of perfect competition is that imitation will be easy, not too costly, and speedy. Any differences that emerge will be competed away very quickly. The introduction ...
generic strategies John McGee
Competitive forces on industries, supply chains, and markets suggest that firms can have substantial problems in identifying and responding to the economic forces that surround them. However, some firms very deliberately set out to countervail these forces and create space within which they can earn profits at a higher rate than their industry confrères. This is the essence of strategy, the creation of space within which discrete and distinctive actions can secure improved positioning within markets and greater performance. These competitive forces and their drivers are summarized in Figure 1. Competitive position can be improved in two basic ways. A firm might enjoy cost advantages that its rivals will find difficult to imitate. Or a firm might create a differentiated product that its rival might find difficult to imitate. The essence of perfect competition is that imitation will be easy, not too costly, and speedy. Any differences that emerge will be competed away very quickly. The introduction of an extra feature on a car (such as rear parking sensors) is generally easy to copy. However, to offer hybrid motors (electric plus gasoline such as in the Toyota Prius) is much more difficult to copy in terms of quality, of cost, and in speed of imitation. Firms with distinctive cost advantages will typically have built-up economies of scale and scope over a long period of time and rivals may find it difficult to attain the same low costs. The very well-known report on the British Motorcycle Industry (HMSO, 1970) identified huge-scale economies in Japanese motorcycle factories (leading, e.g., to labor productivity figures of about 500 bikes per man year) compared to the traditional craft-based production processes of European and US producers whose labor productivity was around 18 bikes per man year. This kind of cost advantage is inherently difficult to replicate and would take a very long time if it were judged even sensible to try to emulate. The other main dimension of strategic choice revolves around the notion of scope. Economies of scope arise when the average cost of a single product is lowered by its joint production with
other products in a multi-product firm. This is based on the indivisibility of certain resources. For example, knowledge is indivisible in the sense that it cannot be divided into pieces some of which you choose to have and some of which you choose not to have. Knowing about aluminum means that you will have knowledge relevant to airframe manufacture and to pots and pans. Economies of scope arise when your knowledge or other indivisible resource can be applied in multiple directions without using up that resource. Thus scope becomes interesting strategically. A firm may choose to operate with broad scope (such as Ford in the automobile assembly industry covering a very wide product range and covering also the whole globe). Conversely a firm may choose to operate on a very narrow scope (such as Morgan Cars which covers only a particular part of the sports car market). The choice of broad scope suggests a calculation about available economies of scope in such a fashion that once chosen, it is a commitment that cannot readily be reversed. The choice of narrow scope suggests an alternative calculation that the benefits of assets and other resources and capabilities focused and decimated to specific ways creates differentiation and/or cost advantages of a different sort. Figure 2 illustrates these generic strategies. Generic strategies represent typologies that illustrate the type and range of strategic options that in principle are available. Thus within the brewing industry over time, it is possible to see some brewing companies as low-cost players relying on the size of brewing plants to reduce costs to the lowest possible levels. Other brewers would see themselves as offering a wide range of differentiated products (e.g., cask-conditioned beer). Many well-known breweries are comparatively quite small but offer only a small range of “real ale” products. Historically, most brewers were small local operations producing cheap and cheerful low-cost products. These typologies are useful in understanding the nature of the strategic options that face firms but they do not in themselves provide prescriptions for strategic choice. Choice depends on the ways in which an individual firm can deploy advantages from cost, differentiation, and scope – the key dimensions of the generic strategies box.
Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper. Copyright © 2014 John Wiley & Sons, Ltd.
2 generic strategies Supplier/buyer power
Barriers to entry
Relative concentration Relative importance of product to the provider and the user Credible threat of vertical integration Substitution possibilities
Scale economics and experience Product differentiation Capital requirements Switching requirements Access to distribution Scale-independent cost advantages Level of expected retaliation
Control of information Switching costs Intensity of rivalry High if ... Several equally strong players Low/no growth in market High fixed costs and cyclical demand Few changes for differentiation Large-scale capacity increments Different ‘culture’ of players High strategic stakes Major exit barriers
Pressure from substitutes Benefits not product features Sideways competition Comparative price/performance Comparative technology lifecycle What business are you in? Backing by rich competitor
Figure 1 Behind the competitive forces.
Product characteristic
Narrow
Market scope
Broad
Commodity
Differentiated
Cost leadership
Differentiation
Cost focus
Differentiation focus
Figure 2 Porter’s generic strategies. Source: Porter (1980, Chapter 2).
generic strategies Porter (1980) observed that cost and differentiation strategies were mutually exclusive on the grounds that the resources required of each were quite different – high-volume, low-cost plants compared with knowledge-based creative innovation, for example. He claimed that a firm’s attempts to pursue both would lead it to be “stuck in the middle” with neither differentiation nor cost nor focus as advantage. This has led to much criticism on the basis of a simplistic over-characterization of cost and differentiation. Reconciling differentiation with cost has been one of the greatest strategic challenges of the 1990s (see Grant, 2011 for an extended discussion). Common to the success of Japanese companies in consumer goods industries such as cars, motorcycles, consumer electronics, and musical instruments has been the ability to reconcile low costs with high quality and technical progressiveness. (Grant, 2011)
The generic strategy approach proved valuable in separating out different and powerful forces at work in competitive space. But its power has been muted by the many ways in which differentiation and cost advantage can be simultaneously attained. There is, however, an ongoing debate about the relative efficacy of each with many commentators observing that differentiation remains powerful while cost advantage is capable of imitation or circumvention. In this more complex world, Porter’s original typology does not adequately capture all strategic varieties and thus must be said not to be collectively exhaustive. Mintzberg (1988) has
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attempted to answer these conceptual limitations by proposing an alternative typology. In this, he introduces resource-based considerations in contrast to Porter’s focus on market domains. He disaggregates Porter’s differentiation strategy into differentiation by image, design, quality, support, and “undifferentiation” (which means no basis for differentiation). Here, Mintzberg is trying to make his dimensions of strategy both more practical and collectively more exhaustive (see Kotha and Vadlamani, 1995 for an empirical investigation). See also competitive strategy; global strategy; five forces of competition Bibliography Grant, R.M. (2011) Contemporary Strategy Analysis, Basil Blackwell, Oxford. Her Majesty’s Stationery Office (HMSO) (1970) The British Motorcycle Industry, HMSO, London. Hill, C. (1988) Differentiation versus low cost: a contingency framework. Academy of Management Review, 13, 401–412. Kotha, S. and Vadlamani, B.L. (1995) Assessing generic strategies: an empirical investigation of two competing typologies in discrete manufacturing industries. Management Journal, 16 (1), 75–83. Mintzberg, H. (1988) Generic strategies: Toward a comprehensive framework. Advances in Strategic Management, 5, 1–67. Porter, M.E. (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York.
