Competitive Strategy

Class Learning Outcomes

- Critically evaluate the concept of Porter’s generic strategies

- Use Porter’s generic framework in an organisational context
Contents
- Porter’s Generic Framework
Strategy Framework
- Once the internal analysis is done, the next step is to formulate the strategic
direction for the company
- One of such tool is Porter’s Generic strategies
Introduction
- Generic strategies were first set out by Michael Porter in 1985 in his book,
“Competitive Advantage: Creating and Sustaining Superior Performance”.
- Michael Porter is a professor at Harvard Business School
Introduction
- A firm’s success in strategy rests upon how it positions itself in respect to its
environment
- Michael Porter has argued that a firm’s strengths ultimately fall into one of two
headings: cost advantage and differentiation
- By applying these strengths in either a broad or narrow scope, three generic
strategies result;
- Cost leadership, differentiation, and focus
Porter’s Generic Strategies

Advantage Advantage
Target Scope (Low Cost) (Product Uniqueness)

Broad (Industry Wide) Cost Leadership Differentiation

Narrow (Market Wide) Focus Strategy Focus Strategy

(Low cost) (Differentiation)
Please Remember…
- The terms “Cost Focus” and “Differentiation Focus” can be a little confusing.
- They may be interpreted as meaning “a focus on cost” or “a focus on
differentiation”.
- Remember that ‘Cost Focus’ means emphasizing cost-minimization within a
focused market
- And Differentiation focus means pursuing strategic differentiation within a
focused market
Cost Leadership Strategy
- Aiming to become Lowest Cost Producer
- The aim is to compete on the cost with every other industries and earn higher
unit profits
- Target can be broad market
- Competitive advantage is achieved by driving down costs
- A successful cost leadership strategy requires that the firm is the cost leader
and is unchallenged in this position
- Especially beneficial, where customers are price sensitive
Cost Leadership Strategy
- As we seen Porter’s generic strategies are ways of gaining competitive
advantage
- Means, developing the “edge” that gets you the sale and takes it aways from
your competitors
- There are two ways of achieving this within a Cost Leadership Leadership
Strategy
- Increasing profits by reducing costs, while charging industry-average prices

- Increasing market share by charging lower prices, while still making a reasonable profit on
each sale, by reducing costs.
Remember…
- Cost Leadership is about minimizing the cost to the organisation of delivering
products and services.
- The price paid by the customer is a separate issue.
Cost Leadership Strategy - example
Walmart, USA
- The central goal of Walmart is to keep retail price low, and the company has
been very successful at this
- Experts estimate that Walmart saves shoppers at least 15 percent on a typical
cart of groceries
- Walmart Stores Inc. is rolling out its “everyday low prices” (EDLP) retail
strategy to more international markets to replace the more usual high-low
pricing in emerging markets
Cost Leadership Strategy - example
Walmart, USA
- EDLP means working with suppliers to ensure their prices are constantly low,
but also means price changes are kept to a minimum
- This is achieved by employing a good structure that works with the systems to
empower the low price strategy
- Walmart has in place a set of systems that help it achieve its strategy of low
prices everyday
Cost Leadership
- Companies that are successful in achieving Cost Leadership usually have:
- Access to the capital needed to invest in technology that will bring costs down

- Very efficient logistics

- A low-cost base (labour, materials, facilities), and a way of sustaining cutting costs below
those of other competitors

- The greatest risk for this strategy is the competitors copy your strategy
- This is why it’s important to continuously find ways of reducing every cost
- One successful way is adopting Kaizen philosophy of continuous
improvement
Cost Leadership
- Cost leadership strategy involves being the leader in terms of cost in your
industry or market.
- Simply being amongst the lowest-cost producers is not good enough
- Because the competitors may attack you with price war, and block your effort.
- Therefore the business needs to be confident that they can achieve and
maintain the number one position before choosing the Cost Leadership route.
Cost Leadership Strategy - Success Elements
- Access to the capital required to make a significant investment in production
of assets
- Design skills for efficient manufacturing
- High level of expertise in manufacturing process engineering
- Efficient distribution channels
Cost Leadership Strategy - Risks Involved
- Other firms may be able to lower their cost as well
- As technology improves, the competition may be able to leapfrog production
capabilities, thus eliminating the competitive advantage
- It could lead to a damaging price wars
- There might be difficulty in sustaining cost leadership in the long run
- A firm following a focus strategy might be able to achieve even lower cost
within their segment
Differentiation Strategy
- Differentiation strategy call for the development of a product or service that
offers unique attribute that are valued by customers
- Customers perceive the product to be different and better than that of rivals
- Differentiation can be based on the product image or durability, after-sales,
quality, additional features, functionality etc.
Differentiation Strategy
- The value added by the uniqueness of the product may allow the firm to
charge a premium price for it
- It requires flair, research capability and strong marketing
- Organisation must be agile with their new product development process.

