Harvard professor, Michael Porter, developed the phrase “generic competitive strategies or GCS” in his business planning and strategizing book, “Competitive Advantage: Creating and Sustaining Superior Performance.” Porter’s generic competitive strategy is a framework that is useful for planning the strategic direction of your business that assists with gaining an advantage in the marketplace over your competitors. Micahel Porter(1980) set out to uncover the ways companies maintain long-term advantages over their competitors. Generic Competitive Strategies, three interconnected concepts that most organizations use to develop key operating procedures and outmaneuver competitors.
Porter identified three generic strategies
that can be implemented in any industry (and by companies of any size.). Porter called the generic strategies
"Cost Leadership" (no frills), "Differentiation"
(creating uniquely desirable products and services) and "Focus"
(offering a specialized service in a niche market). He then subdivided the
Focus strategy into two parts: "Cost Focus" and "Differentiation
Focus."
Cost leadership
The companies that follow this strategy
has goal to increase profits by reducing
costs while charging industry-standard prices, or to increase market share by
reducing the sales price while retaining profits.
The
cost leadership allows a competitive edge by manipulating production
costs. It does this in two important ways:
- Charging
lower prices to increase market share. This is done by casting
the company as a low-cost alternative, which increases both sales and the
company’s profile.
- Reducing
costs to increase profits. With fewer expenses on the books, organizations
can move money into other avenues, like salaries or product research.
It
often depends on the specifics of their given industry. Many business ventures
will have access to capital for investing in technology and infrastructure.
These kinds of adjustments and innovations help businesses bring down costs. It
also helps to minimize the standard operating expenses. As an extension of
that, proper logistics are crucial. Companies must be able to effectively
manage the flow of products between the point of creation and respective
storefronts.
In cost leadership strategy companies
charge a lower price but their volumes are larger. Therefore, volume of
business allows a company to maintain its profits and expand its market
share.
Companies that are successful in achieving Cost
Leadership usually have:
·
Access to the capital needed
to invest in technology that will bring costs down.
·
Very efficient logistics.
·
A low-cost base (labor,
materials, facilities), and a way of sustainably cutting costs below those of
other competitors.
The
greatest risk in pursuing a Cost Leadership strategy is that these sources of
cost reduction are not unique to you, and that other competitors copy your cost
reduction strategies. This is why it's important to continuously find ways of
reducing every cost. One successful way of doing this is by adopting the
Japanese Kaizen philosophy
of "continuous improvement."
One
real-world business who has championed Cost Leadership is Wal-Mart. The
conglomerate has built its model partly on low prices, continually
promising to beat those of its competitors. Executives are able to do that
because Wal-Mart has an especially efficient supply chain, often sourcing
products from less expensive foreign markets.
Another brilliant example of cost leadership
is the Swedish furniture retailer Ikea. This company offers furniture at
amazing low price. It’s the best example of innovativeness. Ikea is able to
keep its prices low because it sources its products from low-wage countries. It
saves on labour cost and it does not assemble or deliver furniture; customers
must collect the furniture from the warehouse and assemble at home
themselves. Thought from convenience point of view this is less suitable,
customers still buy it from Ikea because of the lowest price tags.
The product could still be priced at
competitive parity (same prices as others), but because of the lower cost of
production, the company would be able to sustain itself even through lean times
and invest more into the business all throughout.
Examples are the TPS system developed by the
Toyota Motor Company. The TPS system aims to cut costs throughout the company,
but Toyota cars are still priced at almost the same levels as American or other
Japanese cars.
1. Moser Baer India
·
Noida UP based world-class mfg. company
·
Well known for CD’s
·
Among the top three global companies for the data storage
business
2. GCMMF – Gujarat Cooperative Milk Marketing Federation –
Brand Amul – Ice Cream market
Differentiation
To implement this strategy, your company's
products need to be significantly better than the competition's, improving
their competitiveness and value to the public. It requires thorough research
and development, plus effective sales and marketing.
The
Differentiation method looks to develop product uniqueness and attractiveness
to engage customers. Once again, there are a number of concepts involved in
this approach, and each one is all about playing to customers’ perceptions.
