Generic Strategy

Generic Strategies for Competitive Advantage

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

Set strategies to satisfy key stakeholders…

…by improving critical business processes…

…and aligning resources and organization

Stakeholders

Processes

Resources

Organization

Sources of Profitability

Profit

= Revenue – Cost

Revenue = Price x Volume •

Increase revenues by increasing price

•

Lower cost and hold revenue constant

•

Increase revenue by increasing volume

•

Lower costs in excess of revenue losses

•

Increase revenue and hold cost constant

•

Lower costs and increase revenues (price increases)

•

Increase revenues in excess of cost increases

Dr. Deshpande : Primer on Generic strategies

Understanding the Value Chain

Firm Infrastructure Human Resource Management

Support (Enabling) Technology Activities Development

M a

Procurement

r g i n

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

After-Sales Service

Primary (Core) Activities Dr. Deshpande : Primer on Generic strategies

Source: Michael Porter, Competitive Advantage, 1985

DuPont (Fibers) Order Delivery

Milliken (Fabric) Order Delivery

Levi Strauss’s Value-Delivery Network

Competition is between networks,

Levi’s (Apparel)

not companies. The winner is the company with the better network. Order

Delivery

Sears (Retail) Order Delivery

Customer

Generic Strategies

STRATEGIC ADVANTAGE

STRATEGIC TARGET

Uniqueness Perceived by the Customer

Industry wide

Particular Segment only

Dr. Deshpande : Primer on Generic strategies

DIFFERENTIATION

Low Cost Position

OVERALL COST LEADERSHIP

FOCUS

Source: Michael Porter, Competitive Strategy, 1980

The typology of Generic Strategies

Cost Leadership

Product Differentiation

Market Segmentation

Cost Structure

Distinctive Competency

Differentiation

Focus

Low

High

Low or High

(Principally

(Principally by

(Price or

based on price)

Uniqueness)

Uniqueness)

Low

High

Low

(Mass Market)

(Many

(One of a few

segments)

key segments)

Low

High

Low or High

(Efficiency)

(Value Added)

(Efficiency or Value Added)

Manufacturing

Research and

Any kind of

and Materials

Development,

distinctive

Management

Marketing

competency

Dr. Deshpande : Primer on Generic strategies

Mixing low cost and differentiation

Price

$ Cost

Industry average competitor

Successful differentiated competitor

Successful low-cost competitor

Price per unit Cost per unit

Dr. Deshpande : Primer on Generic strategies

Competitor with dual advantage

Low cost player

•

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….)

Dr. Deshpande : Primer on Generic strategies

Low cost player

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)

Dr. Deshpande : Primer on Generic strategies

When does low cost differentiation work

ˆ Price competition in industry is very vigorous industry product is standardizedcommodities ˆ There are few ways to achieve meaningful product differentiation-buyers are only sensitive to price differences ˆ Low or no switching costs are incurred by buyers ˆ Buyers are large, and have significant power to drive down prices Pitfalls of a low cost strategy ⇒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)

Dr. Deshpande : Primer on Generic strategies

Differentiation strategy

The essence of this strategy is to be unique in ways that are valuable to the

• command a premium price for

buyer, and that can be sustained

their product • sell more of their product at the

It is an attractive approach whenever

“going rate” and increase market

buyers needs are too diverse to be satisfied by a standardized product

share

Dr. Deshpande : Primer on Generic strategies

Differentiation strategy . . .

Signal differentiation

Types of differentiation

• Buyers will not pay extra for value they don’t perceive, no matter how real the unique extras may be

• Different taste of product-Dr. Pepper • Special features- Trinitron Technology Sony • Superior service-Dell

• Actual and perceived value can differ whenever buyers have trouble assessing what their experience with the product may be

• Spare parts availability- Caterpillar • Engineering design and performanceMercedes • Prestige and distinctiveness - Rolex • Product reliability-Johnson & Johnson

• Incomplete knowledge from buyers often causes them to judge value based on signals

• Technological leadership - 3M • Full range of services-Merrill Lynch • Quality manufacture - Toyota

Failure Failure to to signal signal value, value, where where customers customers cannot cannot adequately adequately evaluate evaluate their their potential potential experience experience with with the the product product is is aa serious, serious, and and is is aa common common cause cause of of failure failure for for differentiators differentiators Dr. Deshpande : Primer on Generic strategies

Differentiation and Impact on the five forces

• 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

Dr. Deshpande : Primer on Generic strategies

Pros and Cons of differentiation

When does it work ?

What are the risks ?

There are many ways to differentiate a

⇒ Trying to differentiate on the basis of

product or service and many buyers perceive

something that does not lower a buyer’s

these differences to have value

cost or enhance a buyer’s well-being- as perceived by the buyer

Buyers needs and uses for your product are ⇒ Over-differentiating so that the price is

diverse

too high relative to competitors, or product Few rival firms are following a similar differentiation approach

quality or service levels exceed buyer needs ⇒ Trying to charge too high a price premium ignoring the need to signal value

“Point” of differentiation cannot easily be copied by competitors

⇒ Not understanding what buyers value

Dr. Deshpande : Primer on Generic strategies

Focus strategy

When it is costly or difficult for broad This strategy sets a focus on a narrow piece of the total market The target segment can be defined by:

market players to meet the needs of the segment When no other rival is attempting to specialize in the market niche

- geographic uniqueness

- special product attributes that

When the firm doesn’t have the resources to go after a wider part of the total market

appeal only to niche members When the industry has many different segments, allowing the focuser to pick the one most suited to its strengths and capabilities

Dr. Deshpande : Primer on Generic strategies

Focus strategy

Focus attractiveness The segment is big enough to be profitable -the segment has good growth potential

Focus examples

The segment is not crucial to the success • Rolls Royce

of major competitors

• Omega - underwater watches The focusing firm has the skills and

• Rolex

resources necessary to serve the

• MUL - 800 for the physically handicapped

segment

(low cost focus)

The focuser can defend against challengers based on loyalty and the goodwill it has built

Dr. Deshpande : Primer on Generic strategies

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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