Lesson 9A – Generic and strategies

Summary
• At the end of the lesson, students should be able
to:
– Explain the Generic strategies of:
• Low Cost leadership
• Differentiation and
• Focus
– List describe, Evaluate and give examples of
the 15 grand strategies

• Chapter 7 of course text J. Pearce Strategic

Management
 Generic Strategies
• There are many specific strategies of each type
(offensive or defensive), and identifying which is best
depends on the circumstances.

• Porter suggests 3 broad or generic strategies for

creating a defendable position in the long-run and
outperforming competitors.

• Cost Leadership

• Cost leadership means having the lowest per-unit (i.e.,

average) cost in the industry – that is, lowest cost
relative to your rivals.
 Low Cost Leadership
• This could mean having the lowest per-unit cost
among rivals in highly competitive industries, in
which case returns or profits will be low but
nonetheless higher than competitors Or,

• This could mean having lowest cost among a few

rivals where each firm enjoys pricing power and
high profits.

• Cost leadership is defined independently of

market structure.
 Low Cost Leadership
• Cost leadership is a defendable strategy
because:
– It defends the firm against powerful buyers.
Buyers can drive price down only to the level of
the next most efficient producer.
– It defends against powerful suppliers.
– Cost leadership provides flexibility to absorb an
increase in input costs, whereas competitors may
not have this flexibility.
– The factors that lead to cost leadership also
provide entry barriers in many instances.
 Low Cost Leadership
• Economies of scale require potential rivals to enter the
industry with substantial capacity to produce, and this
means the cost of entry may be prohibitive to many
potential competitors.

• Achieving a low cost position usually requires the

following resources and skills:

– Large up-front capital investment in new technology, which

hopefully leads to large market share in the long-run, but
may lead to losses in the short-run.

– Continued capital investment to maintain cost advantage

through economies of scale and market share.
 Low cost Leadership
– Process innovation – developing cheaper ways to
produce existing products.
– Intensive monitoring of labor, where workers
frequently have an incentive-based pay structure
(i.e., a contract which includes some combination
of a fixed-wage plus piece-rate pay).
– Tight control of overhead.
 Differentiation
• Differentiating the product offering of a firm means
creating something that is perceived industry wide as
being unique.
• It is a means of creating your own market to some
extent.
– There are several approaches to differentiation:
– Different design
– Brand image
– Number of features
– New technology
• A differentiation strategy may mean differentiating
along 2 or more of these dimensions.
 Differentiation
• Differentiation is a defendable strategy for
earning above average returns because:
• It insulates a firm from competitive rivalry by
creating brand loyalty;
– it lowers the price elasticity of demand by making
customers less sensitive to price changes in your
products.
• Uniqueness, almost by definition, creates barriers
and reduces substitutes.
– This leads to higher margins, which reduces the need
for a low-cost advantage.
 Differentiation
– Higher margins give the firm room to deal with
powerful suppliers.
– Differentiation also mitigates buyer power since
buyers now have fewer alternatives.
• Achieving a successful strategy of differentiation
usually requires the following:
– Exclusivity, which unfortunately also precludes market
share and low cost advantage.
– Strong marketing skills.
– Product innovation as opposed to process innovation.
– Applied R&D.
– Customer support.
– Less emphasis on incentive based pay structure.
 Focus or Niche
• Here we focus on a particular buyer group, product
segment, or geographical market.

• Whereas low cost and differentiation are aimed at

achieving their objectives industry wide, the focus or niche
strategy is built on serving a particular target (customer,
product, or location) very well.

• Note, however, that a focus strategy means achieving

either a low cost advantage or differentiation in a narrow
part of the market.

• For reasons discussed above, this creates a defendable

position within that part of the market.
 Stuck in the Middle
• Failure to develop a strategy in one of these 3
directions is a firm that is “stuck in the middle.”
• This means you lack the market share, capital,
and overhead control to be a cost leader, and lack
the industry wide differentiation necessary to
create margins which obviate the need for a low-
cost position.
• Being “stuck” implies low profits as a rule:
– Profits are bid away to compete with low cost
producers; or,
– The firm loses high margin business to firms who
achieve better differentiation.
 Stuck in the Middle
• Classic examples of this problem are large,
international airline companies, many of
which are now bankrupt.
• Depending on a firm’s capabilities and
resources, a “stuck” firm must gravitate
toward either low cost (usually by buying
market share) or focus or differentiation
(which may mean decreasing market share).
 Risks of Each Strategy
• Risks of each Strategy:
• Each generic strategy is based on erecting different
kinds of defences against the competitive forces, and
hence they involve different risks.

