The Five Generic Competitive Strategies free essay sample

There are five generic business strategies that companies choose from when trying to successfully compete within their respective industries. This is the first choice a company must make, even before deciding an overall strategy. These generic business strategies include low-cost provider strategy, broad differentiation strategy, best-cost provider strategy; focused strategy based on low costs, and focused strategy based on differentiation. These strategies have many advantages as well as disadvantages. Choosing which one to use depends on what market position a company wants to pursue. Deciding to be more offensive or defensive also plays a role in choosing a business strategy. Some of these strategies are focused while others appeal to a broader spectrum of customers. These strategies can also be combine which allows a company to be even more competitive or to appeal to a new customer base (Thompson, Strickland, Gamble, 2010) Companies can also choose to start with one strategy and switch to another one to achieve a business turnaround. We will write a custom essay sample on The Five Generic Competitive Strategies or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Although many companies use the same strategy, no two companies will ever really have the same business strategies. This is because of the countless unique variations that can be added by each company, which can yield as many business strategies as there are businesses. (Generic Business Strategies, 2010) The low-cost provider strategy is setting a lower price than the competitors while trying to appeal to more customers. This strategy is very powerful in a market where there are price sensitive buyers. When companies strive for cost advantage over their competitors, they must include special features and services that buyers consider essential. (Thompson, Strickland, Gamble, 2010) Also, this strategy can be very prevailing when demand is price elastic; all firms the industry produce essentially the standardized products; there are not many ways of achieving product differentiation that have much value to buyers; most buyers utilize product in the same way; and buyer incur few switching costs in changing from one seller to another and thus are strongly inclined to shop for the best price. Generic Business Strategies, 2010) Trying to be the industry leader in achieving an overall low cost position entails being beating out competitors in building the most efficient plants, implementing cost-reducing technological advances, in getting the sales and market share needed to capitalize on learning and experience curve effects, in maintaining a tight grip on overhead and other administrative types of fixed costs, and in containing costs in such areas as research and development, advertising, service and distribution. By doing this, there are many advantages to using the low-cost strategy. Some advantages include: having the best position to compete offensively on the basis of price; having partial profit margin protection from powerful customers; being more insulated than competitors from powerful suppliers if its greater efficiency allows more pricing rooms to cope with increases in the costs of purchased material; and being in a favorable position in regards to barriers to entry. (Generic Business Strategies, 2010) Although there are many advantages to using the low-cost strategy, there are some disadvantages as well. One disadvantage is cutting prices too low and ending up with lower profitability. A second pitfall or disadvantage of low-cost strategy is not emphasizing avenues of cost advantage that can be kept proprietary or that relegate rivals to play catch up. (Thompson, Strickland, Gamble, 2010) Another disadvantage is the technological changes which can result in cost or process breakthroughs that nullify pas investments and efficiency gains. Generic Business Strategies, 2010) Strategic success in trying to be a low-cost firm usually requires a company to be the overall cost leader, not just one of the several firms trying for the position. When there is more than one aspiring low-cost firm, rivalry among them is typically fierce. (Generic Business Strategies, 2010) Southwest Airlines, Wal-Mart and Nucor Corporation are some companies who use the low-cost strategy. Here are some of Southwest’s key characteristics of its low-cost strategy: †¢Mastery of fst turnarounds at gates (25 minutes vs.  45 minutes for rivals) which allows planses to fly more hours per day, more flights to be scheduled per day with fewer aircraft and more revenue generated per plane on average than rivals; †¢Elimination of several services including in-flight meals, assigned seating and baggage transfer to connecting airlines results in costs savings; and †¢Fast, user-friendly online reservation system by facilitating e-ticket ing and reducing staffing requirements at telephone reservation centers and airport counters. (Kuzmicki, 2009) Another generic competitive strategy is broad differentiation strategies. According to Thompson, Strickland, and Gamble, in â€Å"Crafting and Executing Strategy†, broad differentiation strategy is seeking to differentiate the