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Generic Business Strategies - Lesson 4

Generic Business Strategies - Lesson 4

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Strategic Management
Strategic Management

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Published by: api-3738338 on Oct 15, 2008
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03/18/2014

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GENERIC BUSINESS STRATEGIES

Firms tailor their strategies to fit particular circumstances, every firm\u2019s strategy has at least several unique components \u2013 in this sense there are countless strategy variation and options, ultimately yielding as many business strategies as there are businesses. However, when one looks at the basic character of the different strategies that firms employ, the amount of fundamental strategy variation narrows considerably. From this more generalized perspective, it is possible to single out three generic approaches to competing in the marketplace:

1. striving to be overall low-cost producer in the industry;
2. seeking to differentiate product offering in one way ore another from rivals\u2019 products;
3. afocused approach vialow-cost ordif ferentia tion to a narrow portion of the market
rather than going after the whole market.
Strategy of low-cost producer

The impetus for striving to be the industry\u2019s low-cost producer can drive from sizable economies of scale, strong learning and experience curve effects, other cost-cutting and efficiency-enhancing opportunities, and a market comprised of many price-conscious buyers. Trying to be the industry leader in achieving an overall low-cost position typically entails being out in front of rivals in constructing the most efficient-sized plants, in implementing cost-reducing technological advances, in getting the sales and market share needed to capitalize on learning and experience curve effects, in maintaining a tight rein on overhead and other administrative types of fixed costs, and in containing costs in such areas as R&D, advertising, service, and distribution.

This strategy is powerful when:

\u2022demand is price elastic;
\u2022all firms in the industry produce essentially the standardized products;
\u2022there are not many ways of achieving product differentiation that have much value to

buyers;
\u2022most buyers utilize product in the same way;
\u2022buyer incur few (if any) switching costs in changing from one seller to another and
thus are strongly inclined to shop for the best price.
Advantages in pursuing this strategy:
\u2022as concernscompet itors, the low-cost company is in the best position to compete
offensively on the basis of price;
\u2022as concernscustomers, the low-cost company has partial profit margin protection from
powerful customers since the latter will rarely be able to bargain prices down past the
survival level of the next most efficient firm;
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\u2022as concernssuppliers, the low-cost producer can, in some cases, be more insulated
than competitors from powerful suppliers if its greater efficiency allows more pricing
rooms to cope with increases in the costs of purchased materials;
\u2022as concerns potential entrants, the low-cost producer is in a favorable competitive

position because having the lowest costs not only acts as a barrier for a new entrant to hurdle but it also provides the leeway to use price-cutting as a defense against market inroads made by a new competitor;

\u2022as concernssubstitut es, the low-cost producer is, compared to its rivals, in a favorable
position to use price cuts to defend against competition from attractively priced
substitutes.
Risks and disadvantages:
\u2022technological changes can result in cost or process breakthroughs that nullify past
investments and efficiency gains;
\u2022rival firms may find it comparatively easy and/or inexpensive to imitate the leader\u2019s
low-cost methods;
\u2022heavy investments in cost minimization can lock a firm into both its present

technology and present strategy, leaving it vulnerable to new state-of-the-art technologies and to a widening of customer interest in something other than a cheaper price.

Strategic success in trying to be low-cost producer usually requires a firm to be the overall cost leader, not just one of the several firms vying for this position. When there is more than one aspiring low-cost producer, rivalry among them is typically fierce.

Strategy of differentiation

Forms of differentiating the products from rival firms: a different taste, special features, superior service, spare parts availability, overall value to the customer, engineering design and performance, unusual quality and distinctiveness, product reliability, quality manufacture, technological leadership, convenient payment, a full range of services, a complete line of products, and tope-of-the-line image and reputation.

Differentiation strategy is most likely to produce an attractive and lasting competitive edge when it is based on technical superiority, quality, giving customers more support services, and the appeal of more value for the money.

Differentiation strategies work best in situations when:
\u2022There are many ways to differentiate the product or service and these differences are
perceived by some buyers to have value;
\u2022Buyer needs and uses of the item are diverse; and
\u2022Not many rivals firms are following a differentiation strategy.
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Advantages:
\u2022Provides some insulation against the strategies of rivals because customers establish a
preference or loyalty for the brand or model they like best and are often willing to pay
a little (perhaps a lot) more for it;
\u2022Erects entry barriers in the form of customer loyalty and uniqueness for new comers
to hurdle;
\u2022Mitigates the bargaining power of large buyers since the products of alternative
sellers are less attractive to them;
\u2022Puts a firm in a better position to ward off threats from substitutes to the extent that it
has built a loyal clientele.
Risks:
\u2022The cost of adding enough product attributes to achieve differentiation can result in
such a high selling price that buyers opt for lower-priced brands;
\u2022Over a period of time, buyers may decide that they do not need or want extra features,
concluding that a basic or standard model serves just as well;
\u2022Rival firms may imitate the product attributes of the leaders to an extent such that
buyers see little meaningful difference from seller to seller.
Focus and specialization strategies

The distinguishing feature of a focus strategy is that the firm specializes in serving only a portion of the total market. The underlying premise is that a firm can serve its narrow target market more effectively or more efficiently than rivals that position themselves broadly.

The competitive advantage of a focus strategy is earned either by differentiation (better meeting the needs of the target market), achieving lower costs in serving the target market segment, or both.

A competitive strategy based on focus or specialization has merit when:
\u2022There are distinctly different groups of buyers who either have different needs or
utilize the product in different ways;

\u2022No other rival is attempting to specialize in the same target segment;
\u2022Firm\u2019s resources do not permit it to go after a wide segment of the total market;
\u2022Industry segments differ widely in size, growth rate, profitability, and intensity of the

five competitive forces, thereby making some segments more attractive than others.
Advantages:
\u2022Rivals do not have the same ability to serve the focused firm\u2019s target clientele;
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