Generic Business Strategies – Cost Leadership,Differentiation,Focus Business Strategy

Generic Business Strategies

 

Generic Business StrategiesGeneric 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

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