PORTER’S GENERICPORTER’S GENERIC STRATEGY MODELSTRATEGY MODEL

EFFORTS BY:EFFORTS BY:GAURAV TULIGAURAV TULIPARUL ARORAPARUL ARORA

ANKITA SHARMAANKITA SHARMAAPEKSHA BAJAJAPEKSHA BAJAJ

Porter's Generic Porter's Generic StrategiesStrategies

A firm positions itself by leveraging its strengths

Michael Porter has argued that a firm's strengths ultimately fall into one of two

headings: cost advantage and differentiation.

By applying these strengths in either a broad or narrow scope, three generic

strategies result: cost leadership, differentiation, and focus

Cost Leadership StrategyCost Leadership Strategy◦Relatively standardized products

◦Features acceptable to many customers

◦Lowest competitive price

Cost Leadership StrategyCost Leadership Strategy

Low cost producer

Given level of quality

Average industry prices to earn a profit higher than that of rivalsBelow the average industry prices to gain market share

Price wars - competition suffers losses

Without a price wars - Industry matures and prices decline

The cost leadership strategy always targets a broad market

Cost Leadership StrategyCost Leadership Strategy ScenariosScenarios

Cost Leadership StrategyCost Leadership StrategyCost saving actions required by this

strategy:

◦ Building efficient scale facilities

◦ Tightly controlling production costs and overhead

◦ Minimizing costs of sales, R&D and service

◦ Building efficient manufacturing facilities

◦ Monitoring costs of activities provided by outsiders

◦ Simplifying production processes

How to Obtain a Cost How to Obtain a Cost AdvantageAdvantage

Determine Determine and control and control

Cost Cost DriversDrivers

Reconfigure Value Value Chain Chain if needed

Alter production Alter production processprocess Change in automationChange in automation

New distribution New distribution channelchannel New advertising New advertising mediamedia Direct sales in place of Direct sales in place of indirect salesindirect sales

New raw materialNew raw material Forward integrationForward integration Backward integrationBackward integration

Change location Change location relative to suppliers relative to suppliers or buyersor buyers

Cost LeadershipCost Leadership

Threat of new entrants

Bargaining power of suppliers

Rivalry among competing

firms

Bargaining power of buyers

Threat of substitute products

Key Strengths Required for Cost Key Strengths Required for Cost LeadershipLeadership

Access to the capital

Skill in designing products for efficient manufacturing

High level of expertise in manufacturing process engineering

Efficient distribution channels

Risks InvolvedRisks Involved Competition may lower prices

Technological Advancements

Companies using Focus Marketing

Obsolete processes due to innovation in industry

Perception : Lower cost = Low Quality

Easy to imitate the strategy

CASE STUDYCASE STUDY

A leading cost strategy for McDonalds is the ability to purchase the land and buildings of its restaurants

Vertical – top to bottom management style

Low wage workers and less managers

Benefits offered

Cost LeadershipCost Leadership

Differentiation StrategyDifferentiation StrategyAn integrated set of actions taken to

produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them.

◦Focus is on nonstandardized products

◦Appropriate when customers value differentiated features more than they value low cost.

Differentiation StrategyDifferentiation Strategy unique attributes valued by customers

Customers perceive the product to be better

Value added by the uniqueness

Charge a premium price for it

How to Obtain a Differentiation How to Obtain a Differentiation AdvantageAdvantage

Control Cost Cost DriversDrivers if needed

ReconfiguReconfigure re Value Value

ChainChain to to maximizemaximize

Lower buyers’ costsLower buyers’ costs Raise performance of product or serviceRaise performance of product or service Create sustainability through:Create sustainability through:

Customer perceptions of uniquenessCustomer perceptions of uniqueness Customer reluctance to switch to Customer reluctance to switch to

non-unique product or servicenon-unique product or service

Differentiation Strategy: Differentiation Strategy: CompetitorsCompetitors

Threat of new entrants

Bargaining power of suppliers

Rivalry among competing

firms

Bargaining power of buyers

Threat of substitute products

Key RequirementsKey Requirements

Access to leading scientific research.

Highly skilled and creative product development team.

Strong sales team with the ability to successfully communicate the perceived strengths of the product.

Corporate reputation for quality and innovation.

Competitive Risks of Competitive Risks of DifferentiationDifferentiation

Imitation by competitors and changes in customer tastes

The price differential between the differentiator’s product

and the cost leader’s product becomes too large.

Differentiation ceases to provide value for which customers

are willing to pay.

Experience narrows customers’ perceptions of the value

of differentiated features.

Counterfeit goods replicate differentiated features of the

firm’s products.

Various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments.

CASE STUDYCASE STUDY

Medimix herbal soap differentiated itself on the herbal plank two decades back when there were only synthetic soaps.

A new brand of herbal soap launched in today’s context has to probably define the herbal qualities through an enhanced mix of ingredients to convey the differentiation because `herbal’ is the proposition of several brands both new and old.

The established Medimix brand is currently running a campaign, which conveys the brand benefits through appropriate imagery.

Focus StrategiesFocus StrategiesAn integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment.◦ Particular buyer group—youths or senior

citizens

◦ Different segment of a product line—professional craftsmen versus do-it-yourselfers

◦ Different geographic markets—East coast versus West coast

The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation.

The premise is that the needs of the group can be better serviced by focusing entirely on it

A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly.

Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers

However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist.

Factors That Drive Focused Factors That Drive Focused StrategiesStrategies

Large firms may overlook small niches.

A firm may lack the resources needed to compete in the broader market.

A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors.

Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage.

Firms that succeed in a Focus StrategyFirms that succeed in a Focus Strategy often often

have the following internal strengths:have the following internal strengths:

The firm is able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well.

Risks InvolvedRisks InvolvedImitation and changes in the target segments

It may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly

Other focusers may be able to carve out sub-segments that they can serve even better.

A focusing firm may be “outfocused” by its competitors.

A large competitor may set its sights on a firm’s niche market.

Customer preferences in niche market may change to more closely resemble those of the broader market.

CASE STUDYCASE STUDY

By successfully adopting the 'focus' strategy since 1997, PepsiCo has emerged as the second largest consumer packaged goods company

The company has significantly strengthened its competitive position in the beverages segment.

By acquiring leading beverages' company like Tropicana products (July 1998), South Beach Beverage Company (October 2000) and Quaker Oats (December 2000)

IndustryForce

Generic Strategies

Cost Leadership Differentiation Focus

EntryBarriers

Ability to cut price in retaliation deters potential entrants.

Customer loyalty can discourage potential entrants.

Focusing develops core competencies that can act as an entry barrier.

BuyerPower

Ability to offer lower price to powerful buyers.

Large buyers have less power to negotiate because of few close alternatives.

Large buyers have less power to negotiate because of few alternatives.

SupplierPower

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.

Threat ofSubstitutes

Can use low price to defend against substitutes.

Customer's become attached to differentiating attributes, reducing threat of substitutes.

Specialized products & core competency protect against substitutes.

RivalryBetter able to compete on price.

Brand loyalty to keep customers from rivals.

Rivals cannot meet differentiation-focused customer needs.

Generic Strategies and Industry Forces