Major Strategy Frameworks | Generic Competitive Strategy
Consider planning a trip that will require several nights’ stay in a hotel. There are three to choose from in the town: Hotel A has no amenities beyond the basics. A bed, a bathroom and a tiny pool in the back are all that is offered at the low cost accommodations. Hotel B is a pricey resort, loaded with options; has a free breakfast buffet, an on-site spa, several pools and a well-apportioned room with a view of a nature preserve. Hotel C is a smaller hotel that caters to business travelers in the state. They offer business services, studio rooms with full kitchen facilities, catered business dinners and late check-out options to allow for longer meetings. Travelers choose one of these three hotels based on their personal needs and preferences. Each hotel, however, is an example of a particular type of Generic Competitive Strategy that businesses use to set themselves apart from the competition.
Hotel A is betting on the premise that cost is one of the primary decision making factors when choosing a hotel. They don’t offer fancy extras, but the rooms are clean and cheap. Hotel B draws clients who want to be pampered and who will wear the hotel’s monogrammed bathrobe proudly on their way down to breakfast. The rooms are expensive, but are larger than some of the homes people live in. Hotel C has narrowed their attention to the weary business traveler and has mastered the art, while maintaining prices that are middle of the road.
In this article, we look at 1) what is generic competitive strategy, 2) when is the generic competitive strategy useful, 3) components of the generic competitive strategy, 4) creating the generic competitive strategy, 5) using the generic competitive strategy, 6) examples of generic competitive strategy.
WHAT IS GENERIC COMPETITIVE STRATEGY
Harvard professor Michael Porter coined the phrase “generic competitive strategy” in his book, Competitive Advantage: Creating and Sustaining Superior Performance. Since the writing of his book, the phrase has become known in business circles as one of the primary methods of business planning and strategizing for businesses across all industries. The Generic Competitive Strategy (GCS) is a methodology designed to provide companies with a strategic plan to compete and gain an advantage within the marketplace.
According to Porter, a company can leverage its strengths to position itself within the competition. When classifying the strengths of a company, they can either be placed under the heading of cost advantage or differentiation. Within those two strength categories, the scope of the company is either broad or narrow. As a result, there are three strategies that can be applied to any business or industry at the business level (explained later in the post).
WHEN IS THE GENERIC COMPETITIVE STRATEGY USEFUL?
The GCS is useful when a company is looking to gain an advantage over a competitor. If a company wants to ‘win’ the advantage over other businesses, it does so by winning sales and taking customers away from competitors. An advantage in business, though, does not come easily. It must be developed and established firmly within the framework of a company. Using a business strategy is not a one-off or a weekend exercise; it must become the driving force of the company.
In order to do this successfully, a company must implement a Generic Competitive Strategy. Not confined to a specific industry or company, the methodology can be used in for-profit companies of any kind, as well as not for profit organizations. No matter what type of business, the principles behind the GCS are universal and can be applied to any company.
The primary benefit using a GCS is to establish a methodology of doing business that will drive the company in a certain direction. Rather than simply maintaining the status quo, a GCS gives a company a blueprint to follow that will create the structure of the company.
Critics of Generic Competitive Strategy denounce the idea that a company must choose one strategy and use it exclusively. Today’s global economy and workforce is a far from the environment that brought Generic Competitive Strategies to the forefront. There is still a use for the GCS plan in today’s business marketplace, however.
COMPONENTS OF THE GENERIC COMPETITIVE STRATEGY
GCS is based on three generic strategies: cost leadership, differentiation, and focus. Each strategy has a different mechanism for reaching success. Companies within the same industry may not choose the same strategy – it is a choice that must be made with the company’s management, based on the desired outcome for success and the company’s strengths. Each strategy has unique components that shape the company.
A business that wants to achieve an edge through cost leadership will become an expert in lowering costs while maintaining prices. The goal should always be to reduce the costs associated with doing business, while continuing to charge the same price as its competitors. This gives the company a greater profit, without having any extra expenses. Another method of maximizing the Cost Leadership position is by lowering the selling point. Because the costs associated with the products are already low, the company is still making a healthy profit. This allows the company to under bid the competitors while still preserving profits.
The differentiation strategy seeks to set a company apart by creating products that are different than a competitor’s. The specific ways that a company differentiates itself from the competition will depend on the industry of the company, but may include features, support and functionality. The uniqueness of the company – the differentiation – must only be a feature that a customer is willing to pay a premium price for. A company that focuses on differentiation may be disappointed to realize that their market share is continually changing and comes with a set of risks.
The company that uses the Focus strategy is selecting a niche market, and then determining the scope of the focus. Within the Focus strategy is the option to use either cost leadership or differentiation. It may be confusing to keep in mind that the Focus strategy is dealing with a specific, niche market. Focus does not mean a smaller market simply because the company is small – it means that the company has chosen to add value to their products and offer them to a select number of customers. Because the company who chooses a Focus strategy deals exclusively with their client base, they develop a loyal relationship which can generate sales and profits for the future.
