What is Generic Competitive Strategies ?
Michael Porter said that a firm has to decide on the nature and scope to which it can utilize its competitive advantage. The generic strategies are effective because they help in the framing of strategies at the most simple and broad levels. There at various risks associated with each generic strategy and the firm will have to bear those risks, if it does not want to be termed as a mediocre firm.
Porter maintains that the firm's relative position in the industry stems from whether its profitability is more or less than the industry average. A firm is said to have an above average profitability if it has sustained its competitive advantage over the years. At the broader level, the firm can have two competitive advantages it can either aim at cost leadership or differentiation.
The generic competitive strategy of the firm comprises of various activities that it undertakes to acquire customers in the marketplace and satisfy their needs in order to maintain its business position in the competitive market. In terms of application, the focus area of competitive strategy is narrower than the business strategy.
Competitive strategy deals with the efforts of the management in providing superior value to its customers and also overcoming competition in the market. Business strategy deals with not only how the firm competes in the market but also solves other strategic issues faced by the firm.
What are the Generic Competitive Strategies ?
Porter's Generic Competitive Strategies are explained below :
Low Cost Leadership Strategy
In this strategy, the firm employs economies of scale and brings efficiencies in the production lines to drive down the cost of its products lower than that of its competitors. Thus, here the firm tries to beat the competitors by keeping the prices lower. It is characterized by reduction of overheads and fixed costs of production and distribution. The firm can apply the low cost leadership strategy in situations where the customers have a flexibility of changing suppliers, have good product knowledge and the product/service is standardized. A very good example of this strategy is Walmart which has lower overhead costs than other retail chains. It builds large shopping complexes situated outside cities where the rentals are low. It also has an iron grip over its vendors and extracts the best terms from them. This results in an ability which is demonstrated by its "every day low price" policy. In India, Big Bazaar has been able to develop a similar business model. This strategy also leads to a lesser expenditure on marketing the product as its price itself is the biggest attraction to the customers. It also develops entry barriers and it is not easy for newcomers to compete with the firm.
This strategy is utilized by the firm in becoming a low cost producer in the industry. By applying this strategy the firm aims to achieve complete cost advantage and economies of scale with the help of offering a standardized product or service in the market. The critical aspects of cost leadership are operational details, stable product lines, giving special attention to formal profits and budgets, and relying on capital rather than low efficiency labour. The firm aims to attain the lowest cost structure in the industry through strong and effective business activities, economies of scale, and efficient cost control system.
For example, the Chinese economy has invested large capacities for producing consumer items at a very low cost. These can manufacture items at a cost structure which is far less than any other country. This has given China a competitive advantage in items like consumer electronics, clothing, footwear, sporting goods etc. The critical thing in cost leadership is to anticipate the competition. Typically, every industry has one firm which undertakes cost leadership. It is not profitable for other firms to take this role.
Achieving Low Cost Leadership
Cost leadership can be achieved in the following manner :
1) Demand Forecasting :
For achieving cost leadership, a firm must ensure that appropriate forecasting techniques are used for predicting precise future demand.
2) Efficient Resource Utilization :
The strategist has to employ the resources of the firm in an efficient manner. This includes effective utilization of both internal and external resources of the firm.
3) Economies of Scale :
The firm seeks to reduce the cost of its products by minimizing the per unit cost by achieving economies of scale. Achieving economies of scale helps the firm in becoming a cost leader in the competitive market.
4) Experience Curve :
As the firm gains experience its cost of performing activities reduces as it benefits from increased efficiencies.
5) Resource Sharing :
Combining and sharing of resources between various strategic business units also brings down the costs by eliminating wasteful duplication.
6) Outsourcing :
Outsourcing involves hiring specialist firms for carrying-out some activities of the firm at low cost. This helps in attaining cost leadership. Costing can also be reduced by adopting a vertical integration strategy.
7) Capacity Utilization :
Cost leadership can also be achieved by ensuring complete capacity utilization.
8) First Mover Advantage :
The first mover in ant industry helps the firm to achieve cost leadership. This also acts as an entry barrier to new entrants.
