Introduction
According to the Business Dictionary (Para. 1), generic strategies are defined as the fundamental approaches to planning strategies that firms adopt, in whatever the industry or market, to improve their performance in competition.
When the basic determinant of the profitability of a particular firm is how attractive the industry in which it operates is, a significant secondary determinant is a position the firm holds in the industry. As much as an industry may be having profitability that is below average, a firm that is holding the best position can derive the highest returns. A firm puts itself in a position by capitalizing on its strengths. According to Michael Porter’s argument (cited in QuickMBA, 1999: Para 2), a firm’s strengths in due course fall either in differentiation or cost advantage. Through the application of these strengths, three generic strategies come about. These strategies include; differentiation cost leadership and focus. They are put into practice at the business level. These strategies are referred to as generic for the reason that they do not depend on the firm or industry.
In this paper, we are going to look into much detail about these three basic generic strategies together with the fourth one referred to as stuck in the middle that is adopted in the case where a firm fails to come up with a choice among the three generic strategies, that is cost leadership, differentiation and focus. The firm is thus said to be stuck in the middle. In addition, we are going to consider the appropriate machinery one can use in coming up with the best strategy to adopt in order to win a competitive advantage. More so we are going to look at the advantages of these generic strategies.
Porter’s generic strategies can best be illustrated using the table below:
Porters Generic Strategies
Cost Leadership Strategy
This strategy calls for a firm to produce at a low cost in an industry for a given degree of product quality. The products are sold by the firm at average prices in the industry in order to acquire a higher profit than its competitors or the firm can sell its products at the price lower than the average industry prices to achieve market share. In the instance of price war, the firm can still remain with some profits while the rivals get losses.
Likewise, in the absence of price wars, as the industry expands and prices go down, those firms that can produce at low costs will continue making profits over an extended duration. This strategy in most cases targets a wider market.
Cost advantages can be achieved in various ways which include; having access to adequate capital required to invest in efficient technology that will cut down the costs, having special access to cheaper labor, raw materials and facilities, creating best outsourcing and coming up with decisions of vertical integration, or still, doing the best to evade some costs.
The internal strengths associated with those firms with much success in cost leadership include:
- Ability of having access to the required capital to put in advanced technology that will facilitate cutting down of the costs. Such a move will bring about a barrier to entry that would be very hard to overcome by many firms.
- Ability to come up with product designs that can be manufactured more efficiently and more cheaply within the shortest time possible.
- Having the distribution channels that are more effective and efficient in that the customers are accessed easily and within the convenient time possible.
However, this strategy has its own weaknesses. For instance, as much as a firm may bring down its costs, other firms competing with it may as well bring down their costs. More so, as technology advances, the competition within the industry may jump ahead of the firms’ ability to produce and as a consequence, the competitive advantage may be done away with. To add on this, various firms that may have adopted a focus strategy and serving only sections of markets that are not broad may be in a position to reduce their costs and as a result, they acquire a possibly lower cost in these sections and collectively get a reasonable share in the market (QuickMBA, 1999: Para 6). For this reason, it is important for a firm, in order to remain in competition and maintain its status as cost leader; it has to come up with ways of bringing down costs on a continuous basis. It has to carry out non-stop improvements.
Some of the examples of companies that employ the cost leadership include Easy Jet airlines, Ryan Air, among others.
Differentiation Strategy
This is a strategy in which a product (a good or service) is developed by a firm to make look or be perceived as unique in order for the customers to value the product highly in comparison to that which is being offered by the competitors. This additional value by the development of the product may give the firm a permission to price the product slightly higher than that of the competitors. The firm has a belief that the additional costs involved in improving the product are to be covered by the higher price to be charged and even in the end bring in more profit. Since the product is unique, even if the firm’s suppliers bring up the supplies prices, these costs may be covered by charging the customers a higher price especially those who can not come across substitutes in an easy way.
Successful firms that employ this particular strategy possess some internal strengths. These strengths include:
- Having the ability to carry out thorough scientific research in order to come up with new findings. These findings may go a long way in enabling the firm to strive towards achieving customer satisfaction.
