Michael Porter is a professor at Harward Business
A firm’s success in strategy rests upon how it positions
itself in respect to its environment.
Michael Porter has argued that a firm's strengths
ultimately fall into one of two headings: cost advantage
By applying these strengths in either a broad or narrow
scope, three generic strategies result:, cost leadership
differentiation, and focus
• Superior profits
• E.g. : WalMart,
• Creating a
product or service
that is perceived
as being unique
• E.g. : Mcdonald,
• Concentrating on
a limited part of
• E.g. : PepsiCo
Cost Leadership Strategy
Aiming to become Lowest Cost Producer
The firm can compete on the price with every other
industries and earn higher unit profits.
Cost reduction provides the focus of the organisation’s
Targets a broad market.
Competitive advantage is achieved by driving down
A successful cost leadership strategy requires that the
firm is the cost leader and is unchallenged in this
Especially beneficial : where customers are price
(Walmart logo, used from June 30, 2008-present.)
Number of locations
H. Lee Scott(Chairman)
S. Robson Walton (Chairman)
Approx. 2.1 million (2011)
The central goal of Wal-Mart is to keep retail prices low -- and
the company has been very successful at this.
Experts estimate that Wal-Mart saves shoppers at least 15
percent on a typical cart of groceries.
Wal-Mart Stores Inc. is rolling out its "everyday low prices"
(EDLP) retail strategy to more international markets to replace
the more usual high-low pricing in emerging markets. EDLP
means working with suppliers to ensure their prices are
constantly low, but also means price changes are kept to a
Wal-Mart also employs a good structure that works with the
systems to empower the low price strategy.
Wal-Mart has in place a set of systems that helps it achieve its
strategy of low prices everyday.
Access to the capital required to make a significant
investment in production assets.
Design skills for efficient manufacturing
High level of expertise in manufacturing process
Efficient distribution channels.
Other firms may be able to lower their costs as well.
As technology improves, the competition may be able to
leapfrog the production capabilities, thus eliminating
the competitive advantage.
It could lead to a damaging price wars.
There might be difficulty in sustaining cost leadership
in the long run.
A firm following a focus strategy might be able to
achieve even lower cost within their segment.
A differentiation strategy calls for the development of a
product or service that offers unique attributes that are
valued by customers.
Customers perceive the product to be different and
better than that of rivals.
The value added by the uniqueness of the product may
allow the firm to charge a premium price for it.
Differentiation can be based on product image or
It requires flair,research capability and strong
~ May 15, 1940 in San
~ April 15, 1955 in Des
Richard and Maurice
restaurant concept )
Ray Kroc,( McDonald’s
Corporation founder )
James A. Skinner
(Chairman & CEO)
Number of locations
4,00,000 ( 2010)
( hamburgers , chicken ,
french fries , soft drinks ,
coffee , milkshakes , salads,
desserts , breakfast )
McDonald's customers are of all classes, but largely
working and middle classes, and people of all ages.
McDonald’s strove to meet a customer wait time at no
more than one minute in line and 30 seconds at the
McDonald's understood that the parent was making the
purchasing decision, most likely based solely on price.
What McDonald's marketing executives did was
ingenious. They put a $.50 toy in with the hamburger,
french fries, and Coke. Then they gave it a special
name, calling it a Happy Meal. Then they marketed it to
McDonald's knows that some customers go to its stores
to take a quick break from their day's activities and not
because McDonald's was able to make their food ten
seconds faster than a competitor. So McDonald's
marketing executives then put together the phrase,
“Have you had your break today?”
They've taken competing on price right out of the
picture,” says Greshes. “They bring you quality,
convenience, service, and value — and they make you
feel like you are getting a break in your hectic day.
Access to leading scientific research.
Highly skilled and creative product development team.
Strong sales team with the ability to successfully
communicate the perceived strengths of the product.
Corporate reputation for quality and innovation.
Involves higher costs.
Customers might become price sensitive and choose on
price rather than uniqueness.
Customers may no longer need the differentiation
Imitation by competitors and changes in customer
Rivals pursuing a focus strategy may be able to achieve
even greater differentiation in their market segments.
The focus strategy concentrates on a narrow segment
and within that segment attempts to achieve either a
cost advantage or differentiation.
The premise is that the needs of the group can be
better serviced by focusing entirely on it.
A firm using a focus strategy often enjoys a high degree
of customer loyalty, and this entrenched loyalty
discourages other firms from competing directly.
Because of their narrow market focus, firms pursuing a
focus strategy have lower volumes and therefore less
bargaining power with their suppliers
However, firms pursuing a differentiation-focused
strategy may be able to pass higher costs on to
customers since close substitute products do not exist.
Food and Beverages
Donald Kendall,Herman Lay
(Chairman & CEO)
PepsiCo Americas Foods;
PepsiCo Americas Beverages;
PepsiCo Europe; PepsiCo
Asia, Middle East & Africa
~ Quaker Oats
By successfully adopting the 'focus' strategy since 1997,
PepsiCo has emerged as the second largest consumer
packaged goods company.
The company has significantly strengthened its
competitive position in the beverages segment.
By acquiring leading beverages' company like Tropicana
products (July 1998), South Beach Beverage Company
(October 2000) and Quaker Oats (December 2000)
Lower investment in resources.
The firm benefits from specialisation.
Provides scope for greater knowledge of a segment of
Makes entry to new markets easier and less costly.
Firms using a focus strategy often enjoy a high degree
of customer loyalty.
Limited opportunities for growth.
The firm could outgrow the market.
Danger of decline in the chosen segment or niche.
Risk of imitation.
Risk of changes in the target segment.
A reputation for specialisation inhibits move into new
We have Learnt…
- Being the lowest cost producer in the industry as
- The exploitation of a product or service which is
believed to be unique
- Restricting activities to only part of the market through:
- Providing goods or services at lower cost to that
segment (cost focus)
- Providing a differentiated product or service to that
segment (differentiation focus)