Generic strategies, five forces model, and distinctive competencies

Business Strategies

Why is a business' choice of generic strategy so important to its long-term success?

The selection of a generic strategy is critical to the success of any business, because it defines how its core competencies or strengths can be best used to enter and grow sales into a given type of market. The three generic strategies of cost leadership, differentiation and focus guide businesses to the best intersection of their innate strengths or core competencies, and the best possible market for them to profitably operate in. In essence, the three generic strategies are essential for aligning businesses to the business models that will also fuel long-term growth (Ormanidhi, Stringa, 2008).

The generic strategies also are very effective in assessing the competitive strengths of a business in total, taking into account product, process- and people-based unique competitive strengths and defining the best market scope for them to compete in (Ormanidhi, Stringa, 2008). All businesses have varying strengths in the product-related, process-based and people-based areas of their businesses. Taking these three areas and overlaying them into a Venn diagram would show a different percentage overlap depending on the unique strengths of a business. The generic strategies are very effective for taking the intersection of these three factors (product, process, and people) and positioning them in markets that have the greatest potential for success.

An example of this is Nike, who has an exceptionally effective supply chain, well-defined outsourced production processes m strong channel sales systems, and a stable, committed workforce. The intersection of products, processes and system in the company is high; therefore, there is a large percentage overlap of these three factors. Nike is so effective at cross-functional communication because of the high overlap of products, processes and people, they can launch a new product in less than half the time of their competitors. Nike is also known for the rapid development of new brands specifically aimed at sports categories that show significant revenue potential. From the generic strategies standpoint, Nike has attained excellence in a differentiation strategy due to how well the entire company functions as a competitive force in the sports shoe, apparel and equipment industry. Conversely, WalMart has chosen to align its systems and people to dominating the supply chain process to attain cost leadership in retailing. This is a business where the Venn diagram of products, people and process are heavily skewed to the process areas of supply chain planning, management and optimization. This deliberate strategy has given WalMart a globally dominant position in the cost leadership strategy.

The three generic strategies clarify how the unique combination of business strengths or core competencies can best align to current and future market opportunities. As many businesses seek to add to and grow their core competencies over time, their ability to compete in one generic strategy vs. another will also change over time. This shifting of generic strategies can be very difficult to achieve, yet is essential for their survival. Consider how Southwest Airlines began in a cost leadership generic strategy and today is moving more towards a differentiation strategy by concentrating on customer service, $5 WiFi on all planes by 2012, and changing the airline passengers' customer experience. This shift from being purely price-driven in the past to concentrating on service and on-time performance today has made Southwest the airline of choice for many small businesses who have tight travel budgets but also want to have decent service on their flights.

In conclusion, the generic strategies are critical for aligning a company's unique strengths or core competencies to a continually changing market landscape. The best businesses sense the shifts in market requirements and work very hard to add new strengths so they can continue to be successful in one of the three generic strategy areas.

2. This semester we discussed Porter's 5-Forces model to analyzing the external environment. Offer a suggestion or two to improve the model and explain how your ideas would make it better.

The Five Forces Model is effective as a strategic planning framework to capture the threats of new entrants and substitute products or services, in addition to the bargaining power of suppliers and buyers. Dr. Porter revised the assumptions of the Five Forces Model in 2008 with an updated article published in the Harvard Business Review where he provided parallels of the model's effectiveness to the Return on Invested Capital (ROIC) by industry. The graphic shown in Figure 1 was also provided in the article (Porter, 2008).

Figure 1: Five Forces Model

(Porter, 2008)

This model's effectiveness does not however capture the increasingly critical role of tacit and explicit knowledge in businesses. The tacit knowledge, of the type that is learned from the continual streamlining of core processes, is not easily captured and communicated. It is often called tribal knowledge as this type if intelligence often stays within workgroups where it originates and seldom is captured for broader use. Specific knowledge, or the type of intelligence that can easily be captured and communicated, is often not used to its full potential as well. Studies in the auto industry suggest that knowledge, not products or pricing, is the new competitive advantage (Dyer, Nobeoka, 2000). The Five Forces Model does not recognize how important knowledge is as a competitive force in the definition of competitive advantage and its role in defining competitive rivalries. The bargaining power of knowledge needs to be added as does the threat of falling behind the knowledge curve of an industry. An example of this dynamic is how Intel has continually reinvented itself first into microprocessors and later into entire motherboards, subassemblies for servers and chipsets for enabling networking communications. Knowledge is also critical for the development of trust across a value chain and with customers. The greater the knowledge a company has, the greater it can aspire to be a trusted advisor to customers and a trusted partner with suppliers. Knowledge, a catalyst of growth, deserves inclusion in the Five Forces Model because companies compete more on this dimension that any other. Trust is the new currency and the model needs to be updated to reflect this new focus on how knowledge can enable it.

3. How can a business best leverage its distinctive competencies into competitive advantage?