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,
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
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
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.
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