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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