- Having a team that possesses advanced knowledge and creativity in developing the product.
- Presence of a team that has high skills in carrying out aggressive sales and marketing through successful passing on of the information to the customers about the perceived quality of the product.
On the other hand, just like in the former case, this strategy has some problems. For instance, it may be very hard for a firm to predict if the extra costs incurred in the process of developing the product in order to be perceived valuable will actually be covered through the increased price. Also, in the case where a firm may have successfully implemented differentiation strategy, this may cause the rivals to come in and imitate the product (Verena 2005: Para. 6). Other problems may include, the shift in the tastes of customers and their preferences and other firms employing the focus strategy that may enable them to get higher differentiation within the segments they are targeting.
An example of a company that has adopted this generic strategy of differentiation successfully is the Apple Computer Company which produces products that are different and are sold at a lower cost from the products of Microsoft. Among these products we have Mac Mini which is very small and is compact and is also elegant and more so, has no spasm and viruses but Microsoft has these. Therefore, these features encourage the customers to switch from Microsoft’s products to purchasing products made by the Apple Company. Other companies that have adopted this strategy include BMW, Nike, and McDonalds among others.
The Focus Strategy
This strategy acts as a moderator of the other two strategies earlier own discussed. The firms apply this strategy by directing their efforts and attention on the points within the market where there is minimal competition. The companies do this in order to acquire differentiation or cost advantage. The underlining factor in this strategy is that the needs of a particular group within the market can be well met by concentrating entirely on this group. By customers realizing the commitment the firm is showing and working out all the possible means to meet their needs, they will become very loyal to that particular firm and as a consequence this will discourage other firms to enter in to competition to offer their products to these customers.
However, since the firms employing this strategy have a narrow market focus, they have lower volumes of supplies and this translates in to having minimal bargaining power when it comes to their suppliers. But this problem can be countered especially when firms are employing a differentiation strategy. Such firms may be in a position of passing over the higher production costs that they are incurring to their customers because very close substitutes are not there. Successful firms that implement this strategy have the ability to come up with a wider scope of strengths in relation to developing the product to a comparatively smaller segment that they actually understand fully.
Under this strategy, the firm is provided with the possibility to charge a higher price for high quality products. This is a case of differentiation focus. The firm can as well offer a lower price for lower quality products and this is the case of cost focus.
The problems associated with this strategy are variations in the segments targeted and copying from the competitors. In addition, other firms may concentrate on even smaller segment within the original segment and provide service that may be appreciated by the customers even the more.
Some of the examples of firms that employ this strategy include Ferrari whose focus is on the production of cars that have high performance, especially the sport luxury cars and Rolls-Royce has its focus on producing luxury automobiles. These companies possess a focus of premium products that are offered at a premium price. More so, these companies have a small portion of the global market. Another example of a company that has implemented the focus strategy is the Lenovo Company which has been able to improve in to a top brand by implementing the focus strategy through its segmenting its market thus offering catering services selectively to the customers who are very conscious of the cost and premium.(Vast Expanse, 2009: Para 14).
Stuck In the Middle
This is a state whereby a company has failed to choose between differentiation and cost leadership. Such a company at that point does not have a competitive advantage and as a consequence the company performs very poorly. A company may get itself in this particular dirty state after making attempts to gain competitive advantage from all directions. For instance, when a company employs differentiation by producing superior quality products, the company faces a risky prospect devaluating the quality especially if it is in for taking cost leadership. Though the quality of the product may not undergo false perception, the firm may possibly portray a wrong image. This is a reason that prompted Porter to suggest that if any particular firm is seeking success in the long-run, the firm is supposed to adopt only one strategy to implement. This will be an effort by the firm to evade getting stuck in the middle thus losing a competitive advantage.
However, there is an argument that this is not always the case (Verena, 2005: Para 10). Companies such as Toyota and Benetton have been cited to be among those that have employed both differentiation and low cost strategies and this resulted in to big success for the companies. But on the other hand, Porter argues that those firms that are able to succeed after applying more than one strategy usually apply each strategy to a separate business unit created. This application of separate strategies to the business units with unlike policies and unrelated cultures as well makes a firm to avoid getting “stuck in the middle”.
