Read this essay to learn about the frameworks that serve as good starting points for developing business strategies.
Essay # 1. Porter’s Generic Strategies:
Michael Porter developed the most commonly cited generic strategy framework. According to Porter’s typology a business unit must address two basic competitive concerns. 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.
For example, specialty-clothing stores in shopping malls adopt the focus concept and concentrate their efforts on limited product lines primarily intended for a small market niche. In contrast, most chain grocery stores seek to serve the “mass market” -or at least most- of it-by selecting an array of products and services that appeal to the general public as a whole. The smaller the business, the more desirable a focus strategy tends to be, although this is not always the case.
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). Porter views these two alternatives as mutually exclusive because differentiation efforts tend to erode a low-cost structure by raising production, promotional, and other expenses.
In fact, Porter labeled business units attempting to emphasize both cost leadership, and differentiation simultaneously as “stuck in the middle.” However, this is not necessarily the case, and the low-cost-differentiation strategy is a viable alternative for some businesses. Combining the two strategies is difficult, but businesses able to do so can perform exceptionally well.
Depending on the way strategic managers in a business unit address the first (i.e., focus or not) and second (low-cost, differentiation, or low-cost differentiation) questions, six configurations are Possible. A seventh approach multiple strategies-involves the simultaneous deployment of more than one of the six configurations.
i. Low-Cost (Cost Leadership) Strategy (No Focus):
Large businesses that compete with a low-cost strategy produce basic, no-frills products and services for a mass market compose, of price-sensitive customers. Low-cost businesses” often succeed by building market share through low prices, although some charge prices comparable to rival and enjoy a greater margin. Because customers generally are willing to pay only low to average prices for “basic” products or services, it is essential that businesses using this strategy keep their overall costs as low as possible. Efficiency is key to such businesses, as has been demonstrated by mega-retailer Wal- Mart in recent years.
Low-cost businesses tend to emphasize a low initial investment and low operating costs. Such organizations tend to purchase from suppliers who offer the lowest prices within a basic quality standard. Research and development efforts are directed at improving operational efficiency, and attempts are made to enhance logistical and distribution efficiencies. Such businesses often-but not always-de-emphasize the development of new and / or improved products or services that might raise costs, and advertising and promotional expenditures will be minimized.
A cost leader may be more likely than other businesses to outsource a number of its production activities if costs are reduced as result, even if modest amounts of control over quality are lost in the process. In addition, the most efficient means of distribution is sought, even if it is not the fastest or easiest to manage. It is worth noting that successful low-cost businesses do not emphasis cost minimization to the degree that quality and service decline excessively. In other words, cost leadership taken to an extreme can result in the production of “cheap” goods and services chat nobody is willing to purchase.
Low-cost leaders depend on unique capabilities not available to others in the industry such as access to scarce raw, materials, large market share or a high degree of capitalization. However, manufacturers that employ a low-cost strategy are vulnerable to enterprise competition that drives profit margins down and limits their ability to improve outputs, augment their products with superior services, or spend more on advertising and promotion.
The prospect of being caught in price war keeps many manufacturers from adopting the low-cost strategy, although it can affect other businesses as well. Other low-cost leaders have bought their suppliers to control quality and distribution. Price cutting in the airline industry led to the demise of a number of upstarts even before the events of September 11, 2001, and made it even more difficult to raise fares shortly thereafter.
Imitation by competitors can also be a concern when the basis for low-cost leadership is not proprietary and can be easily duplicated. Low-cost businesses are also particularly vulnerable to technological obsolescence. Manufacturers that emphasize technological stabilities and do not respond to new product and market opportunities may eventually find that their products have become obsolete.
ii. Focus-Low Cost Strategy:
The focus-low-cost strategy emphasizes low overall costs while serving a narrow segment of the market, producing no-frills products or services for price sensitive customers in a market niche. Ideally, the small business unit that adopts the focus-low-cost strategy competes only in distinct market niches where it enjoys a cost advantage relative to large, low-cost competitors.
Like low-cost businesses those adopting the focus-low-cost strategy are vulnerable to intense price con petition that periodically occurs in markets with no-frills outputs. For instance, a number of years ago, Laker Airways used the focus-low-cost strategy very successfully by providing the first no- frills, low-priced trans-Atlantic passenger service.
