6 Generic Strategies - PORTERS GENERIC COMPETITIVE...

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Unformatted text preview: PORTER’S GENERIC COMPETITIVE STRATEGIES PORTER’S GENERIC STRATEGIES Porter's Generic Strategies A firm positions itself by leverageing its strengths Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus Porter's Generic Strategies Michael Porter is a professor at Harward Business School. 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 and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result:, cost leadership differentiation, and focus Business Level Strategies Competitive Advantage Cost Broad Target Competitive Scope Narrow Target Uniqueness Cost leadership Differentiation Intergrated Cost Leadership/ Differentiation Focused Cost leadership Focused Differentiation Generic Strategies 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 in the same time, which led to the success of the companies. Cost Leadership Strategy This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses 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 The cost leadership strategy always targets a broad market. 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. A leading cost strategy for McDonalds is the ability to purchase the land and buildings of its restaurants 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 Using fewer in-store managers allows the company to hire lower-wage workers to complete tasks. 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. Apple uses low-cost direct materials to develop the cheapest consumer goods possible. 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 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, non sustainable (Walmart logo, used from June 30, 2008-present.) Type : Industry Public : Retailing Founded : 1962 Founder(s) : Sam Walton Headquarters : Bentonville, Arkansas,US Number of locations : 8,970 (2011) Area served : Worldwide Key people : Mike Duke(CEO) H. Lee Scott(Chairman) S. Robson Walton (Chairman) Employees : Approx. 2.1 million (2011) Subsidiaries : Walmex Asda Sam's Club Seiyu Group 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 minimum. 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. Success Mantra… 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 engineering. Efficient distribution channels. Risks Involved.. Other firms may be able to lower their costs as well. As technology improves, the competition may be able to advance the production capabilities, thus eliminating the competitive advantage. 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. Differentiation Strategy 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. 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. Medimix herbal soap differentiated itself on the herbal plank two decades back when there were only synthetic soaps. 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. The established Medimix brand is currently running a campaign, which conveys the brand benefits through appropriate imagery. 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. Reva through 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 Type : Industry Public : Restaurants Founded : McDonald’s Corporation ~ May 15, 1940 in San Bernardino, California ~ April 15, 1955 in Des Plaines, Illinois Founder(s) : Richard and Maurice McDonald,( McDonald’s restaurant concept ) Ray Kroc,( McDonald’s Corporation founder ) Headquarters : Oak Brook,Illinois,US Area served : Worldwide Key people : James A. Skinner (Chairman & CEO) Number of locations salads, : Employees : Products : 32,000 4,00,000 ( 2010) Fast Food ( hamburgers , chicken , french fries , soft drinks , coffee , milkshakes , 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 counter. 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 the kids. 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. Success Mantra… 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. Risks Involved… Involves higher costs. Customers might become price sensitive and choose on price rather than uniqueness. Customers may no longer need the differentiation factor. Imitation by competitors and changes in customer tastes. Rivals pursuing a focus strategy may be able to achieve even greater differentiation in their market segments. Focus Strategy 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. Market Segmentation / Focus 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 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 where a competition is weakest to earn above-average return on investment. Type : Industry Public : Food and Beverages Founded : North Carolina,U.S.(1986) Founder(s) : Donald Kendall,Herman Lay Headquarters : Purchase,New York,US Area served : Worldwide Key people : Indra Nooyi (Chairman & CEO) Employees : 2,94,000 (2010) Divisions : PepsiCo Americas Foods; PepsiCo Americas Beverages; PepsiCo Europe; PepsiCo Asia, Middle East & Africa Subsidiaries : Products, Trademarks ~ Frito-Lay ~ 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) Success Mantra… Lower investment in resources. The firm benefits from specialisation. Provides scope for greater knowledge of a segment of the market. Makes entry to new markets easier and less costly. Firms using a focus strategy often enjoy a high degree of customer loyalty. Risk Involved… 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 sector. Differentiat Focus Indust Cost Leadersh ion ry Force ip Entry Barrier s Ability to cut price in retaliation deters potential entrants. Customer loyalty can discourage potential entrants Focusing develops core competencies that can act as an entry barrier. Buyer Power Ability to offer lower price to powerful buyers. Large buyers have less power to negotiate because of few close alternatives. Large buyers have less power to negotiate because of few alternatives. Supplie r Power Better insulated from powerful suppliers. Better able to pass on through suppliers, price increases to customers. Suppliers have power because of low volumes Threat Can use low Customer's become Specialized products 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. ...
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