STRATEGIC MANAGEMENT

Learning Objectives
After reading this chapter, you should be able to understand and articulate answers to the
following questions:
1.​ Why is an examination of generic strategies valuable?
2.​ What are the four main generic strategies?
3.​ What is a best-cost strategy?
4.​ What does it mean to be “stuck in the middle”?
Introduction
In the strategic management framework, an organization's generic business-level strategy,
or competitive strategy, determines its approach in the marketplace. Michael Porter outlines five
strategies: broad cost leadership, broad differentiation, focused cost leadership, focused
differentiation, and best cost. These strategies focus on the target audience rather than product
lines, with broad strategies appealing to a wide market and focused strategies targeting a narrow
niche. Broad cost leadership offers the lowest price, while differentiation provides unique
products. Best cost combines lower cost and differentiation. Continuous improvement is crucial,
using assessments and SWOT analysis to refine the chosen business-level strategy and align it
with the organization's vision.
6.1.​ Understanding Business-Level Strategy through “Generic Strategies”
Business-level strategy is a critical aspect of a firm's overall strategic planning,
addressing the fundamental question of how a company will compete within a specific industry.
This involves complex decisions related to the source of competitive advantage (cost or
differentiation) and the scope of operations (broad or narrow). Michael Porter's framework
identifies four generic business-level strategies, each with its own unique approach.
✔​ Broad Cost Leadership:
Objective: Become the low-cost producer in the industry to achieve a competitive advantage.
Example (Philippine Retail Industry): Puregold, a supermarket chain, emphasizes efficient
supply chain management and economies of scale to offer a wide range of products at
competitive prices.
Strategic Focus: Operational efficiency, cost control, and large-scale procurement.
✔​ Broad Differentiation:
Objective: Stand out in the market by offering unique and distinctive products or services.
Example (Philippine Retail Industry): Jollibee, a fast-food giant, differentiates itself through
unique menu items tailored to local tastes, innovative marketing, and a strong Filipino brand
identity.
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Strategic Focus: Product innovation, marketing, and creating a distinctive brand image.
✔​ Focused Cost Leadership:
Objective: Concentrate on a narrow market segment and strive to be the low-cost producer
within that segment.
Example (Philippine Retail Industry): 7-Eleven, a convenience store chain, focuses on providing
cost-effective and convenient products to urban consumers.
Strategic Focus: Tailoring operations to meet the specific needs and cost expectations of a
specific urban market segment.
✔​ Focused Differentiation:
Objective: Concentrate on a specific market segment and offer unique products or services
tailored to that segment.
Example (Philippine Retail Industry): Bench, a clothing brand, targets the youth market by
providing trendy and culturally relevant fashion items.
Strategic Focus: Understanding and meeting the unique needs of a specific customer segment,
often through product innovation and customization.
Importance of Understanding Strategies
Understanding the differences among these generic strategies is crucial because they offer
distinct value propositions to customers. Different strategies require different value chain
configurations. For instance, a cost leadership strategy might emphasize supply chain efficiency
and cost reduction, while a differentiation strategy may require substantial investment in
marketing, research, and development.​
Limitations of Generic Strategies
✔​ Overemphasis on Homogeneity:
Observation: Generic strategies categorize firms into distinct types (cost leadership,
differentiation, etc.), assuming a certain homogeneity within each category.
Limitation: Not all firms within a specific strategy type exhibit identical characteristic. Variations
may arise due to industry specifics, resource availability, or strategic choices.
✔​ Rigidity in Categorization:
Observation: Generic strategies imply clear-cut categories, potentially oversimplifying the
dynamic nature of business environments.
Limitation: Real-world strategies often involve a mix of elements, making it challenging to fit
every firm neatly into predefined categories. Some companies might pursue a hybrid strategy
that combines aspects of both cost leadership and differentiation.
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✔​ Context Sensitivity:
Observation: Generic strategies do not account for the industry-specific or contextual nuances
that may influence strategy effectiveness.
Limitation: The success of a generic strategy may depend on factors such as industry structure,
customer preferences, and regulatory environments. Tweaking the strategy recipe becomes
crucial for adapting to specific contexts.
✔​ Variability in Resource Availability:
Observation: Generic strategies assume consistent resource availability for firms within a
category.
Limitation: Differences in resource endowments, financial capabilities, or technological
infrastructure can lead to variations in strategy execution. A small firm may face resource
constraints that impact its ability to implement certain elements of a chosen generic strategy.
✔​ Evolving Competitive Dynamics:
Observation: Business environments are dynamic, with evolving competitive landscapes.
Limitation: A strategy that was successful in the past may not guarantee success in the future.
Changes in consumer preferences, technological advancements, or competitive moves may
necessitate adjustments to the generic strategy recipe for sustained success.
✔​ Marketing and Advertising Divergence:
Observation: Generic strategies often associate specific marketing approaches with certain
strategies (e.g., low advertising for cost leaders).
Limitation: Not all firms strictly adhere to these associations. Examples like Walmart, which
devotes considerable resources to advertising despite being a cost leader, highlight the need for
flexibility in marketing approaches based on the firm's unique context.
✔​ Industry-Specific Challenges:
Observation: Industries vary widely in their characteristics, competitive intensity, and customer
behavior.
Limitation: A generic strategy that works well in one industry may not be as effective in another.
Industry-specific challenges and demands may require a customized approach that goes beyond
the standard generic strategy framework.
✔​ Lack of Guidance on Implementation:
Observation: Generic strategies provide high-level direction but may lack detailed guidance on
implementation.
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Limitation: Firms may struggle with translating the generic strategy into specific actions.
Successful strategy execution often involves more nuanced decision-making and a deep
understanding of the organization's unique circumstances.

