sfi session generic strategies gu

8/3/2019 Sfi Session Generic Strategies Gu

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GENERIC COMPETITIVE

STRATEGIES

SESSION - 1


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Generic Business-Level Strategies

Specific business-level strategies that give a

company a specific competitive positionand advantage vis--vis its rivals

Characteristics of Generic Strategies

Can be pursued by all businessesregardless ofwhether they are manufacturing, service, ornon-profit.

Can be pursued in different kindsof industryenvironments.

Results froma companys consistent choiceson product, market, and distinctive

competencies.


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Background

Which do you prefer whenyou fly:

a cheap, no-frills airline, or

a more expensive operator withfantastic service levels and

maximum comfort?

And would you ever consider goingwith a small company whichfocuses on just a few routes?


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The choice is up to you, of course. But

the point here is that when you come tobook a flight, there are some very differentoptions available.

Why is this so?The answer is that eachof these airlines has chosen a different

way of achieving competitive advantage ina crowded marketplace.


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Theno-frills operators have opted to cut coststo a minimum and pass their savings on tocustomers in lower prices. This helps them grab

market share and ensure their planes are as fullas possible, further driving down cost.

The luxury airlines, on the other hand, focus

their efforts on making their service as wonderfulas possible, and the higher prices they cancommand as a result make up for their highercosts.

Meanwhile, smaller airlines try to make themost of their detailed knowledge of just a fewroutes to provide better or cheaper services thantheir larger, international rivals.


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These three approachesare examples of "genericstrategies", because they can be applied to products or

services in all industries, and to organizations of all

sizes. They were first set out by Michael Porter in 1985in his book Competitive Advantage: Creating and

Sustaining Superior Performance. Porter called thegeneric strategies:

"Cost Leadership" (no frills),

"Differentiation" (creating uniquely desirable

products and services)

"Focus" (offering a specializedservice in a niche market).

He then

Sub-divided

the Focus

Strategy

into

two parts:"Cost Focus

and

"Differentiation

Focus".


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The Four Principal GenericBusiness-Level Strategies

1. Cost LeadershipLowest cost structure vis--vis competitors allowingprice flexibility & higher profitability

2. Focused Cost Leadership

Cost leadership in selected market niches where ithas a local or unique cost advantage

3. DifferentiationFeatures important to customers & distinct fromcompetitors that allow premium pricing

4. Focused DifferentiationDistinctiveness in selected market niches where itbetter meets the needs of customers than the broaddifferentiators


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Business-Level StrategyTheStarting Point

STRATEGY

DIFFERENTIATIONCOST LEADERSHIP

FOCUS

PRODUCT MARKET

the product-market set

determines thestrategic group

Market segmen-

tation determinesthe product-market set

and SWOT

shapes strategy.


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Strategic Groups

SUVJEEP

LANDROVER

CHEVROLETFORD

LUXURYLEXUS

MERCEDESBMW

ECONOMYKIA

YUGO

SPORTSMIATA

BMWAUDI

EXOTICFERRARI

MASERATI

OTHER COMPETITIVE FACTORS

PRICE

MAINSTREAMFORD

CHEVROLETCHRYSLER

TOYOTAHONDA

SIMILARPRODUCT or

SERVICE

SIMILARTARGETMARKET

Competition takes place within Strategic Groups


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Business-Level Strategies

COST LEADERSHIP

FOCUS (Specialization)

DIFFERENTIATION


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Business-Level Strategy

EFFICIENCY

CUSTOMERRESPONSIVENESS

COST LEADERSHIP

FOCUS (Specialization)

DIFFERENTIATION

Dealers Choice

Build competitive advantage through

distinctive competencies in


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Features of Cost Leadership andDifferentiation Strategies

Generic strategy Key strategy elements Resource & organizationalrequirements

COST Scale-efficient plants. Access to capital. ProcessLEADERSHIP Design for manufacture. engineering skills. Frequent

Control of overheads & reports. Tight cost control.R&D. Avoidance of Specialization of jobs andmarginal customer functions. Incentives foraccounts. quantitative targets.

DIFFERENTIATION Emphasis on branding Marketing. Productand brand advertising, engineering. Creativity.design, service, and Product R&Dquality. Qualitative measurement

and incentives. Strongcross-functionalcoordination.


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The Cost Leadership Strategy

Developing the "edge" that gets you the sale andtakes it away from your competitors. There aretwo main ways of achieving this within a CostLeadership strategy:

Increasing profits by reducing costs, while chargingindustry-average prices.

