 The previous class we were talking about the various strategic models out of which the porters generic strategy in which firms, organizations according to Michael Porter need to take three strategic viewpoints either to be a cost leader or capable of differentiating or remaining very focused. And we saw what cost leadership was all about and the next of porters generic strategy is on differentiation. So if you look at this grid it is about the uniqueness with which firms can deliver product or services over a wide market scope. So in addition to the cost leadership you can also have firms that take a conscious decision of being able to differentiate its product and services that it offers to its customers. And that differentiation is from the ability of the organization to offer a set of unique attributes which not only the organization considers unique but those attributes need to be valued by customers to be better or completely different from what competition is offering. So the propensity of organizations to develop a product or a service that is uniquely different from competition or better than what competition is offered and this uniqueness is from the perspective of a customer is what makes it is what is key to a differentiation strategy. As a result of which the value that is added by the uniqueness it is because that there is an incremental value addition that organizations can increase the price and that is why you have a premium price for an incremental value. And if the value is not perceived to be unique by customers there is no point in just having a premium price that is why firms have to be very cautious of the fact that what they perceive as unique must be equally perceived if not more by the customers to be unique. And if there is a high cost in providing this uniqueness it is the higher price that the firms are able to command because of this uniqueness that will take care of these higher cost that is incurred in offering this unique value. And on the other hand because of the uniqueness if the suppliers increases the suppliers increase prices then it is easy for relatively easy for firms to pass this to the customers because it is very difficult to find substitute products especially when your product or service is delivering something that is very unique and it is a value proposition that is not easily available from a substitute product or service. So we must understand that the fundamental to a firm that decides to choose differentiation as a strategic option that it has to provide a set of unique attributes whether it is a product or a service that it is offering. And this uniqueness must be perceived to be really value add by the customer and the advantage of that as I said before it provides the firm the opportunity to price opportunity to premium price its product. And secondly the absence of an immediately available substitute it can easily transfer increases in prices to the customers and many firms will have different internal resources that provides the strength to differentiate and these could come from the presence of scientific research within an organization that can provide this value proposition or a very highly skilled and creative product development team that can come out with a product with some unique set of features or a skilled team that can deliver a unique set of services or a very strong sales team which can forcefully and successfully communicate the perceived uniqueness of the product or service or a combination of all of this and also a reputation that a firm carries for its quality and innovation that anything from such a firm is already perceived to be unique to be differentiated. So these are all the various internal combination of factors that can strengthen the firm's decision to differentiate the firm's decision to choose differentiation as its strategic option and this differentiation can come in different forms to begin with from the product differentiation itself examples you could see in this electric utility vehicle REVA the product differentiation is clear and telling or IBM's or Hero Honda when it introduce its first four stroke motorcycle or Gillette so firms will provide this differentiation that is clearly visible in the product offering itself or it could also come from the ingredients that it can use examples could be the lead free narrow lack pains as a result of which it says the differentiation it says is that it does not the pains are let free and the resultant health benefits of inhaling the the paint smell is does not harm your health or prestige non-sticky pants result of using special types of ingredients in manufacturing them or herbal toothpaste or organic food products so these are also ingredient based differentiation or again add more features to the primary product aristocrats wheeled baggage it was the one that started pioneer the concept of having wheels as part of the baggage or today you see backpacks with mobile phone holders with with water bottle holders so these are all additional features which are provided to the primary product as a source of differentiation or differentiation can also come from packaging and that you see very much in the tetrapacks or sashes or today you have ketchup tubes as against the conventional bottles in which ketchup come or the cockroach the hits sleaze nozzles that provides access to places that are otherwise difficult to reach or differentiation can also come from the design capabilities that explains why Apple is very strong it is able to provide a differentiation because of its capability to come out with new designs in its product offerings or 3M or the electronic ignition scooters the press start scooters because of the design that comes from the electronic ignition has made the TV a scooty or the kinetic Honda very popular or differentiation from the positioning itself 30 minute pizza order you get your pizza and 30 minutes or your 2 