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3.4. Generic Competitive Strategies

Area of Business 2, which should be addressed at a corporate level, involves deciding on which generic, competitive logic your business or SBU will implement. This step does not involve determining the specific, competitive qualities of your product or other details regarding your company’s competitive position; but rather selecting a generic competitive framework to guide your company’s business activities. We are referring to a generic competitive strategy or strategies.

Companies who implement their competitive position consistently and don’t …

A bad example of how a selected but poorly implemented competitive strategy adversely impacts your customers’ perception of your company is a medium-sized company that sells bedroom furniture (bed frames and other bedroom furniture, mattresses etc.). Although the prices of these products are set very high and they boast high-quality materials differentiating them from other companies (in terms of a generic competitive strategy this would be differentiation and high prices), the company has experienced many problems with product installation and communicating with their customers - assembly teams have noted that furniture sets are missing important pieces required for assembly and are not prepared to handle such situations (they do not have any spare parts on hand, even though all it would take are some small pieces or screws), the company does not keep the client well-informed when his claim is being resolved, the claim filing process does not run smoothly etc. These problems have an adverse impact on the customer’s impression of the company. The company clearly has issues when it comes to resolving problems and maintaining a certain standard of quality in their products, displaying problems in other of the company’s processes as well.

On the other hand, a positive example of a company with a good generic competitive strategy is a small family business that manufactures custom furniture. The owner has also based his business model on higher prices and high-quality materials and production (i.e. regionally, using a generic competitive strategy based on differentiation and high prices), as well as providing seamless assembly services for customers. The owner assembles the customer’s furniture himself, as he does not trust any of his less-experienced staff to do the job. This is also why he has chosen not to expand his company, even though judging from the success of his company it would be viable.

An example of a company that neglected its generic competitive position and went out of business after 2 years, is a design studio based in Brno, with a brick-and-mortar store in the city center. The studio focused on selling Scandinavian design - i.e. dishes and other home accessories from traditional Finnish and Swedish manufacturers. Although these products are of the highest quality and offer high sales potential with Czech customers due to their timeless design and utility value, the company was not able to compete in the market. A customer, who wanted to buy a large quantity of their products from their store, had to wait several days for the price offer to be processed, return to the store to make the order in person, wait 3 weeks for delivery and come back to the store for pick-up, not to mention the store’s problematic parking situation. A Finnish online store was able to quickly calculate a price offer for the customer; it then delivered the order within 7 days of placing the order (with free delivery). What is more, the customer ended up paying 10-20% less for his order than from the local brick-and-mortar store.

Certain theoretical approaches can come in handy when deciding on a generic competitive strategy. One of them is a model for generic competitive strategies, used often by many companies (sometimes unknowingly), according to M. Porter (1992), professor at Harvard Business School, and one of the most prominent figures in the field of strategic management.

Porter (1992) suggests that companies should decide whether they want to pursue competitive advantage on the basis of one (of two) fundamental and two additional types of competitive strategies. Based on lower costs, i.e. cost leadership strategy, or differentiation strategy. The cost leadership strategy is based on setting low prices (made possible due to the company’s low operating costs). A differentiation strategy is based on the assumption that the company provides unique products or services for customer segments that are not price-sensitive
(Keřkovský and Vykypěl, 2006). Both of these competitive strategies can be applied when targeting a broad or narrow market segment. This results in four basic variations of the generic competitive strategy, from which a company can choose, see image: 3-2. (Keřkovský and Vykypěl, 2006). When selecting a narrow market segment, the company usually focuses on distinct customer groups with specific needs, which they are better equipped to cater to than their competitors, or their competitors have no interest in catering to this segment’s specific needs.

Family construction company and a cost leadership strategy for a narrow market segment

A generic cost leadership strategy focused on a narrow market segment is typical for owners of construction-related businesses. This company operates at lower costs than other construction companies (appealing to price-sensitive customers), as the owner does most of the work himself with the help of his son (can provide quality services, such as minor reconstruction of houses, painting, bathroom renovations etc.). Smaller orders (i.e. for a more narrow market segment), which the owner specializes in, are not financially viable for larger companies, as their higher operating costs would not generate any profits from this services. The owner therefore specializes in these types of services.

