We're talking about the idea of generic competitive positions. Remember this is the concept that's determined by thinking carefully about a couple of things. First of all, the source of competitive advantage; does that come from low cost structure or does that come from differentiation of products and uniqueness? Then we also think about the competitive scope of a firm's offerings within an industry; is it more broad or is it more narrow? When we think about those things, that tees up four ideal types of generic competitive positions. I want to talk about two of those right now. Let's talk first about cost leadership. How do we understand this particular competitive position? A cost leadership position is where firms really focus on keeping costs lower than those of the competitors, and that's how they generate more profits than the marginal producer in that industry. The firms occupying this position tend to offer standardized products with broadly acceptable product features at the lowest price, and that's the key. A classic example of this would be Henry Ford, when he manufacturer's first automobile, that model T when it was being mass-produced, he was asked, can I get this in other colors? What colors can I get this in? He famously responded, "You can get this in any color provided it's black". The idea here is that firms that are competing from this particular position are not highly differentiating their products, they're not modifying their products, they're not focusing their products based on different preferences but it's a highly standardized kind of product or service offering. There's lots of examples across all sorts of industries. For example in retailing, Walmart would be a great example. Walmart is well-known for providing low cost prices at the cash register for its consumers, and they do that by having a really disciplined low cost leadership position in the industry. We can think of fast food restaurants, McDonald's would be an example of that. Again, it's not based on uniqueness or highly differentiated offerings on the menu, it's more about low cost. We can think about the milling industry, Nucor Steel would be an example of this. Even in financial services a firm like Charles Schwab, largely is trying to compete based on lower cost. For the consumers or the buyers of these products or services that all of this translates into lower prices, and that's how these firms really try to achieve all of the benefits of occupying this particular competitive position. What are different strategic approaches that a firm can take when it's occupying this particular competitive position? First of all, it can engage in aggressive cost-cutting. I've mentioned Walmart, and I think that's a perfect example. Walmart represents a great opportunity to all of its suppliers and its value chain. I'm sure all of those suppliers would love to have their products on the shelves at Walmart, that would represent a lot of potential sales. But Walmart's well-known for for, along with that opportunity, relentlessly helping those suppliers or forcing those suppliers to drive their own costs down so that they can keep flowing those low prices through to the consumer. Another strategic approach can be to really focus on building market share, and by building market share you can gain greater economies of scale, that can really translate into a lower marginal cost structure. Think about an industry like Mass Brewing in the beer industry, Anheuser-Busch is a big mass producer, they realize a lot of benefits from their huge economies of scale. Therefore it's harder for smaller competitors in that industry to compete with Anheuser-Busch's low cost structure. What are other approaches one might take? We can focus on really lowering the cost of the inputs in the supply chain, and that can even involve offshoring. Walmart might be an example of that, or Dell computer comes to mind, they've been very focused on lowering all the cost of the inputs in their value chain, and then that translates into lower prices for the consumers. Another approach might be to minimize overhead. Don't spend a lot of money on R&D or advertising. Dell is a great example of that, they're just focused on on price both in their cost structure and then corresponding to the prices that consumers might pay. On the other hand, in certain cases a firm might actually focus on state of the art operations or continuous improvement. Maybe they'll invest a lot in R&D if that R&D is focused on lowering the cost structure of the firm. Nucor Steel might be an example of that where they really focus on innovation within their manufacturing process, and that in turn allows them to lower their cost structure. That's the cost leadership strategy. Let's talk about the second one, which is the differentiation strategy. This is the place in that chart where we're talking about broad competitive scope within an industry, but instead of focusing on cost structure, we're focusing on uniqueness. What does this mean it means? It means that firms here generate profits from higher willingness to pay. Their buyers are simply willing to pay more for these products or services because there's something unique about them, they're perceived as being superior, and that allows the firms in this particular market position to command price premiums from unique features or from high-quality or from prestige associated with the brand. Again, lots of examples here we might think about in retailing again, as opposed to Walmart we might think of Target. Although Target's largely a low-cost retailer as well. They do try to position themselves as a little more of a differentiator than Walmart. Folks that are looking for a little more style or a little more aesthetic in the products or in the shopping experience, Target is trying to target those particular buyers or consumers. Think about personal computers, Apple is a perfect example of this. Where the product is much more differentiated than all of the other Windows-Based PCs that are out there. Therefore, Apple has a lot more brand specific loyalty and recognition. Intel in the microprocessor industry, they focus a lot on outperforming all of their competitors because it's all about performance. It's not as much about image or brand in that sense, but it is about what's the clock speed, and what's the performance of these microprocessors and Intel invest a lot in R&D to try to achieve the best in class specs. We can think of automobiles, these would be differentiated auto manufacturers like BMW, it's well-known for its brand perceived very differently than a low cost auto manufacturer. What about professional services? We can think about Goldman Sachs, here's a firm that really can command price premiums from its clients, and that's because they perceive they're getting that specialized value, it's a differentiated unique value. What are the different strategic approaches firms can take? Some of them I've mentioned here already, but a lot of the focus is on brand, prestige of brand and brand recognition. That can be achieved through heavy advertising, think about an athletic gear and apparel, Nike would be an example of a firm that occupies this differentiation strategy. They offer a broad range of products. Broad competitive scope within the industry, everything from shoes to baseball bats to footballs to T-shirts. Nike spends a lot of money on R&D and on advertising and branding and endorsements with celebrity athletes, and all of that is to create this perception that the brand is something special. Therefore, consumers are willing to pay a little more for those Nike shoes than they are for the competitors. Another strategic approach can be to develop innovative capability. I mentioned that a little bit with respect to Apple or Intel, that they can invest a lot in R&D so that they are innovating more than the competitors and offering more highly differentiated features on their products. These firms tend to invest more in human resources and R&D. Think of Goldman Sachs, they're very choosy about who they hire and who they put in front of the client because they're trying to offer a very specialized and differentiated service offering. This is the differentiation strategy and these are some of the ways it can be achieved.