minute noodles that was Maggie's differentiation strategy and noodles within 2 minutes so positioning is also a very strong source or differentiation and you can add others as well to this list but primarily differentiation can come from product or the ingredients that it uses or the capability to add additional features to a product or presenting the product in a unique packed format packaging or design to provide that differentiation or a simple positioning that conveys this differentiation so these are things that provides the uniqueness to the product or a service just as it can provide uniqueness there might and that is the strength there is there are also limitations for differentiation it can be imitated by competitors or the customers taste will change altogether making the value proposition which was so relevant at one point of time becoming irrelevant at a later point of time and also that there might be firms that pursue focus strategies which may end up even achieving greater differentiation in their market segments about which I will be talking later but there are limitations to a differentiation strategy but the fact is if firms are able to differentiate the product or service then it is able to optimally use its resources just as resources for firms using cost leadership strategy ensure that cost is reduced at different parts in the value chain differentiation strategy ensures that the resources that are used by the firm are used in such a way that it adds value which is perceived to be unique by the customers and these are all the examples that just drives the point a simple point that differentiation can be a very powerful source for competitive advantage. The third and the last important strategic option in Porto's generic strategies is about focus and the very name focus means that it has to be narrowed down which means we need to concentrate on a narrow segment from a scope perspective. The target scope cannot be as broad and as wide as companies embarking on cost leadership and differentiation have but necessarily has to be in a narrow segment because the reasonable assumption is it is difficult to remain focused when the market segment is very broad and having chosen to remain focused you can either achieve cost competitiveness in the narrow segment or differentiation in the narrow segment. Now why is that there is a need to remain focused at times there will be smaller groups of customers whose needs can be served better if the resources of a firm are focused only towards that narrow group and in the process you can build a competitive advantage and this narrow group of customers may also be a premium group of customers which means you can price your products higher niche customers so what is the benefit of this focus strategy you satisfy a niche market and since you are satisfying that either through low cost differentiation there is a high degree of customer loyalty and also discourages other firms from competing directly into this niche market and assume that you are a firm that has chosen the focus strategy and pursue a differentiation focus strategy so you have the benefit of differentiation as well which means that you will be able to pass higher cost to customers since you are in the niche segment close substitutes do not exist and the fact that you are serving a narrow market will also have the other effect of having less bargaining power with the suppliers because the requirement itself is narrow but nevertheless firms that are able to successfully have a focus strategy in place will be able to provide a range of product or services to a relatively narrow market segment not as broad as cost leadership or differentiation strategies would have but then the biggest advantage is that they know the niche market so well that is an inherent competitive advantage which builds a high degree of customer loyalty which is an inherent entry barrier that discourages other firms from competing directly trying to get market share from this niche narrow market so what makes markets attractive for focus strategy one since it is narrow we must ensure that the size of the segment is big enough to be profitable so narrow mean just because it is small at times it might even become it might even become a loss making proposition if it is small and it is profitable it makes attractive because every firm would be interested in making more profit with a small market segment and the fact that it is small also makes it of secondary importance to big rivals for example the south west airlines example low cost the model of operation is entirely different point to point small size of segment that is frequent traveling and this makes this customer less important to big rivals for example you take a British Airways or a Lufthansa so the size of the segment should be small enough to be of secondary interest to large rivals added if it has a good growth potential that that makes focus markets very attractive and that it is a niche means that it is less vulnerable to substitutes and as I said before such markets are not crucial to the success of major competitors and remember the buyers of this they require specialized expertise or at times each of them needing customized product attributes which only firms that have a focus strategy can deliver and it also makes it very attractive because there is no other rival that is concentrating on the segment because this is narrow so it is the propensity of a firm the capabilities of a firm to identify a market that has that is characterized by all of these and still is able to have a substantive customer base big enough to be profitable and in the process build a great degree of customer loyalty that makes it less vulnerable to competition as well as substitutes that makes market attractive for a focus strategy and there are a number of examples for that in the auto industry Ferrari and Rolls Royce a narrow market but highly