Porter’s Generic

Competitive Strategies

5-1
 “Competitive strategy is about being
different. It means deliberately choosing
to perform activities differently or to
perform different activities than rivals
to deliver a unique mix of value.”

Michael E. Porter
5-2
 Four “Best” Strategic Approaches to Building
Competitive Advantage

• cost-based competitive advantage (being the industry’s low-cost

provider)

• superior product based competitive advantage (higher quality, better

performance, wider selection, value-added services, or some other

attribute)

• niche market based competitive advantage (winning over the rivals by

serving the needs and preferences of buyers comprising the niche)

• capabilities-based competitive advantage (developing expertise and

resource strengths not easily imitated or matched by rivals)

5-3
 Three Generic Strategies
 Low-Cost Provider Strategies

 Differentiation Strategies

 Focused (or Market Niche) Strategies

5-4
 Low-Cost Provider Strategies
Keys to Success
 Make achievement of ‘meaningful lower costs
than rivals’ the theme of firm’s strategy

 Include ‘features and services in product

offering’ that buyers consider essential

 Find approaches to achieve a cost advantage

in ways difficult for rivals to copy or match

Low-cost leadership means low overall costs, not

just low manufacturing or production costs!
5-5
 Translating a Low-Cost Advantage into
Higher Profits: Two Options

Option 1: Use lower-cost edge to

under-price competitors and attract
price-sensitive buyers in enough
numbers to increase total profits

Option 2: Maintain present price, be

content with present market share,
and use lower-cost edge to earn a
higher profit margin on each unit sold,
thereby increasing total profits
5-6
 Approaches to Securing
a Cost Advantage

Approach 1
Do a better job than rivals of
performing value chain activities
efficiently and cost effectively

Approach 2
Control
Revamp value chain to bypass costs!
cost-producing activities that add little
By-pass
value from the buyer’s perspective costs!

5-7
Approach 1: Factors used to pull the cost
down
 Capture economies of scale;
 Capture learning and experience curve effects
 Control percentage of capacity utilization
 Pursue efforts to boost sales and spread costs such as R&D
and advertising over more units
 Improve supply chain efficiency
 Use online systems and sophisticated software to achieve
operating efficiencies
 Adopt labor-saving operating methods
 Use bargaining power to gain concessions from suppliers
 Motivating employees through incentives & company culture

5-8
Approach 1: Cost Drivers - factors used to pull the cost
down

5-9
Approach 2: Revamping the Value Chain

 Use direct-to-end-user sales/marketing methods

 Make greater use of online technology applications
 Streamlineoperations by eliminating low-value-
added or unnecessary work steps
 Relocate facilities closer to suppliers or customers
 Offer basic, no-frills product/service

5-10
 Nucor Corporation’s
Low-Cost Provider Strategy
Eliminate
Eliminatesome
someproduction
productionprocesses
processesfrom
fromvalue
valuechain
chainused
usedby
bytraditional
traditional
integrated
integratedsteel
steelmills;
mills;cut
cutinvestment
investmentin
infacilities
facilitiesand
andequipment
equipment

Strive
Strivehard
hardfor
forcontinuous
continuousimprovement
improvementin inthe
theefficiency
efficiencyof
ofits
itsplants
plantsand
and
frequently invest in state-of-the art equipment to reduce unit costs
frequently invest in state-of-the art equipment to reduce unit costs

Carefully
Carefullyselect
selectplant
plantsites
sitesto
tominimize
minimizeinbound
inboundandandoutbound
outboundshipping
shipping
costs
costsand
andtototake
takeadvantage
advantageof oflow
lowrates
ratesfor
forelectricity
electricity

Hire
Hireaanonunion
nonunionworkforce
workforcethat
thatuses
usesteam-based
team-basedincentive
incentivecompensation
compensation
systems
systems

Heavily
Heavilyemphasize
emphasizeconsistent
consistentproduct
productquality
qualityand
andmaintain
maintainrigorous
rigorousquality
quality
systems
systems

Minimize
Minimizegeneral
generaland
andadministrative
administrativeexpenses
expensesby bymaintaining
maintainingaalean
leanstaff
staffat
at
corporate
corporateheadquarters
headquartersand
andallowing
allowingonly
only44levels
levelsof
ofmanagement
management
5-11
 Wal-Mart’s Approach to
Managing Its Value Chain
Institute
Instituteextensive
extensiveinformation
informationsharing
sharingwith
withvendors
vendorsviaviaonline
online
systems
systems––6% 6%CACA
Pursue
Pursueglobal
globalprocurement
procurementof ofsome
someitems
itemsand andcentralize
centralizemost
most
purchasing
purchasingactivities
activities––2.5
2.5% %CA
CA
Invest
Investininstate-of-the-art
state-of-the-artautomation
automationat atits
itsdistribution
distributioncenters
centers––4% 4%
CA
CA
Strive
Strivetotooptimize
optimizethetheproduct
productmix mixand
andachieve
achievegreater
greatersales
sales
turnover
turnover––2% 2%CACA
Install
Installsecurity
securitysystems
systemsandandstore
storeoperating
operatingprocedures
proceduresthatthatlower
lower
pilferage
pilferagerates
rates––0.5%
0.5%CA CA
Negotiate
Negotiatepreferred
preferredreal
realestate
estaterental
rentaland
andleasing
leasingrates
rateswith
withreal
real
estate
estatedevelopers
developersand andowners
ownersof ofits
itsstore
storesites
sites––2%
2%CACA
Manage
Manageand andcompensate
compensateits itsworkforce
workforcein inaamanner
mannerto toyield
yieldlower
lower
labor
laborcosts
costs––5%5%CACA
5-12
 When Does a Low-Cost
Strategy Work Best?
 Price competition is vigorous
 Product is standardized or readily available
from many suppliers
 There are few ways to achieve
differentiation that have value to buyers
 Most buyers use product in same ways
 Buyers incur low switching costs
 Buyers are large and have significant
bargaining power
 Industry newcomers use introductory low prices to
attract buyers and build customer base
5-13
 Pitfalls of Low-Cost Strategies
 Being overly aggressive in cutting price can affect
product quality
 Low cost methods are easily imitated by rivals
 Becoming too obsessed on reducing costs
and ignoring
 Buyer interest in additional features
 Declining buyer sensitivity to price
 Changes in how the product is used
 Technological breakthroughs open up cost reductions
for rivals
5-14
 Differentiation Strategies