company’s product offering from rivals in ways that will appear to a brad spectrum of buyers. A company attempting to succeed through differentiation must study buyers’ needs and behavior carefully to learn what buyers consider important, what they think has value, and what they are willing to pay for. Then the company has to incorporate buyer-desired attributes into its product or service offering that will clearly set it apart from rivals. (Thompson, Strickland, Gamble, 2010) â€Å"Differentiation strategy is most likely to produce an attractive and lasting competitive edge when it is based on technical superiority, quality, giving customers more support services, and the appeal of more value for the money. † (Generic Business Strategies, 2010) Differentiation strategies work best in cases when there are various ways to differentiate the product or service and these differences are perceived by some buyers to have value; customers’ needs and uses of the item are diverse; and not many competitors’ firms are following a differentiation strategy. (Generic Business Strategies, 2010) Differentiations strategy has some advantages and disadvantages. Some advantages include the ability to have insulation against the strategies of rivals because customers establish a preference or loyalty for the brand or model; to erect entry barriers in the form of customer loyalty and uniqueness for new comers to hurdle; to mitigate the bargaining power of large buyers since the products of alternative sellers are less attractive to them; and put a firm in a better position to ward off threats from substitutes to the extent that it has built a loyal clientele. (Generic Business Strategies, 2010) Some pitfalls of the differentiation strategy include rapid imitations because competitors often reestablish similarity; buyers can see little value in the unique attributes of a company’s product; overspending on efforts to differentiate the company’s product offering which causes low profitability; over differentiating so that product quality or service levels exceed buyers’ needs; trying to a high price premium; and being timid and not striving to open up meaningful gaps in quality, service or performance. (Thompson, Strickland, Gamble, 2010) Many of companies use differentiation strategies which enhances profitability whenever the extra price the product commands out weighs the added costs of achieving the differentiation. Companies can practice differentiation from many angles. Microsoft Vista and Office and iPhone use multiple features to differentiate. Karastan in carpets, Michelin in tires, and Toyota and Honda in cars use quality manufacture as an angle. (Thompson, Strickland, Gamble, 2010) Best-cost provider strategies are another generic competitive strategy. These strategies aim at providing more value for the money. â€Å"A company achieves best-cost status from an ability to incorporate attractive or upscale attributes at a lower cost than rivals. † (Thompson, Strickland, Gamble, 2010) These attributes can be appealing features, excellent product performance or quality, or attractive customer service. The best-cost provider strategies work best in markets where buyer diversity makes product differentiation the norm and where many consumers are sensitive to price and value. This concept is true because a firm using the best-cost strategies can position itself in the middle of the market with either a medium quality product at a below average price or a high quality product at an average or slightly higher price. There is one big disadvantage to the best-cost provider strategies. It is getting in the middle of the strategies of firms using low-cost and high-end differentiation strategies. Customers might be driven to the low-cost providers by the appeal of the lower price despite the less appealing  product attributes. Also, the some customers might be attracted to the high-end differentiators with the appeal of better product attributes even though their products carry a higher price tag. Therefore, a company using the best-cost provider strategies must offer customers better product attributes in order to justify a price above what low-cost leaders are charging and it has to achieve lower costs in providing top notch features so that it can beat out high-end differentiators on the basis of significantly lower prices. (Thompson, Strickland, Gamble, 2010) As discussed in our textbook, â€Å"Crafting and Executing Strategy†, by Thompson, Strickland, Gamble, Toyota used the best-cost provider strategy for its Lexus division. Here are some of the key characteristics of the strategy. One characteristic was to design an array of high-performance elements and upscale features into Lexus models to make them comparable in performance /luxury to other high-end model, i. e. Mercedes, BMW. Another characteristic was to transfer its capabilities in making high-quality Toyota models at low cost to making premium-quality Lexus models at costs below other luxury car makers. Toyota used its relatively lower manufacturing costs to underpriced comparable Mercedes and BMW models. Another characteristic was to establish a new network of Lexus dealers, separate from Toyota dealers, dedicated to