In coping with the five competitive forces, there are three poten-tially successful generic strategic approaches to outperforming other firms in an industry:
- overall cost leadership
Sometimes the firm can successfully pursue more than one approach as its primary target, though this is rarely possible as will be dis-cussed further. Effectively implementing any of these generic strate-gies usually requires total commitment and supporting organiza-tional arrangements that are diluted if there is more than one primary target. The generic strategies are approaches to outperform-ing competitors in the industry; in some industries structure will mean that all firms can earn high returns, whereas in others, success with one of the generic strategies may be necessary just to obtain ac-ceptable returns in an absolute sense.
1. OVERALL COST LEADERSHIP
The first strategy, an increasingly common one in the 1970s be-cause of popularization of the experience curve concept, is to achieve overall cost leadership in an industry through a set of functional pol-icies aimed at this basic objective. Cost leadership requires aggres-sive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoid-ance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on. A great deal of managerial attention to cost control is necessary to achieve these aims. Low cost relative to competitors becomes the theme running through the entire strategy, though quality, service, and other areas cannot be ignored.
Having a low-cost position yields the firm above-average re-turns in its industry despite the presence of strong competitive forces. Its cost position gives the firm a defense against rivalry from competitors, because its lower costs mean that it can still earn re-turns after its competitors have competed away their profits through rivalry. A low-cost position defends the firm against powerful buy-ers because buyers can exert power only to drive down prices to the level of the next most efficient competitor. Low cost provides a de-fense against powerful suppliers by providing more flexibility to cope with input cost increases. The factors that lead to a low-cost po-sition usually also provide substantial entry barriers in terms of scale economies or cost advantages. Finally, a low-cost position usually places the firm in a favorable position vis-à-vis substitutes relative to its competitors in the industry. Thus a low-cost position protects the firm against all five competitive forces because bargaining can only continue to erode profits until those of the next most efficient com-petitor are eliminated, and because the less efficient competitors will suffer first in the face of competitive pressures.
Achieving a low overall cost position often requires a high rel-ative market share or other advantages, such as favorable access to raw materials. It may well require designing products for ease in man-ufacturing, maintaining a wide line of related products to spread costs, and serving all major customer groups in order to build vol–ume. In turn, implementing the low-cost strategy may require heavy up-front capital investment in state-of-the art equipment, aggressive pricing, and start-up losses to build market share. High market share may in turn allow economies in purchasing which lower costs even further. Once achieved, the low-cost position provides high margins which can be reinvested in new equipment and modern facilities in order to maintain cost leadership. Such reinvestment may well be a prerequisite to sustaining a low-cost position.
The cost leadership strategy seems to be the cornerstone of Briggs and Stratton’s success in small horsepower gasoline engines, where it holds a 50 percent worldwide share, and Lincoln Electric’s success in arc welding equipment and supplies. Other firms known for successful application of cost leadership strategies to a number of businesses are Emerson Electric, Texas Instruments, Black and Decker, and Du Pont.
A cost leadership strategy can sometimes revolutionize an indus-try in which the historical bases of competition have been otherwise and competitors are ill-prepared either perceptually or economically to take the steps necessary for cost minimization. Harnischfeger is in the midst of a daring attempt to revolutionize the rough-terrain crane industry in 1979. Starting from a 15 percent market share, Harnischfeger redesigned its cranes for easy manufacture and serv-ice using modularized components, configuration changes, and re-duced material content. It then established subassembly areas and a conveyorized assembly line, a notable departure from industry norms. It ordered parts in large volumes to save costs. All this al–lowed the company to offer an acceptable quality product and drop prices by 15 percent. Harnischfeger’s market share has grown rapid-ly to 25 percent and is continuing to grow. Says Willis Fisher, gener-al manager of Harnischfeger’s Hydraulic Equipment Division:
We didn’t set out to develop a machine significantly better than anyone else but we did want to develop one that was truly simple to manufacture and was priced, intentionally, as a low cost ma-chine.
Competitors are grumbling that Harnischfeger has “bought” mar-ket share with lower margins, a charge that the company denies.
The second generic strategy is one of differentiating the product or service offering of the firm, creating something that is perceived industrywide as being unique. Approaches to differentiating can take many forms: design or brand image (Fieldcrest in top of the line towels and linens; Mercedes in automobiles), technology (Hyster in lift trucks; Macintosh in stereo components; Coleman in camping equipment), features (Jenn-Air in electric ranges); customer service (Crown Cork and Seal in metal cans), dealer network (Caterpillar Tractor in construction equipment), or other dimensions. Ideally, the firm differentiates itself along several dimensions. Caterpillar Tractor, for example, is known not only for its dealer network and excellent spare parts availability but also for its extremely high-qual-ity durable products, all of which are crucial in heavy equipment where downtime is very expensive. It should be stressed that the dif-ferentiation strategy does not allow the firm to ignore costs, but rather they are not the primary strategic target.