6.2.​ Cost Leadership

Cost leadership is a business-level strategy where a firm aims to become the lowest-cost
producer in its industry. The primary objective is to achieve a competitive advantage by offering
products or services at the lowest possible cost, allowing the firm to attract a broad market and/or
achieve higher profitability through cost efficiency.
Key Characteristics:
✔​ Economies of Scale:
Explanation: Cost leaders leverage economies of scale to produce large quantities, spreading
fixed costs over a higher number of units and reducing the average cost per unit.
✔​ Operational Efficiency:
Explanation: Cost leaders focus on streamlining operations and processes to minimize waste,
reduce production time, and enhance overall efficiency.
✔​ Cost Control:
Explanation: Strict cost control measures are implemented across the organization to manage
expenses effectively and maintain a competitive cost structure.
✔​ Standardization of Products/Services:
Explanation: Cost leaders often standardize their offerings to simplify production processes and
reduce variation, contributing to cost savings.
✔​ Market Pricing:
Explanation: Cost leaders typically adopt a market pricing strategy, where products or services
are priced lower than competitors, attracting a large customer base.
Advantages:
●​ Competitive Pricing: Cost leaders can attract price-sensitive customers by offering
products at lower prices than competitors.
●​ Higher Profit Margins: Achieving lower production costs can lead to higher profit
margins, even with competitive pricing.
●​ Market Expansion: A cost leadership strategy allows for broader market penetration,
reaching a larger customer base.
●​ Barriers to Entry: Building efficient cost structures can create barriers for new entrants
attempting to compete solely on price.
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Challenges and Criticisms:

●​ Vulnerability to Technological Changes: Rapid technological advancements may
challenge existing cost structures, requiring continuous adaptation.
●​ Quality Perception: Emphasizing cost may lead to a perception of lower quality,
potentially impacting brand image.
●​ Imitation by Competitors: Competitors may replicate cost-saving practices, eroding the
cost leader's competitive advantage.
●​ Market Changes: Changes in consumer preferences or economic conditions may impact
the effectiveness of a cost leadership strategy.

6.3.​ Differentiation
Differentiation, in the context of strategic management, refers to a business strategy
where a company seeks to distinguish its products or services from those of its competitors in
ways that are valued by customers. The goal is to create a unique and identifiable position in the
market that goes beyond simply competing on price. Instead, differentiation involves providing
unique features, qualities, or experiences that set a company apart and make its offerings more
appealing to customers. Here's a detailed discussion on differentiation in strategic management:
Key Components of Differentiation
✔​ Product Features and Quality: Differentiation often starts with the product itself. This can
include unique features, superior quality, or a combination of both. Customers should
perceive the product as offering something special that competitors don't provide.
✔​ Innovation: Innovation is a powerful driver of differentiation. Companies that
consistently introduce new and improved products or services stay ahead in the market.
This could involve technological advancements, design innovations, or process
improvements.
✔​ Brand Image and Reputation: Building a strong brand image contributes to
differentiation. A positive brand reputation can create trust and emotional connections
with customers, making them more likely to choose a particular brand over others.
✔​ Customer Service and Experience: Providing exceptional customer service can be a
source of competitive advantage. This involves not only addressing customer issues
promptly but also creating a positive overall experience, from purchase to post-sales
support.
✔​ Customization: Offering customizable products or services allows customers to tailor
their experience to their specific needs. This personalization can create a strong
connection between the customer and the brand.
✔​ Distribution Channels: Unique and efficient distribution channels can contribute to
differentiation. This might involve exclusive partnerships, streamlined logistics, or
innovative methods of delivering products to customers.
✔​ Cost Leadership and Differentiation: Some companies pursue a strategy of cost
leadership alongside differentiation. While differentiation adds value, cost leadership
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helps in maintaining competitiveness by offering these unique features at competitive

