STRATEGY AND COMPETITIVE ADVANTAGE GENERIC COMPETITIVE STRATEGIES

COMPETITIVE POSITIONING WHAT IS A FIRM’S RELATIVE POSITION IN AN INDUSTRY? POSITIONING REFERS TO WHETHER THE FIRM HAS ABOVE OR BELOW AVERAGE PROFITABILITY A FIRM NEEDS SUSTAINABLE COMPETITIVE ADVANTAGE TO HAVE ABOVE-AVERAGE PROFITABILITY

GENERIC STRATEGIES Firms create value for customers through: COST LEADERSHIP DIFFERENTIATION FOCUS EACH OF THESE STRATEGIES INVOLVES A FUNDAMENTALLY DIFFERENT ROUTE TO COMPETITIVE ADVANTAGE

GENERIC STRATEGIES Lower cost Differentiation Target Broad cost leadership differentiation Narrow cost focus differentiation focus

GENERIC STRATEGIES COST LEADERSHIP AND DIFFERENTIATION STRATEGIES SEEK COMPETITIVE ADVANTAGES IN A BROAD RANGE OF INDUSTRY SEGMENT FOCUS STRATEGIES AIM AT COST ADVANTAGE OR DIFFERENTIATION IN A NARROW SEGMENT A QUESTION OF CHOICE

COST LEADERSHIP FIRM SETS OUT TO BECOME THE LOW COST PRODUCER (SUSTAINABLE) IN ITS INDUSTRY It serves broad scope and many industry segments

How? Economies of scale Technology Special privileges e.g. Location, Access to raw materials, etc. Learning curve It exploits all sources of cost advantages: It sells standard products and takes benefits from scale

REQUISITIES THE FIRM SHOULD COMMAND PRICES AT OR NEAR THE INDUSTRY AVERAGE IT CANNOT IGNORE THE BASES OF DIFFERENTIATION SOME DIFFERENTIATION IS NECESSARY TO PRESERVE ITS MARKET FIRM NEEDS TO BE COST LEADER, NOT JUST LOW COST PRODUCER RIVALRY IN LOW COST WILL BE DISASTROUS

DIFFERENTIATION FIRM SEEKS TO BE UNIQUE IN ITS INDUSTRY ALONG ONE OR MORE ATTRIBUTES THAT BUYERS PERCEIVE IMPORTANT THE FIRM IS REWARDED FOR ITS UNIQUENESS WITH A PREMIUM PRICE

HOW? PRODUCT ITSELF DELIVERY SYSTEM MARKETING APPROACH EXTRA COST IS INVOLVED IN BEING UNIQUE FIRM IS REWARDED WHEN IT CAN COMMAND PREMIUM PRICE WHICH IS IN EXCESS OF THE EXTRA COST INCURRED.

A DIFFERENTIATOR CANNOT IGNORE ITS COST POSITION OTHERWISE ITS PREMIUM PRICE WILL BE NULLILFIED BY THE EXTRA COST FIRM SHOULD AIM AT COST PARITY OR PROXIMITY RELATIVE TO ITS COMPETITORS

FOCUS STRATEGIES IT RESTS ON THE CHOICE OF NARROW COMPETITIVE SCOPE WITHIN THE INDUSTRY TWO VARIANTS: COST FOCUS: COST ADVANTAGE IN ITS TARGET SEGMENT DIFFERENTIATION FOCUS: DIFFERENTIATION IN ITS TARGET SEGMENT

HOW? FIRM SELECTS A SEGMENT OR GROUP OF SEGMENTS IN THE INDUSTRY IT TAILORS ITS STRATEGY TO SERVE THE SEGMENT ONLY. IT IS IMPORTANT TO SEE THAT: Target segment must be different from other segments Segment should be structurally attractive

STUCK IN THE MIDDLE IF A FIRM IS STUCK IN THE MIDDLE IT WILL BE BELOW-AVERAGE PERFORMER SUCH FIRM MAKES PROFIT IF ITS COMPETITORS ARE ALSO STUCK IN THE MIDDLE STUCK IN THE MIDDLE INDICATES FIRM’S UNWILLINGNESS OR INABILITY TO MAKE CHOICES ABOUT THE COMPETITIVE STRATEGIES

PURSUIT OF MORE THAN ONE GENERIC STRATEGIES EACH GENERIC STRATEGY HAS FUNDAMENTALLY DIFFERENT APPROACH IN CREATING ADVANTAGE ACHIEVING COST LEADERSHIP AND DIFFERENTIATION ARE USUALLY INCONSISTENT BECAUSE DIFFERENTIATION IS USUALLY COSTLY WHILE FOR COST LEADERSHIP, STANDARDIZATION OF PRODUCTS BECOME NECESSARY