How would you differentiation strategy for your product (easier), and service (more
difficult)?
Differentiation Strategy - example
McDonald’s
- McDonald’s customers are of all classes, but largely working and middle
classes, and people of all ages
- McDonald’s strive to meet a customer wait time at no more than one minute in
line, and 30 seconds at the counter
Differentiation Strategy - example
- McDonald’s Happy Meal, with a $0.50 toy, hamburger, french fries, and coke.
They market it for Kids
- McDonald’s knows that some customers go to its stores to take a quick break
from their day’s activities and not because McDonald’s was able to make their
food ten seconds faster than a competitor.
- So McDonald’s marketing executives then put together the phrase, “Have you
had break today?”
Differentiation Strategy - Success Elements
- Access to leading scientific research
- Highly skilled and creative product development team
- Strong sales team with the ability to successfully communicate the perceived
strengths of the product
- Corporate reputation for quality and innovation
Differentiation Strategy - Risks Involved
- Involves higher costs
- Customers might become price sensitive and choose on price rather than
uniqueness
- Customers may no longer need the differentiation factor
- Imitation by competitors and changes in customer tastes
- Rivals pursuing a focus strategy may be able to achieve even greater
differentiation in their market segment
Focus Strategy
- The focus strategy concentrates on a narrow segment and within that
segment attempts to achieve either a cost advantage or differentiation
- Means, that the focus strategy concentrate on niche market
- The premise is that the needs of the group can be better serviced by focusing
entirely on it
Focus Strategy
- A firm using a focus strategy often enjoys a high degree of customers loyalty,
and this entrenched loyalty discourage other firms from competing directly
- Organisation understand the dynamic of the niche, and unique needs of the
customers within that niche, and
- Then develop a uniquely low cost, or well specified product/s for the market
Focus Strategy
- Because of their narrow market focus, firms pursuing a focus strategy have
lower volumes and therefore less bargaining power with their supplies
- However, firms pursuing a differentiation-focused strategy may be able to
pass higher costs on to customers since close substitute products do not
exist.
- Because they serve customers in their market uniquely well, they tend to build
strong brand loyalty amongst their customers.
- This makes their particular market segment less attractive to competitors.
Focus Strategy
- Because of their narrow market focus, firms pursuing a focus strategy have
lower volumes and therefore less bargaining power with their supplies
- However, firms pursuing a differentiation-focused strategy may be able to
pass higher costs on to customers since close substitute products do not
exist.
- Because they serve customers in their market uniquely well, they tend to build
strong brand loyalty amongst their customers.
- This makes their particular market segment less attractive to competitors.
Focus Strategy - PepsiCo
- By successfully adopting the ‘focus’ strategy since 1997, PepsiCo has
emerged as the second largest consumer packaged goods company
- The company has significantly strengthened its competitive position in the
beverages segment
- By acquiring leading beverages’ company like Tropicana, South Beach
Beverage company and Quaker Oats
Focus Strategy - Success Elements
- Lower investment in resources
- The firm benefits from specialisation
- Provides scope for greater knowledge of a segment of the market
- Makes entry to new markets easier and less costly
- Firms using a focus strategy often enjoy a high degree of customer loyalty
Focus Strategy - Risks Involved
- Limited opportunities for growth
- The firm could outgrow the market
- Danger of decline in the chosen segment or niche
- Risk of imitation
- Risk of changes in the target market
- A reputation for specialisation inhibits move into new sector
Choosing the Right Generic Strategy
- Your choice of which generic strategy to pursue underpins every other
strategic decision you make, so it's worth spending time to get it right.
- It wise that the things you need to do to make each type of strategy work
appeal to different types of people.
- Cost Leadership requires a very detailed internal focus on processes.
- Differentiation, on the other hand, demands an outward-facing, highly creative
approach.
Choosing the Right Generic Strategy

- So, when you come to choose which of the three generic strategies is for you,
it's vital that you take your organization's competencies and strengths into
account.
Process of Porter’s Generic Strategy

1. Conduct SWOT analysis for each generic strategy, and understand which is
NOT possible by your organisation
2. Use Five Forces Analysis to understand the nature of the industry
3. Compare the SWOT Analyses of the viable strategic options with the results
of your Five Forces analysis.
Process of Porter’s Generic Strategy
- Once you have done the comparison, for each strategic option, ask yourself
how you could use that strategy to:
- Reduce or manage supplier power.

- Reduce or manage buyer/customer power.

- Come out on top of the competitive rivalry.

- Reduce or eliminate the threat of substitution.

- Reduce or eliminate the threat of new entry.

- Select the generic strategy that gives you the strongest set of options
Please remember…
- Porter’s generic strategic provides you a great starting point for strategic
decision making
- Once you have made your best choice, there are still many strategic options
available, such as
- Bowman’s strategy clock

- Perceptual mapping/Map

- USP analysis

- Core Competency Analysis

USP Analysis

- Your USP (Unique Selling Proposition) is the unique thing that you can offer
that your competitors can't.
- It's your "Competitive Edge." It's the reason why customers buy from you
- USPs have helped many companies succeed.
Core Competency Analysis

- What makes your business, or you as a person, stand out from the crowd?
- What are the unique things that you do that your competitors can't imitate,
and bring you real value?
- They can be products and services, or your own expertise and knowledge –
and they are your "core competencies.
USP Analysis vs. Core Competency Analysis

- USP analysis identifies your 'unique selling proposition', or the thing that only
you offer customers that distinguishes you from your competitors.
- Core competence analysis focuses on what the company does really well,
and that others do not.
Recap
- Porter’s generic strategy
- Cost leadership
- Being the lowest cost producer in the industry as a whole
- Differentiation
- The exploitation of a product or service which is believed to be unique
- Focus
- Restricting activities to only part of the market through;
- Providing goods or services at a lower cost to that segment (cost focus)
- Providing a differentiated product or service to that segment (differentiation focus)
Class Activity
- Formulate a strategy for the selected organisation using Porter’s Generic
Strategies
Thanks for Listening
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