Generic strategies concept definition
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The final exam is a 3000 words essay. It is strongly advised to start working on it from the beginning of the course.
The aim of this essay is to demonstrate your understand of key concepts in strategic management and your capacity to craft a professional document. It will be a very good preparation for your dissertation.
You are asked to:
First part
. choose a concept/model in strategic management. You can choose this concept among the ones discussed in the course or choose another one. Examples of concepts are: core competencies, generic strategies, mergers and acquisitions, alliances, CSR, blue ocean strategy, etc…
. define this concept
. present the history of the concept: when was it discussed first, how did it evolve?
. discuss how/if the concept is relevant or not to today’s business challenges.
The first part should include a minimum of 10 academic references: books and/or articles from academic journals. It excludes textbooks and articles from business magazines that you can use also if needed.
All sources should be adequately referenced as for any professional academic document.
In the second part, you are asked to:
. present a real life application of the concept. You can use your own company or a company of your choice. This section should be like a mini-case study where you will present the situation of a company, the issues faced and how the concept was used to solve the issues and raise the general performance of the firm.
Approximately 2000 words should be dedicated to the first part and 1000 words to the second part.
SAMPLE ANSWER
Generic strategies concept definition
Companies utilize three types of generic strategies as ways of establishing their competitive advantage. Implementing a pure generic strategy is advocated as the ideal way of attaining sustainable competitive advantage. This paper outlines Wal-Mart’s low cost generic strategy that allows it to maintain its leadership position in the retail industry. Wal-Mart utilizes different tactics in logistics, and operations to make savings that are necessary to maintain a price competitive advantage.
The understanding of sustainable competitive advantage is a central area of focus in strategic management. Strategic management explores different concepts and theories that examine the market environment as well as internal factors of a company in a bid to underscore the best strategy for achieving sustainable competitive advantage. Generic strategies form one of the key concepts in determining a company’s strategic direction (Bordean, Borza, & Glaser-Segura, 2011). Generic strategies are three types of pursuits that organizations engage in to achieve competitive advantage. The pursuits mark the position of a company as a leader in a context of increased competition among business rivals. They include cost advantage, differentiation and focus strategies (Tanwar, 2013).
Porter outlined that companies’ competitive advantage may be defined through an approach on low cost operations where they produce goods and services at the least cost in the industry. The other is differentiating the products and services in a distinct way that sets the company apart from other players in the industry. Companies differentiate through providing unique or superior quality, special features or additional services. Differentiation enhances premium value on products or services resulting in higher profits than their rivals. Cost and differentiation are the two main strategies. Focus is the third strategy that entails companies directing their low cost or differentiated strategy towards a particular customer segment. The products or services are developed to suit a particular niche by customizing them to appeal to only one or a few customer segments in an industry. The focus strategy is used for segments that larger competitors ignore either because of geographic factors, buyer’s special needs, or product specifications. It is pertinent that the chosen segment provides adequate growth potential that is not of central importance to major competitors (Allen, 2006).
History of the concept: when was it discussed first, how did it evolve?
In 1985, Porter proposed the generic strategies through his book titled ‘Competitive Strategy’ (Porter, 1985). The strategies are called generic because they can be applied in any organization in any industry. The discussion evolved from the need to underscore the structures of industries within which companies operate through a model of analysis that evaluates their profit capability and attractiveness in 1980. This structural analysis originated from economic disciplines about environmental relations, organizational behaviour, and performance in the 1950s. The 1950’s approach viewed companies as passive but porter’s work changed this perspective by demonstrating that strategies albeit influenced by the respective sector structures, also had the capacity to influence the structures. Porter’s industry analysis model proposed outlined that generic strategies are beneficial when the associated gains are sustainable in relation to actions of the five forces of competition.
In 1989, porter indicated that generic strategies establish a sustainable profitable position against forces that drive competition in a particular industry. This implied that generic strategies involve a combination of external and internal approaches (Weber & Polo, 2009). Porter also indicated that it is rarely possible for businesses to achieve success by combining different generic strategies. It is because generic strategies require exclusive commitment. He also indicated that a business’ choice of a generic strategy is influenced by the five competitive forces that he identified in industries (Furrer, Sudharshan, Thomas, & alexandre, 2008). Selecting one of Porters generic strategies presents the initial step in formulating a business strategy.
How the concept is relevant or not to today’s business challenges
Company’s main business objective lies in attaining sustainable superior performance. Companies pursue either one of the generic strategies to maximize financial performance. There is contention about using a hybrid of the two main generic strategies. Opponents of a hybrid application indicate that pursuing a single strategy is beneficial in industries where customers display pronounced preferences for either quality or price. A pure low cost strategy is effective where customers are highly sensitive to price and where there is a fighting chance to retain a costs advantage. It may be achieved through proprietary technology or exclusive access to cheap factors of production or channels of distribution (Powers & Hahn, 2014). Companies use this concept to determine the most efficient approach based on their customers sensitivity. They evaluate the different customer segments and scrutinize their sensitivity to either quality or price and then tailor products or services to suit customer preferences.
Companies have used porter’s generic strategies since the 1980s to establish their competitive advantage and register above average returns in the industry. In determining which of the strategies to apply in a particular business to maximize performance, managers require an in-depth understanding of the tactics associated with the three generic strategies. For an organization to successfully pursue a differentiation strategy, there are various tactics that a manager must incorporate in its operations. One of the necessary tactics includes investing in innovation in the company’s marketing technology and methods. It may be operationalized through use of databases to identify customers of particular products that match a particular profile and targeting a marketing event to them. Using technology such as a database and mailing system is effective in generating new sales to the existing customers of a particular type of product or service. Marketing managers require using more technology applications efficiently to sell, as interact with consumers, and track the lifetime value of individual customer relationships. This differentiation tactic follows the recommendation that it is less expensive to market to existing customers than finding new customers (Akan, Allen, Helms, & Sprails, 2006).
Another tactic involves fostering innovation and creativity which is not focused on incremental improvements on existing products but rather, it focuses on building new products or services to achieve holistic innovation. It may involve observing customers daily activities to inform new designs of products and services. Its operationalization may be achieved through computational fluid dynamics to understand product performance. It requires that managers are in sensitive to changes in their market environment and invest in cross-functional teamwork that explores perspectives such as customer attitudes, industry trends and new technologies. It is also very imperative that managers create an environment where teams value innovation and creativity. This way, companies target quality differentiated products and uniquely engineered customer experience to sophisticated and knowledgeable customers that are willing to pay higher prices for the products (Akan, Allen, Helms, & Sprails, 2006).
Building a high market share is another imperative tactic for companies to pursue a successful differentiation strategy. Managers require leveraging diversity as an important way of achieving high market share. Recruitment managers require incorporating diversity in the hiring processes to ensure that a particular company’s workforce has a multicultural composition that matches cultural-ethnic diversity in a particular market. This is particularly relevant in a market such as the US, which has rich multicultural demographics. A diverse workforce provides required cultural intelligence that is necessary in designing strategies to reach target consumers. It informs strategies such as customized advertising and new product launches tailored to suit the buying power of various cultural groups within the industry. For instance, minorities may prefer to buy products or services from persons with similar ethnic or racial background. Leveraging workforce diversity achieves success because buyers form better relationships with salespeople that share their cultural values. They bond better with them because they trust them and it often results in repeat sales. It is also imperative that companies use ethnic media such as newspapers, television and radio to increase sales of their quality and differentiated products (Akan, Allen, Helms, & Sprails, 2006).
Managers also use different tactics in their pursuit of cost leadership strategies. For a successful cost leadership strategy, managers require adding value through replenishment logistics. One of the most successful tactic reducing distribution costs is cross docking. Retailers are renowned for minimizing distribution costs because they use retail cross docking and improve their customer service simultaneously. In this approach, goods move directly from the receiving dock and directly shipping. Sometimes goods are temporarily stored in staging to before being moved to the shipping dock. Retailers often order predictable quantities from vendors and this also helps them to benefit from discounts associated with large volume purchases. It eliminates redundant costs emanating from processes such as warehousing. Cost leadership strategies such as cross docking is therefore very necessary in solving business problems of redundant expenditure.
Managers also use different tactics in pursuit of a focus strategy. A manager may either choose a low-cost focus strategy or a differentiation focus strategy. In the low cost focus strategy, one of the tactics that a manager pursues is providing an outstanding customer experience. The operationalization of excellent service tactic may be accomplished through providing products and services at lower prices as compared to competitors and ensuring that customers shop conveniently by having hands on service to assist customers select their merchandise. It may also involve providing access to free services to adjust certain products to match customer expectations and anticipating and providing other services that go together with certain services. Good examples include having a tailor on site to make adjustments on shoppers merchandise in a clothing store and providing free Wi-Fi in the hospitality industry respectively. These free extras are viewed as customer service components that increase customer turnover to low cost products and services. Excellent service helps the company to save on costs and time that may otherwise be incurred to solve problems.
Companies may also use various systems to improve operational efficiency as a tactic that results in significant costs savings. For instance, health care institutions may invest in a system that reduces the cycle time needed to move medicine to various units. The system configures billing that tracks utilization, inventory and associated expenses. This way the institution keeps proper inventory on the costs per patient correctly and drastically reduces medication loss thereby improving operation efficiency by reducing costs for the health institution. Providing quality products and continuous training for employees is a low cost focus strategy tactic that works to increase customer turnover to products and services. The company saves on costs associated with poorly trained staff and malfunctioning products. The low cost focus strategy is necessary in saving on time and monetary costs that allow companies to sell products at considerably lower prices than competitors (Allen, 2006). A company pursuing this strategy has a delicate task in ensuring that its products and services are cheaper than competitors’ while at the same time providing outstanding service, maintain operational efficiency and offering quality products and availing highly trained personnel.
Pursuing a differentiated focus strategy requires certain tactics. The two tactics include managers must ensuring production of specialty products and services, targeting a high price market niche. To produce specialty products, it is essential that a company defines its main specialization such as furniture and offer other accessories that go hand in hand with furniture’s. It presents a competitive advantage of a company as a place that customers visit to discover new and different products every season. It provides a solution for customers looking for retailers offering a wide range of specialized products through a one stop shopping experience (Pretorius, 2008). This way the quality new entrant takes advantage of a new growing market segment.
The three generic strategies avail a pool of options for companies to utilize and attain long lasting competitive advantage. These strategies define a company’s positioning through an examination of where and how the company competes. The how is the type of strategy and where is the market segments and the business and geographic scope. There is increased support for implementing a pure strategy than combining several generic strategies. It is because doing so results in companies being stuck in the middle or lacking a clearly defined generic strategy (Brenes, Montoya, & Ciravegna, 2014). It is therefore advisable that companies in a particular sector avoid combining all the strategies such as offering unique products at low costs because it is highly delicate and it might present difficulties in performance.
Wal-Mart’s low cost generic strategy case study
Wal-Mart has nearly nine thousand retail stores in fifteen countries and over two million employees worldwide. As one of the largest corporation, globally its turnover in 2010 was four hundred and twenty one billion US dollars. It thus has a significant impact on its suppliers and markets worldwide. Wal-Mart is heralded for using a low cost strategy that informs its competitive advantage. The corporation takes pride in providing products at low prices, which saves customers’ money. It extends the low cost strategy to customers when venturing into both local and international markets. The strategy allows Wal-Mart to clinch a large market share and dominance over competitors locally and internationally. The corporation’s market dominance in the US market allows it the advantage of influencing low prices for a broad range of consumer products. Its strategy is backed through sale of high volumes at discounted costs while simultaneously focusing on well-organized supply chain management (Blanchard, Comm, & Mathaisel, 2008).
Wal-Mart’s low cost strategy results in low profit margins but high consumer turnover coupled with low supply costs. The corporation invests in technology systems that significantly minimizes internal operations costs, benefits from large economies of scale achieved through bargaining and large volume purchasing and improves its customer experience to outstanding levels in its store (Blanchard, Comm, & Mathaisel, 2008). For The Corporation to achieve success with its low cost strategy it works more efficiently than its business rivals. This entails maintaining low salaries for its employees and low prices to suppliers. It also saves on costs through an investment on energy efficient stores (Stankeviciute, Grunda, & Bartkus, 2012).
Wal-Mart’s initial years were characterized by challenges in maintaining low prices for its consumers. To maintain its reputation as a low cost retailer, the founder used tactics such as establishing store in areas with low real estate costs and ensuring that warehouses were less than a day’s travel as a strategy to minimize on costs. It also relied on word of mouth marketing rather than expensive media advertising. In the 70s and 80s, the corporation began combining merchandise and groceries stores under one roof as a way of spreading recurring overhead costs (Mottner & Smith, 2009). It enabled the company to increase its profit margins through realized cost savings.
The corporation strives to continually drive down high logistics costs incurred in transporting its supplies. To address the issue, it is currently retrofitting its hybrid-electric trucks to run on waste cooking grease in partnership with Daimler Trucks North. This project will avail more efficient lower cost transport fleet enabling the corporation to better compete. It is also selling its waste cooking grease from its restaurants to bio-fuel producers for pre-processing and this provides additional income (Stankeviciute, Grunda, & Bartkus, 2012). The savings are extended to consumers and works to maintain its cost leadership sustainable competitive advantage in the retail industry.
Wal-Mart also addresses challenges of competition by accruing savings that result from its investment in technology. It uses barcodes to tag its merchandise during manufacture and instantly relays sale information using its information technology. The corporation integrates its supply chain with Retail Link technology that ensures communication with its supply chain partners. Wal-Mart shares this technology with its suppliers and vendors to inform their shipment and routing activities. Internally, it uses Inforem technology to facilitate its automated replenishment which informs its ordering decisions. This way, it promptly offers the right products at low cost to customers (Crain & Abraham, 2009). Another way in which Wal-Mart succeeds in warding off its competitors is through cross docking. It possesses a large trucks fleet that avails products to the distribution channels at faster speeds than its competitors and its customers access required goods at faster rates. It also eliminates middlemen and reliance on hired transport supply chains. This way, it cuts down on business costs such as warehousing.
The fact that it is the largest retailer in the world allows it to benefit from economies of scale during procurement. It purchases goods in high volume and establish long-term relationships with suppliers. Bulk supplies ensure that it attracts higher discounts than its competitors. It also allows the company to negotiate low interest rates on large loans. It also targets its customers with trusted brands that allow it to further befit from economies of scale through reduced need for expensive advertising. It is nearly impossible for competitors to have bargaining power over suppliers and lenders that that matches Wal-Mart’s. This allows the corporation to maintain its leader position in the retail market of price sensitive consumers (Weber & Polo, 2009).
Wal-Mart also cuts down on costs through reducing personalized services because it pursues a pure low cost strategy. These way price sensitive customers can benefit from low priced products. Understaffing at its retailing units is however attractive to customers that are keen on accessing outstanding customer experience resulting in loss of potential customers to business rivals with better customer service. This however does not affect its profitability because it has established a niche in low-income customers that remain loyal customers owing to their preferences for lower prices. It is necessary for the company to remain committed to its low cost strategy as a way on maintaining long lasting profitability positioning in the sector (Werbach, 2009).
Wal-Mart continues to use its cost leadership strategies as avenues to attain competitive advantage over competitors for price sensitive customers. It is clear demonstration that Porter’s recommendation that companies pursue a pure generic strategy to benefit from its associated balance is accurate (Blanchard, Comm, & Mathaisel, 2008). For Wal-Mart to perpetually remain relevant in the retail market, it is imperative that it maintains its focus on low cost rather than combining it with differentiation strategy to also target consumers interested high quality services. Investing in quality services and providing products at low prices is not financially viable. It would be a failed business unit strategy. Companies must therefore carefully examine their generic strategy to ensure that it results in sustained profitability and superior business performance.
References
Akan, O., Allen, R. S., Helms, M. M. and Sprails, S. A., 2006. Critical Tactics for Implementing Porter’s Generic Strategies. Journal of Business Strategy, 27(1), 43-53.
Allen, R. S., 2006. Linking Strategic practices and Organizational Performance to Porter’s Generic Strategies. Business Process ManagementJournal, 12(4), 433-354.
Blanchard, C., Comm, C. and Mathaisel, D., 2008. Adding Value to Service Providers: Benchmarking Wal-Mart. Benchmarking: An International Journal, 15(2), 166-177.
Bordean, O.-N., Borza, A. and Glaser-Segura, D., 2011. A Comparative Approach of the Generic strategies within the Hotel Indiustry Romania vs USA. Management & Marketing , 6(4), 501-514.
Brenes, E. R., Montoya, D. and Ciravegna, L., 2014. Differentiation Strategies in Emerging Markets: The Case of Latin American Agribusiness. Journal of Business Research, 67, 847-855.
Crain, D. and Abraham, S. 2009. Using Value Chain Analysis to Discover Customers’ Needs. Strategy & Leadership, 36(4), 29-39.
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Mottner, S. and Smith, S., 2009. Wal-Mart: Supplier Perfomance and Market Power. Journal of Business Research, 535-541.
Porter, M., 1985. Competitive Advantage. New york: Free Press.
Powers, T. L. and Hahn, W., 2014. Critical Competitive Methods, Generic Strategies, and Firm Performance. The Interantional Journal of Bank Marketing, 22(1), 43-64.
Pretorius, M., 2008. When Porter’s Generic Strategies are not Enough: Complementary strategies for Turnaround Situations. Journal of Business Strategy, 29(6), 19-28.
Stankeviciute, E., Grunda, R. and Bartkus, E. V., 2012. Pursuing a Cost Leadership Strategy and Business Sustainability Objectives: Wal-Mart Case Study. Economics and Managment, 3, 1200-1206.
Tanwar, R., 2013. Porter’s Generic Competitive Strategies. Journal of Business and Management, 15(1), 11-17.
Weber, W. and Polo, E. F., 2009. Evolution of Generic Competitive Strategies and the Importance of Michael E. Porter. Artigo-Marketing, 17(1), 99-117.
Werbach, A., 2009. Strategy for Sustainability: A Business Manifesto. Boston: Harvard Business Press.
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