Generic Strategies for Competitive Advantage

Stakeholders Processes Resources Organization Set strategies to satisfy key stakeholders… …by improving critical business processes… …and aligning resources and organization The High Performance Business (Arthur D.Little, Inc 1992)

Sources of Profitability Increase revenues by increasing price Increase revenue by increasing volume Increase revenue and hold cost constant Increase revenues in excess of cost increases Lower cost and hold revenue constant Lower costs in excess of revenue losses Lower costs and increase revenues (price increases) Profit = Revenue – Cost Revenue = Price x Volume Dr. Deshpande : Primer on Generic strategies 1

Understanding the Value Chain Inbound Logistics OperationsOutbound Logistics Marketing & Sales After-Sales Service M a r g i n Primary (Core) Activities Support (Enabling) Activities Firm Infrastructure Human Resource Management Technology Development Procurement Source: Michael Porter, Competitive Advantage, 1985 Dr. Deshpande : Primer on Generic strategies 2

DuPont (Fibers) Milliken (Fabric) Levi’s (Apparel) Sears (Retail) Customer Order Delivery Levi Strauss’s Value- Delivery Network Competition is between networks, not companies. The winner is the company with the better network.

Generic Strategies OVERALL COST LEADERSHIP DIFFERENTIATION Low Cost Position Uniqueness Perceived by the Customer Industry wide Particular Segment only STRATEGIC ADVANTAGE STRATEGIC TARGET Source: Michael Porter, Competitive Strategy, 1980 FOCUS Dr. Deshpande : Primer on Generic strategies 3 “all men can see are the tactics by which I conquer... what none can see is the strategy from which it evolves.” - Art of war

Generic Strategies Cost Leadership Differentiation Focus Product Differentiation Low (Principally based on price) High (Principally by Uniqueness) Low or High (Price or Uniqueness) Market Segmentation Low (Mass Market) High (Many segments) Low (One of a few key segments) Cost Structure Low (Efficiency) High (Value Added) Low or High (Efficiency or Value Added) Distinctive Competency Manufacturing and Materials Management Research and Development, Marketing Any kind of distinctive competency Dr. Deshpande : Primer on Generic strategies 4

Mixing low cost and differentiation $ Industry average competitor Successful differentiated competitor Competitor with dual advantage Successful low-cost competitor Price Cost Dr. Deshpande : Primer on Generic strategies 5 Price per unit Cost per unit

This strategy involves striving to be the overall low cost provider of a product or service that appeals to a broad range of customers It is a powerful strategy when the markets contains many price-sensitive buyers The aim of this strategy is to open up a sustainable cost advantage over competitors and then use the company’s lower cost edge as a basis for either: -Under-pricing competitors and gaining market share (best choice if strong economies of scale are prevalent) -Selling at The “going rate” and earning a higher profit margin (low cost, therefore, does not always translate into a low price….) Low cost player Dr. Deshpande : Primer on Generic strategies 7

To achieve a cost advantage, a firm’s cumulative costs across its value chain must be lower than their competitor’s cumulative costs Alternative methods to accomplish this: - Do a better job than rivals in performing value chain activities, and therefore lower their cost - Revamp the value chain to cut out some elements altogether (b/ward integration, f/ward integration;simplify product design;cut out all frills,features, options on the product) Dr. Deshpande : Primer on Generic strategies 8

 Technological breakthroughs open up cost reductions for rivals  Cost reduction strategy can be copied-advantage becomes short-lived and fixation on costs can cause failure to react to market changes (increased interest in new features) Pitfalls of a low cost strategy Price competition in industry is very vigorous industry product is standardized-commodities There are few ways to achieve meaningful product differentiation-buyers are only sensitive to price differences Low or no switching costs are incurred by buyers Buyers are large, and have significant power to drive down prices When does low cost differentiation work Dr. Deshpande : Primer on Generic strategies 9

The essence of this strategy is to be unique in ways that are valuable to the buyer, and that can be sustained It is an attractive approach whenever buyers needs are too diverse to be satisfied by a standardized product Differentiation strategy command a premium price for their product sell more of their product at the “going rate” and increase market share Dr. Deshpande : Primer on Generic strategies 10

Different taste of product-Dr. Pepper Special features- Trinitron Technology - Sony Superior service-Dell Spare parts availability- Caterpillar Engineering design and performance- Mercedes Prestige and distinctiveness - Rolex Product reliability-Johnson & Johnson Technological leadership - 3M Full range of services-Merrill Lynch Quality manufacture - Toyota Types of differentiation Buyers will not pay extra for value they don’t perceive, no matter how real the unique extras may be Actual and perceived value can differ whenever buyers have trouble assessing what their experience with the product may be Incomplete knowledge from buyers often causes them to judge value based on signals Signal differentiation Failure to signal value, where customers cannot adequately evaluate their potential experience with the product is a serious, and common cause of failure for differentiators Dr. Deshpande : Primer on Generic strategies 11

Attempts to achieve differentiation usually raise costs These costs must not be so high that they require a price most buyers are not willing to pay-or eat up all your expected returns You can only offer profitable “bells & whistles”-which requires a solid understanding of what the market really values, and how much they are willing to pay for it Reduces rivalry between the firms when it enhances buyer loyalty - you don’t have to worry that your customers will leave you for your competitors New entrants are “blocked” because they cannot overcome the buyer loyalty you have developed Buyers have less power because no one can offer them a more attractive product-(loyalty, again) Substitutes are not appealing-your product meets buyers needs “too” well (loyalty, again) Powerful suppliers can raise prices, but your profit margins are protected-you can pass these costs on to your customers because they really want what you sell Differentiation and Impact on the five forces Dr. Deshpande : Primer on Generic strategies 12

There are many ways to differentiate a product or service and many buyers perceive these differences to have value Buyers needs and uses for your product are diverse Few rival firms are following a similar differentiation approach “Point” of differentiation cannot easily be copied by competitors  Trying to differentiate on the basis of something that does not lower a buyer’s cost or enhance a buyer’s well-being- as perceived by the buyer  Over-differentiating so that the price is too high relative to competitors, or product quality or service levels exceed buyer needs  Trying to charge too high a price premium ignoring the need to signal value  Not understanding what buyers value When does it work ?What are the risks ? Dr. Deshpande : Primer on Generic strategies 13

This strategy sets a focus on a narrow piece of the total market The target segment can be defined by: -geographic uniqueness -special product attributes that appeal only to niche members When it is costly or difficult for broad market players to meet the needs of the segment When no other rival is attempting to specialize in the market niche When the firm doesn’t have the resources to go after a wider part of the total market When the industry has many different segments, allowing the focuser to pick the one most suited to its strengths and capabilities Focus strategy Dr. Deshpande : Primer on Generic strategies 14

Rolls Royce Omega - underwater watches Rolex MUL for the physically handicapped (low cost focus) The segment is big enough to be profitable -the segment has good growth potential The segment is not crucial to the success of major competitors The focusing firm has the skills and resources necessary to serve the segment The focuser can defend against challengers based on loyalty and the goodwill it has built Focus attractiveness Focus examples Dr. Deshpande : Primer on Generic strategies 15

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