Porter’s Generic Strategies (Porter, 1992)

In the original version of the generic competitive strategy concept, he suggested that companies choose ONE competitive position, not more, and to focus their efforts on it. If a company wanted to excel by having more competitive advantages at once, and wanted to have lower prices as well as high-quality goods or services, it would have failed and lost its competitive edge. In today’s society however, many lines of business (ex. suppliers in the automotive industry) believe that a company must achieve both - high quality and low prices. In these companies, it is even more crucial that they are well-acquainted with their competitive strategy and that they seek out innovative approaches towards implementing their strategy, even though oftentimes they end up using a combination of strategies with conflicting requirements.

When choosing a generic competitive strategy, it is worth noting that each of these strategies are efficient under different conditions and also come with a different set of risks. A summary of the different competitive strategies can be found in the table below (adapted from Keřkovský and Vykypěl, 2009).

Basic Characteristics of the Strategy	What Makes it Effective	Risks
Cost Leadership Strategy
Ability to appeal to a broad market segment The ability to achieve high savings while retaining the minimum level of quality expected by the target segment compared to competitors, offering low prices due to low operating costs Often based on applying economies of scale – is my company capable of generating such high volumes? Stable, very few changes in the products, markets etc. Your company sells standard, basic, functional, no-frills products An emphasis on low operating costs – “We save wherever we can“– low overhead, R/D aimed at low production costs, not innovation etc.	Against competitors, in that if there is a decrease in demand, the company lowers prices and the market reacts by increasing the demand for their products due to the price-sensitivity of their customers Against new, rivaling companies in the segment - a new company is not likely to offer better prices than existing, experienced companies that sell large volumes. What is more, relatively low profits do not appeal to new competitors. Against substitutes, that is, products from other companies which can also meet the customer’s needs that the customer can switch to - if the products are inexpensive, the customer has no financial reason to switch to an alternative. Against customers switching to your competitors, because low prices for standard products makes the decision to switch to another brand or company more difficult. Against high demands of suppliers, as mass production and the subsequent mass/stable demand for the company’s products strengthens the company’s position when it comes to negotiating with suppliers (the company is important for suppliers and can often squeeze suppliers on price).	Unpredictable changes in technology can devalue investments in large volumes of specialized manufacturing equipment. The possibility that the company’s business model can be easily copied by its competitors Customers can develop an interest in differentiated or high-quality products. Limited flexibility in terms of addressing specific customer demands - standardized mass production does not cater to customers who require customized or personalized products due to low operating costs. Strategic success in cost leadership strategies implies that your company will be a “cost leader” among its rivals. This is usually the goal of all competitors in a specific market segment, which can result in fierce competition.
Basic Characteristics of the Strategy	What Makes it Effective	Risks
Differentiation Strategy
	A differentiation strategy is beneficial for the following reasons: Competition in the market segment is usually not as intensive as it is for companies who pursue cost leadership strategies. Market entry for competitors tends to be difficult (must have know-how, an original approach, ideas, solutions, ability to implement the above-mentioned). The threat of substitutes is usually low, customer loyalty is higher. The customer’s bargaining power tends to be lower due to the special qualities of differentiated products (especially if the products are truly unique). The negotiation position with suppliers for companies with a differentiation strategy is favourable due to their higher product prices, meaning the company is not as dependant on input prices (it can afford to pay higher input prices)	Prices that are too high may reflect poorly on product demand. Customers may lose interest in differentiated products in favour of cheaper alternatives. Competitors usually try hard to copy “differentiated” products. This can be prevented with adequate copyright protection or a high frequency of innovation. A “differentiated” company must continuously work at maintaining the “differentiated” nature of their products. That is why such companies have higher product development and marketing costs. A “differentiated” company should carefully consider the extent of its activities, as it can be outdone by companies providing niche products/services.
Basic Characteristics of the Strategy	What Makes it Effective	Risks
Cost Leadership Strategy or Differentiation Strategy for Narrow Market Segments (Focus Strategies)
This strategy can be suitable for small and medium-sized businesses, for which a narrow market segment is large enough, and which can cater to the specific demands of this segment more flexibly than bigger companies.	Compared to larger companies, which may not be able (limited by their strategy) or willing to cater to the needs of a narrow market segment.	A narrow market segment may not be large enough to ensure the company’s long-term financial stability.

Porter’s generic competitive strategies are not the only option. Michael Treacy and Fred Wiersema (Treacy, Wiersema, 1993) can also serve as a source of inspiration for your company’s generic competitive strategy. Their approach is based on their findings of over 3 years of research of many competitively successful companies, and they suggest that companies choose one of three areas to focus their generic strategy on (i.e. value disciplines), in order to be better (that is, to generate higher customer value) than their competition. The company should devote as much of their capacity and resources as possible and continually improve and become a leader in their field. In the remaining two areas (value disciplines), it should at least be on par with the status quo.

Being a leader in the field, among other things, means that the company is capable of CONSISTANTLY INCREASING their minimum perception value, which customers expect of companies in any given field. When a company is able to increase their value, it can maintain its competitive position (Treacy, Wiersema, 1993).

Customer Value Today

No matter what generic competitive strategy your company chooses, it is necessary to note that customer value today can no longer be reduced to a simple product/service to price ratio, but rather entails a wider range of factors - this includes the customer’s entire experience with the company - e.g. comfort and ease of the purchase, warranty service and conditions and many others. Customer value must then be approached from every angle.

An interesting analysis tool for added customer value for various business activities is a value chain analysis, which is described in the internal environment analysis session.

Three value disciplines or competitive strategies which can serve as inspiration for your company (Treacy, Wiersema, 1993):

Operational Excellence means providing reliable products or services at competitive (reasonable) prices, while providing a shopping experience that is easier or more comfortable than with competing companies. These companies must be at the forefront in terms of optimizing and streamlining their production and other processes and minimizing operating costs, ensuring that they have competitive prices.
Customer Intimacy is based on the company’s excellent ability to accurately segment their market and to meet their customers’ specific needs. This usually requires
high production flexibility (the ability to cater to individual needs of customers by tailoring their products and services). As a result, companies that use this strategy have customers with high, long-term loyalty, as they view their business not in terms of immediate profit i.e. profit from individual transactions, but rather from the perspective of the long-term (if not lifelong) potential that these loyal customers can bring. This strategy also relies on the company’s short-term tolerance of initial, higher expenses and their understanding of the needs of potential customers. An example of this is a company that in no way limits the amount of time they spend with customers, as understanding exactly what their customers want and need is the cornerstone of their competitive advantage. Another example of a company’s sophisticated approach to segmentation and subsequent attention to its clients is a smaller, American investment firm, whose call center recognizes existing clients based on phone number (a large investor with specific needs vs. smaller investors), allowing them to redirect their client directly to a consultant who specializes in this type of client. Individual consultants are trained to assist certain types of clients, allowing them to provide their customers with high-quality service. Similarly, a company with a sophisticated information system, Kraft in the USA, is able to offer a selection of their products in every retail sector based on the type of customer (and their lifestyle) that frequently visits the store in even the smallest of locations.

The last discipline, Product Leadership, is based on the company’s ability to continuously innovate their products, rendering their competitors obsolete. This is the very same competitive strategy that the once small, start-up NIKE based their business model on, as they fought against the much larger and well-established brand, Adidas. Companies who abide by this strategy must have three skills - firstly, creativity and an ability to get inspirational and creative ideas from outside the company. Secondly, they must be capable of quickly realizing their creative and innovative ideas. And thirdly, they must be able to consistently surpass their own innovative achievements - in other words, these companies should never boast about their current success but always be one step ahead, thinking about their next innovation. In order for this strategy to work, the company must be able to create an innovative environment, where employees bring in new ideas from the outside. The company then, without prejudice, welcomes them, regardless of how unconventional they may see or where they came from. These companies must be extremely flexible, minimizing any bureaucracy, which only slows down the ability to quickly develop and launch new products. Figuratively speaking, these companies have an idea today and sell it tomorrow. The cornerstone of their competitive edge is their ability to quickly respond to whatever comes their way. This fast-paced, flexible and innovative environment is the key to everything the company does - especially hiring the right employees who can adapt to and support this type of company.

The generic competitive strategies that we have described here are not the only options. They can, however, serve as inspiration on how to approach your company’s competitive logic.