Generic Competitive Strategies

Overall cost leadership Differentiation Focus

Overall cost leadership

Efficient-scale facilities Pursuit of cost reductions Tight cost and overhead control and avoidance of marginal customer accounts Cost minimization in areas like R& D, sales force Low cost position protects the firm against all five competitive forces

Overall cost leadership

Defends against powerful buyer as the cost can be reduced up to the next efficient producer and against powerful supplier by having more flexibility to cope up with increased cost. Creates entry barrier by having cost advantage and relatively safe form substitute products

But this requires some of the following

High market share, favorable excess to raw material Easy to manufacture products Maintaining a wide line of related products to spread the cost and serving all major group of customer to build volumes Heavy capital investment, aggressive pricing, start-up losses to build market share

 Examples are Du Pont, Texas Instrument, Black and Decker, Indigo, Mahindra Tractors, Nirma Quote from Hydraulic Equipment Division of a company We did not set out to develop a machine significantly better than anyone else but we did want to develop one that was truly simple to manufactured and priced , intentionally at a low price

 Differentiating the product or service offering of the firm Design or brand image (Mercedes) Technology(Bose in sound system), features (Galaxy 3), customer service (Maruti), dealer network (Hindustan Unilever, ITC) Can be done on more than dimension, if product demands Caterpillar is not only known for dealer network but also for high spare parts availability and durable products

Differentiation

 Insulates against competition rivalry by building brand loyalty, this also acts as entry barrier. Safeguards against supplier power because the company enjoys higher margin. Buyers do not have alternatives so not in a position to threaten the company and are less price sensitive. Better protected against substitute as a result of loyal customer

 May preclude high market share as a result of exclusivity May be a trade off with cost position as product designing, servicing, research and high quality material may cost more.

Focus
Focusing on a particular buyer group, segment of the product line, or geographic market

Industry wide

Differentiation

Overall cost leadership

Focus
Particular segment only

 It implies some limitation over market share achievable Involves a trade off between sales volume and profitability (more vol will erode profitability as the market is limited) Like differentiation strategy, it may or may not involve a trade off with over all cost position.

Requirement of Cost leadership strategy

Commonly required skills
Capital investment, Process engineering skills

Common organizational requirements

Tight cost control, structured organizations and responsibilities

Intense supervision pf Incentive based on meeting labour. Product designed strict quantitative targets for ease of manufacture

Low cost distribution

Frequent detailed control reports

Requirement of Differentiation Strategy

Commonly required skills Strong marketing abilities, product engineering, creative flair Common organizational requirements Strong coordination among function in R& D, product development and marketing

Strong capability in Amenities to attract highly research, reputation for skilled labour, creative quality/ technology people leardeship Unique combination of skills, strong cooperation from channels Subjective measurements and incentive instead of quantitative measures

Requirement of Focus Strategy

A combination of above strategies directed at the particular strategic target

Stuck in the Middle

Firm is in extremely poor situation lacking in investment, market share and resolve to play low cost game. The firm is guaranteed to earn low profit Suffers from a blurred corporate culture and conflicting sets of organisational structure and motivating system. Tend to flip back and forth over time among generic strategies.

Risk of Generic Strategies

Two risks: Failing to attain or sustain the strategy Value of strategy advantage to erode with industry evaluation

Risk of overall cost leadership

Technological change that nullifies past investments or learning Low-cost learning by industry newcomers through imitation or through ability to invest in state art facilities Inability to see required product or marketing change because of the attention placed on cost Inflation in costs that narrows the firms ability to maintain enough of price differential to offset brand advantage

 Examples: Ford in 1920 and Sharp Electronics when they could not face General motor and Sony/ Panasonic

Risk of differentiation
The cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty Imitation narrows perceived differentiation a common occurrence as industries matures

Risk of Focus
The cost differential between broad- range competitors and the focused firm widens to eliminate cost advantage of serving a narrow target or offset the differentiation achieved by focus The differences in products between the strategic target and the market narrows down Competitors find sub markets within the target market and out focus the focuser