BUSINESS STRATEGIES: THE

GENERIC STRATEGIES
5.10.2021 Prof. Francesca Di Pietro
 Resources, capabilities and strategy
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 Competitive advantage
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¨ Competitive advantage
refers to the ability
gained through attributes
and resources to perform
at a higher level than
others in the same
industry or market
¨ Better position than its
competitors
 Business-Level Strategy
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¨ Business-level strategy details the goal-directed

actions managers take in their quest for competitive
advantage when competing in a single product
market.
¨ It may involve a single product or a group of
similar products that use the same distribution
channel.
 Formulate an appropriate business-
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level strategy
¨ ■ Who—which customer segments will we serve?
¨ ■ What customer needs, wishes, and desires will
we satisfy?
¨ ■ Why do we want to satisfy them?
¨ ■ How will we satisfy our customers’ needs?
 Industry and firm
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 Generation of competitive advantage
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¨ To gain a competitive advantage the firm has to be

different from competitors
¨ Value a firm is able to create for consumers (V),

¨ how much consumers are willing to pay for a

product or service, and the total cost (C)

¨ V-C = economic value created

Higher economic value created, higher competitive

advantage
 Generation of competitive
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advantage
¨ To achieve a desired strategic position, managers
must make strategic trade-offs—choices between a
cost or value position.
The competitive strategies
¨ 2 main generic strategies: can be used by any
organization—manufacturing or service, large or
small, for-profit or nonprofit, public or private,
domestic or foreign

Cost
Leadership Differentiation
 Two main generic strategies
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¨ A cost-leadership strategy, seeks to create the same or

similar value for customers by delivering products or
services at a lower cost than competitors, enabling the
firm to offer lower prices to its customers.
¨ A differentiation strategy seeks to create higher value
for customers than the value that competitors create, by
delivering products or services with unique features
while keeping costs at the same or similar levels,
allowing the firm to charge higher prices to its
customers
 Scope of competition
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¨ When considering different business strategies,

managers also must define the scope of
competition—whether to pursue a specific, narrow
part of the market or go after the broader market
 General Motors
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 Telsa
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¨ Tesla focuses on environmentally conscious

consumers who are willing to pay a premium
price.
¨ GM’s competitive scope is broad—with a

focus on the mass automotive market

¨ Tesla’s competitive scope is narrow—with a

focus on high-end (all-electric) luxury cars

 The competitive strategies
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The generic competitive strategies

Striving to achieve lower overall costs than rivals on products

Cost leadership that attract a broad spectrum of buyers.

Differentiating the firm’s product offering from rivals with

Differentiation attributes that appeal to a broad spectrum of buyers.

Focused Concentrating on a narrow price-sensitive buyer segment to

Low-Cost offer a lower-priced product.

Focused Concentrating on a narrow buyer segment by meeting specific

Differentiation tastes and requirements of niche members
The generic competitive strategies

Striving to achieve lower overall costs than rivals on products

Cost leadership that attract a broad spectrum of buyers.

Offer unique features that will increase the perceived

Differentiation value of goods and services in the minds of consumers so they
are willing to pay a higher price

Focused Concentrating on a narrow price-sensitive buyer segment and

Low-Cost on costs to offer a lower-priced product.

Focused Concentrating on a narrow buyer segment by meeting specific

Differentiation tastes and requirements of niche members
Cost leadership
¨ The goal of a cost-leadership strategy is to reduce
firm’s costs below that of its competitors while
offering adequate value
¨ How? Reducing the cost to manufacture a product or
deliver a service in order to offer lower prices to its
customers.
¨ Optimize value chain activities to achieve a low-cost
position
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Cost Drivers: The Keys to Driving Down
Company Costs
 (some) cost-cutting methods
¨ Use lower-cost inputs
¨ Economies of scale.
¨ Learning-curve effects.
 Low-cost inputs
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¨ Raw materials
¨ Workforce
¨ Capital (interest-free government loans)
Economies of Scale (1)
¨ The advantages of large scale production that
result in lower unit (average) costs (cost per unit)
¨ Economies of scale – spreads fixed costs over a
greater range of output
¨ Advantages that arise as a result of the growth of
the firm
¤ Technical
¤ Commercial
¤ Financial
¤ Managerial
 Economies of Scale (2)
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Average cost of production

Economies
of scale
Optimal Marginal
Cost
Diseconomies
of scale
q* Q
Diseconomies of Scale
¨ The disadvantages of large scale production that
can lead to increasing average costs
¨ Bigger is not always better;
¤ Problems of management
¤ Maintaining effective communication

¤ Co-ordinating activities – often across

the globe!
¤ De-motivation and alienation of staff

¤ Divorce of ownership and control

Learning Curve (1)
¨ People and organizations become better at their tasks
as the tasks are repeated
¨ It takes less and less time to produce the same output as
we learn how to be more efficient—learning by doing
drives down cost.
¨ Time to produce a unit decreases as more units are
produced
¨ Develop robust standard operating procedures and
processes, where team members become experts at
their specific tasks.
¨ Technology stay the same
Learning Curve (2)
Cost/time per repetition

0 Number of repetitions (volume)

When apply a cost leadership?
¨ Price competition among rivals is vigorous.
¨ Identical products are available from many sellers.
¨ There are only few ways to differentiate industry
products.
¨ Most buyers use the product in the same ways.
¨ Buyers’ switching cost is low.
Pitfalls of a cost leadership
¨ Lowering selling prices results in gains that are
smaller than the increases in total costs, reducing
profits rather than raising them.
¨ Relying on a cost advantage may not be
sustainable because rivals can copy or otherwise
overcome it.
¨ The cost leader must not forget that it needs to
create an acceptable level of value.
 Examples
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¨ Wal-Mart
¨ Wal-Mart follows an economic value model by having low
costs because of their capability to buy in large quantity
and it has become successful cost leader in their market. So,
to offer a different motorcycle product than their existing
competitors they have used their cost leadership strategy.
¨ Aldi
¨ This company has been successful in cutting down the
excesses at every point of production and it uses a no-frills
marketing strategy too. Which in turn will be able to provide
the consumers with quality products at low prices.

