Generic Competitive

Strategies
 Sources of Competitive Advantage

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

Avoid Be Better Than

Competitors Competition
Attractive Attractive Attractive
Industry Strategic Niche Cost Differentiation
Group Advantage Advantage
Entry Mobility Isolating
Barriers Barriers Mechanisms
 Competitive Advantages as the
Source of Superior Profitability
• 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
Sources of Superior Profitability

• A business can achieve a higher rate of profit (or potential

profit) over a rival in one of two ways:
• supplying an identical product/service at a lower cost
(cost-based advantage)
• supplying a differentiated product/service in such a way
that the customer is willing to pay a price premium that
exceeds the cost of the differentiation (differentiation-
based advantage)
• These two sources of competitive superiority define
fundamentally different approaches to business strategy
• A firm that attempts to achieve both or attains neither is
“stuck in the middle”.
Market Share-Profitability Relationship:
“Porter’s Bucket”
High

Differentiation- Low Cost

based Strategies Leadership
Strategies
Profitability

Stuck-in-the-Middle

Low

Low High

Market Share (Quantity)

Porter’s Generic Strategies
Porter’s Generic Strategies (Revised Model)
 Video with examples on
Porter’s generic strategies
• https://www.youtube.com/watch?
v=mZeNOaO3Pzk
 Porter’s generic strategies
• Cost Leadership corresponds to the “no frills” experience, like
the low-cost airline carriers, who choose the cost leadership
strategy to achieve competitive advantage. E.g. Walmart,Low
cost Airlines, Low cost Hotels
• Differentiation, on the other hand, corresponds to the luxury
providers, like Park group of hotels , Timex or. Nike athletic
shoes, Apple Computer
• These companies provide uniquely desirable products or
services to their customers.
• Differentiation Focus is about market segmentation by offering
a specialized product or service in a niche market like Rolls
Royce or Ferrari, Gucci, Armani or Prada
• Cost focus : Arvind Eye hospital, Bycus, Army hospitals
 Cost-based
Competitive Strategies
The Sources of Cost Advantages

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

• Performing value-chain activities in more a cost-effective

manner can be achieved by:
• Outsourcing;
• Using the companies bargaining power to drive down
suppliers costs;
• Make use of economies of scale (buy materials in bulk);
• Invest in technology to increase production efficiency;
• Adopt labor saving operating methods;
 Strategies to optimize value chain (Cost
leadership strategy)
• You can also look for opportunities to optimize your value-chain by:
• Bypassing cost of distributors and dealers by selling directly to customers;
• Replacing certain value chain activities with technology;
• Eliminating low-value activities;
• Relocating facilities to lower shipping or handling costs;
• Offering frills-free experience (bare-bones product or service – anything
other than essential is charged extra);
• Limit product line;
• One way to stay ahead of the competition in a relatively leveled playing field
is to introduce continuous optimization of the production and value chain by
introducing lean manufacturing techniques like Six-Sigma or Kaizen.
Differentiation-based
Competitive Strategies
 Differentiation
• Differentiation means making your products (or services) different from
those of your competitors or more appealing to your customer base. This
is highly dependent on your several factors, like industry, market,
customer base, and the nature of the actual products or services.
Whatever it is it has got to be something that makes your products or
services stand out.
• The key success factor in a differentiation strategy is to make it either
very difficult or very expensive for rivals to replicate your product or
service. To achieve this, companies need to invest in:
• Research & Development;
• Production and delivery of high-quality and unique products or services;
• Marketing and sales to create awareness and desire for it’s unique
products.
 Products in the
Products in the Differentiation Hall of Fame
Differentiation Hall of Fame
Ford Mustang
VW Beetle
Honda Accord
Dodge Caravan
Sony Walkman
McDonalds restaurants
Apple Macintosh
IBM PC
Lotus 123
IBM 370 series
Federal Express
Timex watches
Louis Vuitton bags
Holiday Inns hotels
Disneyland
Boeing 747
Polaroid Land camera
Alcort Sunfish sailboat
Xerox photocopier
American Express credit cards and travelers checks
Numbered Swiss bank accounts
Keys to Successful Differentiation

• Understanding customer needs and preferences

• Commitment to customers

• Knowledge of company's capabilities

• Innovation

Source: Robert M. Grant, Contemporary Strategy Analysis , Basil Blackwell, 1991.

