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Generic strategies - Strategic Alternatives & Choice of Strategy

   Posted On :  26.06.2018 03:42 am

According to Micheal E. Porter strategies allow organisations to gain competitive advantage from three different bases.

Generic strategies
 
According to Micheal E. Porter strategies allow organisations to gain competitive advantage from three different bases.
 
1. Overall cost leadership
 
2. Differentiation, and
 
3. Focus.
 
Organizations achieve competitive advantage by providing their customers with what they want, or need, better or more effectively than competitors and in ways the competitors find difficult to imitate. A firm’s relative position within its industry determines whether a firm’s profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities by which a firm seeks to achieve them, lead to three internally consistent generic competitive strategies that can be used by the organization to outperform competition and defend its position in the industry. These strategies are:
 
1. Cost Leadership
 
2. Differentiation, and
 
3. Focus and Niche Strategies.
 
Each of these strategies is designed to give a firm a competitive advantage. The focus strategy has two variants, cost focus and differentiation focus as shown in Figure 9-2.



Overall cost leadership emphasizes producing standardized products at a very low per-unit for consumers who are price – sensitive. Differentiation is a strategy aimed at producing products and services considered unique industry wide and directed at consumers who are relatively price-insensitive. Focus means producing products and services that fulfill the needs of small groups of consumers.
 
Overall cost leadership yields a firm above – average returns in its industry despite the presence of strong competitive forces. However, this strategy often requires high relative market share or other advantages, such as favorable access to raw materials or the ready availability of cash to finance the purchase of the most efficient equipment. National Can Company, for example, is in a no-growth industry but depends on being the low-cost producer of cans and bottles to increase its profits.
 
Reliance became number one company of India because of its cost leadership strategy. Presently it is the lowest-cost polyester producer in the world. Reliance’s project management skills, among the best in its business anywhere in the world, and its competencies in mobilizing large amount of low-cost finance enables them to set up world –scale plants at the highest speeds and lowest capital costs.
 
“In the competition for markets, it has won through an aggressive strategy based largely on scale and pre-emption. By continuously investing in capacity, often ahead of manifest demand, Reliance has not only expanded its market share but has also wrested all investment initiative from its competitors. In essence, it has played a ‘chicken game’ to see who blinks first – and given its reputation of always putting its money where its mouth is, it is competitors who have blinked. The net result is that Reliance has come to command between 33 and 80% market share in India for all its key products. These market shares have translated into cost advantages making Reliance the most profitable company in its industry during an upswing and robust in a downswing.” Sumantra Ghoshal profoundly remarks.
 
Ranbaxy laboratories, number two most competitive company of India (after Reliance) attained cost leadership through upgrading technology, vertical integration and benchmarking against international competitors.
 
Gujarat Ambuja made a success by following this cost leadership strategy. It benchmarked itself against the best practices of cement companies across the world.
 
Differentiation involves creating and marketing unique products for the mass market. Approaches to differentiation include developing unique brand images (Levi’s jeans), unique technology (MacIntosh stereo components), unique features (Jenn – Air electric ranges), unique channels (Tupperware), unique customer service (IBM), or the like. In other words, the key to differentiation is obtaining a differential advantage that is readily perceived by the consumer. Differentiation is a viable strategy for earning above – average returns in an industry, because it creates a defensible position for coping with the five competitive forces.
 
Presently Titan and its sister company Timex together hold 77% market share while HMT has 12%. There was time when HMT had 90% share because of its low price strategy. Titan with its focus on exterior design, was able to charge a premium price and gain more market share.
 
Focus is essentially a strategy of segmenting markets and appeal-ing to only one or a few groups of consumers or industrial buyers. The logic of this approach is that a firm that limits its attention to one or a few market segments can serve those segments better than firms that seek to influence the entire market. For example, products such as Rolls – Royce automobiles, Cross pens, and Hartmann luggage are designed to appeal to the upscale market and serve it well rather than trying to compete in the mass market.
 
Strategy of opening hotels in Himachal is focused strategy of Himachal Tourism Development Corporation, which is pursued on geographic grounds. Rolls – Royce pursues the strategy of selling cars to status conscious high –income consumers. Ranbaxy focused on just two categories of drugs – antibiotics and antibacterial (product – line)
 

Choices

 
The requirements for adopting the strategies are listed in Table 9-1 and risks associated with them are given in Table 9-2. Of course, the specific strategies that it is best to use depend on the characteristics of, and opportunities and constraints in, the industry.




Source:

Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Pres, New York

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