9) Operating Decision :
Effective operations help a firm in lowering costs more efficiently than other competing firms.
10) Technological Advantages Independent of Scale :
The use of different and improved technologies also gives the firm a cost advantage over its rivals. Technological advantages are not dependent on the scale of operations. The technology in this case includes hardware and software technologies and also includes quality of labour relations, culture, efficiency of management control system, etc. The economic cost is affected by all these aspects of the firm.
11) Policy Choices :
Firms which adopt a low cost strategy typically have standardized policies which aim to sell simple products at prices lesser than rival firms.
Conditions under which Low Cost Leadership is Used
Low cost leadership is most effective in the following situations :
- When the main basis of competition in the industry is price competition.
- When the industry sells a standardized, product which is easily accessible to many firms.
- When its possible to differentiate the product in only limited number of ways that has value for the customers.
- When the buyers have similar preferences regarding the ways they use the product and when they are not seeking customization.
- When there is low switching cost in moving to an alternate seller and when the buyers are looking for best price in the market.
- When the target marker is big and the bargaining power of the buyers is high.
Advantages of Low Cost Leadership Strategy
The following are the benefits of low cost leadership :
1) Risk Avoidance :
A low cost leader is able to create a sense of aversion in its customers towards other competing firms. The customer becomes habituated to the products offered by the low cost leader and has no incentive to try to go for the brands offering similar products, unless there is some extra benefit. This helps low cost producers to get a dominant market presence.
2) Strong Market Presence :
Competitors cannot match the cost structure of the low cost leader. Thus, the low cost leader is able to bring price stability in the industry and has strong market presence.
3) Creating Entry Barriers :
Low cost leaders can create substantial entry barriers for potential new entrants in the industry. Since they have very low cost structures, they can lower the prices. This low cost leadership acts as a barrier for the new entrants.
4) Able to Sustain during Inflation :
Low cost producers also are better placed to absorb price increases from their suppliers and do not pass on the same to the end consumers. This is because they have a very low cost structure and even after the increase in price of the materials used in their product they are able to sustain a low end-user price.
For example, Tata Motors being a low cost leader in manufacturing automobile can bear the rise in the prices of iron with more ease than other competing automobile manufacturers.
5) Increases Market Share :
The low cost leader invariably has a very high market share and profitability. Examples can be taken from Walmart and Indigo, where both are cost leaders in their industry and have large market share and profitability.
Disadvantages of Low Cost Leadership Strategy
Risks of low cost leadership strategy are as follows :
1) Expensive :
The adoption of a low cost strategy requires large asset investments and capital intensive activities. A low cost leader has to make investments in latest technologies, high class production facilities, inflexible assets, etc., so that it can deliver the products and services at low prices. This makes it difficult to focus on other products or services that are offered by the firm.
2) Easy to Imitate :
A major drawback of the cost leadership strategy is that it can be easily imitated by the competitors. Cost advantages: which arise out of cost leadership strategies are not long lasting.
3) Less Skill due to Lack of Research :
The entire emphasis is on the low cost strategy to keep the per unit cost low. This often leads to a neglect of activities like analysis of market trends, research and development initiatives, etc. The low cost leader is thus likely to lag behind in detecting and adopting new trends and changes in the external environment. This can lead to the situation, where low cost leader may lose its dominant market position to its rivals.
Differentiation Strategy
A differentiation strategy is adopted wants to differentiate its products and services from ts competitors. In other words, the firm wants to highlight some feature or benefit in its product offering as superior to that of its competitors. Differentiation strategy is adopted when the firm is likely to generate more profit by focusing on a particular product attribute than becoming a low cost leader. This strategy resorts to heavy advertising to insert this value proposition in the minds of its customers. In this manner, it is able to create a brand loyalty for its products. This brand loyalty allows the company to charge a higher price or brand premium.
For example, L'Oreal has gained huge market share in hair color segment by highlighting the 'no ammonia' attribute of their product. It has been able to create a very high brand loyalty for its product. A successful differentiation strategy also allows the firm from erecting entry barriers which act as deterrents to new entrants in the industry.
