Assignment 09: Cost, Differentiation, Focus & Strategy

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Strategic Analysis for Healthcare

Chapter 22

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Generic Strategies

Michael Porter (1980), the originator of the five forces analysis, also identified three general, or generic, strategies that organizations can use to compete:

cost leadership,

differentiation, and

focus.

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Cost Leadership

Cost leadership is a strategy whereby an organization chooses to compete in a broad market based on low prices.

To compete on price, a company can simply cut its prices, or it can change some other factor in the product, business, or industry.

If a company simply cuts price, competitors can do the same thing, and a price war will ensue.

In changing some other factor, a company seeks to create a sustainable advantage that does not currently exist.

The change may involve the manufacturing process, technology, distribution, process reengineering, cost cutting, or any other area that affects the cost side of the equation for the company.

A reduction on that side of the equation can be passed on to buyers of the product or service in the form of lower prices.

A lower price for a comparable product or service is expected to undercut the competition and drive up sales and market share.

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Differentiation

Differentiation involves creating a product or service that is perceived as superior or unique by the buyer in the broad market.

To the extent that the buyer believes that a product is unique and that the uniqueness is valuable, the buyer will be willing to pay a higher price.

Thus, companies may compete on the uniqueness of products or services rather than on price.

Often, buyers will develop brand loyalty and continue to purchase the same product over time, even if they have to pay a slight premium (e.g., BMW cars).

The difficulty is that the perceived exclusivity of a product can make it harder to mass market, and the higher cost associated with differentiating the service or product’s features can drive up price.

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Focus

A focus strategy centers on a particular niche, customer type, product line segment, or geography.

By segmenting the market and choosing to focus on one or two specific segments, an organization can tailor its offering to the specific needs and desires of the target.

By better serving the target, the organization can maintain higher profit margins.

Sometimes start-up companies use a focus strategy to gain a foothold and then later shift to other strategies to broaden their market.

The trade-off with the focus strategy is often high profit margin versus low sales volume, and vice versa.

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Generic Strategies

Generally, organizations compete using only one strategy for a product or service rather than combining strategies. Maintaining a “low-cost/high-volume” strategy at the same time as a “differentiation/premium-price” strategy, for instance, is difficult.

Health Administration Press