Porters Generic Strategies - competitive advantage

1. Emma Olohan
Marketing Management
PORTER’S GENERIC COMPETITIVE STRATEGIES
Emma Olohan

2. 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.
Emma Olohan

3. 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 company/brand.
Emma Olohan

4. 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.
Emma Olohan

5. 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.
Emma Olohan

6. Cost Leadership
• A company 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:
 Economies of scale
 low direct and indirect operating costs
 control over the supply chain
Emma Olohan

7. • 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
Emma Olohan

8. 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 company/brand 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.
Emma Olohan

9. Examples of differentiation
• Differentiation through Multiple sources: L&T, the engineering company/brand ,
recruits engineers with excellent qualification and claims superiority in executing
projects.
• Coke and Pepsi differentiated through brand power.
• Tesla through an electric car
• Product Differentiation based on ingredients: Toothpaste brands
Emma Olohan

10. Examples of differentiation
Product Differentiation through Additional features:
Samsonite suitcases with wheels , a unique convenience to user
Product Differentiation by Packaging
• Harpic Toilet cleaner with an application friendly nozzle
Product Differentiation by Design:
• especially for women.
Emma Olohan

11. Market Segmentation / Focus
• The company/brand 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 company/brand typically looks to gain a competitive advantage through
product innovation and/or brand marketing rather than efficiency.
• It is most suitable for relatively small company/brands 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.
Emma Olohan

12. Market Segmentation / Focus
• The focus strategy has two variants:
(a) In cost focus, a company/brand 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 company/brand 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.
Emma Olohan

13. 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 simultaneously, which led to the success of the
companies.
Emma Olohan

14. 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.
Emma Olohan

15. Criticisms of Porter’s Generic Strategy Framework
• The competence based strategy framework supersedes 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.
Emma Olohan

16. 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 company/brand
must focus either on cost leadership or on differentiation. The concept is popularly
known as Blue Ocean Strategy.
Emma Olohan

17. See you next week
Thank You.
Emma Olohan