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.
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 firm.
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.
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.
CostLeadership A firm 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:
Examples of Companies That Use Cost Leadership Strategies 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 ﬂuctuations due 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
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 firm 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.
Examples of differentiation Differentiation through Multiple sources: L&T, the engineering firm , recruits engineers with excellent qualification and claims superiority in executing projects. Coke and Pepsi differentiated through brand power. Revathrough an electric car Product Differentiation based on ingredients: HUL Close Up used glycerin instead of calcium carbonate and secured differentiation and Colgate compelled to copy the same
Product Differentiation through Additional features: Aristocrat suitcases with wheels , a unique convenience to user Product Differentiation by Packaging Harpic Toilet cleaner with an application friendly nozzle Hit for cockroach with sleek nozzle for hidden areas Product Differentiation by Design:Kinetic Honda with electronic ignition and do away with kick start routine , automatic gear shifting especially for women.
Examples of differentiation
Market Segmentation / Focus The firm 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 firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency. It is most suitable for relatively small firms 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.
The focus strategy has two variants: (a) In cost focus, a firm 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 firm 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. Market Segmentation / Focus
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. Stuck in the middle
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.
Criticisms of Porter’s Generic Strategy Framework The competence based strategy framework supersede 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.
Looking forward: The road ahead The popular post-Porter model was presented by W. Chan Kim and Renée Mauborgne in 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 firm must focus either on cost leadership or on differentiation. The concept is popularly known as Blue Ocean Strategy.