Download Chapter 5 MAZ

Miles A. Zachary
MGT 4380
 Business-level strategy address the question of how a
firm will compete in a specific industry
 Developing business-level strategies requires not
being mesmerized by all the nuanced strategies of
firms in an industry
 How can executives cut through the mess?
 Generic Strategies-a general way of positioning a firm
within an industry
 Best-known generic strategies developed by Michael
Porter of Harvard Business School
 Two competitive dimensions
 Competitive advantage
 Involves whether a firm stresses lower costs or uniqueness
 Scope of Operation
 Determines whether a firm appeals to a general audience or a
focused subset of consumers
 Four (4) traditional generic strategies
 Cost leadership
 Differentiation
 Focused (niche) cost leadership
 Focused (niche) differentiation
 In addition to the four (4) main generic strategies, two
sub-strategies exist
 Best-Cost Strategy
 “Stuck-in-the-middle” Strategy
 Different generic strategies offer different value
propositions to customers
 They also have different value chain configurations
 Cost leadership firms compete based on price and aim
for a broad target market
 Sell goods for low prices
 Target general consumers
 Emphasize efficiency; spend little on advertising,
market research, or R&D
 Often rely on economies of scale
 Cost of offering goods decreases as a firm is able to sell
more items; expenses distributed across a greater
number of items
 Ex.-Wal-Mart, Payless Shoe Source, etc.
 Advantages
 Low-cost providers better able to withstand price wars
 Discourages new entrants
 Advantage enhanced by high market share
 Disadvantages
 People perceive products and services as low-quality
 High volume necessary because low profit margins
 Need to focus on low cost blinds firms to subtle
environmental trends
 Emphasis on efficiency makes it difficult to change
quickly when needed
 Differentiators compete based on uniqueness and aim
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at a broad target market
Attempt to convince customers to pay higher prices by
providing unique and desirable features
Emphasize that consumers “get what they pay for”
Firms must communicate to consumers why they
should pay higher prices—advertising!
Ex.-Nike, FedEx, Ralph Lauren, etc.
 Advantages
 Strong margins = firms need less customers to make a
profit
 Enduring differentiator firms create strong brand
loyalty—less price sensitive
 Difficult for new entrants to compete with brand loyalty
 Disadvantages
 Customers may not be willing to pay higher prices
 Customers may prefer a cheaper alternative
 Competitors may be able to imitate features such that
they are not sufficiently unique
 A focused cost leadership strategy entails competing
based on price to target a narrow customer market
 Not necessarily the lowest price in the industry; it
charges low prices relative to other firms that compete
within the target market
 In other cases, the target market is defined by the sales
channel used to reach customers
 Unique product distribution/retail
 A focused differentiation strategy requires offering
unique features that fulfill the demands of a narrow
market
 Similar to focused cost leadership strategy, focused
differentiation sometimes focus on a particular sales
channel
 Others target particular demographic groups
 Ex.-Whole Foods Market, Ferrari, etc.
 Advantages
 Higher prices can be charged
 Firms can develop tremendous expertise in their specific
area
 Disadvantages
 Likely limited demand
 Focused area may be taken over by other firms
 Other firms may provide narrower focus
 Firms pursuing best-cost strategies charge relatively
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low prices AND offer substantial differentiation
For firms that want to have their cake and eat it too!
Very difficult to execute
Successful implementation can lead to a strong
competitive advantage
May face attacks from many different directions
Best-cost strategies can be easier to achieve if a firm
can lower their overhead/fixed costs
Ex.- Southwest Airlines, Target, Ikea, etc.
 Some firms are unable to develop any specific generic
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strategy
These firms become “stuck in the middle”
Non-unique products at higher-than-warranted prices
Firms fail when they try to please all consumers
Firms that are stuck in the middle are often put their
as a result of being out maneuvered by competitors
Ex.-Circuit City, Kmart, Blockbuster, Arby’s, etc.