In a differentiation strategy, the firm tries to differentiate its products and services. This can be done either through the use of advertising (Coca Cola and Pepsi), distinctive product features, exceptional service levels (Scandinavian Airlines), or superior product quality (Apple). This strategy allows the firm to target the prospects that are willing to spend their money to get unique and high-end product and services. For example, Cafe Coffee Day is a chain of coffee outlets in India which targets the in India and also those who want to drink youth in coffee in a stylish ambience. That is is why it differentiates its products from its competitors and charges premium prices alike its Another example in India is Mahindra Holidays and its competitors. Resorts which targets family travelers and sells memberships which allows people to access its network of hotels and resorts spread across India and the world. Another example of a service firm which has been able to differentiate from others in India is Jawed Habib hair salons. Through excessive training and stress on quality it has been able to differentiate its service and charge a premium for its hair cutting service from discerning customers.
The flip side of differentiation is that it requires the company to spend a lot of money in advertising and brand building activities. It needs to invest in a strong research and development team and innovative marketing strategies. It also needs to create a culture of creativity in its employees. If done successfully, a differentiation strategy helps to ward off competition and creates very strong entry barriers for the firm offering substitute products.
Achieving Differentiation Strategy
A critical aspect of business success is to carve out a distinct niche in the marketplace. This can be done if the business finds out its unique features and incorporate the same in the marketing strategy of the company. Types of strategies through which a firm can differentiate its products are as follows :
1) Pricing Strategy :
The pricing strategy is an excellent way through which a firm can differentiate itself from its competitors. In this strategy, it can either price itself lower than its competitors or it can charge its products at higher price. A lower pricing than the industry helps the firm to capture the customers of other companies. On the other hand, high pricing helps the firm to create a premium image in the minds of the customers. A low pricing strategy can only be adopted by a company only when they are not at risk of losing their market share. On the other hand, to successfully adopt a premium pricing policy a firm needs to give value added features in its existing product so that the customer views it as a superior offering. For example, Big Bazaar adopts a discount strategy, in other words a low price strategy to attract customers to its stores and prevents them from selecting other departmental stores.
2) Products or Services :
Companies can also differentiate from their competitors by incorporating features or benefits in their products and services which are not found in their competitors.
For example, Samsung has recently launched a refrigerator in which the freezer can be converted into fridge as per the convenience of the customer.
3) Packaging :
Customers are known for judging the product on the basis of the co lour, style, durability, etc., of the product packaging. Packaging is therefore one of the most critical aspects in differentiation, especially if the product quality is by and large the same for all the competitors.
For example, Britannia Nutri Choice biscuits come in one big pack in which there are small packets containing two to three biscuits. This helps in maintaining the freshness of the product.
4) Innovator :
Another way for firms 10 differentiate from others is by being an innovator of first in a space. The firm can do this by offering new products and services or offer attractive promotions to entice customers and get them to buy the product repeatedly. The customers in this case are willing to try new technology as they are often bored with the existing products or technology in the industry. This strategy is often successful in an industry which is full of mature and established companies and in which the customers are in the lookout for new offerings.
For example, Philips has developed a new and innovative product called Air Fryer. This product has become major attraction as it attracts the potential customers willing to spend their money on the product which helps them in maintaining healthy diet.
5) Channel Differentiation :
The manner in which the firms design their channel and distribution strategy and develop their expertise and competency can also be source of a differentiation for the firm.
For example, Coca Cola and Pepsi have developed a successful distribution system in India where they cover all retail outlets in the towns, villages, etc. This has given them a competitive advantage and also has created entry barriers for other potential entrants in the soft drink market in India.
Conditions under which Differentiation is Used
A differentiation strategy works in the following conditions :
- Other competitors have a differentiation strategy in place.
- The market is large enough for offering differentiated products.
- Customers have diverse needs.
- Other competitors in the industry offer largely undifferentiated products and focus on the generic needs of the customers. Special needs of the customers are not being addressed.
Advantages of Differentiation Strategy
Major benefits of differentiation strategy are as follows :
1) Brand Loyalty :
Strong brand loyalty helps the firm in facing the competition. Firms differentiate their offerings from their competitors through the use of trademarks of promotion. This leads to a situation in which the customers associate these products with their respective companies. This creates brand loyalty for the company's products.
