Generic Strategies help organizations cope with the five competitive forces in an industry , creating a defendable position in the industry and outperform other firms in the industry i.e; Generate above average profit. An organization may select different generic strategy for different businesses under its fold for fighting the competitive forces in each of those businesses.
Michael Porter outlined 3 Generic Strategies –
* To gain Comp. Adv. over others operating in the same industry. * Termed as ‘Generic’ because - applicable to variety of situations.
Cost leadership, Differentiation and Focus
* Each involves a fundamentally different route.
* Cost Leadership & Differentiation seek competitive advantage in a broad range of industry segments, * Focus Strategies aim at cost advantage (cost focus) or differentiation (differentiation focus) in a narrow segment. * The specific actions required to implement each generic strategy vary from industry to industry.
* Firm sets out to become the Low-cost Producer in the industry. * Emphasis on Organizational efficiency- developing efficient production methods, keeping tight controls on overhead and administrative costs, procuring supplies at low prices, cost minimization in areas like R&D, services, sales force, advertising and so on.
* SouthWest Airlines (USA), EasyJet (Europe), Air Deccan (India) * Provide a basic air transport at low cost. Few, if any, of the Frills (if offered) are at extra cost (e.g. in flight drink)
* Netto Supermarket -UK
- No delivery or loyalty cards (in contrast to rivals Tesco). - To reduce transaction costs, no credit cards/ cheques,
preferring cash & debit cards ( cheaper to process).
* Dell Computers - “build to order” strategy, low inventory costs.
* Tata Nano – world cheapest car.
Cost Leadership strategy involves several risks –
* 2 or more rival firms vying for cost leadership may drive profits down to extremely low levels, making survival difficult ( Detergent War, Low Cost Airlines war).
* It must constantly stay abreast of new technologies, products or services. Otherwise, competitors using a differentiation strategy may lure customers away with significant product or service improvements.
* Moreover, lower costs should not come at the expense of necessary quality.
* Involves development of product and services that are viewed as unique in the industry.
* Successful differentiation allows the business to charge premium prices, leading to above-average profits.
* Diffn. might sometimes prevent a firm from acquiring high marker share (since requires heavy research, high quality material/services)
* Differentiation can take many forms; e.g. Brand Image (Kellogs), Technology (HP Printers), Customers Service (IBM in computers), Product Features (GE in electric) and Quality (Xerox in copiers).
Apple Computers differentiate on technology and ease of use. Nike shoes differentiate on image.
Rather than just informing customer of availability, price and features, advertising used to build the product image, to help enhance the sense of uniqueness.
Successfully executing this strategy makes it very difficult for others to enter into direct competition. Firms will either devise their own competitive uniqueness factor.
* Nike, Reebok and Adidas pursue a strategy of product differentiation through branding in the sports shoes market.
* Toyota differentiates its products not just on branding but quality and design.
* Apple and Dell compete for the same customers using different strategies). Apple Computers pursues a strategy of technical differentiation, using different CPUs, operating...