Strategic Management

Objectives
The participants will understand the following-

• Identify the components Competitive Strategy

• Analyse each of the Generic Strategies in detail
• Understand the various sources of Competitive Advantage
What is Generic Competitive
Strategy
Generic Competitive Strategy (GCS) is a framework for planning the strategic direction
of your business that assists with gaining an advantage in the marketplace over your
competitors.

It is the ability of an organisation to add more value for its customers than its rivals and therefore
attain a position of relative advantage.

GCS is composed of Three Generic Strategies: cost leadership, differentiation and

focus.
Generic strategies at a glance

Low cost Differentiation Focus

Low cost culture Adding value Niche markets
Economies of scale through Targeting
Eliminate -product features Limited territory
unnecessary costs -product quality Focus on a specific
Enjoy high profits -distinctive offering group of customers
through cost Offer something Either cost leader
advantage new or different or differentiation
High costs but with in the segment
charge premium
price
Sources Of Competitive Advantage
Generic Strategies

1) Cost Leadership- In cost leadership, a firm sets out to become the low cost
producer in its industry. The sources of cost advantage are varied and depend
on the structure of the industry.
They may include the pursuit of economies of scale, proprietary technology,
preferential access to raw materials and other factors.
A low cost producer must find and exploit all sources of cost advantage. if a firm
can achieve and sustain overall cost leadership, then it will be an above average
performer in its industry, provided it can command prices at or near the industry
average.
Generic Strategies

2) Differentiation- In a differentiation strategy a firm seeks to be unique in its

industry along some dimensions that are widely valued by buyers. It selects one
or more attributes that many buyers in an industry perceive as important, and
uniquely positions itself to meet those needs. It is rewarded for its uniqueness
with a premium price.

3) Focus- The generic strategy of focus rests on the choice of a narrow

competitive scope within an industry. The focuser selects a segment or group of
segments in the industry and tailors its strategy to serving them to the
exclusion of others.
Cost leadership
• This strategy concentrates on aiming to become the lowest cost
producer in the industry through economies of scale
• In this way the firm can compete on price with every other producers
in the industry and earn higher unit profits
• Cost reduction provides the focus of the organisation’s strategy
• Competitive advantage is achieved by driving down costs
Cost leadership
• Cost leadership is based on
• Efficiency to drive down costs
• Effectiveness- knowing what is and what is not important to customers and
saving on the latter
• But there is room for only one cost leader
• A successful cost leadership strategy requires that the firm is the cost
leader and is unchallenged in this position
• Cost leadership is especially beneficial in markets where customers
are price sensitive
Sources of cost leadership
• Size - economies of scale
• Greater labour efficiency and effectiveness
• Control of overheads
• Superior management
• Greater operating efficiency and effectiveness
• Low cost production
• Low cost labour
• Design for low cost production
• Use the latest technology to reduce costs and or enhance productivity
• Relocation to low cost site
• Favourable access to low cost sources of supply
• Reduction in waste
Risks of cost leadership
• Vulnerability to even lower cost operators
• As technology improves, a competitor may be able to leapfrog the
production capabilities, thus eliminating the competitive advantage
• It could lead to a damaging price wars
• There might by difficulty in sustaining cost leadership in the long run
• A firm following a focus strategy might be able to achieve even lower
cost within their segment
Differentiation
• A differentiation strategy calls for the development of a product or
service that offers attributes that are both unique and are valued by
customers
• Customers perceive the product to be different and better than that
of rivals
• As a result the value added by the uniqueness of the product may
allow the firm to charge a premium price for it
Differentiation
• Success in a differentiation strategy means
• Gaining a competitive advantage by making their product different from
competitors
• Competing on the basis of value added to customers
• Persuading customers that the firm’s product is superior to that offered by
rivals
• Customers being willing to pay a premium price to cover higher costs
• Differentiation can be based on product image or durability,after-
sales,quality,additional features,after sales
• And it requires talent, research capability and strong marketing
Extra costs and premium prices
• Differentiation adds costs in order to add value
• The extra costs can only be recouped if the market is willing to pay a
premium price
• Problems occur if the extra costs incurred outweigh the additional
revenue generated by higher prices
• For a successful differentiation strategy it is insufficient merely to add
value - customers must recognise and appreciate the difference
• Extra costs should be added only in areas that customers perceive to
be important
Sources of differentiation
• Creation of strong brand
• Superior performance
• High quality
• Additional features offered
• Innovation in packaging
• Speed of distribution
• Higher service levels
• Greater flexibility
• Delivery
• Quality of the materials
Firms that succeed in a differentiation strategy