For example, Coca-Cola through its advertising technique has been able to create a very distinct image with its tagline :open happiness".
2) Innovation :
The practice of differentiation creates a culture of innovation the organisation. Innovation can be of two types "transformational innovation" and "adopted product innovation". Transformation innovation is aimed at producing new products and services which have distinct product features and benefits. Adopted product innovation, on the other hand is aimed at bringing about changes in the existing products and services. Both types of innovation create a win-win situation for the firm and the stakeholders by reviving the product mix, bringing about economies of scale and improving the production process.
3) Creates Value :
A firm which employs a differentiation strategy creates value in the eyes of its consumers as it focuses on the durability and cost savings. It thus creates a perception that the products of the firm offer more than the similar product offered by the rival firms. Thus, it creates a perceived value to customers.
4) Non-Price Competition :
A company can also differentiate from its competitors on the basis of features rather than price.
For example, Mercedes Benz and Audi differentiate from other car manufacturers in terms of the luxury features in their cars and also the kind of perceived superiority or snob value in the eyes of the customer. This strategy also helps small companies to carve out their own niche in the marketplace without having to resort to cutting prices
5) No Perceived Substitute :
When a firm selects: differentiation strategy for competing in the market they compete by stressing on the quality and design aspects of their offering. This leads to 4 perception amongst customers that there is no substitute for the company's products and services. An example of this is Apple. By constantly stressing the superior products created by them they have created a brand loyalty and a perception amongst customers that there are no substitutes for their products. While there are many companies in the market which manufacture similar products like Samsung or Nokia, however, because of the superior design of Apple products it is perceived that they have no substitutes.
Disadvantages of Differentiation Strategy
The risks of differentiation strategy are as follows :
1) Barriers to Entry :
Product differentiation creates barriers of entry for new entrants in the industry. This is because the customers start perceiving the products of the company as superior and develop a very strong loyalty for the product. This superior brand image is created by immense advertising and this also acts as a significant deterrent for new entrants as they have limited fund and are not able to make large capital investment in advertising their products and services.
2) Expense :
Differentiation strategy also requires a high amount of expense to support the superior support service, high product quality, research and development initiatives, promotion expenses, etc. This leads to increase in product cost which the customer has to bear.
3) Implementation :
While implementing the differentiation strategy if the company is not able to differentiate its offering in a way that is not valued by the customer, it may not be able to generate any noticeable returns. This usually happens when a company offers an unnecessary product feature.
For example, when Yippy Noodles were launched, they were promoted as round and non-sticky noodles. But there differentiation strategy was not able to beat their main competitor Maggi.
4) Sustainability :
There is also the problem of sustainability of product differentiation. The tastes of customers change with time and competitors also often imitate the features that differentiate one product from the other. In the long run therefore the customer no longer perceives the offering of the firm as unique.
5) Tough to Create Differentiation :
Differentiation will also not work if the feature or benefit which is being highlighted as unique is not regarded so by the customer.
Focus Strategy
The third generic strategy after cost leadership and differentiation is focus. This is different from the other two strategies because in this strategy, the firm focuses on a particular segment or market within an industry. These segments may be defined in terms of products, geography or customers. A firm is able to create a differentiated and secure market position by catering to a small set of customers. Focus can be e e of two types-Cost focus and Differentiation focus. A cost focused strategy implies a cost advantage in the identified segment whereas a differentiation focus focuses on a differentiated offering in the segment. The focus strategy achieves a low cost or differentiation in its segment. However, it does not have the same value proposition for the entire market.
For example, Mahindra Holidays is a timeshare company in India which caters to family audience. In its segment Mahindra Holidays has a differentiated offer, as it offers holiday packages for the family. They focus on the family segment in the market.
A company practicing focus strategy can either be a low cost producer in its segment or can offer a differentiated product which serves the needs of the customer in a better way. A differentiated focused strategy assumes that there is a segment of customers who are looking for something more than what is being offered by other companies in the segment.
