Generic Competitive Strategies

Generic Competitive Strategies

2. Overall Cost Leadership

3. Differentiation
4. Focus
 Overall Cost Leadership

Overall cost leadership requires

• Efficient scale
• Cost reduction
• Overhead control
• Cost minimization in areas like R&D,
Sales, Advertisement and Services.
 Overall Cost Leadership: Advantages
• Yield above average ROI.
• Better positioned than RIVAL COMPETITORS to
compete offensively on basis of price.
• Low-cost provides some protection from bargaining
leverage of powerful BUYERS .
• Low-cost provides some protection from bargaining
leverage of powerful SUPPLIERS.
• Low-cost provider’s pricing power acts as a significant
barrier for POTENTIAL ENTRANTS
• 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

• Mitigates bargaining power of large BUYERS since other products

are less attractive

• Buyer loyalty acts as a barrier to POTENTIAL ENTRANTS

• Differentiation puts a seller in better position to fend off threats of

SUBSTITUTES not having comparable features

• 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
Uniqueness Perceived Low Cost Position
by the Customer
Strategic Target

Industry wide DIFFERENTIATION COSTOVERALL

LEADERSHIP

Particular FOCUS
Segment Only

Source: Porter (1980)

 Implication of Generic strategies in different areas in an
Organization
Generic Strategies Commonly requires Skills &
Resources
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.
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
Focus Combination of the above
policies directed at the
particular strategic target.
Common Organization
Requirement
Tight cost control, detail control
reports, structured organization
7 responsibilities, incentives
based on meeting strict
qualitative targets
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.
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.

• 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.

• 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.
8. Orientation of particular target (Focus).
9. Differentiation achieve some uniqueness.
The choice of this option is necessary based on firms capabilities and
limitations.
 Stuck in the Middle

High

Differentiation- Low Cost

based Strategies Leadership
Strategies
Profitability

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.

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

basis.

• In case of Intense competitive industries the only way to achieve above

average return is through focus or differentiation

• 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.
• Technological change that nullifies past investment or learning
experience.
• 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.
• 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.

• Appealing product features are easily copied by rivals.

• Differentiating on a feature buyers do not perceive as lowering their

cost or enhancing their well-being.

• Over-differentiating such that product features exceed buyers’ needs.

Not understanding what buyers want or prefer and differentiating on
the “wrong” things.

• Charging a price premium buyers perceive is too high

• 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.

• 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

• 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.

• The differences in desired products or services between the

strategic target and the market as a whole narrows.

• Segment becomes so attractive it becomes crowded with rivals,

causing segment profits to be splintered.