Still, there is a point of view that suggests that one generic strategy may not all the time be the best since the customers may look for multiple satisfactions from one product like an aggregate of price, quality, convenience, and style. Instances have been witnessed whereby firms that produced high quality products stuck on a single strategy but incurred much injury at the point where another firm comes in the market with a product of low quality that satisfied the customer needs.
Choosing the Right Strategy
Choosing the right strategy to adopt outweighs any other strategic choice you can come up with and thus, it is very important to take time to come up with the best generic strategy to implement. In whatever the case, you have to come with a decision anyway.
Porter is very specific in pointing out the danger of adopting more than one generic strategy. This is very sensible piece of advice because whatever the decision made, it should be welcome by various kinds of people or groups of people. Being a cost leader needs a very comprehensive inner concentration on processes. On the other hand, differentiation calls for producing an outward image using a very high level of creativity.
Therefore, when making a choice among the strategies, it is quite important to consider the firm’s strengths and ability to compete in order for you to establish which one works for you. The following steps may be followed in order to come up with the appropriate choice:
- Undertake a SWOT analysis for every generic strategy. Here you have to analyze your strengths and weaknesses, and the opportunities and threats you may encounter when you implement the chosen strategy. After carrying out this analysis, a clear picture may be gotten of whether the firm is likely to succeed through implementing some of the strategies or not.
- To understand the industry in which the firm is, Five Forces Analysis has to be used. This is a tool that is used to understand the strength of the present competitive position and the strength of the future position currently under consideration. Having a clear picture of the point where power is, a firm can capitalize on the strength and improve on its weakness to evade taking wrong moves. This tool works on the assumption that there exist five forces that are a determinant of competitive power in a state of affairs. These forces include; supplier power, buyer power, competitive rivalry, threat of substitution and threat of entry. Under supplier power, here the assessment of the firm’s suppliers to hike the prices. Under buyer power, the concern is on how easy it is for the buyers to bring down the prices. Competitive rivalry concerns the approximate number and ability of the competitors. Threat of substitution is the case where there is the capability of the customers coming up with a way of doing what the firm is doing. And lastly, threat of new entry refers to the ability of entry in the industry of new firms to increase the competition in the market.
Make a comparison between the SWOT analyses of strategic options that are feasible with the Five Forces analysis results. Then ask yourself the following questions for every strategic option:
- How could that strategy lower or control the supplier power?
- How could the strategy be used to manage the customer power?
- How could the strategy enable the firm rise to the top of competitive rivalry?
- How could it be used to do away with the threat of substitution?
- How could it bring down or do away with the threat of new entry.
The generic strategy that gives the strongest set of options is then selected (Mind Tools, 1995: Para. 24).
The Advantages of the Generic Strategy
The generic strategies are very important in improving the performance of a business firm especially in regard to competing with other firms within the same industry. Therefore, these strategies enable the firm to always be competition-conscious and thus, the firm will:
- Be keen on the competitive advantage and consider the capacity and resources available and can be build or purchase in order to utilize them for competitive advantage.
- Will be keen on the going on of the competitive advantage for the longest time possible and to come up with new designs to take the place of the old ones.
- Try to carry out exploitation on the external variations to come up with opportunities for competitive advantage or to the minimal level be able to put up with the competition brought about by other firms.
- Have to concentrate on its efforts to improve on its ability and its competitive advantage related with both the present and the future.
- Will find it necessary to trace the strategy that it would like to choose and implement from among the three generic strategies, as a general and guiding strategy, in order to carry out exploitation of the resources and capacity.
Works cited
Business Dictionary. 2009. Web.
QuickMBA. Porter’s Generic Strategies. 1999. Web.
Mind Tools Ltd. Porter’s Generic Strategies. 1995-2009. Web.
Verena, V. Porter’s Generic Strategies. 2005. Web.
Vast Expanse. Corporate strategies – Porter’s Generic strategies. 2009. Web.