Generic Business Strategies

Cost-based and Differentiation-based Competitive Strategies

Presented By

Aamir Shah (14)

Aadil Aslam (15) Aamir Farooq (6)

Competitive Advantages as the Source of Superior Profitability

Competitive advantages work in two basic ways avoiding competitors (i.e.. lock-outs/valuable resources) outperforming competitors (i.e.. 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: Porters Bucket

High

Differentiationbased Strategies

Profitability

Low Cost Leadership Strategies

Stuck-in-the-Middle

Low Low High

Market Share (Quantity)

Target and Advantage of Porters Generic Strategies

Strategic Advantage
Uniqueness Perceived by the Customer Low Cost Position

Strategic Target

Industrywide

DIFFERENTIATION

OVERALL COST LEADERSHIP

Particular Segment Only

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 costs PRODUCTION TECHNIQUES -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 -Indivisibilities -Specialization & division of labor -Increased dexterity -Improved coordination/organization -Ratio of fixed to variable

PRODUCT DESIGN

INPUT COSTS

MANAGERIAL EFFICIENCY

Differentiation-based
Competitive Strategies

Products in the Products in the Differentiation Hall of Fame Differentiation Hall of Fame
Ford Mustang VW Beetle Honda Accord Dodge Caravan Sony Walkman McDonalds restaurants Apple Macintosh IBM PC Lotus 123 IBM ThinkPad Federal Express Timex watches Louis Vuitton bags Holiday Inns hotels Disneyland Boeing 747 Polaroid Land camera Xerox photocopier American Express credit cards and travelers checks

Keys to Successful Differentiation

Understanding customer needs and preferences

Commitment to customers
Knowledge of company's capabilities Innovation

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:

INTANGIBLE DIFFERENTIATION
Unobservable and subjective characteristics relating to image status, exclusively, identity.

size, color, materials, etc.

performance packaging complementary services

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.