Generic Strategies

SACA 2010
 Generating competitive advantage
What distinguishes a firm?
What provides a firm with above-normal
profits?
Premium prices charged (than average)
Lower costs (than average)
 Costs

Average Firm
Industry Average Prices

Succ. Cost Leader

Successful Differentiator
Competitive advantage
 Generic competitive strategies
Is the firm economically profitable?
If No, then its stuck in the middle
If Yes, Is the product sold at premium prices?
• If No, the firm is a cost leader
• If Yes, the firm is a differentiator
 Cost leadership
Characteristics
Target the average customer
Look for higher market share
Lower production costs
Few unique or new features
 Cost leadership
Calls for
Leveraging scale economies
Marketing: wide product line/ aggressive pricing/
start-up losses
Organizational requirements
• Efficient organizational systems and structures
• Tight cost and overhead controls
• Incentives based on quantitative targets
• Low cost distribution systems
 Cost leadership
Works best when
Price competition is vigorous
Product (technology) standardized and readily
available with many suppliers
Most buyers use the product in same ways
Buyers incur low switching costs
Larger buyers have significant bargaining power
Industry newcomers use low prices to attract
buyers and build customer base
 Cost leadership
Risks
Technological change can nullify past investment
and learning
Low-cost learning by new comers and followers
High attention on cost leads to inability to
foresee product-market changes
Inflation of costs can narrow price advantage
 Differentiation
Characteristics
Perceived uniqueness
Based on
• Quality
• Service
• Design
• Brand
• Technology
• Features
 Differentiation
Calls for
Strong marketing capabilities
Product design skills (creative flair)
Strong cooperation from suppliers and channel
partners
Being exclusive
Organizational requirements
• Strong coordination skills
• Incentives based on subjective goals
• Attract and retain creative talent
 Differentiation
Works best when
There are many ways to differentiate the product
Buyer needs and uses are diverse
Few rivals are following a similar differentiation
approach
Technological change and product innovation are
fast paced
 Differentiation
Risks
Uniqueness that is not valuable
Too high a price premium for the differentiating
factors
Differentiating factors could be easily imitated –
reducing perceived differentiation
Dilution of brand identification through product-
line extensions
Perception of differentiation may vary between
buyers and sellers
Fall in buyers’ need (value) for differentiating
factors as buyers become more sophisticated
 Choosing a cost/ differentiation
position
Differentiation
Higher perceived A (Taj Leisure)
value, higher prices

B (Taj Business)

C (Taj Gateway)

D (Taj Ginger)

Cost Leadership
Lower perceived value,
Lower prices
 Choosing the right generic
strategy
Based on both the industry structure as well as
competitive positioning
Select unique positions
Each generic strategy positions the firm differently
in the market and competitive environment
Deciding which generic strategy to adopt is an
important strategic commitment – it drives the rest
of the strategic actions
Each strategy entails different actions/ postures in
terms of product lines, production emphasis,
marketing emphasis, and means of sustaining the
advantage
Caution against “stuck in the middle” strategies
that represent compromises
Competitive scope
Focus Strategies
 Focus
Characteristics
Small overall share of the market
Serves chosen (well defined) market segment
Either a cost leader, differentiator, or both within
that segment
 Focus
Calls for
Choice of the right buyer group/ product
segment/ geographic market
Strong marketing capabilities
Product design skills (creative flair)
Strong image of customization (for that product-
market segment)
 Focus
Works best when the market niche is
Potentially profitable, offers growth potential
Not crucial for the success of industry leaders
Costly or difficult for multi-segment competitors
to meet specialized needs of the niche
Focuser has resources and capabilities to
effectively serve that niche
Few other rivals specialize in the same niche
Focuser can defend against challengers via
superior ability to serve that niche
 Focus
Risks
Narrowing product differences between the niche
products and the market as a whole
Higher premium charged than the low-cost
prices – may erode brand loyalty
Erosion of cost advantages (within the narrow
segment)
Focused products and services subject to
competition from new entrants and imitators
Could become too focused to satisfy buyer needs