Generic strategies

Executive summary

The purpose of making strategic choices is to position your business in a playing field of your choice, in way that your business succeeds. That is it satisfies specific customers and their needs in a way that other businesses cannot.

Using generic strategies can be a way to ensure faster and more consistent choice making and subsequent refinement or expansion of your strategic choices.

Scope vs. Source

Michael Porter suggested that generic strategies can be defined by two key dimensions: the scope of the strategy and the source of the competitive advantage.

Scope

For scope, the company could target a broad market or a narrow focused market.

Source

For the source of competitive advantage, the company could either be the low-cost leader or a differentiator.

The result is these four quadrants that represent the four generic strategies: Overall cost leadership, differentiation, cost focus and differentiation focus.

Once you have identified whether your business aims to attract / win customers either through a good enough product at a competitive price (Cost leadership) or a Differentiated offering that meets specific customer needs in a way that others do/can not, then making and validating your other strategic choices will be easier to achieve consistently. Sometimes business leaders engineer ambiguity by trying to be superior in some way, whilst also being the cheapest which is difficult to do on a sustainable basis.

Purpose

Provide you and your team a refresher or necessary background knowledge on the concept of generic strategies to give your team an edge in making your strategic choices consistently and faster.

Objectives

1. Define the types generic strategies.
2. Outline the features and capability requirements of each strategy type
3. Introduce the idea of the stuck in the middle as a consequence of a failure to choose.
4. Introduce alternative ways to define your generic strategy
5. A discovery challenge for you and your team, that may enable new opportunities

Purpose of a business

As the great Peter Drucker stated it is to create a customer

What do people / organizations buy?

1. An acceptable product (to get the job done) at a price cheaper than alternatives
2. An superior product (to get the job done) but at price that the consumer believes justifies the extra cost

Generic strategies model

The following model shows the generic strategies model. It is essentially a matrix that shows the ONLY two ways a business generates a competitive advantage.

Read more: There Are Still Only Two Ways to Compete links to Harvard Business Review

Differentiation strategy

Using differentiation as a source of advantage means the business is focussed upon increased price for an offer superior to some market segment as the main lever for financial sustainability / competitive advantage. This does not mean costs are irrelevant, but it does mean the business is prepared to increase its costs to provide a solution that is superior to some segment of the market.

The main risks with differentiation can include:

• Higher costs with potential for limited appeal

  Hence the ongoing investment in Research and Development capabilities including early product to market fit validation.

• Increased competition from imitators.

  Hence the ongoing investment in Research, Development and Innovation capabilities.

• Change in customer preferences.

  Hence the ongoing investment in external analysis and customer research to understand emerging customer needs and skating to where demand is likely to be.

• Limited appeal:

  Hence the strategy will need to support investment in Product management and Marketing capabilities. Closing feedback loops between these capabilities with Sales will also be frequently important.

• Difficulty in differentiating: A company that positions itself as a differentiator may struggle to differentiate itself from its competitors / imitators without a valuable resource inaccessible to competitors e.g network effect, unique intellectual property or know-how.

Cost leadership

A cost leadership strategy is an integrated set of choices taken to produce good or services that are acceptable to customers at a low cost and potentially the lowest cost relative to competitors. It does not mean the low-cost leader does not have other quality differentiators in its offering e.g. friendly service, convenience, fast delivery etc. What it does mean the main competitive edge is its' ability to deliver its offering to the market at the lowest cost.

Cost leadership is focussed on reducing costs through economies of scale, minimize input and any / all unnecessary activities related to production, distribution, marketing / sales and so forth.

The main risks with cost leadership can include:

• Fixed costs: there is often a substantial upfront investment in fixed costs (plant / machinery), and given a downturn in demand, the business can start loosing money very quickly.

• Being out innovated, by a rival who develops a capability to bring an equivalent offering or an acceptable substitute offering at a lower price.

  Low cost leaders scan the external and industry environment for technology innovations that enable cost reductions e.g. process automation, robotics etc.

• Poor quality: In order to achieve low costs, a company may need to cut corners on things like quality control or customer service. This can lead to a decrease in the perceived value of the company's products or services.

  Low cost leaders frequently use an operational effeciency strategy (described soon) to keep focus on quality.

• Limited appeal: A cost leadership strategy may not appeal to customers who are willing to pay a higher price for higher-quality products or services. This can limit the company's customer base and make it more reliant on price-sensitive customers.
• Difficulty in differentiating: A company that positions itself as a low-cost leader may struggle to differentiate itself from its competitors, as price is typically the primary factor that customers consider when choosing a low-cost product or service.

Failure to choose

Failure to be uniquely valuable to a market segment either through differentiation or price can result in being stuck in the middle.

Stuck in the middle

A business is classified as stuck in the middle when

1. Its product is not superior in any way to any segment of an existing market i.e. it does satisfy any consumers needs in a superior way AND;
2. Consumers have ready access to cheaper alternatives

Examples

Overcoming being stuck in the middle

To overcome the challenges of being stuck in the middle, a company may need to develop a more focused and differentiated strategy. This may involve identifying a unique value proposition or niche in the market, investing in marketing and branding efforts to better communicate the company's value to customers, and/or seeking ways to improve efficiency and reduce costs. It may also involve exploring new markets or channels for growth, or partnering with other companies to expand its reach and capabilities.

An additional way to classify your strategy

In addition to differentiation and cost leadership there are 3 other ways to classify your strategy. These can also be used to make your strategic choices easier and more consistent. These models come from the New Times Best selling book The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market by Michael Treacy and Fred Wiersema.
These 3 models will seem obvious to you once presented, but then you can choose to classify the type of strategy you want to create based upon the differentiation / cost leadership along with one of these.

1. Toyota is famous example of operational excellence

   Operational excellence

   There are several key elements of an operational excellence strategy:

   1. Continuous improvement: This involves continuously reviewing and optimizing processes to identify and eliminate waste and inefficiencies, and to improve quality and productivity.

   2. Standardization: This involves establishing consistent, best-practice processes and procedures across the organization to ensure efficiency and reduce variability.

   3. Lean principles: These principles, which originated in the manufacturing industry, focus on minimizing waste and maximizing value. They can be applied to any type of operation to streamline processes and improve efficiency.

   4. Six Sigma: This methodology uses data and statistical analysis to identify and eliminate defects in processes, with the goal of improving quality and reducing variability.

   5. Collaboration and empowerment: An operational excellence strategy often involves empowering employees at all levels of the organization to identify and address inefficiencies and make continuous improvement a part of the company culture.

   Implementing an operational excellence strategy requires a commitment to ongoing process improvement and a willingness to make changes to existing systems and practices. It also requires the development of key performance indicators (KPIs) to measure progress and success.

2. Product leaders

   Competitive advantage obtained by creating the best product / superior product for a market segment. Customer support and relationship management may not be best in class.
   A product leadership strategy focuses on differentiation enabled by understanding customer need (current / emerging), specialist engineering and design capabilities, product management and continuous innovation and adaptability.
   
   

3. Customer intimacy

   Customer intimacy is an approach to creating competitive advantage that focuses on differentiation through building deep, long-term relationships with customers by understanding their needs, preferences, and behavior. A customer intimacy strategy involves gathering and analyzing customer data, engaging with customers on a regular basis, and using that information to tailor products and services to meet the specific needs of individual customers.
   
   To implement a customer intimacy strategy, a company develops a customer-centric culture and may use a variety of tools and tactics, such as customer surveys, focus groups, and customer relationship management (CRM) systems focus on delivering a personalized, high-quality customer experiences.

Strategic thinking for you and your strategy team