Increasing market share through charging lowerprices, while still making a reasonable profit on each

sale because you have reduced costs.


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Cost Leadership

VALUE

PRICE

COST

VALUE

PRICE

COST

VALUE

PRICE

COST

A B C

Cost Leadership Strategies

Note that low cost doesntnecessarily mean low price


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The Sources of Cost Advantages

Scale Experience

Capacity Utilization Product Design/Process Fit Location Integration/Purchasing

Organizational Skills


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Drivers of Cost Advantage

PRODUCTION TECHNIQUES

PRODUCT DESIGN

INPUT COSTS

CAPACITY UTILIZATION

RESIDUAL EFFICIENCY

ECONOMIES OF LEARNING

ECONOMIES OF SCALE

Organizational slack; Motivation &culture; Managerial efficiency

Ratio of fixed to variable costs Speed of capacity adjustment

Location advantages Ownership of low-cost inputs Non-union labor Bargaining power

Standardizing designs & componentsDesign for manufacture

Process innovation

Reengineering business processes

Increased dexterity Improved organizational routines

Indivisibilities Specialization and division of labor
http://www.tech.plym.ac.uk/sme/TSOC302/desman1.htmhttp://www.tech.plym.ac.uk/sme/TSOC302/desman1.htm


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Economies of Scale: The Long-RunCost Curve for a Plant

Units ofoutput

per period

MinimumEfficient PlantSize: the point

where mostscale economies

are exhausted

Cost perunit ofoutput

Sources of scale economies:

- technical input/output relationships

- indivisibilities

- specialization


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The Costs Developing New Car Models(including plant tooling)

$ billion

Ford Mondeo / Contour 6

GM Saturn 5

Ford Taurus (1996 model) 2.8

Ford Escort (new model 1996) 2

Renault Clio (1999 model) 1.3

Chrysler Neon 1.3

Honda Accord (1997 model) 0.6

BMW Mini 0.5

Rolls Royce Phantom (2003 model) 0.3


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10 20 50 100 200 500 1,000

Annual sales volume (millions of cases)

Advertising

Expenditure($percase)

0.0

2

0.0

5

0.1

0

0.1

5

0.2

0

CokePepsi

Seven Up

Dr. PepperSprite

Diet Pepsi

Tab

FrescaDiet Rite

Diet 7-Up

Schweppes SF Dr. Pepper

Despite the massive advertising budgets of brand leaders Coke and Pepsi, theirmain brands incur lower advertising costs per unit of sales than their smaller rivals.

Scale Economies in Advertising: U.S. Soft Drinks


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Remember that Cost Leadershipis about minimizing

the cost to the organization of

delivering products and services.

The cost or price paid by

the customer isa separate issue!


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The Cost Leadership strategy is exactly that itinvolves being the leader in terms of cost in the

industry or market. Simply being amongst thelowest-cost producers is not good enough, asone leave oneself wide open to attack by otherlow cost producers who may undercut the prices

and therefore block the attempts to increasemarket share.

Therefore, one need to be confident that he canachieve and maintain the number one positionbefore choosing the Cost Leadership route.


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Companies that are successfulin achieving Cost Leadership

usually have:

o Access to the capital needed toinvest in technology that willbring costs down.

o Very efficient logistics.

o A low cost base (labor,materials, facilities) and a way ofsubstantially cutting costs belowthose of other competitors.


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Risk in Pursuing a Cost LeadershipStrategy

These sources of cost reduction are notunique and that other competitors can

copy these cost reduction strategies. This

is why it's important to continuously findways of reducing every cost.

One successful way of doing this is byadopting the JapaneseKaizenphilosophyof"continuous improvement".
http://www.mindtools.com/pages/article/newSTR_97.htmhttp://www.mindtools.com/pages/article/newSTR_97.htm


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When a Low-cost Provider StrategyWorks Best

Price competition among rival sellers isespecially vigorous.

The industrys product is essentially

standardized or a commodity readilyavailable from a host of sellers.

There are few ways to achieve product

differentiation that have value to buyers.

Most buyers utilize the product in thesame ways.


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When a Low-cost Provider Strategy WorksBest (Contd)

Buyers incur low switching costs inchanging from one seller to another.

Buyers are large and have significantpower to bargain down prices.

Industry newcomers use introductory lowprices to attract buyers and build acustomerbase.