prices.
Advantages of Differentiation
✔​ Brand Loyalty: Differentiated products often lead to strong brand loyalty, with customers
choosing a particular brand over others due to the perceived value and uniqueness.
✔​ Premium Pricing: Successful differentiation allows companies to command premium
prices, leading to higher profit margins and potentially offsetting higher production costs.
✔​ Competitive Advantage: Companies that effectively differentiate themselves can gain a
competitive edge by providing something that competitors find challenging to replicate.
✔​ Reduced Sensitivity to Price Changes: Differentiated products are less sensitive to price
changes, as customers are willing to pay for the added value they perceive.
Disadvantages of Differentiation
✔​ Higher Costs: Achieving and maintaining differentiation often requires additional
investment, leading to higher production and marketing costs.
✔​ Imitation by Competitors: Competitors may attempt to imitate differentiated features,
eroding the uniqueness and reducing the competitive advantage.
✔​ Consumer Preferences Shift: Changing consumer preferences can diminish the appeal of
differentiated features over time, necessitating constant innovation.
✔​ Complexity in Management: Managing a differentiated strategy can be complex,
requiring coordination across various functions and a careful balance between innovation
and efficiency.
✔​ Risk of Over-Differentiation: Trying to differentiate on too many fronts may lead to
over-complexity, confusing customers and diluting the brand's core message.
Implementation of Differentiation
✔​ Market Research: Understand customer needs and preferences through thorough market
research to identify areas where differentiation can be most effective.
✔​ Innovation Culture: Foster a culture of innovation within the organization to consistently
introduce new and unique offerings.
✔​ Brand Building: Invest in building a strong brand through effective marketing and
communication strategies.
✔​ Quality Control: Ensure consistent and superior product quality to uphold the perceived
value associated with differentiation.
✔​ Customer Relationship Management (CRM): Implement CRM systems to enhance
customer interactions, understand their needs, and tailor offerings accordingly.
✔​ Strategic Partnerships: Form strategic partnerships that can enhance the overall value
proposition of the products or services.
✔​ Employee Training: Train employees to deliver exceptional customer service and to align
with the company's differentiation strategy.
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In the Philippine setting, differentiation strategies can be observed across various

