Generic Competitive Strategies

Generic Competitive Strategies

Generic Competitive Strategies

2. Overall Cost Leadership 3. Differentiation 4. Focus

Overall Cost Leadership Overall cost leadership requires •

Efficient scale

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Cost reduction

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Overhead control

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Cost minimization in areas like R&D, Sales, Advertisement and Services.

Overall Cost Leadership: Advantages •

Yield above average ROI.

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Better positioned than RIVAL COMPETITORS to compete offensively on basis of price.

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Low-cost provides some protection from bargaining leverage of powerful BUYERS .

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Low-cost provides some protection from bargaining leverage of powerful SUPPLIERS.

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Low-cost provider’s pricing power acts as a significant barrier for POTENTIAL ENTRANTS

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Favorable position vis-à-vis substitutes.

Differentiation A product / service with unique and appealing attributes allows a firm to, if it achieved viable strategy for earning above average return. –Command a premium price –Increase unit sales –Build brand loyalty Differentiation can be achieved by design or brand image, technology, features, customer services, dealer network etc It is a trade off with cost.

Differentiation: Advantages •

Buyers develop loyalty to brand they like best--can beat RIVAL COMPETITORS in the marketplace

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Mitigates bargaining power of large BUYERS since other products are less attractive

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Buyer loyalty acts as a barrier to POTENTIAL ENTRANTS

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Differentiation puts a seller in better position to fend off threats of SUBSTITUTES not having comparable features

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Higher margin which to deal with SUPPLIER POWER.

Types of Differentiation Themes • Multiple features -- Microsoft Windows and Office • Unique taste – Bikaner Bhujia • Wide selection and one-stop shopping -- Amazon.com • Superior service – FedEx, Airtel • Spare parts availability -- Caterpillar • More for your money -- McDonald’s, Wal-Mart • Prestige -- Rolex • Quality manufacture -- Honda, Toyota • Technological leadership -- 3M Corporation • Top-of-line image -- Ralph Lauren.

Focus Strategies • Focus strategy is build around serving a particular target very well and each functional policy is built with this in mind. • Focus strategy focusing on a particular buyer group, segment of product line and geographical market with unique needs. • Involve concentrated attention on a narrow piece of the total market. Serve focus buyers better than rivals. • Focus involves a trade off between profitability and sales volume.

Examples of Focus Strategies • eBay Online auctions • Porsche Sports cars • Animal Planet and History Channel Cable TV • Royal Enfield

Bikes

Difference among the three Generic Strategies Strategic Advantage

Strategic Target

Uniqueness Perceived by the Customer

Industry wide

Particular Segment Only

Low Cost Position

DIFFERENTIATION COSTOVERALL LEADERSHIP

FOCUS

Source: Porter (1980)

Implication of Generic strategies in different areas in an Organization Generic Strategies

Commonly requires Skills & Resources

Common Organization Requirement

Overall cost Leadership

Sustained capital investment and access to capital, Process Engg. Skills, Intense supervision of labour, product designed for ease in manufacturing & Low cost distribution system.

Tight cost control, detail control reports, structured organization 7 responsibilities, incentives based on meeting strict qualitative targets

Differentiation

Strong Marketing abilities, product engineering, strong capability in basic research, corporate reputation for quality or technology leadership, unique combination of skills drawn from other businesses and strong cooperation from channels

Strong coordination among R&D, product development and marketing. Subjective measurement and incentives instead of qualitative measures & amenities to attract highly skilled labor, scientists, or creative people.

Focus

Combination of the above policies directed at the particular strategic target.

Combination of the above policies directed at the particular strategic target.

Stuck in Middle •

A firm failing to develop at least one of the three directions.

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Such firms lacks market share, losses high volume customers, losses margin business and suffers dim culture and conflicting set of organizational arrangement and motivation system.

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Fundamental strategic decisions are necessary for such firms.

7.

To achieve cost leadership: Aggressive investment to modernize and that is necessary to buy market share. Orientation of particular target (Focus). Differentiation achieve some uniqueness. The choice of this option is necessary based on firms capabilities and limitations.

8. 9.

Stuck in the Middle High

Profitability

Differentiationbased Strategies

Low Cost Leadership Strategies

Stuck-in-the-Middle Low

Low

Market Share (Quantity)

High

Stuck in Middle •

Firms takes time and sustained efforts are necessary to come out from this situation.

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U-shaped relationship is usually seen in automobile industry on a global basis.

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In case of Intense competitive industries the only way to achieve above average return is through focus or differentiation

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Structural Analysis should illuminate the choice and also allow analyst to explain or predict relationship between market share and profitability in any particular industry.

Risk of Overall Low Cost Strategy •

Low cost methods are easily imitated by rivals or through their ability to invest in state of art facilities.

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Technological change that nullifies past investment or learning experience.

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Inflation in costs that narrow the firm’s ability to maintain enough of a price differentiation to offset competitors brand image or other approaches to differentiation.

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Becoming too fixated on reducing costs and ignoring – Buyer interest in additional features – Declining buyer sensitivity to price – Changes in how the product is used

Risk of Differentiation •

Buyers see little value in unique attributes of product.

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Appealing product features are easily copied by rivals.

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Differentiating on a feature buyers do not perceive as lowering their cost or enhancing their well-being.

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Over-differentiating such that product features exceed buyers’ needs. Not understanding what buyers want or prefer and differentiating on the “wrong” things.

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Charging a price premium buyers perceive is too high

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Not striving to open up meaningful gaps in quality, service, or performance features vis-à-vis rivals’ products.

Risks of Focus •

Competitors find effective ways to match a focuser’s capabilities in serving niche.

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Competitors find submarkets within the strategic target and outfocus the focuser. Niche buyers’ preferences shift towards product attributes desired by majority of buyers – niche becomes part of overall market

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The cost differential between broad-range competitors and the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus.

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The differences in desired products or services between the strategic target and the market as a whole narrows.

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Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered.