PORTER’S GENERIC STRATEGIES

Michael Porter developed generic competitive strategy keeping in view the five competitive forces

A firm’s success in strategy rests upon how it positions itself in respect to its environment.

It is a defensive strategy designed to reduce the effects of rivalry.

Includes all moves and approaches a firm is taking

to attract buyers to withstand competitive pressure to improve it’s market position It is a basic one which can be combined with other

strategies.

Introduction…

Cost Leadership

• Superior profits through lower costs.

• E.g. : Wal-Mart, Micromax phone

Differentiation• Creating a

product or service that is perceived as being unique “throughout the industry”

• E.g. : Mcdonald, Nokia, Samsung

Focus• Concentrating on

a limited part of the market.

• Cost Focus• Differentiation

Focus• E.g. : PepsiCo,

Apple I-phone, Vertu

Generic Strategies

Target ScopeAdvantage(Low Cost)

Advantage(Product

Uniqueness)

Broad Cost Leadership Differentiation

Narrow Focus Strategy(Cost Focus)

Focus Strategy(Differentiation)

Porter’s Generic Strategy…

Porter Generic StrategyCO

MPA

NY

SCO

PE

COMPETITIVE ADVANTAGE

Low cost strategy

The low cost strategy is a powerful approach in markets where most of the customers are price sensitive.

Targets a broad market.

Competitive advantage is achieved by driving down costs.

A successful cost leadership strategy requires that the firm is the cost leader and is unchallenged in this position.

Especially beneficial : where customers are price sensitive

Cost Leadership Strategy

(a) To gain Maximum market share.

(b) To earn high profit margin.

(c) To fix the price for the products at lower level compare to that of competitors.

Purpose of Low cost Strategy

(a) Out managing rivals on efficiency and cost control.

(b) Finding creative ways to cut cost producing activities.

Way To Achieve Cost Advantage

(a) Strong position to compete with rival competitors.

(b) It can prevent the entrance of competitors.

(c) It is better positioned than high cost rivals against substitute products.

Advantages

Other firms may be able to lower their costs as well.

As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage.

It could lead to a damaging price wars.

There might be difficulty in sustaining cost leadership in the long run.

A firm following a focus strategy might be able to achieve even lower cost within their segment.

Risks Involved..

“The act of designing a set of meaningful differences to distinguish the company’s offerings from competitors offerings”…..

Customers perceive the product to be different and better than that of rivals.

The value added by the uniqueness of the product may allow the firm to charge a premium price for it.

It requires flair,research capability and strong marketing.

EXAMPLE : Mercedes Benz

Differentiation Strategy

Differentiate by taste Differentiate by features Differentiate by design Product durability Differentiate by positioning

Q. Which differences should be pronounce ?

Approaches :

Provides some buffer against rival’s strategy

Erects entry barriers in the form of loyalty and uniqueness

Mitigates the bargaining power of customers

Helps to fend off threats of substitute product

Need for Differentiation :

Where there are many ways to differentiate and customers feel these differences valuable.

Where customers need , taste , preferences and uses of items are diverse.

Where a few companies follow differentiation.

Where strategy is such which can’t be easily copied by competitors.

Situations suitable :

The Product commands a premium price

Attract more customers for the special features

The product gains customer loyalty to it’s brand

Enhances the profitability

Advantages :

Buyers may perceive little value in uniqueness.

Over differentiating results high cost

Results loss when cost exceeds the extra price

Low cost strategy may defeat this

Customers might become price sensitive and choose on price rather than uniqueness.

Rivals pursuing a focus strategy may be able to achieve even greater differentiation in their market segment.

Disadvantages & Limitations

Combination of both differentiation and cost leadership.

It described as “Stuck in the middle” . Integrated position – elements of one position

support a strong standing in the other.Example : Toyota , Mc Donald’s

Integrated Position

Focusing begins by choosing a

market niche where customers have

distinctive preferences or requirements .

Focus Strategy

(a) Where the market segment is large.

(b)Where the market segment has good growth potential.

(c)When a company does not have resources.

(d)Where market segment is not significant to major competitors.

Situations where it is efficient

(a) Entry barriers for new firms.

(b) Entry barriers for substitute products.

(c) Customers bargaining power lowered.

Advantages

Risk Involved…(a) Competitors may find ways and means to

match the focused firm.

(b) Niche customers taste, preference, needs may change.

(c) High rate profitability of the focused firm may attract the competitors.

Cost Leadership- Being the lowest cost producer in the industry as a whole

Differentiation- The exploitation of a product or service which is believed to be unique

Focus - Restricting activities to only part of the market through: - Providing goods or services at lower cost to that segment (cost focus) - Providing a differentiated product or service to that segment (differentiation focus)

We have Learnt…