Generic Business Strategies
Generic Business Strategies refer to strategies which help a firm in achieving competitive advantage and sustaining superior performance. Competitive advantage can be achieved in two ways either by lowering costs or by differentiating the product/service in the market. The three generic business strategies suggested by Michael Porter are : Cost Leadership strategy ( lower costs/broad target market), Differentiation strategy (product differentiation/broad target market) and Focus business strategies (lower cost or differentiation/narrow target market ).
(A) Cost leadership – When the competitive advantage of a company lies in its lower costs of products and services relative to what their competitors have to offer. It offers a margin of flexibility to firms to lower prices if the competition becomes stiff and yet earn more or less the same level of profit.
Ways to achieve cost leadership –
♦ Accurate demand forecasting and high capacity utilization
♦ Attain high economies of scale
♦ Standardization of products and services
♦ Aiming at the average consumer
♦ Investing in cost saving techniques
Conditions in which cost leadership exists –
♦ Price based competition in the market
♦ Products/services offered are of standardized quality
♦ Buyers possess the bargaining power to negotiate price reduction from the suppliers
♦ Less customer loyalty
♦ Less switching cost
♦ Few ways available for differentiation
Benefits –
♦ Cost advantage helps to protect from competition
♦ Threat of cheap substitutes can be offset by lowering prices
♦ Cost advantage acts as barrier to new entrants
♦ Powerful suppliers possess high bargaining power i.e. power to negotiate price increase from inputs Powerful buyers possess high bargaining power to effect price reduction
Risks –
♦ Cost advantage is temporary
♦ It is not a market friendly approach
♦ Less efficient producers may not choose to remain in the market owing to dominance in competition
♦ Threat of technological shifts
(B) Differentiation – When the competitive advantage of a firm lies in special features incorporated into the product/service, which are demanded by customers who are willing to pay for it.
Achieving differentiation –
The firm must incorporate features in the product/service that offer-
♦ Utility for customers and match their taste and preferences
♦ Raise the performance of the product
♦ Increase buyer satisfaction
♦ Offer promise for high quality
♦ Enables a customer to claim distinctiveness from other customers and enhance their status
Conditions under which differentiation works –
♦ The market is too large to be catered by few organizations selling standardized products
♦ Customers’ needs and preferences are too large to be satisfied by a standardized product
♦ It is possible for an organization to charge premium prices for differentiation
♦ There is scope for increasing production on the basis of this strategy
Benefits –
♦ Competitive rivalry is less as firms can distinguish themselves on the basis of differentiation
♦ Powerful suppliers can negotiate price increase that the firm can absorb due to its loyal customers
♦ Powerful buyers do not negotiate prices due to fewer options
♦ Acts as a barrier to new entrants
Risks –
♦ Long-term perceived uniqueness is difficult to maintain
♦ There may be several firms adopting differentiation strategy
♦ It fails if the attribute is not valued by the customer
♦ Price premium has a limit
♦ Failure of organization to communicate the benefit associated with the product
(C) Focus Business Strategy – It relies on cost leadership or differentiation but cater a niche or narrow market. It is employed for identifying customer groups on the basis of demographic characteristics and geographic segmentation.
Ways of achieving –
♦ Choosing niches by identifying gaps not covered by cost leaders or differentiators
♦ Creating superior skills to cater such market
♦ Creating superior efficiency for serving such market
♦ Achieving lower cost/differentiation as compared to competitors
♦ Developing innovative ways to manage value chain
Conditions under which focus strategy works –
♦ There is some type of uniqueness in the segment
♦ There are specialized requirements for using the product/service that common customers cannot fulfill
♦ Niche market is big enough to be profitable
♦ Major players of the industry are not interested in such niche market
♦ Focusing firm has the necessary skills and expertise to serve the segment
Benefits –
♦ Buyers buy in small quantities therefore powerful suppliers have a low interest
♦ Buyers are less likely to shift loyalty
♦ Specialization acts as a barrier to new entrants and substitute products
Risks –
♦ Being focused means to commit to a narrow market
♦ Have to develop distinctive competencies
♦ Niche are short lived
♦ Niche may be attractive to big players
♦ Rival may serve the niche market in a better manner
♦ Costs are higher due to limited markets and small volume of production and sales