The most commonly-used strategic tools in the for-profit sector are probably the generic strategies. They aren’t called generic because they’re bland or simple but because they can be used by almost any for-profit corporation to plan their strategy. There are three generic strategy tools:
Why should a customer prefer to buy our product rather than keep their money in their pocket? Why should they prefer to buy from us over our competitors?
In strategic planning, these aren’t usually sales questions. If we are more creative in our marketing or more skilled in our sales, we might be able to make plenty of sales even if we can’t give a good answer to these value proposition questions, but the value proposition approach is focused on coming up with convincing, demonstrable answers to these two questions.
Boiled down, there are only a very few possible answers to these value proposition questions:
- We can either offer the lowest-cost product, or we can differentiate our product from our competitors’.
- And, if we choose to differentiate, we can only differentiate by features or by execution.
When using value proposition as a tool, it’s strongly recommended that a company choose only one value proposition and stick to it. Trying to be the lowest-cost provider AND differentiate, or differentiating by features AND execution opens you up to being beaten by a competitor with a tighter focus.
And it’s important to remember that there can be only one lowest-cost provider of a product in a particular market.
At first blush, the value proposition approach may seem limited and confining. After all, can there really only be three routes to success, and is one of them really limited to a single player in a market? These limitations are more apparent than real. Each value proposition can be further broken down into sub-categories:
|Credit rates||Pre- & post- sales service||Reliability|
|Indirect||Options / choice||Intensity|
|Financial assistance||Guarantees||Sales hustle|
|Capital vs. operating||Intangible/Image||Service hustle|
|Life cycle cost||Design||Friendliness|
Many companies have made an excellent living on picking only one of these value propositions and delivering better and more consistently than their competitors.
According to this strategic planning approach, company should choose to do only one of three things:
Choosing concentration means you’re going to focus on selling your product to as many customers in your current customer pool as possible. So if, for example, you are a bakery in a small town, you are going to spend your time and effort on having as many of the town residents as possible to come to your store to buy your baked goods.
Choosing penetration means you are going to try to sell your product more often to your current customers. So your bakery would not worry about reaching all the people in your town. Instead, you would try to double the number of purchases your existing customers make from your bakery.
Choosing expansion means you’re going to try to reach beyond your current customer pool. So your bakery might concentrate on becoming a destination for out-of-towners.
This approach is similar to the Market Options approach in that it proposes a company should focus on doing only one thing—in this case, one of four things:
- core business
- vertical integration
- horizontal integration
The Company Scope approach is different from the Market Options approach in that it concentrates on what business the company should be in, while the Market Options approach concentrates on how (and to whom) the company should sell its product.
If a company chooses the first scope option—concentration—it defines something as its core business and focuses solely on that.
If a firm chooses the second option—vertical integration—it actively pursues purchasing or partnering with business ahead or behind it on its industry’s value chain. A furniture manufacturer might open a chain of retail stores to sell its product, or buy a particle-board plant to supply one of its key input materials.
If a firm chooses the third option—horizontal integration—it would be actively pursuing, partnering or creating a business at the same stage on the value chain as it is, but in a closely-related industry. So a furniture manufacturer might seek to amalgamate with a kitchen cabinet manufacturer.
If a firm chooses the fourth option—diversification—it would want to add look for businesses that are outside its industry and not at the same point in the value chain.
Assessing Generic Strategies
Although all three of these tools are considered generic (i.e.: they are supposed to be relevant to virtually any company in virtually any industry) they actually vary in how widely they can be applied. For example, Market Options is applicable primarily for companies seeking to grow their sales, while Company Scope doesn’t usually apply to small businesses.
Deciding which of these three generic strategy tools to use for a particular firm is rarely obvious.
Despite these drawbacks, these three generic strategy tools can be incredibly useful if applied clearly and consistently over time. They can be very useful in providing focus in every facet of an organization. And, although they were developed for for-profit businesses, they can be surprisingly-applicable to some non-profits.