Generic Strategies for Competitive Advantage

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

Set strategies to satisfy key

stakeholders…
Stakeholders

…by improving critical business Processes

processes…

…and aligning resources

and organization Resources Organization
Sources of Profitability

Profit = Revenue – Cost

Revenue = Price x Volume

• Increase revenues by • Lower cost and hold revenue

increasing price constant

• Increase revenue by • Lower costs in excess of

increasing volume revenue losses

• Increase revenue and hold • Lower costs and increase

cost constant revenues (price increases)

• Increase revenues in excess

of cost increases

Dr. Deshpande : Primer on Generic strategies

Understanding the Value Chain

Firm
Infrastructure
Human
Resource
Support Management
(Enabling)
Technology
Activities Development M
Procurement a
r
g
i
n

Inbound Operations Outbound Marketing After-Sales

Logistics Logistics & 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 Competition is between networks,
Value-Delivery Levi’s
not companies. The winner is the
Network (Apparel)
company with the better network.
Order
Delivery

Sears
(Retail)
Order
Delivery

Customer
Generic Strategies

STRATEGIC ADVANTAGE
Uniqueness Perceived
by the Customer Low Cost Position

OVERALL
DIFFERENTIATION
STRATEGIC TARGET

Industry wide COST LEADERSHIP

Particular
FOCUS
Segment only

Dr. Deshpande : Primer on Generic strategies Source: Michael Porter, Competitive Strategy, 1980
The typology of Generic Strategies

Cost
Leadership Differentiation Focus

Low High Low or High

Product (Principally (Principally by (Price or
Differentiation
based on price) Uniqueness) Uniqueness)

Low High Low

Market (Mass Market) (Many (One of a few
Segmentation
segments) key segments)

Low High Low or High

Cost (Efficiency) (Value Added) (Efficiency or
Structure
Value Added)

Manufacturing Research and Any kind of

Distinctive and Materials Development, distinctive
Competency Management Marketing competency

Dr. Deshpande : Primer on Generic strategies

Mixing low cost and differentiation

Price

$
Cost

Industry Successful Successful Competitor

average differentiated low-cost with
competitor competitor competitor dual
advantage

Price per unit

Cost per unit

Dr. Deshpande : Primer on Generic strategies

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 standardized-

commodities

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
• Actual and perceived value can differ
whenever buyers have trouble
assessing what their experience with
the product may be
• Incomplete knowledge from buyers
often causes them to judge value based
on signals
• Different taste of product-Dr. Pepper
• Special features- Trinitron Technology -
Sony
• Superior service-Dell
• Spare parts availability- Caterpillar
• Engineering design and performance-
Mercedes
• Prestige and distinctiveness - Rolex
• Product reliability-Johnson & Johnson
• 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 isis 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
quality or service levels exceed buyer needs
Few rival firms are following a similar
differentiation approach
⇒ 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

market players to meet the needs of the
This strategy sets a focus on a narrow piece
segment
of the total market

When no other rival is attempting to

The target segment can be defined by:
specialize in the market niche

- geographic uniqueness
When the firm doesn’t have the resources to
- special product attributes that 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
of major competitors • Rolls Royce
• 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.
End of deck