Chapter 7 Flashcards
Business Unit
An organizational entity with its own mission, set of competitors, and industry.
Generic Strategies
A simple categorization of competitive strategies available to businesses
Strategic Group
Businesses employing the same generic strategy.
Porter’s Generic Strategies
Michael Porter’s typology originally included four options: low cost with focus, low cost without focus, differentiation with focus, and differentiation without focus.
First, managers must determine whether the business unit should focus its efforts on an identifiable subset of the industry in which it operates or seek to serve the entire market as a whole. Second, managers must determine whether the business unit should compete primarily by minimizing its costs relative to those of its competitors (i.e., a low-cost strategy) or by seeking to offer unique and/or unusual products and services (i.e., a differentiation strategy
Low-Cost (Cost Leadership) Strategy (without focus)
Produce basic, no-frills products and services for a mass market of price-sensitive customers.
Often (but not always) build market share through low prices.
Low initial investment and low operating costs.
Often outsource to reduce costs.
Vulnerable to price competition
Focus–Low-Cost Strategy
Emphasizes low costs while serving a narrow segment of the market, producing no-frills products or services for price-sensitive customers in a market niche.
Compete only in a niche where cost advantages relative to large competitors can be enjoyed.
Vulnerable to price competition.
Differentiation Strategy (without focus)
Produce and market to the entire industry products or services that are readily distinguished from those of their competitors.
Emphasize scientific breakthroughs, technology, and flexibility (speed/timing).
Differentiation can be based on the product’s physical characteristics or other factors such as quality, marketing, or service.
Examples include specialty clothing retailers.
Focus-Differentiation Strategy
Produce and market highly differentiated products or services for the specialized needs of a market niche.
Customers in a niche might be willing to pay higher prices for specialized products or services.
Low-Cost–Differentiation Strategy (without focus)
Emphasize both low costs and differentiation.
Combination Strategy Debate: According to Porter, low cost and differentiation are not compatible in the long run, as efforts to differentiate generally increase a business’ relative cost position. Others argue that the two may be compatible, although combining strategies is usually more difficult to accomplish.
5 Ways a Business Can Pursue a Low-Cost–Differentiation Strategy
Commitment to Quality Differentiation on the Basis of Low Costs Process innovations Product Innovations Value innovations
Commitment to Quality
Commitment to quality not only improves outputs but also reduces costs involved in scrap, warranty, and service after the sale.
Building quality into a product can reduce the costs of rework, scrap, and servicing the product after the sale; the business benefits from increased customer satisfaction and repeat sales, which can improve economies of scale.
Differentiation on the Basis of Low Costs
Many firms that achieve low-cost positions also lower their prices because many of their competitors may not be able to afford to match their price level.
Process innovations
Process innovations increase the efficiency of operations and distribution.
Although these improvements are normally thought of as lowering costs, they can also enhance product or service differentiation.
Product Innovations
Product innovations are typically presumed to enhance differentiation but can also lower costs.
Example: Adding filters to cigarettes not only helped differentiate one brand from another, but it also reduced production costs.
Value innovations
Modify products, services, and activities in order to maximize the value delivered to customers.
Differentiate products and services only when associated cost hikes can be justified by increases in overall value and by pursuing cost reductions that result in minimal, if any, reductions in value.