industries. Here are some examples of companies or sectors that employ differentiation
strategies:
Human Nature (Personal Care Products):
Human Nature, a local brand producing natural and organic personal care products,
differentiates itself by promoting ethical and environmentally friendly practices. The company
emphasizes its commitment to providing products that are cruelty-free, all-natural, and sourced
sustainably. This approach appeals to consumers who prioritize ethical and eco-friendly choices.
ABS-CBN (Media and Entertainment):
ABS-CBN, a major media network in the Philippines, has differentiated itself by
producing and airing content that resonates with the Filipino audience. This includes a mix of
local dramas, reality shows, and news programming that reflects the cultural preferences and
values of the Philippine audience. The network's focus on local content distinguishes it from
international competitors.
Belo Medical Group (Health and Wellness):
Belo Medical Group, a popular aesthetic clinic, differentiates itself by offering a range of
innovative and advanced cosmetic treatments. Dr. Vicki Belo, the founder, is known for
introducing cutting-edge technologies in the field of cosmetic surgery and skin care. This
commitment to staying at the forefront of the industry sets Belo apart in the highly competitive
beauty and wellness sector.
Goldilocks (Bakery and Food Industry):
Goldilocks, a well-known bakery, and food chain, differentiates itself by offering a wide
variety of Filipino-inspired cakes, pastries, and local delicacies. Their products are specifically
tailored to Filipino taste preferences, celebrating local flavors and traditions. This focus on
cultural relevance distinguishes Goldilocks in the bakery industry.
6.4.​ Best-Cost Strategy
In strategic management, a best-cost strategy is a business approach where a company
aims to offer products or services that provide the best value in terms of both low cost and high
quality. This strategy seeks to position the company as a cost leader in the industry while
simultaneously delivering products or services that meet or exceed the quality expectations of
customers. The goal is to achieve a competitive advantage by offering a balance between cost
and value. Here are key components and considerations related to the best-cost strategy:
Key Components of Best-Cost Strategy:
✔​ Cost Leadership: The foundation of the best-cost strategy is achieving cost leadership.
This involves minimizing production costs through efficient processes, economies of
scale, technology utilization, and effective supply chain management.
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✔​ Quality Focus: While pursuing cost leadership, the company must also focus on
maintaining or improving product or service quality. The goal is to offer a level of quality
that meets or exceeds customer expectations, creating a value proposition that goes
beyond low prices.
✔​ Efficiency and Process Improvement: Continuous improvement in operational efficiency
and processes is crucial. This includes optimizing production processes, reducing waste,
and streamlining operations to further reduce costs.
✔​ Economies of Scale: Achieving economies of scale is often a key element in a best-cost
strategy. Larger production volumes can lead to lower per-unit production costs,
enhancing the company's ability to offer competitive prices.
✔​ Supply Chain Management: Efficient supply chain management helps in cost reduction.
Negotiating favorable deals with suppliers, minimizing inventory costs, and optimizing
logistics contribute to overall cost-effectiveness.
✔​ Technology Integration: Leveraging technology to improve processes, automate tasks,
and enhance efficiency can contribute to cost reduction. It can also lead to innovations
that improve the quality of products or services.
✔​ Strategic Pricing: Determining an optimal pricing strategy is essential. The company
should set prices that are competitive and provide value to customers while still ensuring
profitability.
✔​ Market Positioning: Communicating the value proposition to customers is crucial. The
company should clearly convey that it offers high-quality products or services at prices
that are lower than or comparable to competitors.
Advantages of Best-Cost Strategy
✔​ Competitive Advantage: Achieving a balance between low cost and high quality can lead
to a competitive advantage. The company is able to offer products or services that are
appealing to cost-conscious consumers without compromising on quality.
✔​ Increased Market Share: A best-cost strategy can attract a larger customer base, including
those who are price-sensitive but still value quality. This can result in increased market
share.
✔​ Profitability: Despite offering competitive prices, a best-cost strategy aims to maintain
profitability through cost leadership and operational efficiency.
✔​ Adaptability to Market Changes: Being cost-efficient allows the company to adapt to
changes in the market, including fluctuations in demand and pricing pressures from
competitors.
✔​ Customer Loyalty: Providing high-quality products or services at competitive prices can
foster customer loyalty. Customers may choose the company over competitors due to the
perceived value.
Challenges and Considerations
✔​ Balancing Cost and Quality: Striking the right balance between cost reduction and
maintaining product or service quality is challenging and requires careful management.
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✔​ Market Perception: Ensuring that customers perceive the company's products or services
as both cost-effective and high-quality is essential. Misalignment with customer
expectations can hinder success.
✔​ Dynamic Competitive Environment: The competitive landscape may change, and new
entrants may challenge the company's position. Continuous monitoring and adaptation
are necessary.
✔​ Investment in Technology and Innovation:
✔​ To sustain the best-cost strategy, companies need to invest in technology and innovation
to stay ahead in terms of efficiency and quality.
✔​ Risk of Imitation: Competitors may attempt to imitate the best-cost strategy, leading to
increased competition. Constant innovation and differentiation are required to stay ahead.
Examples of Best-Cost Strategy
Toyota (Automobile Industry)
Toyota has historically pursued a best-cost strategy by focusing on operational efficiency,
lean production, and quality control. The company offers a range of vehicles known for their
reliability and efficiency at competitive prices.
Zara (Fashion Retail)
Zara, known for its fast fashion model, balances cost efficiency with a focus on trendy
and quality clothing. The company leverages a vertically integrated supply chain to reduce costs
while providing fashionable products.
Xiaomi (Technology and Electronics)
Xiaomi, a Chinese electronics company, pursues a best-cost strategy by offering
high-quality smartphones and consumer electronics at prices lower than many competitors. The
company achieves this through a combination of cost-effective production and an online-focused
distribution model.

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