Generic Business Strategies Cost-based and Differentiation-based Competitive Strategies
Sources of Competitive Advantages (Sources of Rates of Profit in Excess of the Competitive Level) Avoid Competitors Attractive Industry Attractive Strategic Group Attractive Niche Entry Barriers Mobility Barriers Isolating Mechanisms Be Better Than Competition Cost Advantage Differentiation Advantage
Competitive Advantages as the Source of Superior 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 of Superior 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 Share-Profitability Relationship: “Porter’s Bucket” High Profitability Differentiationbased Strategies Low Cost Leadership Strategies Stuck-in-the-Middle Low High Market Share (Quantity)
Target and Advantage of Porter’s Generic Strategies Strategic Advantage Strategic Target Uniqueness Perceived by the Customer Industrywide Particular Segment Only Low Cost Position DIFFERENTIATION COSTOVERALL LEADERSHIP FOCUS Source: Porter (1980)
Cost-based Competitive 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 ECONOMIES OF LEARNING CAPACITY UTIIZATION -Indivisibilities -Specialization & division of labor -Increased dexterity -Improved coordination/organization -Ratio of fixed to variable costs PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS MANAGERIAL EFFICIENCY -Mechanization and automation -Efficient utilization of materials -Increased precision -Design for automation -Designs to economize on materials -Location advantages -Ownership of low-cost inputs -Bargaining power -Supplier cooperation -Organizational slack
Differentiation-based Competitive Strategies
Products in the Differentiation Hall of Fame Ford Mustang VW Beetle Honda Accord Dodge Caravan Sony Walkman Mc. Donalds 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 to Successful 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 Nature of 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 DIFFERENTIATION • • Observable product characteristics: size, color, materials, etc. performance packaging complementary services INTANGIBLE DIFFERENTIATION Unobservable and subjective characteristics relating to image status, exclusively, identity. TOTAL CUSTOMER RESPONSIVENESS: Differentiation not just about the product, it embraces the whole relationship between the supplier and the customer.
Achieving Differentiation 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.