Differentiation, if achieved, 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, albeit in a dif-ferent way than cost leadership. Differentiation provides insulation against competitive rivalry because of brand loyalty by customers and resulting lower sensitivity to price. It also increases margins, which avoids the need for a low-cost position. The resulting custo-mer loyalty and the need for a competitor to overcome uniqueness provide entry barriers. Differentiation yields higher margins with which to deal with supplier power, and it clearly mitigates buyer power, since buyers lack comparable alternatives and are thereby less price sensitive. Finally, the firm that has differentiated itself to achieve customer loyalty should be better positioned vis-à-vis substi-tutes than its competitors.
Achieving differentiation may sometimes preclude gaining a high market share. It often requires a perception of exclusivity, which is incompatible with high market share. More commonly, however, achieving differentiation will imply a trade-off with cost position if the activities required in creating it are inherently costly, such as extensive research, product design, high quality materials, or intensive customer support. Whereas customers industrywide ac-knowledge the superiority of the firm, not all customers will be will-ing or able to pay the required higher prices (though most are in industries like earthmoving equipment where despite high prices Caterpillar has a dominant market share). In other businesses, dif-ferentiation may not be incompatible with relatively low costs and comparable prices to those of competitors.
The final generic strategy is focusing on a particular buyer group, segment of the product line, or geographic market; as with differentiation, focus may take many forms. Although the low cost and differentiation strategies are aimed at achieving their objectives industrywide, the entire focus strategy is built around serving a par-ticular target very well, and each functional policy is developed with this in mind. The strategy rests on the premise that the firm is thus able to serve its narrow strategic target more effectively or efficiently than competitors who are competing more broadly. As a result, the firm achieves either differentiation from better meeting the needs of the particular target, or lower costs in serving this target, or both. Even though the focus strategy does not achieve low cost or differen-tiation from the perspective of the market as a whole, it does achieve one or both of these positions vis-à-vis its narrow market target. The difference among the three generic strategies are illustrated in fig-ure 2-1.
The firm achieving focus may also potentially earn above-aver-age returns for its industry. Its focus means that the firm either has a low cost position with its strategic target, high differentiation, or both. As we have discussed in the context of cost leadership and dif-ferentiation, these positions provide defenses against each competi–tive force. Focus may also be used to select targets least vulnerable to substitutes or where competitors are the weakest.
For example, Illinois Tool Works has focused on specialty mar-kets for fasteners where it can design products for particular buyer needs and create switching costs. Although many buyers are uninter-ested in these services, some are. Fort Howard Paper focuses on a narrow range of industrial-grade papers, avoiding consumer prod-ucts vulnerable to advertising battles and rapid introductions of new products. Porter Paint focuses on the professional painter rather than the do–it-yourself market, building its strategy around serving the professional through free paint–matching services, rapid delivery of as little as a gallon of needed paint to the worksite, and free coffee rooms designed to provide a home for professional painters at fac-tory stores. An example of a focus strategy that achieves a low-cost position in serving its particular target is seen in Martin-Brower, the third largest food distributor in the United States. Martin-Brower has reduced its customer list to just eight leading fast-food chains. Its entire strategy is based on meeting the specialized needs of the customers, stocking only their narrow product lines, order taking procedures geared to their purchasing cycles, locating warehouses based on their locations, and intensely controlling and computeriz-ing record keeping. Although Martin-Brower is not the low-cost dis-tributor in serving the market as a whole, it is in serving its particular segment. Martin-Brower has been rewarded with rapid growth and above-average profitability.
FIGURE 2-1. Three Generic Strategies
The focus strategy always implies some limitations on the over-all market share achievable. Focus necessarily involves a trade-off between profitability and sales volume. Like the differentiate strat-egy, it may or may not involve a trade-off with overall cost position.
4. OTHER REQUIREMENTS OF THE GENERIC STRATEGIES
The three generic strategies differ in dimensions other than the functional differences noted above. Implementing them successfully requires different resources and skills. The generic strategies also im-ply differing organizational arrangements, control procedures, and inventive systems. As a result, sustained commitment to one of the strategies as the primary target is usually necessary to achieve suc-cess. Some common implications of the generic strategies in these areas are as follows:
The generic strategies may also require different styles of lead-ership and can translate into very different corporate cultures and atmospheres. Different sorts of people will be attracted.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.