Strategic Strategic ManagementManagementPorter's Generic StrategiesPorter's Generic Strategies

Porter's Generic Porter's Generic StrategiesStrategies

A firm positions itself by leveraging its A firm positions itself by leveraging its strengthsstrengths

Michael Porter has argued that a firm's Michael Porter has argued that a firm's strengths ultimately fall into one of two strengths ultimately fall into one of two headings: cost advantage and differentiation. headings: cost advantage and differentiation.

By applying these strengths in either a broad By applying these strengths in either a broad or narrow scope, three generic strategies or narrow scope, three generic strategies result: result: cost cost lleadershipeadership, , differentiationdifferentiation, and , and focusfocus

Cost Leadership StrategyCost Leadership Strategy

This generic strategy calls for being the This generic strategy calls for being the low cost producer in an industry for a low cost producer in an industry for a given level of quality. given level of quality.

The firm sells its products either at The firm sells its products either at average industry prices to earn a profit average industry prices to earn a profit higher than that of rivals, or below the higher than that of rivals, or below the average industry prices to gain average industry prices to gain market sharemarket share..

In the event of a price war, the firm can In the event of a price war, the firm can maintain some profitability while the maintain some profitability while the competition suffers losses competition suffers losses

Even without a price war, as the industry Even without a price war, as the industry matures and prices decline, the firms that matures and prices decline, the firms that can produce can produce more cheaplymore cheaply will remain will remain profitable for a longer period of time profitable for a longer period of time

The cost leadership strategy always The cost leadership strategy always targets a targets a broad marketbroad market. .

Firms that succeed in cost leadership Firms that succeed in cost leadership often have the following internal often have the following internal

strengths:strengths: Access to the capital required to make a Access to the capital required to make a

significant investment in production significant investment in production assets; this investment represents a assets; this investment represents a barrier to entry that many firms may not barrier to entry that many firms may not overcome. overcome.

Skill in designing products for efficient Skill in designing products for efficient manufacturing.manufacturing.

High level of expertise in manufacturing High level of expertise in manufacturing process engineering. process engineering.

Efficient distribution channelsEfficient distribution channels

Risks InvolvedRisks Involved Other firms may be able to lower their costs Other firms may be able to lower their costs

as well. as well. As technology improves, the competition may As technology improves, the competition may

be able to leapfrog the production be able to leapfrog the production capabilities, thus eliminating the competitive capabilities, thus eliminating the competitive advantage. advantage.

Several firms following a focus strategy and Several firms following a focus strategy and targeting various narrow markets may be able targeting various narrow markets may be able to achieve an even lower cost within their to achieve an even lower cost within their segments and as a group gain significant segments and as a group gain significant market share. market share.

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

McDonalds also developed a strong McDonalds also developed a strong division of labor for its production division of labor for its production processes, tight management control and processes, tight management control and product development strategy. Creating a product development strategy. Creating a strong top-down style of management is strong top-down style of management is another leading cost strategy for another leading cost strategy for McDonalds McDonalds

Using fewer in-store managers allows the Using fewer in-store managers allows the company to hire lower-wage workers to company to hire lower-wage workers to complete tasks.complete tasks.

After nearing complete bankruptcy in the After nearing complete bankruptcy in the 1980s, Apple clawed its way back into the 1980s, Apple clawed its way back into the personal electronic industry through smart personal electronic industry through smart business practices and highly desirable business practices and highly desirable consumer goods. consumer goods.

Apple uses low-cost direct materials to develop Apple uses low-cost direct materials to develop the cheapest consumer goods possible. the cheapest consumer goods possible.

Creating long-standing business agreements Creating long-standing business agreements with companies like AT&T for web hosting and with companies like AT&T for web hosting and other applications helps Apple stay focused on other applications helps Apple stay focused on developing products rather than Internet developing products rather than Internet hosting or accesshosting or access

Differentiation StrategyDifferentiation Strategy A differentiation strategy calls for the A differentiation strategy calls for the

development of a product or service that development of a product or service that offers offers unique attributesunique attributes that are valued by that are valued by customers and that customers perceive to be customers and that customers perceive to be betterbetter than or different from the products of than or different from the products of the competition. the competition.

The The valuevalue added by the uniqueness of the added by the uniqueness of the product may allow the firm to charge a product may allow the firm to charge a premiumpremium price for it. The firm hopes that the price for it. The firm hopes that the higher price will more than higher price will more than cover the extra cover the extra costscosts incurred in offering the unique product. incurred in offering the unique product.

Firms that succeed in a differentiation Firms that succeed in a differentiation strategy often have the following strategy often have the following

internal strengths:internal strengths: Access to leading scientific research. Access to leading scientific research.

Highly skilled and creative product Highly skilled and creative product development team. development team.

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

Corporate reputation for quality and Corporate reputation for quality and innovation. innovation.

Risks InvolvedRisks Involved

Imitation by competitors and Imitation by competitors and changes in customer tastes changes in customer tastes

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

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

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

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

Focus StrategyFocus Strategy The focus strategy concentrates on a The focus strategy concentrates on a narrow narrow

segmentsegment and within that segment attempts and within that segment attempts to achieve either a cost advantage or to achieve either a cost advantage or differentiation. differentiation.

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

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

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

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

Firms that succeed in a Focus StrategyFirms that succeed in a Focus Strategy often have the following internal often have the following internal

strengths:strengths:

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

Risks InvolvedRisks Involved

Imitation and changes in the target segments Imitation and changes in the target segments

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

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

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

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

By acquiring leading beverages' company By acquiring leading beverages' company

like Tropicana products (July 1998), South like Tropicana products (July 1998), South Beach Beverage Company (October 2000) Beach Beverage Company (October 2000) and Quaker Oats (December 2000) and Quaker Oats (December 2000)

IndustIndustryryForceForce

Cost Cost LeadershLeadershipip

DifferentiatDifferentiationion

FocusFocus

EntryEntryBarrierBarrierss

Ability to cut Ability to cut price in price in retaliation retaliation deters deters potential potential entrants.entrants.

Customer loyalty Customer loyalty can discourage can discourage

potential entrantspotential entrants

Focusing develops Focusing develops core competencies core competencies that can act as an that can act as an

entry barrier.entry barrier.

BuyerBuyerPowerPower

Ability to offer Ability to offer lower price to lower price to powerful powerful buyers. buyers.

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

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

SupplieSupplierrPowerPower

Better Better insulated from insulated from powerful powerful suppliers. suppliers.

Better able to Better able to pass on through pass on through suppliers, price suppliers, price increases to increases to customers. customers.

Suppliers have Suppliers have power because of power because of low volumeslow volumes

Threat Threat ofofSubstitSubstituteute

Can use low Can use low price to price to defend against defend against substitutes. substitutes.

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

Specialized products Specialized products & core competency & core competency protect against protect against substitutes. substitutes.

RivalryRivalry Better able to Better able to compete on compete on price. price.

Brand loyalty to Brand loyalty to keep customers keep customers from rivals. from rivals.

Rivals cannot meet Rivals cannot meet differentiation-differentiation-focused customer focused customer needs. needs.