Chapter 5 The Five Generic Competitive Strategies

Business Level Strategy How are we going to compete in our industry/segment? Improving the firm’s competitive position Competitive advantages are the single most dependable contributor to above-average profitability

Porter’s Generic Strategies  Two fundamental issues Competitive advantage - Strategic Target -  Pursuit of the generic strategies provides protection from each of the five forces

Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus Competitive Advantage Strategic Target Overall Low-Cost Focused Differentiation Broad Differentiation Focused Low-Cost

Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus Competitive Advantage Strategic Target Best-Cost Provider NOT one of Porter’s Generic Strategies

Differentiation  Offer attributes that customers want, and are willing to pay for. Leads to premium price, higher volume, loyalty  Maintaining uniqueness can be a challenge Kodak, Wrigley’s, Campbell’s, Coca-Cola, Gillette, Del Monte, and Nabisco all leaders since 1923  Marginal revenue must exceed the costs of differentiation PERCEIVED VALUE versus INCREMENTAL COSTS

Differentiation (cont.)  Signalling important when:

Differentiation (cont.)  Risky when: quick imitation no value in uniqueness over differentiation  cell phones premium price costs too high poorly understood/changing customer needs  Minivan, FAO Schwartz costs/price become more important than uniqueness unwillingness to offer true differentiation

How can Differentiation protect against…? Starbuck’s $1.80 Costs Profit Price New Entrants

How can Differentiation protect against…? Joe’s Coffee Starbuck’s $1.80 Assume Equal Costs New Entrants

How can Differentiation protect against…? New Entrants Joe’s Coffee 99 cents Starbuck’s $1.80

How can Differentiation protect against…? New Entrants Joe’s Coffee 99 cents Starbuck’s $1.80 Extra Profits

How can Differentiation protect against…? Rivals Starbuck’s $1.80 Joe’s Coffee 99 cents

How can Differentiation protect against…? Starbuck’s $1.80 Joe’s Coffee 99 cents Advertising & Promotions drive costs UP

How can Differentiation protect against…? Starbuck’s $1.80 $1.70 Joe’s Coffee cents Discounts and sales drive prices DOWN

How can Differentiation protect against…? Substitutes Starbuck’s $1.80

How can Differentiation protect against…? Starbuck’s $1.80 There is no substitute for the truly differentiated product

How can Differentiation protect against…? Power of Buyers - How do powerful buyer’s leverage their power? Lower Prices, Higher Quality

How can Differentiation protect against…? Starbuck’s $1.80 $1.70 Joe’s Coffee cents Raise Quality Lower Prices

How can Differentiation protect against…? Power of Suppliers - How do powerful suppliers leverage their power? Drive up costs

How can Differentiation protect against…? Starbuck’s $1.70 Joe’s Coffee 89 cents Raise Costs

How can Differentiation protect against…? Differentiation does not eliminate any of these forces, it just allows the differentiated firm to more easily deal with these forces, or offset the power of these forces, and potentially, remain profitable.

Low Cost Leadership Design, produce, and market a comparable product at a lower cost Effective utilization of value-chain relocation of manufacturing efficient scale process, not product engineering - cost reductions products designed for simple assembly and sharing common components procurement and materials handling low cost distribution – direct or on-line sales, or efficient distribution tactics Requires organizational culture to support close supervision, cost controls

Low Cost Leadership (cont.) Attractive when price is dominant consideration vigorous price competition commodity and low differentiation low switching costs powerful buyers

Low Cost Leadership (cont.) What firms pursue a low cost strategy? How do they drive their costs down Risky when:

How can Low Costs provide protection from…. New Entrants Wal-Mart Joe’s Box of Tide $1.99

How can Low Costs provide protection from…. Wal-Mart Joe’s Box of Tide $1.99 Higher costs

How can Low Costs provide protection from…. Rivalry Wal-Mart Joe’s Box of Tide $1.99

How can Low Costs provide protection from…. Wal-Mart Joe’s Box of Tide $1.89 …can push prices down….

How can Low Costs provide protection from…. Wal-Mart Joe’s Box of Tide $1.99 … or push costs up

How can Low Costs provide protection from…. Wal-Mart Joes Box of Tide $1.99 Substitutes

How can Low Costs provide protection from…. Wal-Mart Joe’s Box of Tide $1.89 …can push prices down….

How can Low Costs provide protection from…. Wal-Mart Joe’s Box of Tide $1.99 … or push costs up

How can Low Costs provide protection from…. Wal-Mart Joe’s Box of Tide $1.99 Power of Buyers

How can Low Costs provide protection from…. Wal-Mart Joe’s Box of Tide $1.89 …can push prices down….

How can Low Costs provide protection from…. Wal-Mart Joe’s Box of Tide $1.99 Power of Suppliers

How can Low Costs provide protection from…. Wal-Mart Joe’s Box of Tide $1.99 … can push costs up

How can Low Costs protect against…?  Low cost leadership does not eliminate any of these forces, it just allows the low costs firm to more easily deal with these forces, or offset the power of these forces, and potentially, remain profitable.

Focus  Emphasizing a market niche where customers have unique preferences or requirements. Either focus-low cost or focus-differentiation  Profitable when niche is large, growing niche is not crucial to broad-based competitors difficult for broad-based competitors to need specialized needs many niches available niche is relatively vacant firm is able to defend position, often through reputation/loyalty

Focus (cont.)  What firms pursue a focus strategy?  What is their niche?  Risky when:

Integrated Low Cost-Differentiation  Combines both generic strategies  Difficult to implement

Stuck in the Middle  Firm’s offering are too costly to compete with low costs provider’s product, and too undifferentiated to command the price premium gained by the differentiated firm

Best Cost  Upscale attributes at lower costs than rivals Incorporate attractive features Good to excellent quality cheaper than rivals  Targets value-conscious, not budget- conscious consumers  Works well when industry products are differentiated and consumers are sensitive to price and value  Biggest risk = getting squeezed at both ends