That might include promoting a product’s durability and general utility,
which appeals to a customer’s sense of value. It could also involve touting the
support system for a service or product, which creates a certain air
of accountability. Finally, there is also the notion of brand image,
creating meaningful connections with customers to
ensure long-term loyalty. Companies that differentiate want to meet
customers’ unique needs, and are rewarded with premium prices.
To
properly implement the Differentiation strategy, a company needs the following:
- Marketing
and promotions teams. These individuals are on the frontlines of defining
a brand and emphasizing its uniqueness.
- Delivering
high-quality products. Customers won’t stay loyal if the reality doesn’t
meet the company’s promises.
- Ongoing
research and innovation. Only by pushing technological boundaries can a
company hope to maintain relevancy.
Large organizations pursuing a differentiation
strategy need to stay agile with their new product development processes.
Otherwise, they risk attack on several fronts by competitors pursuing Focus
Differentiation strategies in different market segments.
One of the more successful
examples of the Differentiation approach is McDonald’s. Over the
years, the fast food giant has used technology and research to gain
consistently loyal customers, including efforts to reduce wait times and
marketing directly to children.
Etsy
is an online artisan store and shopping gallery which has used differentiation
strategy wisely. Etsy offers its users a platform to showcase their handmade
wares and sell them to customers around the world. Hence this store is called
as a crafter’s paradise. Etsy has carved a niche for itself through sales of
craft supplies as well as homemade items. Through Etsy, the community of
crafters has found a home on the internet and the world has been opened to the
amateur artisan/crafter those who wish to sell their products. The Etsy
business model brings together the artists and the business savvy of investors
who are keen to support the ideas and talent of craftsmen. This business model
has worked wonders for Etsy.
Differentiation is a
marketing term used to describe the process of developing promotional messages
that distinguish products from those offered by competitors. The
differentiation plank is created in the minds of target customers. Effective
differentiation is critical to building a strong business model. Samsung has
adopted differentiation strategy by providing its customers large numbers of
service centers network, online technical support, entertaining online complaints,
live chats with customers and phone support. Each year Samsung invests minimum
9% of its sales revenue in R&D activity. It believes in innovative concepts
and innovative marketing strategies.
A variety of products, each branded and promoted
differently with levels of function, allows a company to 'desensitize' prices,
and on the basis of being different, charge premium or higher prices. This
strategy also provides a hedge against different markets and product life
cycles, allowing cash flow to come in even if a few products decline, while
others grow or mature.
A prime example of this strategy is Hindustan
Lever, which, while focused on FMCG, has a range of products even within the
soaps category for different segments. Such a strategy needs strong segmentation,
marketing and branding skills.
·
Orient
Fans: Kolkata based C K Birls organization, premium price, exports to many
stores including Walmart, technology differentiation- Air delivery, the reach
of air and electricity consumption
·
Gati
– A multinational transport company, technology-driven company, delivering
premium value to the customers
Differentiation- risk insurance for shipments, refund on failure to deliver on
time, door to door pick up and delivery, time-bound operations, online tracking
and safer transportation
·
Parle
Agro -Frooti – the packaging
Focus
Successful implementation entails the
company selecting niche markets in which to sell their goods. It requires an
intense understanding of the marketplace, its sellers, buyers and competitors. More
information about the generic strategies is available in Porter's 1985
book, Competitive Advantage (Free Press).
The
Focus approach, however, eschews mass appeal, instead layering
efforts toward one niche market. Companies who choose to adopt this strategy
are taking a deliberate risk. On the one hand, by engaging a specific
demographic – many of which are often underserved – the company is able to captivate
an increasingly loyal pool of consumers. Unfortunately, research has
shown that catering to only a select group of people might prove
unattractive to those outside the group. Thus, these companies become almost
solely dependent on the spending habits of a very small percentage of people.
Within
the Focus strategy, there are two distinct variants:
- Cost
Focus:
Here, companies are looking to find a cost advantage in their intended
market segment.
- Differentiation
Focus:
These companies work to find as unique of a market as possible in order to
maximize efforts.
Regardless
of the specific variant, Focus is all about balancing the relationship between
production costs and delivery. Cost Focus intends to find those markets where
costs are optimal, while Cost Differentiation emphasizes the buyer’s unique
needs.
PepsiCo is among the largest consumer packaged goodscompanies in the U.S. It achieved this by absorbing a number of smaller
companies that helped it develop an edge in the beverage industry. The company’s
subsidiaries include Tropicana, Naked Juice, Frito-Lay and the South Beach
Beverage Company.