However, the major airlines responded by dropping prices, eventually driving Laker out of business. The large competitors, because of their greater financial resources, were able to weather the short-term financial losses and survive the shakeout). Southwest Airlines, in contrast, adopted a similar strategy and has been able to perform well despite competitive pressure from its large rivals.
Like low-cost businesses that do not adopt a focus approach, focus-low-cost businesses are particularly vulnerable to technological obsolescence. Businesses that value technological stability and do not respond to new product and market opportunities may eventually find that their products have become obsolete and are no longer desired by their customers.
iii. Differentiation Strategy (No Focus):
Businesses that employ the differentiation strategy produce and market to the entire industry products or services that can be readily distinguished from those of their competitors. Differentiated businesses often attempt to create new product and market opportunities and have access to the latest scientific breakthroughs because technology and flexibility are key factors if firms are to initiate or keep pace with new developments in their industries.
The potential for differentiation is to some extent a function of its physical characteristics. Tangibly speaking, it is easier to differentiate an automobile than bottled water. However, intangible differentiation can extend beyond the physical characteristics of a product or service to encompass everything associated with the value perceived by customers. Because such businesses’ customers perceive significant differences in their products or services, they are willing to pay average to high prices for them.
There are a number of prospective bases for differentiation, the most obvious of which is features of the product (or the mix of products offered), including the objective and subjective differences in product attributes. Lexus automobiles, for example, have been differentiated on product features and are well known for their attention to detail, quality, and luxury feel.
Timing can also be a key factor, because first movers are more able to establish themselves in the market than those who come later, as was seen for a number of years with Domino’s widespread introduction of pizza delivery. Other factors such as partnerships with other firms, location(s), and a reputation for service quality can also be important.
When customers are relatively price-insensitive, a business may select a differentiation strategy and emphasize quality throughout its functional areas. Marketing materials may be printed on high- quality paper. The purchasing department emphasizes the quality and appropriateness of supplies and raw materials over their per-unit costs. The research and development department emphasizes new product development (as opposed to cost-cutting measures).
Differentiated businesses are vulnerable to low-cost competitors offering similar products at lower prices, especially when the basis for differentiation is not well defined or it is not valued by customers. For example, a grocer may emphasize fast checkout, operating on the assumption that customers are willing to pay a few cents more to pay for additional cashiers and checkout lanes. If customers tend to be more concerned with product assortments and prices than with waiting times, they may shop at other stores instead.
iv. Focus-Differentiation Strategy:
Firms employing the focus-differentiation strategy produce highly differentiated products or services for the specialized needs of a market niche. At first glance, the focus-differentiation strategy may appear to be a less attractive strategy than the no-focus differentiation strategy because the former consciously limits the set of customers it seeks to target: However, unique market segments often require distinct approaches. For example, the Limited operates a number of retail outlets to address multiple demographic segments simultaneously. Men are served by its Structure stores, women by its Lane Bryant stores, and children by its Limited Too stores. The Limited even targets young adults with The Gap and trendy consumers with Express stores. In some cases, however, large business units are simply not interested in serving smaller, highly defined niches.
Firms can focus the efforts in a number of ways. Popular retailer Cabala’s has even successfully targeted its efforts to men who hate to shop. The Cabala’s in Michigan draws an estimated six million visitors to its retail store each year, mixing its outdoorsman-oriented merchandise with an aquarium, an indoor waterfall stocked with trout, and realistic nature scenes. As a result, Cabala’s has secured a customer base largely ignored by other retailers.
In general, high prices are acceptable to certain customers who need product performance, prestige, safety, or security, especially when only one or a few businesses cater to their needs. As such, focus-differentiation is most appropriate when market demand inelastic because high-cost products are often required to support the specialized efforts to serve a limited market niche. As a result, cost reduction efforts, while always desirable, are not emphasized.
v. Low-Cost-Differentiation Strategy (No Focus):
Debate is widespread among scholars and practitioners as to the feasibility of pursuing low-cost and differentiation strategies simultaneously. Porter suggests that implementing a low-cost-differentiation strategy is not advisable and leaves a business “stuck ill the middle” because actions designed to support one strategy could actually work against the other.
Simply stated, differentiating a product generally costs a considerable amount of money, which would erode a firm’s cost leadership basis. In addition, a number of cost-cutting measures may be directly related to quality and/or other bases of differentiation. Following this logic, a business should choose either low-cost or differentiation, but not both.
