First: Generic Strategies

Generic Competitive Strategies:

1- Cost Leadership
2- Differentiation
3- Focus
Cost
Differentiation Focus
Leadership
Product
Differentiation
Low High Low to High
(Principally by (Principally by (Price or
Market
Price) Uniqueness) Uniqueness)
Segmentation
Low High Low
(Mass Market) (Many Market (One or a Few
Distinctive
Segments) Segments)
Competency
Standardization Any Kind of
R&D, Sales and
and Marketing Distinctive
Marketing
Competency

Strategic Competitive Advantage

Low Cost Position Uniqueness

Perceived by
Customer
Broad Lower cost Differentiation
Competitive Scope or
Wide Variety
Strategic Target
of Customers
Narrow Focus Focus
Specific
Segment
 Sources
SourcesofofCompetitive
CompetitiveAdvantage
Advantage

Competitive Advantages
(Sources of Rates of Profit in
Excess of the Competitive
Level)

Avoid Be Better Than

Competitors Competition

Attractive Attractive Attractive

Cost Differentiation
Industry Strategic Niche
Advantage Advantage
Group

Isolating
Entry Mobility
Mechanism
Barriers Barriers
s

Competitive Advantages as the Source of Superior Profitability

Competitive Advantage is the ability to earn above normal economic returns

• Competitive advantages work in two basic ways

• avoiding competitors (ie. lock-outs/valuable resources)
• outperforming competitors (ie. productivity and
efficiency/distinctive competencies)
• Best-practice and empirical research has identified two internally-consistent
competitive business strategies:
• Low Cost Leadership
• Differentiation
• Successful businesses use their competitive advantages and resources to develop
one of these generic business strategies

I- COST LEADERSHIP STRATEGY

Cost Leadership:
 It is a low cost competitive strategy that aims at the broad mass market and
requires “aggressive constructions of efficient-scale facilities, vigorous pursuit of
 cost reductions from experience, tight cost and overhead control, avoidance of
marginal customer accounts, and cost minimization in areas like R&D, service,
sales advertising and so on.”

 Its low price will serve as a barrier to entry because few new entrants will be able
to match the leader’s cost advantages; as a result, cost leaders are likely to learn
above average ROI. The risk it faces is competitors imitate technology changes.

Cost leadership strategy sources

• Scale
• Experience
• Capacity Utilization
• Product Design/Process Fit
• Location
• Integration/Purchasing
• Organizational Skills

Drivers for Cost leadership strategy:

ECONOMIES OF SCALE -Indivisibilities
-Specialization & division of labor
ECONOMIES OF LEARNING -Increased dexterity
-Improved coordination/organization
CAPACITY UTIIZATION -Ratio of fixed to variable costs
PRODUCTION TECHNIQUES -Mechanization and automation
-Efficient utilization of materials
-Increased precision
PRODUCT DESIGN -Design for automation
-Designs to economize on materials
INPUT COSTS -Location advantages
-Ownership of low-cost inputs
-Bargaining power
-Supplier cooperation
MANAGERIAL EFFICIENCY -Organizational slack

Strengths of Low-Cost Leadership

 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
 Low cost puts a company in position to use low price as a defense against
SUBSTITUTES
Common Pitfalls in Cost Leadership
 Misunderstanding of actual costs
 False perception of cost drivers
 Focus on manufacturing
 Failure to exploit linkages
 Ignoring competitor behavior

II- DIFFERENTIATION STRATEGY

 is aimed at the broad mass market and involves the creation of a product or
service that is perceived throughout its industry as unique. It’s a viable strategy
for earning above-average returns in a specific business because the resulting
brand loyalty lowers customer’s sensitivity to price.
 It’s more likely to generate higher profits than is a low cost strategy as
differentiation creates a better entry barrier, while low cost will generate a higher
market share. The risk it faces is competitors imitate bases for differentiation
become less important to buyers.

Incorporate differentiating features that cause buyers to prefer firm’s product or service
over the brands of rivals
Approaches to differentiation:
1- Incorporate product features/attributes that lower buyer’s overall costs of using
product
2- Incorporate features/attributes that raise the performance a buyer gets out of the
product
3- Incorporate features/attributes that enhance buyer satisfaction in non-economic or
intangible
4- Compete on the basis of superior capabilities

Key success factors for Differentiation strategy:

1. Understanding customer needs and preferences
2. Commitment to customers
3. Knowledge of company's capabilities
4. Innovation

Types of Differentiation:
1- Tangible Differentiation
Observable product characteristics:
• size, color, materials, etc.
• performance
• packaging
• complementary services

2- Intangible Differentiation
 Unobservable and subjective characteristics relating to image status, exclusively,
identity

Total Customer Responsiveness:

Differentiation not just about the product, it embraces the whole relationship between the
supplier and the customer.
THE KEY IS CREATING VALUE FOR THE CUSTOMER

Achieving Differentiation Advantage

• Observable Goods: the buyers can easily form accurate judgments about the
quality of a product.
• Experience Goods: the buyers finds it difficult and/or costly to determine the
quality of the product prior to purchase and use.
• Communication Goods: the value to the buyer rises as the number of buyers and
users increases.