providing a level of personalized customer service unmatched in the industry. Thompson, Strickland, Gamble, 2010) The other two generic competitive strategies are the focused (market niche) strategies. These two strategies are the focused low-cost strategy and the focused differentiation strategy. The distinguishing feature of a focus strategy is that the firm specializes in serving only a portion of the total market. The underlying premise is that a firm can serve its narrow target market more effectively or more efficiently tan rivals that position themselves broadly. The competitive advantage of a focus strategy is earned either by differentiation, achieving lower costs in serving the target market, or both. (Generic Business Strategies, 2010) A focused strategy based on low cost aims at securing a competitive advantage by serving consumers in the target market niche at a lower costs and a lower price than rival competitors. Focused low-cost strategies are fairly common. According to Thompson, Strickland, Gamble, in â€Å"Crafting and Executing Strategy†, The Perrigo Company has become a leading manufacturer of over-the-counter health care products, with 2007 sales of more than $1. 4 billion, by focusing on producing private-label brands for retailers such as Wal-Mart, CVS, Walgreens, Rite-AID, and Safeway. Also, Motel 6 has used a low-cost strategy in catering to budget-conscious travelers who just want to pay for a clean, no-frills place to spend the night. (Thompson, Strickland, Gamble, 2010) According to Thompson, Strickland, Gamble, in â€Å"Crafting and Executing Strategy†, A focused strategy based on differentiation aims at securing a competitive advantage with a product offering carefully designed to appeal to the unique preferences and needs of a narrow, well-defined group of buyers (as distinguished from a broad differentiation strategy aimed at many buyer groups and market segments). Companies like Godiva Chocolates, Chanel, Gucci, Rolls-Royce, employ successful differentiation-based focused strategies targeted at upscale buyers wanted products and services with world-class attributes. (Thompson, Strickland, Gamble, 2010) The focused strategies work best with certain favorable market conditions. One favorable market condition is having a target market niche that is large enough to be profitable and offers a good growth potential. Another market condition is firms not seeing a presence in the niche as crucial to their success. If it is costly or difficult for multi-segment competitors to put capabilities in place to meet the specialized need of buyers which will comprise the target market niche and satisfy the expectations of their mainstream customers at the same time. Another condition is if the industry has many different niches and segments which allow a focuser to pick a competitively attractive niche suited to its resource strengths and capabilities. Also, if other competitors are attempting to specialize in the same target causing a condition that reduces the risk of segment overcrowding. (Thompson, Strickland, Gamble, 2010) There are a few risk associated with using the focus strategies. One risk is the possibility that broad-range competitors will find effective ways to match the focused firm in serving the narrow target market. Another risk is shifts in buyer preferences and needs away from the firm’s special product attributes toward more generally available features desired by the target segment. Also, the chance that competitors will find smaller segments within the target segment and â€Å"out focus† the firm. (Generic Business Strategies, 2010) Michael Porter said, â€Å"Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value. † (Kuzmicki, 2009) Companies should choose from five generic business strategies when trying to successfully compete within their industries. As discussed above, the generic business strategies are the low-cost provider strategy, the broad differentiation strategy, the best-cost provider strategy; the focused strategy based on low costs, and the focused strategy based on differentiation. There are many benefits and risks to using these strategies. Also, companies have to be very careful in choosing the right strategy or strategies to pursue because the choosing the right generic strategy will affect several aspects of how the business will operate and the manner in which value chain activities must be managed. This decision is the most important decision a company will make because of its huge impact on the business. Firms can also choose to combine or switch between strategies. They must find the best strategy for the company without getting torn between the pros and cons of the various strategies and opt for â€Å"stuck-in-the-middle strategies†. These strategies rarely produce sustainable competitive advantage. If a company makes a vital commitment to one of the five generic competitive strategies, it will stand a chance of succeeding and sustaining competitive advantage. (Thompson, Strickland, Gamble, 2010) â€Å"Winners in business play rough and don’t apologize for it. The nicest part of playing hardball is watching your competitors squirm,† said George Stalk Jr. and Rob Lachenauer. (Kuzmicki, 2009) References