Generic Strategies at the Business Level Strategic Management Generic Strategies at the Business Level Strategic Management

Strategic Orientation— Porter’s Three Generic Strategies Low Cost Position Uniqueness Broad Overall Cost Leadership Differentiation Business Scope Overall Cost leadership: Fairly standard product; underprice Examples: From computers to chain saws HNH International; Texas Instrument; Naxos specializes in making original compact discs priced at half the competition’s; Sotec—Japan’s low cost computer maker (imitation apple) Differential Advantage: Unique product, Quality; Design—Brand name, reputation, higher-than-average price e.g. The case of 7-Up Canon quality strategy in the copy-machine field Hewlett Packard adopted this strategy for hand-held calculators in the early stages. HP calculators were more expensive that Texas Instrument’s. In recent years, TI matched the performance and technological features of HP while maintaining its low-cost leadership thus forcing HP to reduce its price. Focused low-cost strategy—Hotel 81 Seeking to be a low-cost producer in only one product line or in a limited target market— Focused differentiation: Oriental hotel, Raffles hotel Harley-Davidson’s decision to stay in the heavyweight motorcycle segment, where it had distinctive styling; Chong Brothers, a Singaporean furniture company, runs two stores for different segments. Its Milico store sells mainly locally manufactured furniture with Italian-inspired designs to the average household, while its Interhome outlets sells fully imported Italian furniture to higher-income families; Lipton herbal teas Focus Low Cost: $1.99 Stores Focus Focus Differentiation Focus Low Cost Narrow Strategic Advantages Strategic Management

“Generic” Competitive Strategies Two “generic” competitive strategies for outperforming other corporations in a particular industry: Lower cost is the ability of the corporation or its business unit to design, produce and market a comparable product more efficiently than its competitors. Differentiation is the ability to provide unique and superior value to the buyer in terms of product quality, special features, or after-sale service. These strategies are called generic because they can be pursued by any type or size of business firm, even not-profit organisations. Strategic Management

Competitive Scope The breadth of the company’s target market A company can choose: a broad target (that is, aim at the middle of the mass market) or a narrow target (that is, aim at a market niche). Strategic Management

Overall Cost Leadership Cost Leadership is a low-cost competitive strategy that aims at the broad mass market and requires vigorous pursuit of cost reductions. Because of its lower costs, the cost leader is able to charge a lower price for its products than its competitors and still make a satisfactory profit. Having a low-cost position also gives a company or an SBU a defence against rivals. Its lower costs allow it to continue to earn profits during times of heavy competition. Strategic Management

Overall Cost Leadership Its high market share means that it will have high bargaining power relative to its suppliers. Its low price will also serve as a barrier to entry, since few new entrants will be able to match the leader’s cost advantage. Cost leaders are likely to earn above-average returns on investment. Strategic Management

Differentiation Differentiation is aimed at the broad mass market and involves the creation of a product or service that is perceived throughout its industry as unique. The company may then charge a premium for its product. This specialty can be associated with design or brand image, technology, features, dealer network, or customer service. Strategic Management

Differentiation Differentiation is a viable strategy for the earning of above-average returns in a specific business, because of the resulting brand loyalty, lowers customers’ sensitivity to price. Increased costs can usually be passed on to the buyers. Buyer loyalty also serves as an entry barrier. Strategic Management

Creating Differentiation (1) Purchasing and procurement activities that ultimately spill over to affect the performance or quality of the company’s product end. Product R & D activities that aim at improved product designs and performance features, expanded end users and applications, shorter lead times in developing new models, more frequent first-on-the market victories, wider product variety, added user safety, greater recycling capabilities, or enhanced environmental protection, etc. Strategic Management

Creating Differentiation (2) Production R & D and technological activities that permit custom-order manufacturing at an efficient cost, make production methods more environmental friendly, or improved product quality, reliability and appearance. Manufacturing activities that reduce product defects, prevent premature product failure, extend product life, allow better warranty coverage, improve economy of use, etc Strategic Management

Creating Differentiation (3) Outbound logistics and distribution activities that allows faster delivery, more accurate order filling, and fewer warehouse and on-the-shelf out-of-stock conditions. Marketing, sales, and customer service activities that can result in superior technical assistance to buyers, faster maintenance and repair services, more and better product information, greater customer convenience, etc. Strategic Management

Cost Focus Cost Focus is a low-cost competitive strategy that focuses on a particular buyer group or geographic market and attempts to serve only this niche, to the exclusion of others. In using cost focus, the company seeks a cost advantage in its target segment. This strategy is valued because of a belief that a company or an SBU that focuses its efforts is better able to serve its narrow strategic target more efficiently than can its competition. A focus strategy does necessitate that a trade-off between profitability and overall market share be made. Strategic Management

Differentiation Focus In using differentiation focus, the company seeks differentiation in its target segment. The target segments must either have buyer with unusual needs or else the production and delivery system that best serves the target must differ from that of the other industry segments. This strategy is valued because of a belief that a company or an SBU that focuses its efforts is better able to serve its narrow strategic target more effectively than its competitors. Strategic Management

Risks of Cost Leadership Risks of Differentiation Risks of Focus Cost leadership is not sustained: Competitors imitate Technology changes Other bases for cost leadership erode Proximity in differentiation is lost Cost focusers achieve even lower cost in segments Differentiation is not sustained: Bases for differentiation become less important to buyers Cost proximity is lost Differentiation focusers achieve even greater differentiation in segments The focus strategy is imitated The target segment becomes structurally unattractive: Structure erodes Demand disappears Broadly targeted competitors overwhelm the segments: The segment’s differences from other segments narrow The advantages of a broad line increase New focusers subsegment the industry Strategic Management

Struck in the Middle Porter argues that to be successful, a business unit must achieve one of the above “generic competitive strategies. Otherwise, the business unit is stuck in the middle of the competitive marketplace with no competitive advantage and is doomed to below-average performance. Although Porter agrees that it is possible for a company or an SBU to achieve low cost and differentiation simultaneously, he argues that this state is often temporary. Strategic Management