Advantages of Differentiation Strategy:

A product / service with unique and appealing attributes allows a firm to
 Command a premium price and/or
 Increase unit sales and/or
 Build brand loyalty
= Competitive Advantage
 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
 Differentiation puts a seller in better position to withstand efforts of SUPPLIERS
to raise prices
 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

Common Pitfalls in Differentiation

 Creating differentiation that buyers do not value
 Over-fulfilling buyer needs
 Failing to understand costs of differentiation
 Failing to recognize buyer segments
 Creating differentiation that competitors can emulate quickly or cheaply

III- FOCUS STRATEGY

Involve concentrated attention on a narrow piece of the total market

Serve niche buyers better than rivals

 Choose a market niche where buyers have distinctive preferences, special
requirements, or unique needs
Develop unique capabilities to serve needs of target buyer segment

Approaches to 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.
It’s valued by those who believe that a company that focuses its efforts is better able
to serve its narrow strategic target more than can its competition. The risk it faces is
that demand may disappear.
Achieve LOWER COSTS than rivals in serving the segment-- A low-cost strategy

 Differentiation focus:
like cost focus, using that strategy the company seeks differentiation in a targeted
market segment.
Offer niche buyers SOMETHING DIFFERENT from rivals- differentiation strategy

Strength of Focus / Niche Strategies

1- RIVAL COMPETITORS do not have matching capabilities to meet specialized
needs of niche members
2- Focuser’s competencies/capabilities act as a barrier to POTENTIAL ENTRANTS
3- Focuser’s competencies/capabilities pose obstacle to sellers of SUBSTITUTES
4- Focuser’s unique ability to meet niche buyers’ needs can blunt bargaining
leverage of powerful BUYERS

Common Pitfalls in Focus

 Picking the wrong segment (no one was in there for a reason)
 Picking a segment that cannot meet growth goals
 Failing to understand what adds value in a segment
 Failing to create a truly targeted offering for the segment
 Assuming that segment will pay a price premium for a targeted offering

IV- EXTRA STRATEGY

Innovation as a Generic Strategy

 Innovation attempts to upset the current structure of competition by
 Significantly increasing the level of customer value
 Significantly reducing costs of production or marketing
 Innovation means seeking out new customer or user groups
 Innovation requires building new business models and critical mass

Generic Cooperative Strategies

Can be used to gain competitive advantage within an industry by working with other
firms
 Collusion:
is the active cooperation of firms within an industry to reduce output and raise prices.
Can be Explicit (direct communication) or Tacit (indirect communication).

 Strategic Alliance:
is a partnership of 2 or more corporations or business units to achieve strategically
significant objectives that are mutually beneficial. Alliances last for short and long-
terms.

Reasons for forming strategic alliances include:

 To obtain technology / manufacturing capabilities.
 To obtain access to specific markets.
 To reduce financial risk.
 To reduce political risk.
 To achieve competitive advantage

Second: Grand Strategies

1- Growth
Companies sometimes use strategic alliance or collaborative partnership to
complement their own strategic initiatives and strengthen their competitiveness. Such
cooperative strategies go beyond normal company-to-company dealings but fall short
of merger or formal joint venture.
(1) Concentration
 Merger
Combination and pooling of equals, with newly created firm often taking
on a new name.
 Acquisition
One firm, the acquirer, purchases and absorbs operations of another (the
acquired)
 Merger-Acquisition
Specially suited for situations where alliances do not provide a firm with
needed capabilities or cost-reducing opportunities
Ownership allows for tightly integrated operations, creating more control
and autonomy hat alliances.
 Vertical Integration
Backward into the sources of supply
Forward toward end users of final products
Can aim at either full or partial integration
 Outsourcing
 Deintergration, involves narrowing the scope of the firm’s operation,
focusing on performing certain core value chains activities and relying on
outsiders to perform the remaining value chain of activities.

(2)Diversification
A company is diversified when it is in two or more lines of business.
Types:
Related diversification: in one business
Unrelated diversification in different businesses

 A diversified company needs a multi industry or multinational strategy

 A strategic action plan must be developed for several different businesses
 Diminishing growth prospects in the present business
 Opportunities to add value for customers and gain competitive advantage
 Attractive opportunities to transfer existing competencies to new business
 Potential cots-saving opportunities
 Availability of adequate financial and organizational resources.
 Strategic fit is required

2- Stability
Pause / Proceed with caution:
 Rest before growth
 Temporary
 Consolidate resources
No change strategy
 Do nothing now
 Lack of change
 Little growth
Profit strategy
 Artificially support profits
 Temporary difficulty

3- Retrenchment
To restore money losing-business and divest a weak or unattractive business
 Sellout
 Divestment (selling division of the firm)
 Bankruptcy (giving up management and settlement of some obligations)
 Liquidation Terminating the firm’s existence