Emma Olohan

Marketing Management

PORTER’S GENERIC COMPETITIVE STRATEGIES

Emma Olohan

Introduction: The rationale behind studying competition

• Today, companies face their toughest competition ever.

• Companies use their understanding to design market offers to deliver more value than the offers of competitors seeking to win the same customers.

• Companies must also understand their competitors, identify and analyze their strategies to position themselves in such a way as to gain the greatest possible competitive advantage against competitors in the marketplace.

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Porter’s Generic Strategy Framework

• Michael Porter has suggested three general types of positioning strategies to

achieve competitive advantage.

• These three generic strategies are defined along two dimensions: strategic scope

and strategic strength.

Strategic scope looks at the size and composition of the market you intend

to target.

Strategic strength is a supply-side dimension and looks at the strength or core

competency of the company/brand.

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Porter’s Generic Strategy Framework

• The three strategies are:

1.Cost leadership,

2.Differentiation, and

3.Market Segmentation (or focus)

• Market segmentation is narrow in scope while both cost leadership and differentiation are relatively broad in market scope.

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Examples of Companies That Use Cost Leadership Strategies

• Wal-Mart is famous for EDLP, achieved by developing close

relationships with its suppliers and vendors to achieve cost savings

through large volume purchases and pass these savings to the

consumers.

• Dell Computers :achieved market share by keeping low inventories

and only building computers to order, procurement advantages from

preferential access to raw materials, or backward integration.

• Low-cost budget Irish based airlines Ryanair who despite having fewer

planes than the major airlines, were able to achieve market share

growth by offering cheap, no-frills services at prices much cheaper than

those of the larger competitors.

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Cost Leadership

• A company tries to reduce its overall production and distribution costs.

• It wins market share by appealing to cost-conscious customers.

• It sets the lowest prices in the target market segment, or at least the lowest price

to value ratio.

• 3 ways to achieve this:

Economies of scale

low direct and indirect operating costs

control over the supply chain

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• India’s largest steel company Tata Steel, the cost leader in the steel manufacturing sector owns raw material assets such as coaland limestone mines through joint ventures or completely, with the assets spread across countries such as Australia, Oman and Mozambique. Tata Steel has largely been able to withstand raw material price fluctuationsdue to captive iron ore mines.

• Reliance Industries has become a global leader in various business activities based on innovation and cost by achieving more effecient production arising from experience and economies of scale, innovation in production methods, and differential Low-Cost Access to Productive Inputs.

• Disadvantage : lower customer loyalty, a reputation for low quality, ends up in price wars, non sustainable

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Differentiation

• A company concentrates on differentiating the products in some way

in order to compete successfully.

• appropriate where the target customer segment is not price-sensitive,

the market is competitive , customers have very specific under-served

needs and the company/brand has unique resources to satisfy these

needs in ways that are difficult to copy.

• Includes patents or other Intellectual Property (IP), unique technical

expertise, talented personnel or innovative processes. Successful

brand management also results in perceived uniqueness even when

the physical product is the same as competitors. Fashion brands rely

heavily on this form of image differentiation.

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Examples of differentiation

• Differentiation through Multiple sources: L&T, the engineering company/brand ,

recruits engineers with excellent qualification and claims superiority in executing

projects.

• Coke and Pepsi differentiated through brand power.

• Tesla through an electric car

• Product Differentiation based on ingredients: Toothpaste brands

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Examples of differentiation

Product Differentiation through Additional features:

Samsonite suitcases with wheels , a unique convenience to user

Product Differentiation by Packaging

• Harpic Toilet cleaner with an application friendly nozzle

Product Differentiation by Design:

• especially for women.

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Market Segmentation / Focus

• The company/brand focuses its marketing effort on serving a defined, focused

market segments with a narrow scope by tailoring its marketing mix to these

specialized markets, it can better meet the needs of that target market.

• The company/brand typically looks to gain a competitive advantage through

product innovation and/or brand marketing rather than efficiency.

• It is most suitable for relatively small company/brands but can be used by any

company.

• A focused strategy should target market segments that are less vulnerable to

substitutes or where a competition is weakest to earn above-average return on

investment.

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Market Segmentation / Focus

• The focus strategy has two variants:

(a) In cost focus, a company/brand seeks a cost advantage in its target

segment, It exploits differences in cost behavior in some segments .

For instance, Southwest Airlines, famous for its low cost focus follows

basically a linear route structure. It only flies one type of airplane and

it wants to stay in high-density markets and has been highly efficient.

(b) Differentiation focus a company/brand seeks differentiation in its

target segment. It exploits the special needs of buyers in certain

segments. Ferrari , targets high performance sports car segment and

due to differentiation based on design, high performance and grand

prix records which allows it to charge a premium price.

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Stuck in the middle

• A company’s failure to make a choice between cost leadership and differentiation

essentially implies that the company is stuck in the middle.

• There is no competitive advantage for a company that is stuck in the middle and

the result is often poor financial performance .

• However, companies like Toyota and Benetton have adopted more than one

generic strategy. Both these companies used the generic strategies of

differentiation and low cost simultaneously, which led to the success of the

companies.

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Criticisms of Porter’s Generic Strategy Framework

• A business can employ a hybrid strategy without being struck in the middle. Nissan, for instance.

• Cost leadership does not sell products itself.

• Differentiation can be used to increase sales volume rather than charging a premium price.

• Price can sometimes be used to differentiate.

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Criticisms of Porter’s Generic Strategy Framework

• The competence based strategy framework supersedes the generic strategy framework.

Despite these criticisms, porter’s model can constitute the basis of a useful framework for categorizing and understanding sources of competitive advantage.

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Looking forward: The road ahead

• The popular post-Porter model was presented by W. Chan Kim and Renée Mauborgnein their 1999 Harvard Business Review article "Creating New Market Space“, described a "value innovation" model in which companies must look outside their present paradigms to find new value propositions.

• Their approach fundamentally goes against Porter's concept that a company/brand must focus either on cost leadership or on differentiation. The concept is popularly known as Blue Ocean Strategy.

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See you next week

Thank You.

Emma Olohan