly as possible. The first task for rescue is diagnosis: what lies at the root of poor performance?; is it bad competitive strategy or poor implementation and execution of an otherwise workable strategy?; are the causes of distressed beyond management control?; can the business be saved?. This diagnosis is a prerequisite to formulating a turnaround strategy. There are five generic approaches to achieving a business turnaround: - Revamping the existing strategy. When the cause of bad performance is diagnosed as “bad” strategy, the following actions can be taken: shifting to a new competitive approach and thus trying to rebuild the firm’s market position; merging with another firm in the industry and converting to its basic strategy; retrenching into a reduced core of products and customers more closely matched to the firm’s strengths. - Revenue-increasing. Revenue-increasing turnaround efforts aim at generating increases in sales volume using the following options: price cuts (when demand is price elastic), increased promotion, a bigger sales force, added customer services, and quickly achieved product improvements. - Cost-reducing. This approach is best when the firm’s cost structure is flexible enough to permit radical surgery, and when the firm is relatively close to its breakeven point. The actions are: increase budgeting and cost control, elimination of jobs and hirings, modernization of existing plant and equipment to gain grater productivity, and postpone the capital expenditure. 6

- Asset reduction. This approach can be approached when cash flow is a critical consideration and when the most practical way to generate cash is through the sale of some assets.

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