• Cost Leadership:
• Maintaining cost leadership can be risky because:

– Innovations nullify past inventions and learning, and hence

cost leadership requires continual capital investment to
maintain cost advantage.

– Exclusive attention to cost can blind firms to changes in

product requirements.
 Risks of Each Strategy
• Cost increases narrow price differentials and
reduce ability to compete with competitors’
brand loyalty.
 Risks of each Strategy
• Differentiation:
• Risks are:
– Cost differentiation between low cost firms and
differentiating firms becomes too large to hold
customer loyalty.
• Buyers trade-off features, service, or image for price.
– Buyers need for differentiation falls.
– Imitation decreases perceived differentiation.
End
Grand Strategies
 Grand Strategies
• Grand strategies are major, over-reaching
strategies that shape the course of a business.

• Unlike tactics, they are focused on the long-

term goals of the business.

• Running your own business means pondering

grand strategies involving everything from
product development to liquidation.
 Grand Strategies

• Different strategies will, of course, fit different

situations, so it is best to be familiar with a
few different approaches.
 Grand Strategies
• Market Growth

• Market growth is a low-risk strategy compared

to other, more encompassing, strategies.

• Instead of investing in research and

development to create new product offerings,
the market-growth strategy focuses on
growing the market for a current product.
 Grand Strategies
• Market Growth
• An example of this is an electronics company
that develops markets for an existing stereo
system instead of developing a new system.

• To develop new markets it may be necessary

to sell stereos in other markets as time passes,
such as in foreign countries that are less
technologically developed.
 Grand Strategies
• Product Development
• Product development is essentially the
opposite of market development.

• While market development focuses on

exploitation, product development focuses on
exploration.

• This involves investing heavily in research and

development in order to create new and
innovative product offerings.
 Grand Strategies
• Product Development

• For example, a food manufacturer may invest

heavily in research into healthier foods that
can be marketed to the general public, or a car
manufacture may develop safer or more fuel-
efficient cars through investments in research.

• These advances give firms an advantage over

the competition.
 Grand Strategies
• Turnaround

• The turnaround strategy is used when a firm is

experiencing profit stagnation, decline or
other serious problems.

• It is an attempt to change the firm's strategy

in the hopes of reversing its fortunes.
 Grand Strategies
• Turnaround

• In order to turn a firm around, managers will

often change the direction of the firm.

• For example, a print newspaper might make

the switch to online publication in order to
adapt to the changing market.
 Grand Strategies
• Liquidation

• Liquidation is the grand strategy of last resort.

When a firm cannot successfully turn itself
around and there are no interested buyers,
there is no choice but to liquidate the firm.
 Grand Strategies
• Liquidation
• Liquidating the firm involves selling off all its
assets, including physical assets such as
factories and merchandise, as well as
intellectual assets, like brands and patents.

• The goal of a liquidation strategy is to recoup

as much money for the ownership as possible,
before shuttering the business.
 Grand Strategies
• Concentric Diversification
• This strategy involves the acquisition of
businesses that are related to the acquiring
firm in terms of technology, markets, or
products.

• With this strategy, the selected new

businesses possess a high degree of
compatibility with the firm’s current
businesses.
 Grand Strategies
• Conglomerate Diversification
• In this strategy, a firm, particularly a very large
one, plans acquire a business because it
represents the most promising investment
opportunity available.

• The principal concern of the acquiring firm is

the profit pattern of the venture, rather than
creating product-market synergy with existing
businesses
 Grand Strategies
• Divestiture
• This strategy involves the sale of a firm or a
major component of a firm.
 Grand Strategies
• Horizontal Integration
• In this term strategy there is growth through
the acquisition of one or more similar firms
operating at the same stage of the
production-marketing chain.

• Such acquisitions eliminate competitors and

provide the acquiring firm with access to new
markets
 Grand Strategies
• Vertical Integration
• A company’s aim in this strategy is to acquire
firms that supply it with inputs (such as raw
materials) or are customers for its outputs (such
as warehouses for finished products).

• When supplying firms are acquired, it is called

Backward Vertical Integration.

• When output firms are acquired, it is called

Forward Vertical Integration.
 Grand Strategies
• Concentrated Growth
• In this strategy, a firm directs it resources to
the profitable growth of a dominant product,
in a dominant market, with a dominant
technology
 Grand Strategies
• conglomerate diversification:

• This strategy focuses on expansion through

brand new products and new markets.
 Grand Strategies
• joint venture:

• Through this strategy, two companies form a

new company and share its operations.

