Generic

Generic Business
Business
Strategies
Strategies

Cost-based and
Differentiation-based
Competitive
Strategies
 Sources
Sources of
of Competitive
Competitive
Advantage
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
Competitive Advantages
Advantages asas
the
the Source
Source of
of Superior
Superior
Profitability
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
Sources of
of Superior
Superior
Profitability
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
Market Share-Profitability
Share-Profitability
Relationship:
Relationship:
“Porter’s
“Porter’s Bucket”
Bucket”
High

Differentiation- Low Cost

based Strategies Leadership
Strategies
Profitability

Stuck-in-the-Middle

Low

Low High

Market Share (Quantity)

Target
Target and
and Advantage
Advantage of
of

Porter’s
Porter’s Generic
Generic
Strategies
Strategies
Strategic Advantage
Uniqueness Perceived Low Cost Position
by the Customer
Strategic Target

Industrywide DIFFERENTIATION COSTOVERALL

LEADERSHIP

Particular FOCUS
Segment Only

Source: Porter (1980)

Cost-based
Cost-based
Competitive
Competitive
Strategies
Strategies
 The Sources of Cost
Advantages

• Scale
• Experience
• Capacity Utilization
• Product Design/Process Fit
• Location
• Integration/Purchasing
• Organizational Skills
 Drivers of Cost
Advantages
ECONOMIES OF SCALE -Indivisibilities
-Specialization & division of labor
ECONOMIES OF LEARNING -Increased dexterity
-Improved
coordination/organization CAPACITY UTIIZATION -
Ratio of fixed to variable costs
PRODUCTION TECHNIQUES -Mechanization and automation
-Efficient utilization of materials
-Increased precision
PRODUCT DESIGN -Design for automation
-Designs to
economize on materials INPUT COSTS -
Location advantages -
Ownership of low-cost inputs -
Bargaining power -
Supplier cooperation
MANAGERIAL EFFICIENCY -Organizational slack
 Differentiation-
Differentiation-
based
based Competitive
Competitive
Strategies
Strategies
 Products
Products in in the
the
Differentiation
Differentiation
Products Hall
Hall
in the Differentiation Hall of
of
of Fame
Fame
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
Keys to
to Successful
Successful
Differentiation
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
The Nature
Nature of
of
Differentiation
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
• size, color, materials, etc. characteristics relating to image
• status, 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
Achieving
Differentiation
Differentiation Advantage
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.