For
example, Porche markets to the particular segment that likes fast and expensive
cars and can afford it. A company in a niche market has customers who
understand, appreciate and can pay a premium for their indulgence. Competitive
advantage - either by cost or differentiation- is created specially for the
niche. But the risks are that the niche may not grow, or it may disappear with
time and change.
Examples
of niche markets are organic foods which are more expensive, but with promise
of better quality and enhanced for environment protection. Another example of a
niche is of traditional 35mm film cameras and films; these have become rare.
The producers no longer enjoy the same economies of scale, but some consumers
still like to use it.
Café
Coffee Day in India. This chain of coffee restaurants brought in the concept of
cafes to India where the young and the old can sit for a while, chat, discuss,
and meet over a steaming cup of coffee. The first one opened in 1996 on Brigade
Road in Bangalore. At CCD, people can have leisure meetings. Nobody disturbs or
asks you to vacate the table. The concept instantaneously became a hit. It has
a target audience of educated, serious people in big cities and metros where
meeting places are in shortage. Another appreciation CCD has capped is
that there are also 11,000 small growers in India from whom they source coffee
from.
Narrow
target and advantage in uniqueness: M.A.C. cosmetics, founded in Toronto
in the mid-1980s, follows a focused differentiation by selling a wide variety of
cruelty-free products for the everyday consumer: eyeshadows, lipsticks, lip
gloss, foundations, concealer, nail polish, mascara and stage makeup. MAC also
sells fragrances and make-up brushes. They sell skin care products as well.
Stuck in the Middle
A company that tries to engage in
each generic strategy but fails to achieve any of them, is considered ‘stuck in
the middle’. Such a company has no competitive advantage regardless of the
industry it is in. As a matter of fact, such a company will compete at a
disadvantage because the ‘cost leader’, the ‘differentiators’ and the
‘focusers’ in the industry will be better positioned to compete. It may be the
case, however, that a company that is stuck in the middle still earns
interesting profits simply because it is operating in a highly attractive
industry or because its competitors are stuck in the middle as well. If one of
the two exceptions are not present it will be very hard for companies to engage
in both differentiation and cost
leadership, Porter argues, because differentiation is usually costly. Each
generic strategy is a fundamentally different approach to creating and
sustaining superior performance and requires a different operating model.
Generic
strategies apply to not-for-profit organizations too.
A
not-for-profit can use a Cost Leadership strategy to minimize the cost of
getting donations and achieving more for its income, while one pursuing a
Differentiation strategy will be committed to the very best outcomes, even if
the volume of work it does, as a result, is smaller.
Local charities are great examples of organizations using
Focus strategies to get donations and contribute to their communities.
Steps to help
you choose.
When
companies need to choose one out of three strategies they need to take into
account their SWOT analysis. Also organizations need to do the five force
analysis of the industry. Companies must select the generic strategy that gives
them the strongest set of options because it is the starting point of strategic
decisions making.
Step 1:
For each generic strategy, carry out a SWOT Analysis of your strengths
and weaknesses, and the opportunities and threats you would face, if you
adopted that strategy.
Having done
this, it may be clear that your organization is unlikely to be able to make a
success of some of the generic strategies.
Step 2:
Use Five Forces Analysis to understand
the nature of the industry you are in.
Step 3:
Compare the
SWOT Analyses of the viable strategic options with the results of your Five
Forces analysis. For each strategic option, ask yourself how you could use that
strategy to:
·
Reduce
or manage supplier power.
·
Reduce
or manage buyer/customer power.
·
Come
out on top of the competitive rivalry.
·
Reduce
or eliminate the threat of substitution.
·
Reduce
or eliminate the threat of new entry.
Select
the generic strategy that gives you the strongest set of options.
Porter’s advise on choosing the right
strategy: Porter
says that organizations must spend time and efforts before they make choice of
which generic strategy to pursue because it underpins every other strategic
decision. He cautions organizations to use not more than one strategy. One of
the most important reasons why companies must use only one of the three
strategies is because the entire planned feeling revolves around it. Cost
Leadership requires a very detailed internal focus on processes.
Differentiation, on the other hand, demands an outward-facing, highly creative
approach.
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