MBA 613 – International Management Strategies

Porter's Generic Strategies

Professor : Ester V . Tan , ED . D

Prepared by : Christian A . Diaz

Michael Eugene Porter
qHarvard Business School University Professor qhe is a leading authority on company strategy and the competitiveness of nations and regions qauthor of 18 books and numerous articles including Competitive Strategy, Competitive Advantage, Competitive Advantage of Nations, and On Competition qhe is generally recognized as the father of the modern strategy field, and his ideas are taught in virtually every business school in the world qhe has served as strategy advisor to numerous leading U.S. and international companies, including Caterpillar, Procter & Gamble, Scotts Miracle-Gro, Royal Dutch Shell, and Taiwan Semiconductor qsix-time winner of the McKinsey Award for the best Harvard Business Review article of the year

Porter's Generic Strategies Target Scope Advantage Low Cost Product Uniqueness Broad (Industry Wide) Cost Leadership Strategy Differentiation Strategy Narrow (Market Segment) Focus Strategy (low cost) Focus Strategy (differentiation) .

This is achieved by having the lowest prices in the target market segment. There are three main ways to achieve this.control over the supply/procurement chain to ensure low costs . or at least the lowest price to value ratio (price compared to what customers receive).achieving low direct and indirect operating costs 3.achieving a high asset turnover 2. To succeed at offering the lowest price while still achieving profitability and a high return on investment. the firm must be able to operate at a lower cost than its rivals. 1.Cost Leadership Strategy •This strategy involves the firm attractive market share by appealing to cost-conscious or price-sensitive customers.

•Skill in designing products for efficient manufacturing. the competition may be able to leapfrog the production capabilities. this investment represents a barrier to entry that many firms may not overcome. Risks Associated with Cost Leadership Strategy •Other firms may be able to lower their costs as well. •As technology improves. for example. •Efficient distribution channels. •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.Firms that succeed in cost leadership often have the following internal strengths: •Access to the capital required making a significant investment in production assets. . •High level of expertise in manufacturing process engineering. having a small component count to shorten the assembly process. thus eliminating the competitive advantage.

•This strategy is appropriate where the target customer segment is not price .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 market is competitive . customers have very specific needs which are possibly under . and the firm has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to copy . •Strong sales team with the ability to successfully communicate the perceived strengths of the product.sensitive . Firms that succeed in differentiation strategy often have the following internal strengths: •Access to leading scientific research.served . •Corporate reputation for quality and innovation. •Highly skilled and creative product development team.

a distinct groups with specialized needs. . the company ideally focuses on a few target markets. you can better meet the needs of that target market. It is hoped that by focusing your marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets. •Target market segments that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investment.Risks Associated with Differentiation Strategy •imitation by competitors •changes in consumers tastes •various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments Focus Strategy •In adopting a narrow focus. The choice of offering low prices or differentiated products/services should depend on the needs of the selected segment and the resources and capabilities of the firm. •The firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency.

and for which customers are willing to pay to see and own. and compete either on price (low cost) or differentiation (quality. branding and user experience that enables it to charge a price premium due to the perceived unavailability of close substitutes. Examples: Wal Mart has a broad scope and adopts a cost leadership strategy in the mass market. providing short-haul point-to-point flights in contrast to the hub-and-spoke model of mainstream carriers. In adopting a broad focus scope. Apple also targets the mass market with its iPhone and iPod products.Focus Strategy Example: Southwest Airlines. using its unique capabilities in story-telling and animation to produce signature animated movies that are hard to copy. and Family Dollar. Pixar also targets the mass market with its movies. brand and customization) depending on its resources and capabilities. the principle is the same: the firm must ascertain the needs and wants of the mass market. but adopts a differentiation strategy. but combines this broad scope with a differentiation strategy based on design. .

Firms that succeed in focus strategy often have the following internal strengths: a high degree of •Firms using a focus strategy often enjoys customer loyalty. and this deep-rooted loyalty discourages other firms from competing directly. Risks Associated with Focus Strategy •imitation and changes in the target segments •trouble-free for a broad-market cost leader to adapt its product in order to compete directly •other focusers may be able to create sub-segments that they can serve even better . •Firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist. •Firms that succeed in a focus strategy are able to tailor a wide range of product development strengths to a relatively narrow market segment that they know very well. •Firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers.

attached to differentiating core competency protect attributes. Better able to pass on Suppliers have power supplier price increases to because of low volumes. customers from rivals. Rivals cannot meet differentiation-focused customer needs. Large buyers have less power to negotiate because of few alternatives.   Focus Focusing develops core competencies that can act as an entry barrier. Rivalry Better able to compete on Brand loyalty to keep price. . reducing threat against substitutes. Ability to offer lower price to powerful buyers. Supplier Power Better insulated from powerful suppliers. Differentiation Customer loyalty can discourage potential entrants. customers.Generic Strategies and Industry Forces Industry Force Entry Barriers Buyer Power Generic Strategies Cost Leadership Ability to cut price in retaliation prevents potential entrants. of substitutes. but a differentiationfocused firm is better able to pass on supplier price increases. Threat of Substitutes Can use low price to Customer's become Specialized products & defend against substitutes. Large buyers have less power to negotiate because of few close alternatives.

industry Substitutes available Buyers' incentives DEGREE OF RIVALRY  -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes .Diagram of Porter's 5 Forces   SUPPLIER POWER  Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry   BARRIERS TO ENTRY  Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products THREAT OF SUBSTITUTES  -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes   BUYER POWER  Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs.

in addition CR's for the largest 8. the competitive landscape is less competitive . §CR indicates the percent of market share held by the four largest firms. 25. and 50 firms in an industry also are available. . A low concentration ratio indicates that the industry is characterized by many rivals. §Concentration Ratio (CR) is one which measures rivalry in a particular industry. With only a few firms holding a large market share.Rivalry §Economists measure rivalry by indicators of  industry concentration . §The Bureau of Census periodically reports the CR for major Standard Industrial Classifications (SIC's) A high concentration ratio indicates that a high concentration of market share is held by the largest firms. These fragmented markets are said to be competitive . none of which has a significant market share.

Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price watch market. . for example .using a distribution channel that is new to the industry. vExploiting relationships with suppliers for example . from the 1950's to the 1970's Sears. with high-end jewelry stores reluctant to carry its watches. dominated the retail household appliance market. Roebuck and Co. . Sears set high quality standards and required suppliers to meet its demands for product specifications and price. vCreatively using channels of distribution . implementing innovations in the manufacturing process and in the product itself.Rivalry In pursuing an advantage over its rivals .improving features.raising or lowering prices to gain a vImproving product differentiation . a firm can choose from several competitive moves : vChanging prices temporary advantage.

Slow market growth causes firms to fight for market share. The firm must compete. 6 . A low level of product differentiation is associated with higher levels of rivalry.Rivalry The intensity of rivalry is influenced by the following industry characteristics : 1 . 7 . Strategic stakes are high when a firm is losing market position or has potential for great gains. This intensifies rivalry. High exit barriers cause a firm to remain in an industry. High exit barriers place a high cost on abandoning the product. 4 . competition for customers intensifies. If other producers are attempting to unload at the same time. even when the venture is not profitable. Low switching costs increases rivalry. A larger number of firms increase rivalry because more firms must compete for the same customers and resources. . High fixed costs result in an economy of scale effect that increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers. 8 . High storage costs or highly perishable products cause a producer to sell goods as soon as possible. 2 . 5 . 3 .

etc. An event that eliminates the weak or unproductive elements from a system. Rivalry is volatile and can be intense. 10 . .. as a result of intense competition in a market of declining sales or rising standards of quality. products. histories. Industry Shakeout elimination of some competing businesses. and philosophies make an industry unstable.Rivalry 9 . A diversity of rivals with different cultures. There is greater possibility for misjudging rival's moves.

Threat of Substitutes A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. In the truck tire market. tire retreads are a substitute. The price of aluminum beverage cans is constrained by the price of glass bottles. Today. and plastic containers. . example 2 . But in the trucking industry new tires are expensive and tires must be replaced often. retreading remains a viable substitute industry. example 1 . These containers are substitutes. yet they are not rivals in the aluminum can industry. new tires are not so expensive that car owners give much consideration to retreading old tires. steel cans. To the manufacturer of automobile tires. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players.

substitutes is determined by factors like: the threat of §Brand loyalty of customers §Close customer relationships §Switching costs for customers §The relative price for performance of substitutes §Current trends .Threat of Substitutes Similarly to the threat of new entrants.

Here are a few reasons that customers might have power: §Small number of buyers §Purchases large volumes §Switching to another (competitive) product is simple §The product is not extremely important to buyers. If one customer has a large enough impact to affect a company's margins and volumes. they can do without the product for a period of time §Customers are price sensitive .Buyer Power This is how much pressure customers can place on a business. then the customer hold substantial power.

If one supplier has a large enough impact to affect a company's margins and volumes. Here are a few reasons that suppliers might have power: §There are very few suppliers of a particular product §There are no substitutes §Switching to another (competitive) product is very costly §The product is extremely important to buyers - can't do without it §The supplying industry has a higher profitability than the buying industry .Supplier Power This is how much pressure suppliers can place on a business. then it holds substantial power.

licenses etc. etc. Some naturally occurring barriers to entry could be technological patents or patents on business processes.). qualified expert staff §Access to raw materials is controlled by existing players §Distribution channels are controlled by existing players . or they can occur naturally within the business world.Barriers to Entry / Threat of Entry Barriers to entry can exist as a result of government intervention (industry regulation. special tax benefits to existing firms. legislative limitations on new firms.g. These are typically: §Economies of scale (minimum size requirements for profitable operations) §High initial investments and fixed costs §Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets §Brand loyalty of customers §Protected intellectual property like patents. §Scarcity of important resources. e. The threat of new entries will depend on the extent to which there are barriers to entry. a strong brand identity. strong customer loyalty or high customer switching costs.

e.§Existing players have close customer relations. from longterm service contracts §High switching costs for customers §Legislation and government action Industry's follows: entry and exit barriers can be summarized as Barriers to Entry / Threat of Entry Easy to Enter if there is : •Common technology •Little brand franchise •Access to distribution channels •Low scale threshold Difficult to Enter if there is : •Patented or proprietary know-how •Difficulty in brand switching •Restricted distribution channels •High scale threshold Easy to Exit if there are : •Salable assets •Low exit costs •Independent businesses Difficult to Exit if there are : •Specialized assets •High exit costs •Interrelated businesses .g.

The End .

Sign up to vote on this title
UsefulNot useful