Porter's Generic Strategies

A Project on Porter's Generic Strategies

1. Strategic Strategic
ManagementManagement
Porter's Generic StrategiesPorter's Generic Strategies

2. Porter's Generic StrategiesPorter's Generic Strategies
A firm positions itself by leveraging its A firm positions itself by leveraging its strengthsstrengths
Michael Porter has argued that a firm's strengths Michael Porter has argued that a firm's strengths
ultimately fall into one of two headings: cost ultimately fall into one of two headings: cost
advantage and differentiation. advantage and differentiation.
By applying these strengths in either a broad or By applying these strengths in either a broad or
narrow scope, three generic strategies result: narrow scope, three generic strategies result: cost cost
lleadershipeadership, , differentiationdifferentiation, and , and focusfocus

3. Cost Leadership StrategyCost Leadership Strategy
This generic strategy calls for being the low cost This generic strategy calls for being the low cost
producer in an industry for a given level of producer in an industry for a given level of
quality. quality.
The firm sells its products either at average The firm sells its products either at average
industry prices to earn a profit higher than that of industry prices to earn a profit higher than that of
rivals, or below the average industry prices to rivals, or below the average industry prices to
gain gain market sharemarket share..

4. In the event of a price war, the firm can maintain In the event of a price war, the firm can maintain
some profitability while the competition suffers some profitability while the competition suffers
losses losses
Even without a price war, as the industry matures Even without a price war, as the industry matures
and prices decline, the firms that can produce and prices decline, the firms that can produce
more cheaplymore cheaply will remain profitable for a longer will remain profitable for a longer
period of time period of time
The cost leadership strategy always targets a The cost leadership strategy always targets a
broad marketbroad market. .

5. Firms that succeed in cost leadership often Firms that succeed in cost leadership often
have the following internal strengths:have the following internal strengths:
Access to the capital required to make a Access to the capital required to make a
significant investment in production assets; this significant investment in production assets; this
investment represents a barrier to entry that investment represents a barrier to entry that
many firms may not overcome. many firms may not overcome.
Skill in designing products for efficient Skill in designing products for efficient
manufacturing.manufacturing.
High level of expertise in manufacturing process High level of expertise in manufacturing process
engineering. engineering.
Efficient distribution channelsEfficient distribution channels

6. Risks InvolvedRisks Involved
Other firms may be able to lower their costs as Other firms may be able to lower their costs as
well. well.
As technology improves, the competition may be As technology improves, the competition may be
able to leapfrog the production capabilities, thus able to leapfrog the production capabilities, thus
eliminating the competitive advantage. eliminating the competitive advantage.
Several firms following a focus strategy and Several firms following a focus strategy and
targeting various narrow markets may be able to targeting various narrow markets may be able to
achieve an even lower cost within their segments achieve an even lower cost within their segments
and as a group gain significant market share. and as a group gain significant market share.

7. A leading cost strategy for McDonalds is the A leading cost strategy for McDonalds is the
ability to purchase the land and buildings of its ability to purchase the land and buildings of its
restaurants restaurants
McDonalds also developed a strong division of McDonalds also developed a strong division of
labor for its production processes, tight labor for its production processes, tight
management control and product development management control and product development
strategy. Creating a strong top-down style of strategy. Creating a strong top-down style of
management is another leading cost strategy for management is 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.

8. After nearing complete bankruptcy in the 1980s, After nearing complete bankruptcy in the 1980s,
Apple clawed its way back into the personal Apple clawed its way back into the personal
electronic industry through smart business electronic industry through smart business
practices and highly desirable consumer goods. practices and highly desirable 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 with Creating long-standing business agreements with
companies like AT&T for web hosting and other companies like AT&T for web hosting and other
applications helps Apple stay focused on applications helps Apple stay focused on
developing products rather than Internet hosting developing products rather than Internet hosting
or accessor access

9. Differentiation StrategyDifferentiation Strategy
A differentiation strategy calls for the A differentiation strategy calls for the
development of a product or service that offers development of a product or service that offers
unique attributesunique attributes that are valued by customers that are valued by customers
and that customers perceive to be and that customers perceive to be betterbetter than or than or
different from the products of the competition. different from the products of 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 higher price price for it. The firm hopes that the higher price
will more than will more than cover the extra costscover the extra costs incurred in incurred in
offering the unique product. offering the unique product.

