Generic Business Strategies

Firms tailor their strategies to fit particular circumstances, every firm’s strategy has at least several unique components – in this sense there are countless strategy variation and options, ultimately yielding as many business strategies as there are businesses. However, when one looks at the basic character of the different strategies that firms employ, the amount of fundamental strategy variation narrows considerably. From this more generalized perspective, it is possible to single out three generic approaches to competing in the marketplace:

1. striving to be overall low-cost producer in the industry;

2. seeking to differentiate product offering in one way ore another from rivals’ products;

3. a focused approach via low-cost or differentiation to a narrow portion of the market rather than going after the whole market.

Strategy of low-cost producer

The impetus for striving to be the industry’s low-cost producer can drive from sizable economies of scale, strong learning and experience curve effects, other cost-cutting and efficiency-enhancing opportunities, and a market comprised of many price-conscious buyers. Trying to be the industry leader in achieving an overall low-cost position typically entails being out in front of rivals in constructing the most efficient-sized plants, in implementing cost-reducing technological advances, in getting the sales and market share needed to capitalize on learning and experience curve effects, in maintaining a tight rein on overhead and other administrative types of fixed costs, and in containing costs in such areas as R&D, advertising, service, and distribution.

This strategy is powerful when:

• demand is price elastic;

• all firms in the industry produce essentially the standardized products;

• there are not many ways of achieving product differentiation that have much value to buyers;

• most buyers utilize product in the same way;

• buyer incur few (if any) switching costs in changing from one seller to another and thus are strongly inclined to shop for the best price.

Advantages in pursuing this strategy:

• as concerns competitors, the low-cost company is in the best position to compete offensively on the basis of price;

• as concerns customers, the low-cost company has partial profit margin protection from powerful customers since the latter will rarely be able to bargain prices down past the survival level of the next most efficient firm;

• as concerns suppliers, the low-cost producer can, in some cases, be more insulated than competitors from powerful suppliers if its greater efficiency allows more pricing rooms to cope with increases in the costs of purchased materials;

• as concerns potential entrants, the low-cost producer is in a favorable competitive position because having the lowest costs not only acts as a barrier for a new entrant to hurdle but it also provides the leeway to use price-cutting as a defense against market inroads made by a new competitor;

• as concerns substitutes, the low-cost producer is, compared to its rivals, in a favorable position to use price cuts to defend against competition from attractively priced substitutes.

Risks and disadvantages:

• technological changes can result in cost or process breakthroughs that nullify past investments and efficiency gains;

• rival firms may find it comparatively easy and/or inexpensive to imitate the leader’s low-cost methods;

• heavy investments in cost minimization can lock a firm into both its present technology and present strategy, leaving it vulnerable to new state-of-the-art technologies and to a widening of customer interest in something other than a cheaper price.

Strategic success in trying to be low-cost producer usually requires a firm to be the overall cost leader, not just one of the several firms vying for this position. When there is more than one aspiring low-cost producer, rivalry among them is typically fierce.

Strategy of differentiation

Forms of differentiating the products from rival firms: a different taste, special features, superior service, spare parts availability, overall value to the customer, engineering design and performance, unusual quality and distinctiveness, product reliability, quality manufacture, technological leadership, convenient payment, a full range of services, a complete line of products, and tope-of-the-line image and reputation.

Differentiation strategy is most likely to produce an attractive and lasting competitive edge when it is based on technical superiority, quality, giving customers more support services, and the appeal of more value for the money.