differentiated GU aerospace very narrow and highly differentiated differentiation comes from the R and D the technology behind it or body shop differentiation comes from the ingredients body shop it is known for its natural products play schools again very narrow differentiation comes from the fact that it is just meant for those who need preschool care day cares service apartments again a very narrow market low cost solution it is a good bridge between the 5 star hotels or permanent houses so this is again an example of focus strategy with low cost option call taxis in airports again a very narrow catering only to the to the flying customers a low cost solution or the dollar stores the one dollar store or recently till recently the Subic here is a light slight deviation but still I would categorize this as a focus strategy it is a little broad and cost base but focus towards especially towards a different set of customers there are limitations for focus strategies as well some of the competitors would have this wait and watch syndrome so they might just wait and see whether this focus strategy has proven to be a success and then if it is successful they might get attracted the good example was the dominoes pizza delivery it started the pizza delivery and build a market focus towards a set of customers who would always want a pizza to be delivered it was a big success and only then others jumped into this focus market or firms may become easy takeover targets for large firms who would like to fill a missing product portfolio a very good example for this is how the cola companies extended that product line coke buying power aid or pepsico buying gatter aid with power aid and gatter aid are popular sports drinks or fritoli pepsico bought this chips or quaker oats gain pepsico pepsi bought quaker oats extending the product line and the most expected limitation is that consumer preferences and needs may shift they no longer need to be niche another internal limitation also comes from the fact that organizations might slip into this illusion that it is only this focus strategy that is creating this competitive advantage and at times they might miss seeing the bigger picture or fail to realize that even in this focus they have some form of low cost or they are able to differentiate and that they are not able to leverage this low cost or the ability to differentiate if they fall into this illusion that it is only focus that is responsible for the success another limitation is probably a competitor can still find a smaller segment within the target segment and out focus the focused firms it is a possibility so these are the limitations of the focus strategy so you find organizations either to be low cost leaders or differentiators or focused and organizations that do not know what they are doing are stuck in the middle somewhere it is very difficult for generic strategies to be compatible within each other within a given firm it means that a firm must not try to have all of them in the same place with the view that it can achieve advantages on all fronts that is the biggest mistake that many firms do trying to put in place in bits and pieces all the three generic strategies with the hope that it will acquire advantages from each of them believing that these three are compatible against each other with one another and at the end of the day they realize that they have not got any advantages because of this amalgam of these three generic strategies if a firm differentiates by supplying high quality products let us for example take assume that a firm differentiates by supplying high quality products it might undermine this differentiation by also trying to become a low cost provider I am not saying that it is very difficult to give high quality at low cost but then if you choose to differentiate by providing high quality and also attempt to become low cost then you run the risk of losing the advantages of being both another thing another disadvantages assuming that your quality did not suffer the imagery before a customer itself becomes a little confusing and this is what when competition to south west wanted to become low cost as well as the conventional airline company they could not do it and the failure of king fisher king fisher plus deccan very difficult to be king fisher's differentiation came from its service whereas deccan's success was from its low cost and it was very difficult to seamlessly integrate a low cost with a highly differentiated airline and projecting one brand imagery as king fisher and to be successful that is why michael porter strongly believes that a firm must select only one of these three generic strategies otherwise they are just stuck in the middle and it is very difficult to achieve a long term sustainable competitive advantage if you do not carefully choose any one of these three generic strategies or it is possible that if you want to have multiple strategies we still can do that by creating separate business units for each of this strategy and each of the business units will have different units with their own policy making with their own culture that is very distinctly separate from another business unit this way they are not business units stuck in the middle and giving a confusing imagery that I explained before and I must also give a disclaimer at an end that it is a single that a single generic strategy is not always best because you might find that within the same product or service there is always a set of customers who have multi-dimensional expectations who would want a combination of convenience, price, style, quality and this multi-dimensional expectation or the satisfaction of a customer makes a case strong that it is just not enough if you have a single strategy in place because let us say if I am differentiating with high quality and that and I am faithfully following this differentiation strategy at one point of time it may suffer