Chapter 5 The Five Generic Competitive Strategies

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

Broad Segment/Focus

CompetitiveAdvantage

Strategic Target

Overall Low-Cost

Focused DifferentiationBroad Differentiation

Focused Low-Cost

Porter’s Generic Strategies

Low Cost

Differentiation

Broad Segment/Focus

CompetitiveAdvantage

Strategic Target

Best-CostProvider

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

AssumeEqualCosts

New Entrants

How can Differentiation protect against…?

New Entrants

Joe’s Coffee99 cents

Starbuck’s$1.80

How can Differentiation protect against…?

New Entrants

Joe’s Coffee99 cents

Starbuck’s$1.80

Extra Profits

How can Differentiation protect against…?

Rivals Starbuck’s$1.80

Joe’s Coffee99 cents

How can Differentiation protect against…?

Starbuck’s$1.80

Joe’s Coffee99 cents

Advertising& Promotionsdrive costs UP

How can Differentiation protect against…?

Starbuck’s$1.80 $1.70

Joe’s Coffee99 89 cents

Discountsand sales drive prices DOWN

How can Differentiation protect against…?

SubstitutesStarbuck’s

$1.80

How can Differentiation protect against…?

Starbuck’s$1.80

There is nosubstitute for the

truly differentiatedproduct

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 Coffee99 89 cents

RaiseQuality

LowerPrices

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 Coffee89 cents

RaiseCosts

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 tacticsRequires 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 downRisky 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 pushprices 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 pushprices 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 pushprices 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