Porter Generic Strategy Model

Diagram of Michael Porter’s Generic Strategies

 

Broad Target

Cost Leadership

Differentiation

COMPETITIVE SCOPE

Narrow Target

Focused Cost Leadership

Focused Differentiation

Low-Cost Products/            Differentiated Services                                products/services COMPETITIVE ADVANTAGE

These can be explained in following matrix

 

 

Porter called these, base generic strategies. These strategies have been termed generic because they can be pursued by any type or size of business firm and even by not-for-profit organizations. Larger firms with greater access to resources typically compete on a cost leadership and/or differentiation basis, whereas smaller firms often compete on a focus basis.

Cost leadership strategy 

Cost leadership emphasizes producing standardized products at a very low per-unit cost for consumers who are price-sensitive.

Differentiation

Differentiation is a strategy aimed at producing products and services considered unique industry wideand directed at consumers who are relatively price-insensitive.

Focus

Focus means producing products and services that fulfill the needs of small groups of consumers. Porter stresses the need for strategists to perform cost-benefit analysis to evaluate “sharing opportunities” among the firm’s existing and potential business units. Sharing activities and resources enhances competitive advantage by lowering costs or raising differentiation. In addition to prompting sharing, Porter stresses the need for firms to “transfer” skills and expertise among autonomous business units effectively in order to gain competitive advantage. Depending upon factors such as type of industry, size of firm and nature of competition, various strategies could yield advantages in cost leadership differentiation, and focus.

 

Cost Leadership Strategy

Cost leadership strategies can be achieved through following steps

1.Cost leadership achieved when company look for gaining strategic advantages with low cost product and services to achieve broad target of competitive scope. For example, McDonald’s fast food restaurants have successfully followed low-cost leadership strategy.

2. Cost leadership focus on producing standardized products at a very low per unit cost for consumers who are price-sensitive.
3. It requires cost reduction process in the areas of procurement, storage, production, and distribution and other overhead costs.
4. Cost leader will be able to charge a lower price for its products than its competitors and still make satisfactory profits.
5. Forward, backward, and horizontal integration strategies are followed just to gain cost leadership benefits.
6. Other factors for achieving cost leader can be the percentage of capacity utilisation and relationship with suppliers and distributors.
7. Potential for sharing costs and knowledge within the organization, R&D costs associated with new product development or modification of existing products, labor costs, tax rates, energy costs, and shipping costs are important for cost leadership strategy.
8. Low-cost producer will be successful in case of price-sensitive buyers, especially when buyers do not care much about differences from brand to brand, or when there are a large number of buyers with significant bargaining power.
9. The basic idea of cost leadership is to under-price competitors and thereby gain market share and sales.
10. Cost leadership aims at driving some competitors out of the market entirely.
11. Competitors may imitate the cost leadership strategy, driving overall industry profits down.

 

Action plan to achieve Cost Leadership Strategy

To achieve cost leadership, following are the actions that could be taken:

1. Standardization of products for mass production to yield lower cost per unit.
2. Invest in cost saving technologies and try using advance technology for smart working.
3. Resistance to differentiation till it becomes essential.
4. Forecast the demand of a product or service promptly.
5. Achieving economies of scale leads to lower per unit cost of product/service.
6. Optimum utilization of the resources to get cost advantages.

 

Advantages of Cost Leadership Strategy

The biggest advantages of cost leadership are that no competitors will be able to influence profitability of organization. Other benefit to the organization can be understood in respect of following elements:

1. Rival
2. New entrants,
3. Buyers
4. Suppliers
5. Substitute products

Rival – Competitors are likely to avoid a price war, since the low cost firm will continue to earn profits even after competitors compete away their profits.

New Entrants – Low-cost leaders create barriers to make entry tough through its continuous focus on efficiency and reducing costs.

Customers or Buyers – Powerful buyers or customers would not be able to exploit the cost leader firm. These customers will continue to buy its product from same company.

Suppliers – Cost leaders are able to absorb greater price increases before it raises selling price to customers.

Substitutes – Low-cost leaders are more likely to lower their costs, to induce customers to stay with their product. Low cost company invests into developing substitutes products too.

 

Disadvantages of Cost Leadership Strategy

Cost advantage may not remain for long as competitors may also follow cost reduction technique.

Cost leadership can succeed only if the firm can achieve higher sales volume. Cost leaders tend to keep their costs low by minimizing advertising, market research, and research and development, but this approach can prove to be expensive in the long run. Technology changes are a great threat to the cost leader.

 

Differentiation Strategy

1. Differential strategy is followed when company wants to gain competitive advantages with unique or different product and want broad target of competitive scope.
2. In differential strategy company focus on consumers who are relatively price-insensitive. But very keen for unique product.
3. The uniqueness can be associated with product design, brand image, features, technology, dealer network or customer service, superior service, spare parts availability, engineering design, product performance, useful life, gas mileage, or ease of use.
4. Because of differentiation, the business can charge a premium for its product and gain customer loyalty because consumers may become strongly attached to the differentiation features.
5. Differentiation does not guarantee competitive advantage, especially if standard products sufficiently meet customer needs or if rapid imitation by competitors is possible.
6. Differentiation strategy should be pursued only after a careful study of buyers’ needs.
7. Many time differentiation features may not be valued high enough by customers to justify the higher price.
8. In case customers do not care for differential feature then a cost leadership strategy easily will defeat a differentiation strategy.
9. Another risk is that competitors may develop ways to copy the differentiating features quickly.
10. In differential strategy company must find durable sources of uniqueness that cannot be imitated quickly or cheaply by rival firms.

 

Basis of Differential Strategy

There are three basis of differentiation strategy .These are: product, pricing and organization.

Product: Innovative products that meet customer needs can be an area where a company has an advantage over competitors. The pursuit of new product offerings can be costly especially when huge expenditure is needed in research and development. Innovative products can be costly even when production and marketing costs are huge. But in spite of huge cost, there is high pay-off too. There can be huge numbers of customers to be among the first to have the new product.

Pricing: Some company differentiate themselves based on pricing. Price can fluctuate, based on its supply and demand. Price can also be influenced by the customer’s ideal value for the product. Companies that differentiate based on product price can either determine to offer the lowest price, or can attempt to establish superiority through higher prices.

Organization: Organizational differentiation is yet another form of differentiation. Maximizing the power of a brand, or using the specific advantages that an organization possesses, can be instrumental to a company’s success. Location advantage, name recognition and customer loyalty can all provide additional ways for a company differentiate itself from the competition.