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PPT Porters Three Generic Strategies

PPT Porters Three Generic Strategies

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Published by: Gaurav on Jul 29, 2010
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1. Cost leadership 2. Differentiation 3. Focus.

•Generic strategies were used initially in the early 1980s, and seem to be even more popular today. •They outline the three main strategic options open to organization that wish to achieve a sustainable competitive advantage.

Strategic Orientation— Porter’s Three Generic Strategies
Low Cost Position Overall Cost Leadership Focus Focus Low Cost

d oa Br

Business Scope

Differentiati on

w ro ar N

Focus Differentia tion

Strategic Advantages

Cost Leadership.
The low cost leader in any market gains

competitive advantage from being able to produce at the lowest cost. Products tend to be 'no frills.' Cost is driven down through all the elements of the value chain.

Cost Leadership.
 However, low cost does not always lead to low price.

Producers could price at competitive parity, exploiting the benefits of a bigger margin than competitors.  Toyota, is very good not only at producing high quality autos at a low price, but have the brand and marketing skills to use a premium pricing policy. Wal-Mart is another example of low-cost strategy.

The Sources of Cost Advantages

Economies of Scale  Experience or learning-curve  Capacity Utilization  Product Design  Location  Vertical Integration/Outsourcing  Value chain configuration

“Differentiation means providing something unique that is valuable to the buyer beyond simply offering a low price.” (M. Porter)
Differentiated goods and services satisfy the

needs of customers through a sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin.

Differentiatio n
Incurs additional costs in creating their

competitive advantage. These costs must be offset by the increase in revenue generated by sales. Costs must be recovered. There is also the chance that any differentiation could be copied by competitors. Therefore there is always an incentive to innovate and continuously improve.

Keys to Successful Keys to Successful

Differentiation Differentiation
Understanding customer needs and preferences
• • • •

Commitment to customers Knowledge of company's capabilities Innovation

The Nature of The Nature of Differentiation Differentiation
TANGIBLE Observable characteristics:  size, color, materials, etc.  performance  packaging  complementary services

INTANGIBLE Unobservable and subjective characteristics relating to image status, exclusively, identity.

TOTAL CUSTOMER RESPONSIVENESS: Differentiation not just about the product, it embraces the whole relationship between the supplier and the customer.

Pitfalls of Differentiation Strategies
Uniqueness that is not valuable Too much differentiation Too high a price premium Differentiation that is easily imitated Dilution of brand identification through

product-line extensions Perceptions of differentiation may vary between buyers and sellers

Niche/ Focus strategies
Here the organisation focuses its effort on

one particular segment and becomes well known for providing products/services within the segment. They form a competitive advantage for this niche market and either succeed by being a low cost producer or differentiator within that particular segment. Examples include Roll Royce, Bentley or Organic food.

Focus is based on the choice of a narrow

competitive scope within an industry

 Firm selects a segment or group of segments

(niche) and tailors its strategy to serve them  Firm achieves competitive advantages by dedicating itself to these segments exclusively

Two variants
 Cost focus  Differentiation focus

Where competitors are weakest

Pitfalls of Focus Strategies
Erosion of cost advantages within the narrow

segment Focused products and services still subject to competition from new entrants and from imitation Focusers can become too focused to satisfy buyer needs. E.g.,Restaurant menu.

Stuck In The Middle
The danger some organisation face is that

they try to do all three and become what is known as stuck in the middle. They have no clear business strategy, be all to all consumers, which adds to their running costs causing a fall in sales and market share. It is argued that if you select one or more approaches, and then fail to achieve them, your organization gets stuck in the middle without a competitive advantage. Good takeover targets.

Market Share-Profitability Market Share-Profitability Relationship: Relationship: “Porter’s Bucket” “Porter’s Bucket”

Differentiationbased Strategies


Low Cost Leadership Strategies


Low Low High

Market Share (Quantity)

Ikea's success in the retail industry can be

attributed to its vast experience in the retail market, product differentiation, and cost leadership. One of the World's most successful multinational retailing firms operating as a global organization based on its unique concept that the furniture is sold in kits that are assembled by the customer at home.

Ikea's mission is to offer a wide range of home

furnishing items of good design and function, excellent quality and durability, at prices so low that the majority of people can afford to buy them. The company targets the customer who is looking for value and is willing to do a little bit of work serving themselves, transporting the items home and assembling the furniture for a better price. The typical Ikea customer is young low to middle income family.

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