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Generic

Generic Business
Business
Strategies
Strategies
Cost-based and
Differentiation-based
Competitive
Strategies

Sources
Sources of
of Competitive
Competitive Advantage
Advantage
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
Competitive Advantages
Advantages as
as the
the
Source
Source of
of Superior
Superior Profitability
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
Sources of
of Superior
Superior
Profitability
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
Market Share-Profitability
Share-Profitability
Relationship:
Relationship:
Porters
Porters Bucket
Bucket
High

Profitability

Differentiationbased Strategies

Low Cost
Leadership
Strategies

Stuck-in-the-Middle

Low
Low

High

Market Share (Quantity)

Target
Target and
and Advantage
Advantage of
of
Porters
Porters Generic
Generic
Strategies
Strategies

Strategic Target

Strategic Advantage

Industrywide

Particular
Segment Only

Uniqueness Perceived
by the Customer

Low Cost Position

DIFFERENTIATION

OVERALL
COST LEADERSHIP

FOCUS

Source: Porter (1980)

Cost-based
Cost-based

Competitive
Competitive Strategies
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

-Indivisibilities
-Specialization & division of labor
ECONOMIES OF LEARNING
-Increased dexterity
-Improved
coordination/organization
CAPACITY UTIIZATION
Ratio of fixed to variable costs
PRODUCTION TECHNIQUES
-Mechanization and automation
-Efficient utilization of materials
-Increased precision
PRODUCT DESIGN
-Design for automation
-Designs to
economize on materials
INPUT COSTS
Location advantages
Ownership of low-cost inputs
Bargaining power
Supplier cooperation
MANAGERIAL EFFICIENCY
-Organizational slack

Differentiation-based
Differentiation-based
Competitive
Competitive Strategies
Strategies

Products
in
the
Products
in
the
Products in the Differentiation Hall of Fame
Differentiation
Differentiation Hall
Hall of
of Fame
Fame
Ford Mustang
VW Beetle
Honda Accord
Dodge Caravan
Sony Walkman
McDonalds 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
Keys to
to Successful
Successful

Differentiation
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
The Nature
Nature of
of Differentiation
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
Achieving
Differentiation
Differentiation Advantage
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.

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