¨ Amazon
¨ Amazon offers maximum value for its customers at the lowest
price and wraps its business around the customers wherein
they find it to be a reliable portal for their online shopping
needs.
The generic competitive strategies

Striving to achieve lower overall costs than rivals on products

Cost leadership that attract a broad spectrum of buyers.

Offer unique features that will increase the perceived

Differentiation value of goods and services in the minds of consumers so they
are willing to pay a higher price

Focused Concentrating on a narrow price-sensitive buyer segment and

Low-Cost on costs to offer a lower-priced product.

Focused Concentrating on a narrow buyer segment by meeting specific

Differentiation tastes and requirements of niche members
Differentiation (1)
¨ Broad differentiation:
to offer unique
product attributes that
a wide range of
buyers find appealing
and worth paying for.
¤ The product has higher
price or produce
greater unit sales and
it covers the added
costs for differentiation
Differentiation (2)
¨ Effective Approaches:
¤ Study buyers’ needs and
behavior, values and
willingness to pay.
¤ Use higher prices to
cover differentiation
costs.
¨ Advantages of
Differentiation:
¤ Premium prices for
products
¤ Increased unit sales
¤ Brand loyalty
Value drivers for the differentiation
strategy
 Sustainable differentiation
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¨ Difficult for rivals to

duplicate or imitate:
¤ Company reputation
¤ Long-standing relationships
with buyers
¤ A unique product or service
image
¤ Patent-protected product
innovation
¨ Must create substantial
switching costs that lock-in
buyers
¤ Relationship-based
customer service
¤ Link to other products
Pitfalls of differentiation
¨ Relying on product attributes
easily copied by rivals.
¨ Introducing product attributes
that do not evoke an
enthusiastic buyer response.
¨ Eroding profitability by
overspending.
¨ Adding frills and features
such that the product exceeds
the needs and uses of most
buyers.
¨ Charging a too high price
premium.
The generic competitive strategies

Striving to achieve lower overall costs than rivals on products

Cost leadership that attract a broad spectrum of buyers.

Differentiating the firm’s product offering from rivals’ with

Differentiation attributes that appeal to a broad spectrum of buyers.

Focused Concentrating on a narrow price-sensitive buyer segment and

Low-Cost on costs to offer a lower-priced product.

Focused Concentrating on a narrow buyer segment by meeting specific

Differentiation tastes and requirements of niche members
Focused (or market niche) strategies (1)

Focused Strategy
Approaches

Focused Focused
Low-Cost Differentiation
Strategy Strategy
Focused (or market niche) strategies (2)

¨ When a focused low-cost or focused differentiation strategy is

attractive
¤ The target market niche is big enough to be profitable and offers
good growth potential.
¤ Industry leaders chose not to compete in the niche—focusers avoid
competing against strong competitors
¤ It is costly or difficult for multi-segment competitors to meet the
specialized needs of niche buyers.
¤ The industry has many different niches and segments.
¤ Rivals have little or no entry interest in the target segment.
The risks of a focused strategy
1. Competitors will find ways to match the focused
firm s capabilities in serving the target niche.
2. The specialized preferences and needs of niche
members to shift over time toward the product
attributes desired by the majority of buyers.
3. As attractiveness of the segment increases, it draws
in more competitors, intensifying rivalry and
splintering segment profits.
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Blue ocean strategy,

- A business-level strategy that
successfully combines
differentiation and cost-leadership
activities
- using value innovation to reconcile
the inherent trade-offs in those two
distinct strategic positions
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Blue-ocean strategy (1)
¨ A blue-ocean strategy offers growth in revenues and
profits by discovering or inventing new industry
segments that create altogether new demand.

¨ The business universe is divided into:

¤ An existing market with boundaries and rules in which rival
firms compete for advantage.
¤ A “blue ocean” market space, where the industry has not
yet taken shape, with no rivals and wide-open long-term
growth and profit potential for a firm that can create
demand for new types of products.

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 Blue-ocean strategy (2)
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¨ The only way to beat the competition is to stop trying to

beat the competition.
¤ Red oceans represent all the industries in existence today. This is
the known market space.
¤ Blue oceans denote all the industries not in existence today. This
is the unknown market space.

¨ The dominant focus of strategy work over the past 25 years

has been on competition-based red ocean strategies.
Red Ocean Vs Blue Ocean
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¨ ELIMINATE. IKEA eliminated several taken for granted

competitive elements: salespeople, expensive but small
retail outlets in prime urban locations and shopping
malls. IKEA displays its products in a warehouse-like
setting, thus reducing inventory cost.
¨ REDUCE. need for staff, 25-year warranties,
customization, use of expensive materials
¨ RAISE. Variety, online, rooms options, customer
experience (see and touch all products).
¨ CREATE. IKEA created a new way for people to shop
for furniture
Value Innovation, Blue Oceans Cornerstone
 Strategies?
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http://www.eremito.com/en/
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