Others contend that the two approaches are not necessarily mutually exclusive. For example, some businesses begin with a differentiation strategy and integrate “low costs as they grow, developing economies of scale along the way. Others seek forms of differentiation that also provide cost advantages, such as enhancing and enlarging the filter on a cigarette, which reduces the amount of costly tobacco required to manufacture the product.
Perhaps the best example of a business that has successfully combined the two approaches is McDonald’s. The fast-food giant was originally known for consistency from store to store, friendly service, and cleanness. These bases for differentiation catapulted McDonald’s to market share leader, allowing the firm to negotiate for beef, potatoes, and other key materials at the lowest possible cost.
This unique combination of resources and strategic attributes has placed McDonald’s in an enviable position as undisputed industry leader, although it is facing increased competitive pressure from differentiated competitors emphasizing Mexican, “fresh and healthy,” or other distinct product lines.
A more recent example of the combination strategy is the relatively young airline JetBlue Airways, launched in 2000 to provide economical air service among a limited number of cities. Jet Blue distinguished itself by providing new planes, satellite television on board, and leather seating. However, Jet Blue also minimized costs by such measures as squeezing more seats into its planes, selling most of its tickets via the Internet to avoid commissions, shortening ground delays, and serving snacks instead of meals. Hence Jet Blue’s differentiation efforts increased its load factor (i.e., the average pew stage of filled seats), also reducing its per-passenger flight costs.
Indeed, the low-cost-differentiation, strategy is possible to attain and can” be quite effective. Porter’s point is well taken, however, because implementing the combination strategy is generally more difficult that implementing either the low-cost or the differentiation strategy alone. This strategy begins with an organizational commitment to quality products or services, thereby differentiating itself from its competitors. Because customers may be drawn to high quality, demand may rise, resulting in a larger market share, providing economies of scale that permit lower per-unit costs in purchasing, manufacturing, financing, research and development, and marketing.
A business can pursue low costs and differentiation simultaneously through five primary means: commitment to quality, differentiation on low price, process innovations, product innovations, and structural innovations. First, commitment to quality throughout the business organization not only improves outputs but also reduces costs involved in scrap, warranty, and service after the sale.
Quality refers to the features and characteristics of a product or services that enable it to satisfy stated or implied needs. Hence, a high-quality product or service conforms to a predetermined set of specifications and satisfies the needs of its users. In this sense, quality is based on perceptions and is a measure of customer satisfaction with a product over its lifetime, relative to customer satisfaction with competitors’ product offerings.
Building quality into a product does not necessarily increase total costs because the costs of rework, scrap, and servicing the product after the sale may be reduced, and the business benefits from increased customer satisfaction and repeat sales, which can improve economies of scale. The emphasis in the 1905 on Strategy at Work quality improvement programs sought to improve product and service quality and increase customers; satisfaction by implementing a holistic commitment to quality; as seen through the eyes of the customer. Studies suggest that when properly implemented, an emphasis on quality can improve customer satisfaction while lowering costs.
Second, a lower than average price may be viewed as a basis for differentiating one’s products or services. However, low prices should be distinguished from low costs. Whereas price refers to the transaction between the firm and its customers, cost refers to the expenses incurred in the production of a good or service. Firms with low production costs do not always translate these low costs into low prices.
Anheuser-Bush, for example, maintains one of the lowest per-unit production costs in beer industry but does not offer its beers at a low price. However, 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. These firms are combining low costs with a differentiation based on price.
Third, 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. For example, the recent emphasis on eliminating processes that do not add value to the end product has not only cut costs for many businesses, but has also increased production and delivery speed, a key form of differentiation.
Fourth, product innovations are typically presumed to enhance differentiation but can also lower costs. For instance, over the years, Philip Morris developed a filter cigarette and, later, cigarettes with low tar and nicotine levels. These innovations not only differentiated its products, but also allowed the company to use less tobacco per cigarette to produce a higher-quality product at dramatic reduction in per-unit costs.
Finally, the importance of structural innovations, modifying the structure of the organization and/or the business model to improve competitiveness, has been highlighted in recent years. Recent approaches to structural innovation include the virtual corporation, outsourcing, and the Japanese kieretsu. The notion of business webs-systems of inter-networked fluid, specialized businesses that come together to create value for customers-has gained prominence among strategic thinkers. Within the business Web model, organizations do not focus solely on their own activities, but consciously develop partnerships with other businesses, each focusing on its own core competence to better achieve its mission.
vi. Focus-Low-Cost/Differentiation Strategy:
Business units that adopt a focus-low-cost/differentiation strategy produce highly differentiated products or services for the specialized needs of a select group of customers while keeping their costs low. Businesses employing this strategy share all the characteristics of the previous strategies. The focus-low-cost/differentiation strategy is difficult to implement because the niche orientation limits prospects for economies of scale, as well as opportunities for structural innovations.