For example, Karbon mobile phones were initially launched for low-middle class. Whereas, a low cost focus strategy assumes that there is a small customer segment within the market that can be satisfied at a comparatively low cost.
Achieving Focus Strategy
A focus strategy can be achieved in the following manner :
- Working with specialist suppliers for reducing the overall value-chain cost.
- Increasing production efficiency by making investments in technology.
- Remove activities in the value chain which are not adding value to the customer.
- By focusing on the specialized needs of the customers and customizing the products based on these needs.
- Fine tuning their promotional and advertising strategies based on the specific needs of the target market.
Conditions under which Focus Strategies are Used
A focus strategy can be applied in the following conditions :
- The presence of profitable niches which are being ignored by the market leaders.
- Industry competition is low.
- Players who follow a niche strategy can create barriers for potential entrants and market leaders from entering the market segment.
- It is possible to cater to a small segment more effectively than the entire market as being done by other players.
- Some small segments are being inadequately served by the industry leaders.
- The company has an ability to identify the needs of the small customer segment and use its core competencies for satisfying those needs more efficiently and more effectively than the competing firms.
Advantages of Focus Strategy
Following are the benefits of focus strategies :
1) Better Consumer Satisfaction :
The adoption of a focus strategy allows the firm to cater to the needs of specific target segments that have very specific requirements. By making products addressed to the specific needs of customers, the company is able to satisfy the needs of the target customers. Through better marketing, the company is able to offer better services to the customers.
2) Benefits Small Businesses :
The focus strategy is best suited for small firms. These firms face shortages of resources to compete with large companies within the industry. A focus strategy is also suitable for smaller firms because the small market segments are generally neglected by the market leader. The small firm can also cater to the special needs of the small cluster of customers. Bigger players at times are not able to satisfy the requirements of the niche customer segments.
3) Competitive Advantage :
The firm adopting focus as a strategy relies on brand marketing and innovation instead of efficiency for achieving competitive advantage. This is because the customers of small segments are brand loyal and generally do not seek substitutes. This is particularly true where the firm has designed specific products to cater to the explicit needs of the target market.
4) Highly Profitable :
Since the company makes exclusively designed products for the target market, it is able to remain profitable in the business environment even when the industry at large has low market share.
5) Avoid Direct Price Competition :
The biggest advantage of a focus strategy is that it allows smaller players to survive profitably in an industry along with the big players. Some firms. often choose a niche within a niche so that they. become even safer from the big players. For the larger companies it does not make sense to target these segments as there is limited number of customers. In this manner, avoidance of direct competition from larger players and having a position that can be defended are the two main advantages of the focus strategy.
6) Better Utilization of Resource :
Since the firm becomes a specialist in its own niche, it is able to bring about a better utilization of its resources. This enables the firms to increase their competencies and capabilities. These are thus able to create more profitable niches based on their inherent competence.
Disadvantages of Focus Strategy
The risks associated with focus strategies are as follows :
1) Difficulty in Reducing Costs :
A focus strategy implies operating on a small scale. As a result, the costs are not reduced to a great extent as they would be in the case of firm operating at a large scale. This limitation is sometimes overcome with the adoption of latest technologies.
2) Attracts Competitors :
With the increase in profits, more companies get attracted to enter the market. These competitors find innovative ways of challenging the existing companies operating on a focus strategy.
For example, the entry of Japanese car makers in the luxury car market dominated by Mercedes and BMW.
3) Sacrifice of Economies of Scale :
In a focus strategy, a firm caters to a narrow market; therefore it is not able to reap the benefits of economies of scale. Economies of scale can be achieved only by the firms operating in a wide market.
4) Less Distinct Needs :
It is possible the segment or the niche that the firm is catering to loses its distinct identity and actually exhibit the same traits that are shown by the rest of the market.
5) Limited Expansion :
If the firm having a focus strategy wants to expand to other markets once its existing segments are saturated, it has to invest the resources in developing new skills and capabilities.
6) Cost Burden :
The higher cost of operation because of smaller scale of manufacturing becomes an issue for the company practicing focus strategy.
Features of Porter's Generic Competitive Strategies
|