1. Objectives Introduce the concept of generic business strategies:
Cost leadership.
Differentiation.
Focus.
Describe the organizational resources and capabilities associated with these strategies.
Suggest how managers can identify opportunities for reducing costs and differentiating their businesses.

2. Exhibit: Generic Business Strategies
Target Market

3. Generic Business Strategies (cont.)
Cost Leadership (cont.)
Probably most effective in industries or markets where price is most important factor (over service, technology, or product characteristics).
Successful cost leaders develop competitive advantage by offering products and services of comparable quality at lower prices than most industry competitors.
Not the same as selling cheap merchandise or products perceived as inferior.

4. Generic Business Strategies (cont.)
Cost Leadership (cont.)
Successful cost leader does not always have to offer lowest prices.
Customer perception of low prices is most important factor.
Firms following this strategy will seek to maximize market share.

5. Generic Business Strategies (cont.)
Cost leadership strategies are characterized by:
Capital-intensive manufacturing or production processes that reduce labor costs;
Process engineering skills that are aimed at lowering production costs; and
Products designed to be manufactured easily and products which share many common components.
Leaders have developed sophisticated materials procurement and inventory management systems.
Leaders usually have low-cost distribution systems.

6. Generic Business Strategies (cont.)
Firms that wish to pursue cost leadership strategies should emphasize;
Close supervision of labor;
Tight cost controls; and
Incentives based on cost and quantitative targets.
Value chain concept is useful tool for managers using this strategy.

7. Key Stages in Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture
STAGE 1. IDENTIFY THE PRINCIPAL ACTIVITIES
R&D
DESIGN
ENGNRNG
TESTING,
QUALITY
CONTROL
GOODS
INVEN-
TORIES
SALES
&
MKTG
DEALER &
CUSTOMER
SUPPORT
PARTS
INVEN-
TORIES
DISTRI-
BUTION
PURCH-
ASING
COMPONENT
MFR
ASSEMBLY
STAGE 2. ALLOCATE TOTAL COSTS 18

8. Applying the Value Chain to Cost Analysis (continued)
--Plant scale for each -- Level of quality targets -- No. of dealers component -- Frequency of defects -- Sales / dealer Process technology Level of dealer Plant location support Run length Frequency of defects -- Capaciity utilization under warranty
STAGE 3.
IDENTIFY
COST
DRIVERS
PARTS
INVEN-
TORIES
R&D
DESIGN
ENGNRNG
TESTING,
QUALITY
CONTROL
GOODS
INVEN-
TORIES
PURCH-
ASING
COMPONENT
MFR
SALES
&
MKTG
ASSEMBLY
DISTRI-
BUTION
DEALER &
CUSTOMER
SUPPORT
Prices paid depends -- Size of commitment -- Plant scale -- Cyclicality / predictability of sales
on: -- Productivity of R&D/design -- No. of models per -- Flexibility of production
-- Order size -- No. & frequency of new plant -- Customers’ willingness to wait
-- Purchases per models -- Degree of
supplier -- Sales / model automation
-- Bargaining power Wage levels
-- Supplier location Capacity utilization 19

9. Applying the Value Chain to Cost Analysis (continued)
STAGE 4. IDENTIFY LINKAGES
PRCHSNG PARTS R&D COMPONENT ASSMBY TESTING GOODS SALES DSTRBTN DLR
INVNTRS DESIGN MFR QUALITY INV MKTG CTMR
Designing different models around
common components and platforms
reduces manufacturing costs
Consolidation of orders to increase
discounts, increase inventories
Higher quality parts and materials
reduces costs of defects
at later stages
Higher quality in manufacturing
reduces warranty costs
STAGE 5. RECOMMENDATIONS FOR COST REDUCTION 20

10. Drivers of Cost Advantage
Indivisibilities
Specialization and division of labor
ECONOMIES OF SCALE
Increased dexterity
Improved coordination/ organization
ECONOMIES OF LEARNING
Mechanization and automation
Efficient utilization of materials
Increased precision
PRODUCTION TECHNIQUES
Design for automation
Designs to economize on materials
PRODUCT DESIGN
Location advantages
Ownership of low-cost inputs
Bargaining power
Supplier cooperation
INPUT COSTS
CAPACITY UTILIZATION
Ratio of fixed to variable costs
Costs of installing and closing capacity
MANAGERIAL/ ORGANIZATIONAL
EFFICIENCY
Organizational slack 13

11. Generic Business Strategies (cont.)
Differentiation strategy
These firms aim to serve broad segment of market by offering products/services that are perceived as unique.
Likely to work best with products/services that lend themselves well to differentiation.
Even commodities can be differentiated: Morton salt.