Many small, independent restaurants such as those specializing in ethnic or international cuisine adopt this approach, constantly seeking a balance of cost reductions and uniqueness targeted at a specific group of consumers. For example, many university towns have small eateries that emphasize a unique specialty-such as Garibaldi’s barbeque pizza in Memphis-while also minimizing costs to remain affordable to the price-conscious college student.
vii. Multiple Strategies:
In some cases, large business units employ multiple strategies, or more than one of the six strategies. Unlike the combination low-cost- differentiations strategy, multiple strategies involve the simultaneous execution of two or more different generic strategies, each tailored to the needs of a distinct market or class of customer. Airlines utilize multiple strategies when they offer both highly differentiated (and high-priced) service via first class seating and economical, limited frills service in coach. Hotels also utilize multiple strategies when they offer basic rooms to most guests but reserve suites on the top floor for others.
Essay # 2. The Miles and Snow Strategy Framework:
A second commonly used framework introduced by Miles and Snow considers four strategic types: prospectors, defenders, analyzers, and reactors. The Miles and Snow typology is an alternative to Porter’s approach to generic strategy.
Prospectors perceive a dynamic, uncertain environment and maintain flexibility to combat environmental change. Prospectors introduce new products and new services, and design the industry. Thus, prospector tends to possess a loose structure, a low division of labor, and low formalization and centralization. While a prospector identifies and exploits new product and market opportunities, it accepts the risk associated with new ideas. For example, Amazon(dot)com’s initial launch of its Web bookstore was a major risk, one that resulted in much greater success for the company than with literally hundreds of other Internet startups in the late 1990s.
Prospectors typically seek first-mover advantages derived from being first to market. First-mover advantages can be strong, as demonstrated by products widely known by their original brand names, such as Kleenex and Chap Stick. Being first, however, can be a risky proposition, and research has shown that competitors may be able to catch up quickly and effectively: As a result, prospectors must develop expertise innovation and evaluate risk scenarios effectively.
Prospectors are typically focused on corporate entrepreneurship, or entrepreneurship. Whereas entrepreneurship focuses on the development of new business ventures as a means of launching an organization, entrepreneurship involves the creation of new business ventures within an existing firm. Established firms seeking to foster a culture that encourages the type of innovative activity often seen in upstarts must provide time, resources, and rewards to employees who develop new venture opportunities for the organization.
Defenders are almost he opposite of prospectors. They perceive the environment to be stable and certain, seeking stability and control in their operations to achieve maximum efficiency. Defenders incorporate an extensive division of labor, high formalization and high centralization. The defender concentrates on only one segment of their market.
Analyzers stress stability and flexibility, and attempt to capitalize on the best of the prospector and defender strategy types. Tight control is exerted over existing operations with loose control for new undertakings. The strength of the analyzer is the ability to respond to prospectors (or imitate them) while maintaining efficiency in operations. An analyzer may follow a prospector’s successful lead, modify the product or service offered by the prospector, and market it more effectively. In effect, an analyzer is seeking a “second mover” advantage.
Copying successful competitors can be a successful strategy when both organizations share the resources needed to effectively implement similar programs. After sales slumped in 2000 at Taco Bell, President Emil Brolick acknowledged its plans to model the restaurant after Wendy’s, noting Wendy’s ability to gain market share without slashing prices. In 2001, Taco Bell began appealing to a more mature market VI the additional pricey items and fewer promotions. Although the product lines are substantially different, Brolick hopes that a similar approach for Taco Bell can produce similar results.
Reactors lack consistency in strategic choice and perform, poorly. The reactor organization lacks an appropriate set of response mechanisms with which to confront environmental charge. There is no strength in the reactor strategic type.
In some respects, Porter’s typology and Miles and Snow’s typology are similar. For example, Miles and Snow’s prospector business is likely to emphasize differentiation, whereas he defender business typically emphasizes low costs. These tendencies notwithstanding, fundamental differences exist between the typologies. Porter’s approach is based on economic principles associated with the cost-differentiation dichotomy, whereas the Miles and Snow approach describes the philosophical approach of the business to its environment.