CREATING THE GENERIC COMPETITIVE STRATEGY
Before creating a Generic Competitive Strategy, a company must decide which strategy to employ. Taking into account the strengths of the company may give an indication of the best strategy to choose, but should not be rushed simply to move to the next item.
To determine the best strategy for the company, follow a few simple steps:
- Create a Strengths, Weakness, Opportunities, Threats (SWOT) chart for each of the three strategies. Once that is completed, it may be clear that a strategy would not be appropriate. If that is the case, eliminate that strategy, and continue to the next step.
- Conduct an analysis of the industry the business is in. Finding out specifics about the business industry can lead to an increased understanding of the market and how to best position the company.
- Compare the SWOT analysis to the business industry results. Select the most viable options from the SWOT analysis and compare to the business industry analysis.
From the comparisons, a company can begin to answer questions such as:
- How does this strategy help manage supplier power?
- How does this strategy help reduce the threat of substitution?
- How does this strategy help reduce customer power?
As the company begins to answer the comparison questions, a clear choice should emerge. To decide on the correct strategy, choose the strategy that provides the company with the best set of options for the future.
There is an implied danger in not selecting a strategy. Porter referred to the company that had not chosen a definitive strategy as being ‘stuck in the middle’. A firm that doesn’t make a clear choice of strategy may become a company that has little to no profitability, has no competitive advantage and may become a target for companies that chose to differentiate. However, recent studies have indicated that there may be benefit of using a hybrid method that combines more than one strategy. Regardless of what strategy is used, one thing is clear: a company must have a directional strategy to move forward.
USING THE GENERIC COMPETITIVE STRATEGY
Prioritizing the company’s activities based on the chosen strategy will help maximize the success of the plan. The Generic Competitive Strategy will affect the daily decisions of a company, and the industry forces that a company has to deal with may change the way the company operates. The five industry forces (entry barriers, buyer power, supplier power, threat of substitutes, rivalry) would all be affected differently based on the GCS chosen.
Using the Cost Leadership strategy requires an aggressive stance towards cost in every aspect of the company’s operations. With low-cost as the defining quality, the company’s management must be ruthless in the pursuit of lower costs.
The Differentiation strategy, on the other hand, leads to profits but does not lead to a large market share. By focusing on specific traits of a product or service, a portion of the marketplace is automatically disregarded. This leads to a smaller number of potential customers, but may generate more profits due to their loyalty and willingness to spend more.
Establishing a Focus strategy means the company is choosing to prioritize their activities for a specific market segment. That segment may respond in kind by conducting their business exclusively with the company, thus providing higher profit levels. The company will not be successful, however, if they fail to provide their niche market with differences from what the rest of the consumers receive.
Porter’s Generic Competitive Strategies
EXAMPLES OF GENERIC COMPETITIVE STRATEGY
Wal-Mart is perhaps one of the most well-known companies that use Cost Leadership as their business strategy. With efficient distribution methods, huge volume discounts from suppliers, and their control of manufacturing and inventory, they are able to offer low prices. They have minimized costs and are able to pass the savings on to customers, resulting in higher number of customers who spend an average amount of money in their stores. By specializing in low costs, they appeal to a wide number of customers who flock to the store in search of a bargain.
Once a fledgling computer company, Apple has set itself apart through their Differentiation strategy. They developed an operating platform (iOS) and then designed products that use that system. The hardware for their products is designed by Apple engineers and designers and their products are compatible and top-notch. Apple not only set itself apart from the competition, it has created a subculture of loyal customers who flock to be the first to receive new devices and products. By designing every component that is used in their products, they have set themselves completely apart from the rest of the industry – leaving competitors far behind.
For drivers, there are a few choices: car, truck, motorcycle. The market for motorcycles is relatively small and the market for luxury motorcycles is even smaller. Harley Davidson has established itself as an industry leader in the niche market of motorcycle riders. They use Differentiation Focus as a competitive strategy, and they do it well. Harley riders expect a certain standard from their bikes, along with responsive customer service. This niche market has evolved almost to the point of being a ‘club’ where members find their common ground in the machines they drive. Harley has set itself apart, and established itself as the standard for the true bike rider.
Porter began a movement that is still active in today’s business world when he introduced the Generic Competitive Strategy idea. Establishing a company without considering the advantage it wishes to pursue is effectively setting the company up to fail. Careful consideration of the different advantages will give even the most novice entrepreneur an idea of which direction the company should be moving. A correctly implemented strategy will help keep the company on target, while ensuring that they maintain a competitive edge within the industry.
In Berlin, we meet Peter Borchers who founded and heads the Deutsche Telekom Incubator …