 The Nature of Differentiation
“Differentiation 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

TANGIBLE INTANGIBLE
DIFFERENTIATION DIFFERENTIATION
Observable product characteristics: Unobservable and subjective
characteristics relating to image status,
• size, color, materials, etc. exclusively, identity.
• performance
• packaging
• complementary services

TOTAL CUSTOMER RESPONSIVENESS: Differentiation not just

about the product, it embraces the whole relationship between the
supplier and the customer.
 Achieving
Differentiation Advantage
How one goes about obtaining a differentiation advantage
depends upon whether or not a product is an observable
good, an experience good, or a communication good.

• 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.
 When is Differentiation strategy
right ??
• A differentiation strategy is appropriate where the target customer segment is not
price-sensitive, the market is competitive or saturated or customers have very
specific needs which are possibly underserved. In any case, your company needs
to have unique resources and capabilities which enable it to satisfy these needs in
ways that are difficult to copy. Such resources or capabilities might include patents
or other Intellectual Property (IP), unique technical expertise (a mix of individual
talent and collective identity – e.g. Apple designs or Pixar animations), talented
personnel (e.g. a sports team’s star players or a brokerage firm’s star traders), or
innovative processes. Additionally, companies can also invest in brand
management, resulting in an increased perception of a differentiated product, even
when the actual product is the same as competitors (e.g. Starbucks coffee and Nike
sneakers). This is rather common among fashion brands.
• The greatest risk for companies pursuing a Differentiation Strategy is the risk of
attack by competitors pursuing Focus Differentiation strategies in different market
segments. To mitigate this risk companies pursuing a broad market Differentiation
Strategy need to have an agile product development process where constant
innovation helps keep specialized players at bay.
•
Focus Strategies
Focus strategies concentrate on niche markets.
• Companies pursuing Focus Strategies have a deep understanding of a
particular market and the unique needs of it’s customers. They can
therefore develop unique lower cost or differentiated products or services
for that specific market.
• These companies usually have a very strong brand loyalty amongst their
customers and tend to monopolize that segment (particularly in smaller
markets), making it less attractive to competitors thus mitigating the risk of
attack from other niche players, new entrants or broad market competitors
looking to enlarge their customer base through product or service
specialization.
• Narrow market strategies are similar to their broad market scope
namesakes. What is key is that companies focusing on niche markets need
to bring something new into the mix – something that adds value to
customers in that particular market. Otherwise, they’ll soon be competing
with larger, more resourceful and broad-focused companies.
 Choose The Right Strategy –

A company has to spend time and effort to choose the right Generic
Strategy, as this will support all other strategic options. The company needs
to make a decision on which strategy to use and stay on it for the long term.
It is simply not feasible to try out a particular strategy option.

Michael Porter has specifically warned against attempting to “hedge your

bets” by employing more than one strategy option, as every strategy appeals
to different types of people and requires radically different approaches.
Differentiation Strategy requires very outward-facing, communicative and
creative approaches, while
Cost Strategy requires a deep focus on internal processes and optimization
in a profoundly analytical approach.
 Is your strategy right ??/
• So, when choosing which Generic Strategy is right for your
company, play to your company’s strengths.
• Use SWOT ANALYSIS to determine your company’s
strengths, weaknesses, opportunities and threats in each Generic
Strategy scenario;
• Use Porter’s Five forces to assess the balance of power and how
it might affect your company;
• Use the McKinsey 7S Framework to determine what
performance drivers your company would have in each scenario;
• Cross-analyze the results of each finding and work out which
Generic Strategy provides the strongest set of options.