GENERIC COMPETITIVE STRATEGIES

GENERIC COMPETITIVE STRATEGIES

Concept of Generic strategies was developed by Michael Porter & used initially in the early 1980s They outline the three main strategic options open to organization that wish to achieve a sustainable competitive advantage. Each of the three options are considered within the context of two aspects of the competitive environment: -Competitive advantage: are the products differentiated in any way, or are they the lowest cost producer in an industry? -Competitive scope of the market: does the company target a wide market, or does it focus on a very narrow, niche market?

 By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. They are called generic strategies because they are not firm or industry dependent

ADVANTAGE TARGET SCOPE Low Cost Product Uniqueness

Broad (Industry Wide)

Cost Leadership Strategy

Differentiation Strategy

Narrow (Market Segment)

Focus Strategy (Low Cost)

Focus Strategy (differentiation)

COST LEADERSHIP STRATEGY

COST LEADERSHIP STRATEGY

This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share
Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. (Overall cost leadership strategy)

The cost leadership strategy usually targets a broad market.

WAYS THAT FIRMS ACQUIRE COST ADVANTAGES

Improving process efficiencies Gaining unique access to a large source of lower cost materials Making optimal outsourcing Process engineering skills Products designed for ease of manufacture Sustained access to inexpensive capital Close supervision of labor Tight cost control Incentives based on quantitative targets Reduce number of intermediaries

WHEN A LOW-COST STRATEGY WORKS BEST

Price competitions among rivals is dominant competitive force. Industrys product is a commodity type item readily available Few ways to achieve product differentiation that have value to buyers Most buyers have similar need/requirements

Buyers incur low switching cost, changing sellers

Buyers are large and have significant bargaining power
8

RISKS IN THE LOW-COST STRATEGY

Other firms may be able to lower their costs as well. As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. Several firms targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share. Low cost leader become so fixated on cost reduction that it fails to respond to: - increased buyer desires for added quality or better features. - new developments in related products
9

DIFFERENTIATION STRATEGY

10

ADVANTAGE TARGET SCOPE Low Cost Product Uniqueness

Broad (Industry Wide)

Cost Leadership Strategy

Differentiation Strategy

Narrow (Market Segment)

Focus Strategy (Low Cost)

Focus Strategy (differentiation)

11

DIFFERENTIATION STRATEGY
A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition.
The value added by the uniqueness of the product may allow the firm to charge an extra price for it. Because customers see the product as unrivaled and unequaled, the price elasticity of demand tends to be reduced and customers tend to be more brand loyal.

12

TO MAINTAIN THIS STRATEGY THE FIRM SHOULD HAVE

Strong research and development skills Strong product engineering skills Strong creativity skills Strong marketing skills Incentives based largely on subjective measures Be able to communicate the importance of the differentiating product characteristics Stress continuous improvement and innovation Attract highly skilled, creative people

13

RISKS INVOLVED IN THE DIFFERENTIATION STRATEGY

Imitation by competitors Changes in customer tastes Various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments.

14

BEST COST PRODUCER STRATEGY

Some commentators have claimed that low cost strategy need not be able to provide sustainable competitive advantage. In most cases firms might end up into price wars.
They instead, combine a strategic emphasis on low cost with strategic emphasis on differentiation - make an upscale product at low cost - give customers more value for money

15

FOCUS STRATEGY

16

ADVANTAGE TARGET SCOPE Low Cost Product Uniqueness

Broad (Industry Wide)

Cost Leadership Strategy

Differentiation Strategy

Narrow (Market Segment)

Focus Strategy (Low Cost)

Focus Strategy (differentiation)

17

FOCUS STRATEGY
The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. It is also known as market segmentation strategy or niche strategy. A firm using a focus differentiation strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly. Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. Firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist.
18

RISKS INVOLVED IN FOCUS STRATEGY

Imitation Changes in the tastes and preferences of the target segments Fairly easy for a broad-market cost leader to adapt its product in order to compete directly. Other focusers may be able to carve out sub-segments that they can serve even better.

19

"CAUGHT IN THE MIDDLE

Millar suggested that there is a viable middle ground between strategies. Many companies, for example, have entered a market as a niche player and gradually expanded. Michael Porter argued that to be successful over the long-term, a firm must select only one of these three generic strategies. Porter suggested that for firms to succeed at multiple strategies , requires creating separate business units for each strategy. By separating the strategies into different units having different policies and even different cultures, a corporation is less likely to become "stuck in the middle.
20

 However, there exists a viewpoint that a single generic strategy is not always best because within the same product customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience, and price.
There have been cases in which high quality producers faithfully followed a single strategy and were affected when another firm entered the market with a lower-quality product that better met the overall needs of the customers.

21

Generic Strategies

Ind ustr y For ce Ent ry Bar rier s Buy er Pow er Sup plie r Pow er Thr eat of Sub stitu tes Riv alry

Cost Leadership

Differentiation

Focus

Ability to cut price in retaliation deters potential entrants. Ability to offer lower price to powerful buyers.

Customer loyalty can discourage potential entrants.

Focusing develops core competencies that can act as an entry barrier.

Large buyers have less power to negotiate because of few close alternatives.

Large buyers have less power to negotiate because of few alternatives.