10. Firms that succeed in a differentiation Firms that succeed in a differentiation
strategy often have the following internal strategy often have the following internal
strengths:strengths:
Access to leading scientific research. Access to leading scientific research.
Highly skilled and creative product development Highly skilled and creative product development
team. team.
Strong sales team with the ability to successfully Strong sales team with the ability to successfully
communicate the perceived strengths of the communicate the perceived strengths of the
product. product.
Corporate reputation for quality and innovation. Corporate reputation for quality and innovation.

11. Risks InvolvedRisks Involved
Imitation by competitors and changes in Imitation by competitors and changes in
customer tastes customer tastes
Various firms pursuing focus strategies may Various firms pursuing focus strategies may
be able to achieve even greater be able to achieve even greater
differentiation in their market segments. differentiation in their market segments.

12. Medimix herbal soap differentiated itself on the Medimix herbal soap differentiated itself on the
herbal plank two decades back when there were herbal plank two decades back when there were
only synthetic soapsonly synthetic soaps. .
A new brand of herbal soap launched in today’s A new brand of herbal soap launched in today’s
context has to probably define the herbal context has to probably define the herbal
qualities through an enhanced mix of ingredients qualities through an enhanced mix of ingredients
to convey the differentiation because `herbal’ is to convey the differentiation because `herbal’ is
the proposition of several brands both new and the proposition of several brands both new and
old.old.
The established Medimix brand is currently The established Medimix brand is currently
running a campaign, which conveys the brand running a campaign, which conveys the brand
benefits through appropriate imagery.benefits through appropriate imagery.

13. Focus StrategyFocus Strategy
The focus strategy concentrates on a The focus strategy concentrates on a narrow narrow
segmentsegment and within that segment attempts to and within that segment attempts to
achieve either a cost advantage or differentiation. achieve either a cost advantage or differentiation.
The premise is that the needs of the group can be The premise is that the needs of the group can be
better serviced by focusing entirely on it better serviced by focusing entirely on it
A firm using a focus strategy often enjoys a high A firm using a focus strategy often enjoys a high
degree of degree of customer loyaltycustomer loyalty, and this entrenched , and this entrenched
loyalty discourages other firms from loyalty discourages other firms from competing competing
directlydirectly..

14. Because of their narrow market focus, firms Because of their narrow market focus, firms
pursuing a focus strategy have lower pursuing a focus strategy have lower
volumes and therefore volumes and therefore less bargainingless bargaining
power with their suppliers power with their suppliers
However, firms pursuing a differentiation-However, firms pursuing a differentiation-
focused strategy may be able to pass focused strategy may be able to pass higher higher
costscosts on to customers since close substitute on to customers since close substitute
products do not exist. products do not exist.

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

16. 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 compete leader to adapt its product in order to compete
directly 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.

17. By successfully adopting the 'focus' strategy since By successfully adopting the 'focus' strategy since
1997, PepsiCo has emerged as the second largest 1997, PepsiCo has emerged as the second largest
consumer packaged goods company consumer packaged goods company
The company has significantly strengthened its The company has significantly strengthened its
competitive position in the beverages segment.competitive position in the beverages segment.

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

18. Rivals cannot meet
differentiation-focused
customer needs.
Brand loyalty to keep
customers from rivals.
Better able to
compete on price.
Rivalry
Specialized products &
core competency protect
against substitutes.
Customer's become
attached to differentiating
attributes, reducing threat
of substitutes.
Can use low price
to defend against
substitutes.
Threat
of
Substitu
te
Suppliers have power
because of low volumes
Better able to pass on
through suppliers, price
increases to customers.
Better insulated
from powerful
suppliers.
Supplier
Power
Large buyers have less power
to negotiate because of few
alternatives.
Large buyers have less
power to negotiate because
of few close alternatives.
Ability to offer
lower price to
powerful buyers.
Buyer
Power
Focusing develops core
competencies that can act
as an entry barrier.
Customer loyalty can
discourage potential
entrants
Ability to cut price
in retaliation deters
potential entrants.
Entry
Barriers
Focus Differentiati
on
Cost
Leadership
Industry
Force