if there is another firm that enters the market which offers lower quality but then meets the multi-dimensional expectation of a customer then no longer is my differentiation strategy unique. So a single generic strategy is a good way to start and at the same time organizations must realize that it is not necessarily the only best way. So we need to always look out to improvise on these generic strategies or also choose a different strategic model the one that we saw before was ANSOF that does not mean that that is the best that is one and what we saw today was Porter's generic strategies which just relies on three corner pieces, cost leadership, differentiation and focus and that organizations need to carefully choose which one they need to adopt as a strategic imperative. And then use the resources within an organization to ensure that they either cost leaders or they are able to provide a product or a service in a unique way or remain to focus attending to a very niche market segment but never a combination of all of this that only puts an organization completely lost in the middle not knowing what type of an organization it is whether it is a cost leader or a differentiator or a focused one and it is possible that these generic strategies if we compare it with the five forces might also give some internal strengths from a five forces perspective that makes the industry also attractive. For example a cost leadership provides the ability for the firm to cut price and this deters potential new entrance so from an entry barrier perspective from five forces model the ability to cut price deters potential entrance if I am a cost leader, if I am a differentiator customer loyalty can also discourage potential entrance and similarly if my strategy is to focus it develops a set of core competencies that is acting as an entry barrier because these competencies cannot be easily delivered by competition. Then from buyer power ability to offer low prices to powerful buyers because I am a cost leader provides an inherent strength if I am a differentiator large buyers have less power to negotiate because of very few close alternatives. This again is good news for the firm and similarly if I am focusing likewise large buyers will have less bargaining power because of the absence of substitutes since I am in this niche segment already and cost leadership insulates the firm from powerful suppliers and if I am a differentiator I can just pass on price increase from suppliers to the customers. If I am a focused firm I might have limitations because suppliers have more bargaining power because I am a low volume purchaser but if I am a differentiated focused firm then I am able to pass on the any increases in price to the customer. From a threat of substitutes point of view a cost leader can use low price to defend against substitutes but again it is not long term sustainable but if I am a differentiator since I am perceiving this product or service to deliver differentiating attributes threat from substitutes is lower and if I am focused since I am already concentrating on a niche market segment specialized products which requires core competencies to deliver the product and service is a natural installation against any threat from substitutes and as a cost leader I can take on competition because I am able to better price my product as a cost leader. As a differentiator I will fully rely on customer loyalty to keep customers from rivals and similarly as a firm that is very focused rivals cannot meet a differentiated focused firm because a customer needs of a focused firm that differentiates as well as a focused firm that is a cost leader it is difficult for rivals to reach to those customers but that does not mean that all of the five forces are favorably placed it only points to the fact that at this point of time for a cost leader or a differentiator or a firm that is focused a majority of the five factors of the five forces favor a cost leader or a differentiator or a firm that is focused but organizations need to be mindful of the fact that each of them have their limitations which over a period of time will also alter the structural attractiveness of the industry as measured using these five forces. This snapshot just gives an initial map fit between each of the five forces and the firm as a cost leader differentiator or a focused firm. So generic strategies of Michael Porter comprises three options that are available for organizations and they have to choose and it is better that they choose only one of those either be a cost leader or be a differentiator or be a focused product or service provider and by being any one of these you would have to make sure that the resources within the firm are utilized to achieve the very purpose of being any one of these and it is extremely difficult for organizations to choose more than one of these generic strategies and still remain successful because a combination of two or all the three has always worked counter productive to the strategic objective of an organization. Very rarely have we seen examples of organizations being a differentiator as well as a low cost provider. It is this clarity that organizations need to have that is very important. So from the strategic options point of view we saw the answer of product market grid and we saw the generic strategies grid. There are two other strategic options that are available which will be the core competency as a strategic option core competency as developed by C. K. Prahlad and Gary Hammer and the fourth as I said before is the blue ocean strategy. So the next class I will be spending time on core competency as a strategic tool and blue ocean as a strategic tool and before we close this session I would also encourage you to just watch a small video to understand with some examples to understand the thought process behind Michael Porter's three generic strategies. Thank you very much.