CONDITIONS WHEN MORE THAN ONE STRATEGIES CAN BE PURSUED SIMULTANEOUSLY COMPETITORS ARE STUCK IN THE MIDDLE. THIS IS ONLY A TEMPORARY PHENOMENON COST IS STRONGLY AFFECTED BY MARKET SHARE, RATHER THAN BY PRODUCT DESIGN, LEVEL OF TECHNOLOGY, SERVICE PROVIDED ETC. BIG MARKET SHARE MAY MAKE A FIRM CAPABLE TO DIFFERENTIATE IN ONE MARKET AND INCUR ADDED COSTS FIRMS PIONEER A MAJOR INNOVATION THAT LOWERS COSTS, YET HELP TO MAINTAIN DIFFERENTIATION

BEST COST STRATEGY Many firms have been successful at pursuing cost leadership and differentiation simultaneously Profits generated from the successful pursuit of one strategy (Low cost) allow investment in other element such as differentiating features High quality and low cost are complementary rather than conflicting strategy A combination of low cost and differentiation is necessary for creating sustainable competitive advantages

MARKET-BASED GENERIC STRATEGIES THE STRATEGY CLOCK High Differentiation 4 Hybrid Focused Differentiation 3 5 Perceived Added Value Low Price 2 6 7 Low Price/ 1 Strategies destined added value 8 for ultimate failure Low Low Price High

Price-based strategies ( 1 & 2) Cheap and nasty option which entails reducing price and perceived value added and focusing on price sensitive segments It entails reducing price while maintaining quality of product Cost leadership – sustainable lower price

Differentiation Strategies ( 4) It entails a broad differentiation strategy: Offering perceived added value over competitors at a similar or somewhat higher price

The Hybrid Strategy (3) It provides added value to customers while keeping the prices down Many Japanese companies followed this strategy as an entry strategy in a market with established competitors. It is possible when the volume is greater than those of competitors and margins are kept attractive due to low-cost base

Focused differentiation (5) It entails competition by offering higher value to the customers at a significantly higher price. This strategy is followed while competing in a particular market segment

Failure Strategies (6,7, and 8) Route 6 entails increasing price without increasing perceived value to the customers Route 7 is more disastrous as it entails reduction in the perceived value of product while increasing relative price Route 8 entails reducing value while maintaining price

SUSTAINABILITY RISK OF COST LEADERSHIP COMPETITORS IMITATE TECHNOLOGY CHANGES BASES FOR COST LEADERSHIP ERODE PROXIMITY IN DIFFERENTIATION IS LOST

SUSTAINABILITY RISK OF DIFFERENTIATION COMPETITORS IMITATE BASES FOR DIFFERENTIATION BECOME LESS IMPORTANT COST PROXIMITY IS LOST

SUSTAINABILITY RISK OF FOCUS: FOCUS STRATEGY IS IMITATED TARGET SEGMENT BECOMES UNATTRACTIVE BROADLY-TARGETED COMPETITORS OVERWHELM THE SEGMENT

GENERIC STRATEGIES AND ENVIRONMENTAL THREAT COST LEADERSHIP DIFFERENTIATION

COST LEADRSHIP THREAT OF ENTRY: It reduces threat of entry by rivals Caterpillar’s low cost advantage Komatsu emphasized on high quality machine that breaks down less

COST LEADERSHIP THREAT OF RIVALRY: Cost leader has two choices in pricing: 1. Set price equal to the high cost competitors and earn above normal profit. 2. Set prices below the prices of their high cost rivals and earn profit by increase sale Choice depends on how rivals respond

COST LEADERSHIP THREAT OF SUBSTITUTE: It reduces threat of substitutes as low price discourages other rivals to generate substitutes. Higher oil price has led to search for substitutes.

COST LEADERSHIP THREAT OF SUPPLIERS: It reduces the threat of supplier as cost leader firm has greater flexibility to absorb high prices charged by its suppliers If cost leadership is due to large volume supplier will not charge high price to the firm

COST LEADERSHIP THREAT OF BUYERS: Threat of buyers is low as buyers get more value. It also discourages backward integration by the buyers.

DIFFERENTIATION THREAT OF ENTRY: Reduces threat of entry as new entrants are forced to incur additional cost to differentiate

DIFFERENTIATION THREAT OF RIVALRY: Reduces it as each firm needs to carve out its own unique product niche Rivalry is not zero but it is reduced

DIFFERENTIATION THREAT OF SUBTITUTES: Reduced as the product has high perceived value and is made more attractive

DIFFERENTIATION THREAT OF SUPPLIERS: Reduced as increase in prices by suppliers can be accommodated in higher price

DIFFERENTIATION THREAT OF BUYERS: Reduced as the product is differentiated and has high perceived value

GENERIC STRATEGIES AND ORGANIZATIONAL STRUCTURES Each generic strategy require different skills and requirements for success which reflect on organization structure and culture

GENERIC STRATEGIES AND ORGANIZATIONAL STRUCTURES Cost leadership requires Tight control Pursuit of economies of scale Overhead minimization Dedication to learning curve Differentiation requires Flexibility High level of R & D

GENERIC STRATEGIES AND ORGANIZATIONAL STRUCTURES ORGANIZATION CULTURE Differentiation requires risk-taking, innovation and individuality while cost leadership requires discipline, frugality and attention to detail