Porter's Generic Strategies/ Competitive Strategies

Business Strategy: It focuses on improving the competitive position of a company’s or business unit’s products or services within the specific industry or market segment that the company or business unit serves. Business strategy is extremely important because research shows that business unit effects have double the impact on overall company performance than do either corporate or industry effects. Business strategy can be competitive (battling against all competitors for advantage) and/or cooperative (working with one or more companies to gain advantage against other competitors).

Porter’s Competitive Strategies:

Competitive strategy arises the following questions:

-     Should we compete on the basis of lower cost (and thus price), or should we differentiate our products or services on some basis other than cost, such as quality or service?

-       Should we compete head to head with our major competitors for the biggest but most sought-after share of the market, or should we focus on a niche in which we can satisfy a less sought-after but also profitable segment of the market?

Michael Porter proposes two “generic” competitive strategies for outperforming other corporations in a particular industry are- lower cost and differentiation.

These strategies are called generic (broad) because they can be pursued by any type or size of business firm, even by not-for-profit organisations:

-       Lower Cost Strategy: It is the ability of a company or a business unit to design, produce, and market a comparable product more efficiently than its competitors.

-       Differentiation Strategy: It is the ability of a company to provide unique and superior value to the buyer in terms of product quality, special features, or after-sale service.

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Porter further proposes that a firm’s competitive advantage is an industry is determined by its competitive scope, that it, the breadth of the company’s or business unit’s target market. Before using one of the two generic competitive strategies (lower cost or differentiation), the firm or unit must choose the range of product varieties it will produce, the distribution channel it will employ, the types of buyers it will serve, the geographic areas in which it will sell, and the array of related industries in which it will also compete. This should reflect and understanding of the firm’s unique resources.]

Combining these two types of target markets with the two competitive strategies results in the four variations of generic strategies.

-       When the lower-cost and differentiation strategies have a broad mass-market target, they are simply called cost leadership and differentiation.

-       When they are focused on a market niche (narrow target), however, they are called cost focus and differentiation focus.

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Although research does indicate that established firms pursuing broad-scope strategies outperform firms following narrow-scope strategies in terms of ROA (Return on Assets). New entrepreneurial firms have a better chance of surviving if they follow a narrow-scope rather than a broad-scope strategy.]

Cost leadership:

It is a lower-cost competitive strategy that aims at the broad mass market and requires ‘aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on’. Because of its lower costs, the cost leader is able to charge a lower price for its product than its competitors and still make a satisfactory profit. Although it may not necessarily have the lowest costs in the industry, it has lower costs than its competitors. For example: Wal-Mart (discount retailing), McDonald’s (fast-food restaurants), etc.

Differentiation:

It is aimed at the broad mass market and involves the creation of a product or service that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product. This specialty can be associated with design or brand image, technology, features, a dealer network, or customer service. Differentiation is a viable strategy for earning above-average returns in a specific business because the resulting brand loyalty lowers customers’ sensitivity to price. Instead costs can usually passed on to the buyers. Buyer loyalty also serves as an entry barrier; new firms must develop their own distinctive competence to differentiate their products in some way in order to compete successfully. For example: BMW (automobiles), Nike (athletic shoes), etc.

Bibliography:

Wheelen, T. L., Hunger, D. and Thomas, L. V. (2010), Concepts in Strategic Management and Business Policy, 12^th ed, India: Dorling Kindersley (India) Pvt. Ltd.