12. Generic Business Strategies (cont.)
Differentiation strategy (cont.)
It is the perception of differences that is most important -- not just the actual characteristics of competing products.
Customer perceptions can be fragile and short-lived.
Firms must develop strong marketing capabilities and a reputation for quality or uniqueness.

13. Generic Business Strategies (cont.)
Firms pursuing differentiation must also enhance their:
Creativity and research capabilities;
Coordination among R&D, marketing, and manufacturing; and
Ability to attract highly skilled labor, scientists, or creative people.
Value-chain analysis is helpful.

14. Using the Value Chain to Identify Differentiation Potential on the Supply Side
MIS that supports fast response capabilities
Training to support customer service excellence
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
Unique product features. Fast new product development
Customer technical support. Consumer credit. Availability of spares
Quality of components & materials
Defect free products. Wide variety
Fast delivery. Efficient order processing
Building brand reputation 35

15. Service & technical support
Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can Manufacture 1
Inventory holding
Service & technical support
Manufacturing
Purchasing
Design Engineering
Distribution
Sales 5 2 3 4
Inventory holding
Purchasing
Processing
Marketing
Distribution
Canning
Supplies of steel
& aluminum
CAN MAKER
CANNER
1. Distinctive can design can assist canners’ marketing activities.
2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.
3. Frequent, reliable delivery can permit canner to adopt JIT can supply.
4. Efficient order processing system can reduce customers’ ordering costs.
5. Competent technical support can increase canner’s efficiency of plant utilization. 36

16. The Nature of Differentiation
DEFINITION: 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 DIFFERENTATION
Observable product characteristics
size, color, materials, etc.
performance
packaging
complementary services
INTANGIBLE DIFFERENTATION
Unobservable and subjective
characteristics relating to image,
status, exclusivity, identity
TOTAL CUSTOMER RESPONSIVENESS
differentiation not just about the product, it embraces the whole relationship
between the supplier and the customer. 24

17. Differentiation and Segmentation
DIFFERENTIATION: is concerned with how a firm competes within
a market.
SEGMENTATION: is concerned with where a firm competes
within a market.
Does differentiation imply segmentation?
Not necessarily, depends upon the differentiation strategy:
BROAD SCOPE DIFFERENTIATION: Appealing to what is in common between different customers (McDonalds hamburgers, Honda cars, Sears)
FOCUSED DIFFERENTIATION: Appealing to what distinguishes different customer groups (BMW, Doc Marten footwear) 25

18. Identifying Differentiation Potential: The Demand Side
What needs does it satisfy?
THE PRODUCT
What are key attributes?
FORMULATE DIFFERENTIATION STRATEGY
Select product positioning in relation to product attributes
Select target customer group
Ensure customer / product compatibility
Evaluate costs and benefits of differentiation
Relate patterns of customer preferences to product attributes
By what criteria do they choose?
THE CUSTOMER
What price premiums do product attributes command?
What motivates them?
What are demographic, sociological, psychological correlates of customer behavior? 29

19. Generic Business Strategies (cont.)
Focus strategy
Targeted at narrow industry niche.
These firms seek overall cost leadership or perceived uniqueness, but they “focus” that advantage on a particular market segment.
Thus, there are two possible focus strategies: focus differentiation (Rolls-Royce in ultra-luxury car market) and focus cost leadership.
Changes in customer demographics, competing products, and new technologies can wipe-out a narrow target market.

20. Illustrations of Generic Business Strategies
Cost Leader
While the successful cost leader’s product is priced just below industry average, its unit costs are much lower than industry average.
Successful differentiator
Offers product that is perceived as unique.
Can charge prices higher than industry average.
May have costs higher than industry average.

21. Limits of Differentiation (cont.)
Differentiation strategies can be threatened by a number of factors:
Private-label and store brand competition are serious threats.
Discounting.
Gradual commoditization.
Companies fail to invest in maintaining brand image.
Companies have “crowded-out” their own products by introducing new products.

22. Limits of Differentiation
Success of this strategy depends on two factors:
Consumers must value the product/service characteristics on which managers have based their differentiation strategies.
Key to success of any differentiation strategy is the ability of firms to maintain the perception of uniqueness in their products and services.

23. Pursuit of Differentiation and Cost Leadership Strategies
Porter argues that firms pursuing both strategies will be “stuck in the middle.” There are, however, some exceptions..
Morton International
Successful at both with its table salt.
Japanese companies
Canon and its photocopiers
Toyota and its cars

24. Pursuit of Differentiation and Cost Leadership Strategies
While most managers today emphasize one of the generic strategies, their firms always face competition on both cost and differentiation dimensions.