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Examples of Companies that use Cost-leadership Strategies

(Wal-Mart)

Wal-Mart's founder, Sam Walton, developed theevery day low prices (EDLP)strategy. This

strategy hinged upon Wal-Mart's ability to obtainconsumer goods at the cheapest possible price

and pass these savings on to consumers. Inorder to achieve EDLP, Wal-Mart began

developing close relationships with its suppliersand vendors. These relationships allowed Wal-

Mart to achieve cost savings through largevolume purchases. EDLP also helped Wal-Mart

drive up the total dollar amount customers spenton trips to the store.


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(Wal-Mart)

Wal-Mart also developed its owndistribution networkfor supplying itsretail outlets with consumer goods.

This distribution network allowed Wal-Mart to cut out external supply chainsand middlemen, further driving down

business costs. Owning its own

distribution network also helped Wal-Mart avoid costly rate increases from

traditional shipping methods.


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McDonalds

A leading cost strategy for McDonalds is the ability to

purchase the land and buildings of its restaurants.McDonalds also developed a strong division of

labour for its production processes, tightmanagement control and product developmentstrategy. Creating a strong top-down styleof

management is another leading cost strategy forMcDonalds. Using fewer in-store managers allows

the company to hire lower-wage workers to completetasks. Limiting autonomyis also central to avoidingcostly and unnecessary restaurant expenditures like

improvements or altering business processes.


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Apple, Inc.

After nearing complete bankruptcy in the 1980s,Apple clawed its way back into the personalelectronic industry through smart businesspractices and highly desirable consumer goods.Apple uses low-cost direct materials to develop the cheapest

consumer goods possible. Creating long-standingbusiness agreements with companies like AT&T forweb hosting and other applications helps Apple stayfocused on developing products rather than Internethosting or access. Apple may also choose to priceits goods higher than the normal margin, attemptingto create a sense of exclusiveness in consumers.This feeling drives consumers to purchase goodsregardless of price increasing company profits.


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Pitfalls of Low-Cost provider Strategy

1. Getting away with overly aggressively price

cutting and ending up with lower, rather thanhigher profitability. A low cost advantageresults in superior profitability only if :a) Prices are cut by less than the size of the cost

advantage.b) The added gains in the unit sales are large enough

to bring in a bigger total profit despite lower marginsper unit sold.

A company with a 5% cost advantage cannot cut prices

20%, end up with a volume gain of only 10% and still

expects to earn higher profits.


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Pitfalls Contd

2. Value of cost advantage depends onSustainability; that in turn depend on whetherthe company achieved it in ways difficult for therivals to copy.

3. Low cost cannot be pursued so zealously that afirms offerings ends up being too features poor to generate buyers appeal.

4. Cost-saving technological breakthroughs or theemergence of still-lower-cost value chain modelscan nullify a low-cost leaders hard-won position.


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The Differentiation Strategy

Differentiation involvesmaking yourproducts or services different fromand more attractive those of your

competitors. How you do this

depends on the exact nature ofyour industry and of the productsand services themselves, but will

typicallyinvolve features,

functionality, durability, supportand also brand image that your

customers value.


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To make a success of a Differentiation strategy,organizations need:Good research, development and innovation.

The ability to deliver high-quality products or services.

Effective sales and marketing, so that the marketunderstands the benefits offered by the differentiatedofferings.

Large organizations pursuing a differentiationstrategy need tostay agilewith their new

product development processes. Otherwise,

theyrisk attackon several fronts by competitorspursuing Focus Differentiation strategies in

different market segments.


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DifferentiationAnything that makes a meaningful difference in the

mind of the stakeholder.BASIS of DIFFERENTIATION

PRICE

CONVENIENCE

PHYSICAL ATTRIBUTES

FUNCTIONAL ATTRIBUTES

PERCEPTIONS

PSYCHOLOGICAL RESPONSES

WHATEVER

THERE IS FAVORABLE and UNFAVORABLE DIFFERENTIATION

If your business isnt differentiated, itsanonymous; if your product isntdifferentiated, its a commodity


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MIATA ATTRIBUTES BMW

Differentiation: An ExampleSTRATEGIC GROUP:SPORTS CAR MANUFACTURERS and DISTRIBUTORSTARGETMARKET: MIDDLE and HIGH INCOME SINGLES