Objective
 Incorporate differentiating features that cause
buyers to prefer firm’s product or service over
brands of rivals
Keys to Success
 Findways to differentiate that create value for
buyers and are not easily matched or cheaply
copied by rivals
 Not spending more to achieve differentiation
than the price premium that can be charged
5-15
 How to Achieve a
Differentiation-Based Advantage
Approach 1
Incorporate product features/attributes that
lower buyer’s overall costs of using product
Approach 2
Incorporate features/attributes that raise the
performance a buyer gets out of the product
Approach 3
Compete on the basis of intangible features that
enhance buyer satisfaction
Approach 4
Signal the value of the company’s product offering to
the buyer
Manage Value Chain in such ways to create Differentiating Attributes
5-16
Drivers of Differentiation

5-17
 When Does a Differentiation
Strategy Work Best?
 There are many ways to differentiate a product
that have value and that please customers e.g.
apparels

 Buyer needs and uses are diverse e.g. automobiles

 Few rivals are following a similar differentiation

approach

 Technological change and product innovation are

fast-paced
5-18
Benefits of Successful Differentiation

A product / service with unique,

appealing attributes allows a firm to

 Command a premium price and/or

Which
 Increase unit sales and/or hat is
unique?

 Build brand loyalty

= Competitive Advantage
5-19
 Types of Differentiation Themes
 Unique taste – Meswak
 Multiple features – Microsoft Windows and Office
 Wide selection and one-stop shopping – Big Bazzar,
Amazon.com
 Superior service -- FedEx, Ritz-Carlton
 Spare parts availability – Caterpillar
 Engineering design and performance – Mercedes, BMW
 Prestige – Rolex
 Product reliability – Johnson & Johnson
 Quality manufacture –Michelin, Toyota
 Technological leadership – 3M Corporation
 Top-of-line image – Zodiac, Dettol, Fevicol
5-20
 Pitfalls of Differentiation Strategies

 Appealing product features are easily copied by rivals

 Buyers see little value in unique attributes of product
 Overspending on efforts to differentiate the product
offering, thus eroding profitability
 Over-differentiating such that product
features exceed buyers’ needs
 Charging a price premium
buyers perceive is too high

5-21
 Focus / Niche Strategies

 Involve concentrated attention on a narrow piece of

the total market
Objective
Serve niche buyers better than rivals
Keys to Success
 Choose a market niche where buyers
have distinctive preferences, special
requirements, or unique needs
 Develop unique capabilities to serve
needs of target buyer segment
5-22
 Approaches to Defining a Market Niche

 Geographic uniqueness e.g. Vivek, Vijay retail

chains

 Specializedrequirements in
using product/service

 Special product attributes

appealing only to niche buyers
5-23
 Examples of Focus Strategies

 Animal Planet and History Channel

 Cable TV
 Google
 Internet search engines
 Porsche
 Sports cars
 Cannondale
 Top-of-the line mountain bikes
 Enterprise Rent-a-Car
 Provides rental cars to repair garage customers
 Bandag
 Specialist in truck tire recapping
5-24
 Focus / Niche Strategies
and Competitive Advantage

Approach 1
 Achieve lower costs than rivals in
serving a well-defined buyer segment –
Focused low-cost strategy
Which

Approach 2 hat is
unique?

 Offer a product appealing to unique

preferences of a well-defined buyer segment –
Focused differentiation strategy
5-25
 What Makes a Niche
Attractive for Focusing?
 Big enough to be profitable and offers good growth
potential
 Not crucial to success of industry leaders
 Costlyor difficult for multi-segment competitors
to meet specialized needs of niche members
 Firm has resources and capabilities
to effectively serve an attractive niche
 Few rivals are specializing in same niche
 Firm can defend against challengers via superior
ability to serve niche members
5-26
 Risks of a Focus Strategy

 Competitors find effective ways to match

a firm’s capabilities in serving niche

 Niche buyers’ preferences shift towards product

attributes desired by majority of buyers – niche
becomes part of overall market

 Segment becomes so attractive it becomes

crowded with rivals, causing segment profits to be
splintered
5-27
 Importance of Perceived Value

 Buyers seldom pay for value that is not perceived

 Price premium of a differentiation strategy reflects

 Value actually delivered to the buyer

and

 Value perceived by the buyer

 Actualand perceived value can differ when buyers

are unable to assess their experience with a
product
5-28
 Signaling Value as Well
as Delivering Value
 Incomplete knowledge of buyers causes them to judge
value based on such signals as
 Price
 Attractive packaging
 Extensive ad campaigns
 Ad content and image
 Seller facilities or professionalism and
personality of employees
 Having a list of prestigious customers
 Signals of value may be as important as
actual value when
 Nature of differentiation is hard to quantify
 Buyers are making first-time purchases
 Repurchase is infrequent
 Buyers are unsophisticated

5-29