• Each partner has an equity stake.

 Grand Strategies
• strategic alliances:

• This strategy is adopt when two or more

companies enter in a formal relationship and
agree to pursue a common goal.

• There is no equity stake.

 Grand Strategies
• consortia:
• A consortia or Consortium is formed when
two companies involve yourself in in a
common activity next to pooled resources and
achieve a common goal.
• Grand Strategy MatrixQuadrant IV•Concentric
diversification•Horizontal diversification•Conglomerate
diversification•Joint venturesQuadrant
III•Retrenchment•Concentric diversification•Horizontal
diversification•Conglomerate diversification•LiquidationQuadrant
I•Market development•Market penetration•Product
development•Forward integration•Backward
integration•Horizontal integration•Concentric
diversificationQuadrant II•Market development•Market
penetration•Product development•Horizontal
integration•Divestiture•LiquidationRAPID MARKET
GROWTHSLOW MARKET GROWTHWEAK COMPETITIVE
POSITIONSTRONGCOMPETITIVE POSITION
The major Grand Strategies are:
Market Development
This strategy consists of marketing present
products, often with only cosmetic
modifications, to customers in related market
areas by adding channels of distribution or by
changing the content of advertising or
promotion
Product development involves the substantial modification of existing products or the creation of new but related products that can be marketed to cu
Innovation
The underlying rationale of the grand strategy of innovation is to create a new product life cycle and thereby make similar existing products obsolete.
Horizontal Integration
When a firm’s long-term strategy is based on growth through the acquisition of one or more similar firms operating at the same stage of the productio
Vertical Integration
When a firm’s grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are a customer for its outputs (such as warehouse
Some increased risks are associated with both horizontal and vertical integration. For horizontally integrated firms, the risks stem from increased com
Concentric Diversification
Grand strategies involving diversification represent distinctive departures from a firm’s existing base of operations, typically the acquisition or internal
Regardless of the approach taken, the motivations of the acquiring firms are the same:
 Increase the firm’s stock value. In the past, mergers have often led to increases in the stock price or the price-earnings ratio.
 Increase the growth rate of the firm.
 Make an investment that represents better use of funds than plowing them into internal growth.
 Improve the stability of earnings and sales by acquiring firms whose earnings and sales complement the firm’s peaks and valleys.
 Balance or fill out the product line.
 Diversify the product line when the life cycle of current products has peaked.
 Acquire a needed resource quickly (e.g., high-quality technology or highly innovative management).
 Achieve tax savings by purchasing a firm whose tax losses will offset current or future earnings.
 Increase efficiency and profitability, especially if there is synergy between the acquiring firm and the acquired firm.
Concentric diversification involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products. Th
Conglomerate Diversification
In conglomerate diversification, the principal concern of the acquiring firm is the profit pattern of the venture. Unlike concentric diversification, conglom
The principal deference between the two types of diversification is that concentric diversification emphasizes some commonality in markets, products
Unfortunately, the majority of such acquisitions fail to produce the desired results for the companies involved. Exhibit 6–9 provides seven guidelines t
Turnaround
A firm can find itself with declining profits for many reasons such as economic recessions, production inefficiencies, and innovative breakthroughs by
Strategic management research provides evidence that firms that have used a turnaround strategy have successfully confronted decline. The researc
A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actio
The immediacy of the resulting threat to company survival posed by the turnaround situation is known as situation severity. Severity is the governing
Turnaround responses among successful firms typically include two stages of strategic activities: retrenchment and the recovery response. Retrench
The primary causes of the turnaround situation have been associated with the second phase of the turnaround process, the recovery response. Reco
Divestiture
A divestiture strategy involves the sale of a firm or a major component of a firm. When retrenchment fails to accomplish the desired turnaround or wh
The reasons for divestiture vary. They often arise because of partial mismatches between the acquired firm and the parent corporation, because of co
Liquidation
When liquidation is the grand strategy, the firm is typically sold in parts, only occasionally as a whole, but for its tangible asset value and not as a goin
Bankruptcy
Business failures are playing an increasingly important role in the American economy. In an average week, more than 300 companies fail. More than
The other 25 percent of these firms refuse to surrender until one final option is exhausted. Choosing a strategy to recapture its viability, such a compa