MIATA ATTRIBUTES BMWECONOMY, RELIABILITY FUNCTIONALITY PERFORMANCE

ELEGANT, SLEEK DESIGN SPORTY, AGGRESSIVE

FUN EMOTIONAL COMPETITIVE

APPEALS HARD CHARGINGFITS MY LIFE LOGICAL APPROPRIATE FOR THESTYLE & BUDGET APPEALS IMAGE I WANT TO PROJECT

AFFORDABLE PRICE / VALUE PREMIUM PRICE

NO DIFFERENCE CONVENIENCE NO DIFFERENCE

BASIC SERVICES EXTRA SERVICES INCLUDED

JAPANESE RELIABILITY and BRAND IMAGE PRESTIGE, GERMANECONOMY. LOOKING GOOD ENGINEERING

FUN TIMES, GOOD ADVERTISING ACTION, SPEEDLOOKING PEOPLE, MESSAGES COMPETITIVE, SPIRITED


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Branded

Commodity

Branded Anonymous

ProductBrand

Company Brand

Brand Differentiation

DUALBRAND

PRODUCTBRAND

RANDOMBRANDCOMPANYBRAND

BrandingStrategies


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Elements of Brand

The brandable qualities of yourproduct and your company are:

Features and functions

Logical / rational qualities

Subconscious and emotionalqualities

Perceived value

Accessibility and convenience


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Whats the impact of branding?

VALUE

PRICE

COST

VALUE

PRICE

COST

VALUE

PRICE

COST

A B C

COMPETITIVE ADVANTAGE


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TANGIBLEDIFFERENTIATION

Observable product characteristics: size, color, materials, etc.

performance

packaging

complementary services

INTANGIBLEDIFFERENTIATION

Unobservable and subjectivecharacteristics relating to imagestatus, exclusively, identity.

TOTAL CUSTOMER RESPONSIVENESS: Differentiation not justabout the product, it embraces the whole relationship between the

supplier and the customer.

The Nature of DifferentiationDifferentiation means providing something unique that is valuable

to the buyer beyond simply offering a low price. (M. Porter)THE KEY IS CREATING VALUE FOR THE CUSTOMER


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Understanding customer needs and preferences

Commitment to customers

Knowledge of company's capabilities

Innovation

Keys to SuccessfulDifferentiation


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Differentiation Advantages

Customers develop brand loyalty

Powerful suppliers are not a problem because thecompany is geared more toward the price it cancharge than its costs

Differentiators can pass price increases on tocustomers

Powerful buyers are not a problem because theproduct is distinct

Differentiation and brand loyalty are barriers to entry The threat of substitute products depends on

competitors ability to meet customer needs


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Differentiation Disadvantages

Difficulty in maintaininglong-term distinctness incustomers eyes

Agile competitors can quicklyimitate.

Patents and first-moveradvantage are limited.

Difficulty of maintainingpremium price

G i B i L l


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Generic Business-LevelStrategy: Focus

Serving the needs of a specific marketsegment

Geographic

Type of customer

Segment of the product line

After choosing a market segment, a

focused company positions itself usingeither

Low-cost OR differentiation

Wh F St t i A


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Why Focus Strategies AreDifferent


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Focus Advantages

The focuser is protected from rivals to the extentit can provide a product or service they cannot

The focuser has power over buyers because

they cannot get the same thing from anyone else The threat of new entrants is limited by customer

loyalty to the focuser

Customer loyalty lessens the threat fromsubstitutes

The focuser stays close to its customers andtheir changing needs


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Focus Disadvantages

The focuser is at a disadvantage with regard topowerful suppliers because it buys in smallvolume (but it may be able to pass costs along

to loyal customers) Because of low volume, a focuser may have

higher costs than a low-cost company

The focusers niche may disappear because of

technological change or changes in customerstastes

Differentiators will compete for a focusers niche


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Market Share (Quantity)

Low High

Profita

bility

Low

High

Differentiation-based Strategies

Low CostLeadershipStrategies

Stuck-in-the-Middle

Market Share-Profitability Relationship:Porters Bucket


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Strategic Advantage

Uniqueness Perceivedby the Customer

Low Cost Position

Industrywide

StrategicTarge

t

DIFFERENTIATIONOVERALL

COST LEADERSHIP

FOCUSParticularSegment Only

Target and Advantage ofPorters Generic Strategies

Source: Porter (1980)


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Questions ?


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Porters Generic Strategies

ModelBusiness-level strategic decisions are driven

by:

Market scope

Source of competitive advantage

Market scope and source of competitive

advantage combine to generate four generic

strategies.

sfi session generic strategies gu

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