MANAGEMENT POLICY AND STRATEGY SESSION - VI Generic and Grand Strategies

Prof. Sushil Department of Management Studies Indian Institute of Technology, Delhi INDIA Email: sushil@dms.iitd.ernet.in
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Generic Strategies

Low-cost leadership

Differentiation

Focus

PORTERS GENERIC STRATEGIES

Competitive Advantage
Lower Cost Broad Target Competitive Score Narrow Target 3 A. Cost Focus 1. Cost Leadership Differentiation 2. Differentiation

3 B. Differentiation Focus

REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES

Generic Strategy
Overall cost leadership

Commodity Required Skills and Resources

Sustained capital investment access to capital Process engineering skills Intense supervision of labour Products designed for ease Low-cost distribution system Strong marketing abilities Product engineering Creative flare

Common Organizational Requirements

Tight cost control Frequent, detailed control reports Structured organization and responsibilities Incentives based on meeting strict quantitative targets in manufacture Strong coordination among functions in R&D, product development, and marketing

Differentiation

REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES

CONTD
Strong capability in basic research Subjective measurement and incentives instead of quantitative measures Amenities to attract highly skilled labour, scientists, or creative people

Focus

Corporate reputation for quality or technological leadership Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channels Combination of the above Combination of the above policies policies directed at the directed at the regular strategic particular strategic target target

RISKS OF THE GENERIC STRATEGIES

Risks of Cost Leadership Risks of Differentiation Risk of Focus

Cost of leadership is not Differentiation is not The focus strategy is sustained initiated sustained: Competitors imitate The target segment Competitors imitate: Bases for differentiation becomes structurally unattractive Technology changes becomes less imported to Structure erodes Other bases for cost buyers Demand disappears leadership erode Proximity in differentiation Cost proximity is lost Broadly targeted is lost competitors overwhelm the segment: The segments differences from other segments narrow The advantages of a broad line increase Cost focusers achieve Differentiation focusers New Focusers sub-segments even lower cost in segments achieve even greater the industry differentiation in segments
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STAGE OF `INDUSTRY DEVELOPMENT

Growth

Maturity

Decline

Leader
Strategic position of organization Follower

Keeping ahead of the field Imitation at lower cost Joint ventures

Cost leadership Raise barriers Deter competitors Differentiati on Focus

Redefine scope Divest peripherals Encourage departures Differentiation New opportunities

pros:

Porter's generic strategies captured the tension between cost and differentiation. Organisations normally operate with a higher cost base when they produce and sell a premium product that customers highly value. His model showed that differentiation is as effective a strategy as cost leadership. No best strategy exists. Choosing a strategic position depends on time and circumstance. Implementation must be consistent once a position has been selected. Porter based his model on Chandler's assumption that 'structure follows strategy'. Organisations require different sets of structural traits to accommodate either a low cost or a differentiation strategy. The selection of a generic strategy provides direction to management and staff that helps them acquire internal consistency between management style, reward system, recruiting policy, etc.

cons:

The model applies best to large and established companies. Porter directed his analysis primarily on large multinationals with multiple strategic business units. Although the ideas behind the model still hold for smaller organisations, the tools are too heavy and all encompassing to provide valuable insight for them. Porter stressed the importance of choosing one generic strategy and following it through. In the late 70's, Porter saw too many US companies 'stuck in the middle' and unable to compete on a global scale. However, current opinion among strategy theorists holds that the generic strategies should not be treated as absolutes, but as a continuum. The objective of a strategy process is to find strategic positions where the widest gap exists between relative cost and the level of differentiation. An organisation then provides customers the most features at lower cost than its competitors. The Value Chain is used to analyse a firm's position in relation to its direct competitors with the assumption that rivalry drives profitability. This excludes other assumptions such as customer bonding in Alexander Hax's delta model. Porter stated that competitive strategic analysis needs to happen on an ongoing basis. Mintzberg argued that real strategy is fuzzy at best. Even when a quantative/economic change in the industry's conditions is detected, the reaction is frequently too late to realign the company. Most change occurs bottom-up, intuitively and creatively, and can be detected early using soft data rather than hard data. 9

http://www.scribd.com/doc/35044120/PPT-Porters-Three-GenericStrategies

Prof.Sushil\IITD\Session-VI

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Generic Strategies/Industry Forces

These generic strategies each have attributes that can serve to defend against competitive forces.
Generic Strategies Industry Force

Cost Leadership
Ability to cut price in retaliation deters potential entrants.

Differentiation
Customer loyalty can discourage potential entrants. Large buyers have less power to negotiate -few close alternatives.

Focus
Focusing develops core competencies that can act as an entry barrier. Large buyers have less power to negotiate because of few alternatives. Suppliers have power because of low volumes, but a differentiationfocused firm is better able to pass on supplier price increases. Specialized products & core competency protect against substitutes. Rivals cannot meet differentiation-focused customer needs.

Entry Barriers

Buyer Power
Supplier Power

Ability to offer lower price to powerful buyers.

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Threat of Substitutes Rivalry

Use low price to defend against substitutes.

Customers become attached to differentiating attributes, reducing threat of substitutes.

Better able to compete on price.

Brand loyalty to keep customers from rivals.

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