PORTER’S GENERIC STRATEGIES 1
Porter’s Generic Strategies
A strategicbusiness unit (SBU) is concerned with the formulation andimplementation of decisions designed to fulfill particularobjectives. All SBUs are primarily focused on profit and wealthmaximization (Mullins and Walker, 2013). Capitalizing on businessopportunities calls for the deployment of corporate strategy.Nevertheless, the free entry and exit of firms into the marketcreates intense competition. A firm that loses customers runs therisk of going out of business. Profit levels may also shrink due tothe presence of many competitors. This is especially the case inindustries where several businesses offer products that fulfillsimilar functions (McGee, 2014). Therefore, SBUs strive to providegreater value to their customers than that offered by rival firms.Additional value can be ensured by setting lower prices than thosecharged by competitors. Besides, an SBU can also guarantee greaterbenefits and better service that would justify the charging of higherprices.
An SBU createscompetitive advantage through implementing a strategy that is uniqueand unmatched in the market. In this regard, competitors willstruggle to duplicate the value-creating strategy due to itscomplexity. Also, implementing the strategy may seem toocost-intensive for smaller firms to match (Parnell, 2014). For aslong as the other firms fail to duplicate the strategy, an SBU willcontinue to enjoy a competitive advantage. Businesses are alwaysintent on producing better products at lower prices than theirimmediate competitors. This implies that the methods of productionneed constant refinements so as to make the best use of a firm`sresources. The prices set for goods and services would never be lowerthan the cost incurred during production (Pearce and Robinson, 2014).Therefore, the higher the rate of efficiency, the greater theflexibility a firm has to lower its prices.
An SBU could evenenact progressive shifts during which prices were reduced on severaloccasions. Nevertheless, a firm needs to consider various factors indeveloping strategies aimed at creating competitive advantage. Thefirst factor concerns the strengths and weaknesses observed in thefirm`s assets and operations (Tidd and Bessant, 2014). Besides, anSBU needs to consider the available competitors by analyzing thelatter’s products and resources (Blawatt, 2014). The firm seekingcompetitive advantage needs to compare the value they offer vis-à-visthe needs of its consumers.
Michael Porter,the renowned economist, suggested two significant ways through whicha firm could generate competitive advantage. The first methodinvolves incurring lower costs than its direct competitors (DeMoraes, 2015). The second option concerns differentiation of a firm’sproducts so as to make them unique to the consumers. Successfulimplementation of differentiation grants the firm leeway to sethigher prices without the risk of losing customers (Conklin, 2010).An SBU can choose to serve a particular class of consumers. Adoptinga narrow scope would imply restricting marketing and sales to somedemographic group of the population. On the other hand, embracing abroad scope involves focusing on customers across a wide range ofclassifications such as gender, age, marital status, and ethnicity(David and David, 2014). The combination of cost, scope, anddifferentiation form generic strategies applicable to various typesof businesses.
Porter’sgeneric strategies can be represented in the form of a table as shownbelow (De Moraes, 2015):
PORTER’S GENERIC STRATEGIES
1. Cost Leadership
3a. Cost Focus
3b. Differentiation Focus
Porter`s genericstrategies aim to ensure a competitive advantage over rival firms inthe market. It is important to evaluate how each approach contributesto creating competitive advantage.
All firms pricetheir goods and services based on their costs of production. Low-costleadership involves the strategies enacted by a company so as toprovide products and services at lower prices than their competitors.An SBU needs to monitor its production costs and develop ways oflowering variable costs. Some firms have also decided to reduce thenumber of workers so as to limit expenditure on wages and salaries.Obtaining significant cost advantage over competitors can be extendedto consumers so as to acquire larger market share (Friedli and Mundt,2014). A firm can achieve competitive advantage by earning higherprofits than its competitors. Therefore, businesses endeavor toattract as many customers as possible.
The goods sold bycost leaders are usually standardized so as to appeal to a largecaliber of clients. Products that are tailored to the needs, tastes,and desires of particular consumers realize fewer sales compared tothose that target average consumers. Manufacturing products with fewspecifications employs economies of scale (Joyce 2014). Besides, afirm that limits product modification relies on experience tomanufacture more goods. Consequently, the company realizes costreduction benefits (Jones, 2014). Service businesses also adoptlow-cost strategies in areas such as logistics, procurement,marketing, and information systems.
Firms haveadopted various tactics so as to enact low-cost strategies. Athorough examination of a firm’s value chain reveals areas wherecost advantages can be leveraged. In this regard, conducting a SWOTanalysis helps to identify the strengths, weaknesses, opportunities,and threats faced by an organization. It is important to magnify theimpact of strengths while at the same time minimizing the impact ofweaknesses (Tidd and Bessant, 2014). Nevertheless, all avenues oflow-cost advantage need continuous refinements to improve yields,increase the efficiency of delivery, and streamline design. A highdegree of vertical integration can help to reduce the expensesincurred by a business (Hanson and John, 2014). It may also bebeneficial for an SBU to locate its operations closer to the sourceof raw materials to lower transportation costs. However, firms thatadopt cost leadership strategies must guard against providingunreliable goods and services. In pursuit of economies of scale,taking liberties on quality may deter consumers from buying theproducts (Hanson, Hott, Ireland, and Hoskisson, 2014). In thisregard, buyers may demand lower prices or even shift to competinggoods.