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.

Can use low price to defend against substitutes.

Customer's become attached to differentiating attributes, reducing threat of substitutes.

Specialized products & core competency protect against substitutes.

Better able to compete on price.

Brand loyalty to keep customers from rivals.

Rivals cannot meet differentiation-focused customer needs. 22

CRITICAL SUCCESS FACTORS

23

CRITICAL SUCCESS FACTORS (CSF)

The concept was developed by D. Ronald Daniel of McKinsey and Company, "Management Information Crisis," Harvard Business Review, Sept.-Oct., 1961.

CSFs are the limited number of areas in which satisfactory results will ensure successful competitive performance for the individual, department or organization. CSFs are the few key areas where things must go right "for the business to flourish and for the manager's goals to be achieved".
CSF's change with the industry's environment, company's position within an industry, or with problems or opportunities.
24

PRIME SOURCES OF CSFs

The industry Competitive strategy and industry position Environmental Factors Temporal Factors

Managerial Position
25

 THE INDUSTRY Each industry has a set of CSF and each company within the industry must pay attention to these factors. COMPETITIVE STRATEGY AND INDUSTRY POSITION Each company within an industry has its own position determined by its history and current competitive strategy. An organization may be a leader or a laggard in a particular industry. If they are a leader, they may have CSFs that are aimed at ensuring they maintain or increase their market share against other organizations in the industry. On the other hand, if considered a laggard, the organization may have specific CSFs aimed at closing the gap and improving their competitive position relative to other organizations in their industry.
26

 ENVIRONMENTAL FACTORS These are the factors that the organization has little or no control. For example, the fluctuations of the economy, national politics, population trends and regulatory trends etc. TEMPORAL FACTORS These are the activities within the organization which becomes critical for a particular period of time because something out of the ordinary has taken place. MANAGERIAL POSITION Each functional managerial position has a generic set of CSFs associated with it. For example, executive-level managers may have CSFs that focus on risk management, whereas operational unit managers may have CSFs that address production control or cost control.

27

THE HIERARCHICAL NATURE OF CSFs

FOUR LEVELS OF CSFs
Industry CSFs. Corporate CSFs. Sub-organizational CSFs. Individual CSFs.

28

 Organization must develop a strategy with adequate attention to the principal factors that underline success in that industry. Industry objectives and goals developed by a company lead to development of a particular set of CSF for the corporation. Each corporation develops a set of CSFs unique to its own circumstances which becomes input for each sub-organization in the corporation. This can be continued for as many levels of organizational hierarchy as exist. Managers at each of these levels will have an individual set of CSFs depending on his role and responsibilities.

* In theory, the development of CSF should be top-down, however, where corporate or sub-organization CSFs have not been explicitly developed, they can be inferred upward from a careful analysis of each individual manager's stated CSFs.
29

CORE COMPETENCIES

30

CORE COMPETENCIES
Core competencies are those capabilities that are critical to a business in achieving competitive advantage. Prahalad and Hamel (1990) "an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity." Coyne, Hall, and Clifford (1997) proposed that "a core competence is a combination of complementary skills and knowledge bases embedded in a group or team that results in the ability to execute one or more critical processes to a world class standard." Its an aggregate of capabilities, where synergy is created that has sustainable value and broad applicability. Core competencies are harmonized, intentional constructions
31

 Over time companies may develop key areas of expertise which are distinctive to that company and critical to the company's long term growth. These areas of expertise are most likely to develop in the critical, central areas of the company where the most value is added to its products. Core Competencies are not seen as being fixed. As a business evolves and adapts to new circumstances and opportunities, so its core competencies will have to adapt and change. (A competence which is central to the business's operations but which is not exceptional in some way should not be considered as a core competence, as it will not differentiate the business from any other similar businesses.)
32

THE CHARACTERISTICS OF CORE COMPETENCIES

Core competencies provide a set of unifying principles for the organization. Core competencies also are pervasive in all strategies Core competencies must provide access to a variety of markets. They can be exploited to produce a variety of products Makes a significant contribution to the perceived customer benefits of the end product Core competencies must be rare or difficult to imitate.
33

COMPONENTS OF CORE COMPETENCIES

Competence should not be perceived only in terms of expertise , as it would cause one to overlook important components of core competencies. There are many dimensions to organizations, and as organizations mature, they generally become more complex.
Infrastructure Design and Development Analyzing, Explaining, Forecasting Service and Product Organizational Culture

34

STEPS IN DEVELOPING & USING CORE COMPETENCIES

1. Develop an understanding of core competencies 2. Review the mission of the organization 3. Review the products and services of the organization 4. Review the strategic plan of the organization 5. Develop a list of organizational capabilities by product and service 6. Apply core competency tests to potential competencies 7. Consider options for improvement 8. Determine critical success factors 9. Incorporate core competency development into the strategic plan 10. Incorporate core competency development into the corporate culture

35

ADVANTAGES OF CORE COMPETENCIES

The understanding and use of core competencies can provide a strategic planning advantage.
Developing and sharing these competencies across the organization can create new and better services for customers. The synergy possible through sharing areas of "specialized expertise that is the result of harmonizing complex streams of technology and work activity" can be strongly leveraged across geographic boundaries.

36

Thank You!

37