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Porter's Generic Strategies


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A Project on Porter's Generic Strategies

Published in: Business

Porter's Generic Strategies

  1. 1. Strategic Management Porter's Generic Strategies
  2. 2. Porter's Generic Strategies <ul><li>A firm positions itself by leveraging its strengths </li></ul><ul><li>Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. </li></ul><ul><li>By applying these strengths in either a broad or narrow scope, three generic strategies result: cost l eadership , differentiation , and focus </li></ul>
  3. 3. Cost Leadership Strategy <ul><li>This generic strategy calls for being the low cost producer in an industry for a given level of quality. </li></ul><ul><li>The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share . </li></ul>
  4. 4. <ul><li>In the event of a price war, the firm can maintain some profitability while the competition suffers losses </li></ul><ul><li>Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time </li></ul><ul><li>The cost leadership strategy always targets a broad market . </li></ul>
  5. 5. Firms that succeed in cost leadership often have the following internal strengths: <ul><li>Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome. </li></ul><ul><li>Skill in designing products for efficient manufacturing. </li></ul><ul><li>High level of expertise in manufacturing process engineering. </li></ul><ul><li>Efficient distribution channels </li></ul>
  6. 6. Risks Involved <ul><li>Other firms may be able to lower their costs as well. </li></ul><ul><li>As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. </li></ul><ul><li>Several firms following a focus strategy and targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share. </li></ul>
  7. 7. <ul><li>A leading cost strategy for McDonalds is the ability to purchase the land and buildings of its restaurants </li></ul><ul><li>McDonalds also developed a strong division of labor for its production processes, tight management control and product development strategy. Creating a strong top-down style of management is another leading cost strategy for McDonalds </li></ul><ul><li>Using fewer in-store managers allows the company to hire lower-wage workers to complete tasks. </li></ul>
  8. 8. <ul><li>After nearing complete bankruptcy in the 1980s, Apple clawed its way back into the personal electronic industry through smart business practices and highly desirable consumer goods. </li></ul><ul><li>Apple uses low-cost direct materials to develop the cheapest consumer goods possible. </li></ul><ul><li>Creating long-standing business agreements with companies like AT&T for web hosting and other applications helps Apple stay focused on developing products rather than Internet hosting or access </li></ul>
  9. 9. Differentiation Strategy <ul><li>A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. </li></ul><ul><li>The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product. </li></ul>
  10. 10. Firms that succeed in a differentiation strategy often have the following internal strengths: <ul><li>Access to leading scientific research. </li></ul><ul><li>Highly skilled and creative product development team. </li></ul><ul><li>Strong sales team with the ability to successfully communicate the perceived strengths of the product. </li></ul><ul><li>Corporate reputation for quality and innovation. </li></ul>
  11. 11. Risks Involved <ul><li>Imitation by competitors and changes in customer tastes </li></ul><ul><li>Various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments. </li></ul>
  12. 12. <ul><li>Medimix herbal soap differentiated itself on the herbal plank two decades back when there were only synthetic soaps . </li></ul><ul><li>A new brand of herbal soap launched in today’s context has to probably define the herbal qualities through an enhanced mix of ingredients to convey the differentiation because `herbal’ is the proposition of several brands both new and old. </li></ul><ul><li>The established Medimix brand is currently running a campaign, which conveys the brand benefits through appropriate imagery. </li></ul>
  13. 13. Focus Strategy <ul><li>The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. </li></ul><ul><li>The premise is that the needs of the group can be better serviced by focusing entirely on it </li></ul><ul><li>A firm using a focus strategy often enjoys a high degree of customer loyalty , and this entrenched loyalty discourages other firms from competing directly . </li></ul>
  14. 14. <ul><li>Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers </li></ul><ul><li>However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist. </li></ul>
  15. 15. Firms that succeed in a Focus Strategy often have the following internal strengths: <ul><li>The firm is able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well. </li></ul>
  16. 16. Risks Involved <ul><li>Imitation and changes in the target segments </li></ul><ul><li>It may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly </li></ul><ul><li>Other focusers may be able to carve out sub-segments that they can serve even better. </li></ul>
  17. 17. <ul><li>By successfully adopting the 'focus' strategy since 1997, PepsiCo has emerged as the second largest consumer packaged goods company </li></ul><ul><li>The company has significantly strengthened its competitive position in the beverages segment. </li></ul><ul><li>By acquiring leading beverages' company like Tropicana products (July 1998), South Beach Beverage Company (October 2000) and Quaker Oats (December 2000) </li></ul>
  18. 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 Substitute 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 Differentiation Cost Leadership Industry Force
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