There are manypractical cases of businesses that have adopted low-cost strategiesso as to derive competitive advantage. For example, Samsung hasoffered color TV sets at lower prices compared to other manufacturersof electronics. Citigroup offers cheaper credit card services thancompetitors in the financial services sector. Wal-Mart has risenabove its competitors in the retail sector due to the lower costs ofgoods available in its stores. Other firms that have attained costleadership include Emerson Electric and Black and Decker in the areaof power tools, drives, and tolls. In the sector of synthetic fibers,Dupont has attained cost leadership status. Sharp offers the mostcost-friendly flat-TV screens utilizing LCD technology. Bic hasgained universal recognition and acclaim due to the relatively lowcost of its ball point pens (Dess, 2012). Also, Whirlpool hasachieved competitive advantage by offering cheaper washers and dryersto consumers.
Differentiationis concerned with transforming products in a way that makes themunique. Consumers show more willingness to buy goods and servicesthat appear different to those of its rivals. As discussed, the freeentry and exit of firms into the market causes intense competition.Contrariwise, monopolistic firms lack the intensive to differentiatetheir products due to barriers to entry. Some of these obstaclesinclude high startup costs, legislative restrictions, economies ofscale, and sole access to raw materials and distribution channels.New entrants may also anticipate hostile retaliation from currentfirms in the market (De Moraes, 2015). The monopolistic industry mayalso require plenty of learning and experience for a business toprosper and make profits.
High levels ofcompetition occur in areas where the competitors are almost equal insize. A declining or mature market may also lead competing firms tobe overly aggressive in pursuing market leadership. In otherinstances, high fixed costs may cause similarly high barriers toexit. Therefore, differentiation is a primary way of attaining highermarket share than existing rivals. Offering products of a higherquality is one way to achieve differentiation (Conklin, 2010). If theproduct is technically superior, consumers will attach specialsignificance to it. Providing special after-sales services can make aproduct appear unique. The perception of consumers determines howdifferentiation is defined. Differentiation helps to build customerloyalty. Furthermore, it reduces the sensitivities of customerstowards seemingly high prices. Satisfying the needs and preferencesof consumers makes it unlikely that they would search foralternatives.
Adopting aninnovative design or using high-quality materials and processes alsocontribute to perceived differentiation. Differentiation offers acompetitive advantage when the prices acceptable to consumers arehigher than the costs incurred from distinguishing the good orservice (Joyce, 2014). Many companies have managed to engenderdifferentiation into their corporate strategy. For example, Benettonhas produced unique sweaters and other light material clothing. Ininvestment banking, JP Morgan Chase has risen above theircompetitors. Bose offers higher quality stereo speakers relative totheir rivals. In the automobile industry, consumers have shownremarkable loyalty to BMW and Mercedes vehicles. Guns from Berettahave also been differentiated. Callaway golf clubs and Prince tennisrackets have attracted the particular attention of sportspersonalities. Travelers in the US have preferred American Express.Krups, coffee makers and Coors, brewers have also achieveddifferentiation. Buyers of classic-cut clothing manifest loyalty toproducts from Brooks Brothers (Carpenter and Sanders, 2014).
Some firms preferto target particular groups of consumers to buy their products.Various classifications can be used to categorize consumers in theimplementation of focus strategies. Geographic location is onecriterion that can be used to identify target consumers. Some buyergroups have unique tastes and preferences compared to the averageconsumers. A particular product line could be used by a particulargroup of buyers (Gamble, Peteraf, and Thompson, 2015). Focusstrategies are concerned with specializing the firm’s activities soas to derive competitive advantage. A firm achieves competitiveadvantage when it manages to realize higher profits and superiorvalue than other firms incapable of specializing their services.
Firms can achievedifferentiation through two ways. Cost-based focus targets aparticular market segment. Differentiation-based focus appeals to theparticular preferences of consumers in the target market. In manyinstances, implementing focus strategies also contribute to variousaspects of cost and differentiation. Focus strategies are unique inthat they aim for sections of the target market. Granted, the methodsused to attain competitive advantage for differentiation and costleadership are also applicable to focus strategies. Nevertheless,such methods are adapted to fit the particular niche or marketsegment. In this regard, a firm has to ensure that it usesspecialized skills and resources to implement focus strategies.
Many firms havesuccessfully implemented hybrid focus strategies in creatingcompetitive advantage. Some of these firms include Levi Strauss(Olsen, 2014), Magna International, Patek Phillippe, Bang andOlufsen, Chaparral Steel, American Iron Horse, Southwest Airlines,Solectron, and Krispy Kreme Doughnuts (Dess, 2012). Some demographicgroups have shown special demand for particular products. Also, somecommunities avoid consuming certain goods and services. Therefore,opportunistic firms use focus strategies in trying to appeal to theneeds and preferences of these consumers. Indeed, Porter’s genericstrategies are successful.
Porter`s genericstrategies of cost, differentiation, and focus describe the state ofmany companies. The free entry and exit of firms into the consumermarket has intensified the level of competition. Consequently, firmshave actively pursued ways of gaining a competitive advantage overtheir rivals. Cost leadership strategies have helped firms to gain acompetitive advantage by offering products at lower prices thancompetitors. Differentiation has been achieved through making aproduct appear unique and different from those of rival firms. Thedifferentiation of products helps to build consumer loyalty andreduce their sensitivity to seemingly higher prices. On the otherhand, focus strategies have yielded competitive advantage by helpingfirms to concentrate their products to particular demographic groups.Various examples can be cited to prove the applicability of Porter’sgeneric strategies. The unprecedented level of prosperity enjoyed bymultinational organizations such as Wal-Mart, Mercedes, BMW, andSamsung proves beyond reasonable doubt that Porter’s genericstrategies are indeed successful.
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