• Firms that succeed in a differentiation strategy have:

• Have access to leading scientific research
• A strong creative product development team
• Strong sales team with the ability to successfully communicate the strengths
of the product
• Reputation for quality and innovation
• Examples:
• BMW
• Miele - high quality domestic appliances
• James Purdey – rifles
• Bang and Olufsen- high quality hi-fi
• Mercedes
Focus strategy
• In a focus strategy the firm concentrates on one (or at most a limited number of)
segments of the market
• The premise behind this strategy is that the needs of the group can be bettered
served by focussing entirely on it
• The firm might feel more secure in the niche with greater insulation from
competition
• A focus strategy means that the firm’s efforts are not spread too thinly
• Focus strategies are
• Cost focus: cost leader in a particular segment
• Focus differentiation: differentiation in the chosen segment
Requirements of a focus strategy
• A focus strategy requires…
• The identification of a suitable target customer group
• Identification of the specific needs of that group
• Confirmation that the market is sufficiently large to sustain the
business
• Estimation of the extent of competition within the segment
• Production of products to meet the specific needs of that group
• A decision on whether to opt for cost leadership or differentiation
within the segment
Benefits of a focus strategy
• It involves lower investment in resources
• The firm benefits from specialisation
• It provides scope for greater knowledge of a segment of the market
• It makes entry to new markets easier and less costly
• Firms using a focus strategy often enjoy a high degree of customer
loyalty
Focussed cost leadership
• A strategy that aims…
• To attract one type of customer with a low cost product
• To be the lowest cost operator in one particular niche segment of the
market
• Example :Hyundai
Focussed differentiation
• A strategy that aims to attract one type of customer with a
differentiated product
• It involves distinctiveness in one segment
• Aims to exploit unique position in a niche segment of the market
• Not the cheapest but the best or most distinctive in that segment
• Example: BMW, Mercedes
Problems associated with focus strategy

• Limited opportunities for growth

• Sacrifice of economies of scale that would be available from a larger
market
• The firm could outgrow the market
• Danger of decline in the chose segment or niche
• A reputation for specialisation inhibits move into new sectors
• Risk of imitation
• Risk of changes in the target segment
Stuck in the middle
• Porter argued that a firm must make a conscious choice about the
competitive advantage it seeks to develop
• If it fails to choose one of these strategies,it risks being “stuck in the
middle”,trying to be all things to all people,and ends up with no
competitive strategy at all
• Being stuck in the middle leads to low profitability
• Competitors with a clear strategy outperform those whose strategy is
unclear or attempt a combination of strategies
 Summary
Cost leadership
Being the lowest cost producer in the industry as a whole

Differentiation
The exploitation of a product or service which is believed to be unique

Focus
Restricting activities to only part of the market through:
Providing goods or services at lower cost to that segment (cost focus)
Providing a differentiated product or service to that segment (differentiation focus)
 Self - Assessment Questions
Q1. Which one is False: Focused
differentiation is ___________.
Select the correct option.
A. A strategy that aims to attract one type of customer with a differentiated
product

B. It involves distinctiveness in one segment

Students

C. Aims to exploit unique position in a niche segment of the market

D. Not the cheapest but the best or most distinctive in that segment

E. None of the above

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 Self - Assessment Questions

Q2. True or False- Generic Competitive Strategy

(GCS) is a framework for organizing the strategic direction
of your business that assists with all operations

Select the correct option.

A. True
B. False

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Reference List
• Taylor, The Principles of Scientific Management, Harper
& Brothers
• Drucker, The Practice of Management, Harper &
Brothers
• McGregor, The Human Side of Enterprise, McGraw-Hill
• Porter, Competitive Advantage: Creating and Sustaining
Superior Performance
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