PORTERS GENERIC STRATEGY MODEL

EFFORTS BY: GAURAV TULI PARUL ARORA ANKITA SHARMA APEKSHA BAJAJ

Porter's Generic Strategies

A firm positions itself by leveraging its strengths 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

Cost Leadership Strategy

Relatively standardized products

Features acceptable to many customers

Lowest competitive price

Cost Leadership Strategy

Low cost producer Given level of quality Average industry prices to earn a profit higher than that of rivals Below the average industry prices to gain market share

Cost Leadership Strategy Scenarios

Price wars - competition suffers losses Without a price wars - Industry matures and prices decline The cost leadership strategy always targets a broad market

Cost Leadership Strategy

Cost saving actions required by this strategy:

Building efficient scale facilities Tightly controlling production costs and overhead Minimizing costs of sales, R&D and service Building efficient manufacturing facilities Monitoring costs of activities provided by outsiders Simplifying production processes

How to Obtain a Cost Advantage

Determine and control Cost Drivers Reconfigure Value Chain if needed

Alter production process Change in automation

New raw material Forward integration

New distribution channel

New advertising media Direct sales in place of indirect sales

Backward integration Change location relative to suppliers or buyers

Cost Leadership
Threat of new entrants

Rivalry among competing firms

Bargaining power of suppliers

Threat of substitute products

Bargaining power of buyers

Key Strengths Required for Cost Leadership

Access to the capital
Skill in designing manufacturing products for efficient

High level of expertise in manufacturing process engineering Efficient distribution channels

Risks Involved
Competition may lower prices Technological Advancements Companies using Focus Marketing Obsolete processes due to innovation in industry Perception : Lower cost = Low Quality Easy to imitate the strategy

CASE STUDY

Cost Leadership
A leading cost strategy for McDonalds is the ability to purchase the land and buildings of its restaurants Vertical top to bottom management style

Low wage workers and less managers

Benefits offered

Differentiation Strategy

An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them.
Focus is on nonstandardized products Appropriate when customers value differentiated features more than they value low cost.

Differentiation Strategy

unique attributes valued by customers Customers perceive the product to be better

Value added by the uniqueness

Charge a premium price for it

How to Obtain a Differentiation Advantage

Control
Cost Drivers

if needed

Reconfigure Value Chain to maximize

Lower buyers costs Raise performance of product or service Create sustainability through: Customer perceptions of uniqueness Customer reluctance to switch to nonunique product or service

Differentiation Strategy: Competitors

Threat of new entrants

Rivalry among competing firms

Bargaining power of suppliers

Threat of substitute products

Bargaining power of buyers

Key Requirements
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.

Competitive Risks of Differentiation tastes Imitation by competitors and changes in customer

The price differential between the differentiators product and the cost leaders product becomes too large. Differentiation ceases to provide value for which customers are willing to pay. Experience narrows customers perceptions of the value of differentiated features. Counterfeit goods replicate differentiated features of the firms products. Various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments.

CASE STUDY

Medimix herbal soap differentiated itself on the herbal plank two decades back when there were only synthetic soaps. A new brand of herbal soap launched in todays context has to probably define the herbal qualities through an enhanced mix of ingredients to convey the differentiation because `herbal is the proposition of several brands both new and old.

The established Medimix brand is currently running a campaign, which conveys the brand benefits through appropriate imagery.

Focus Strategies

An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment.
Particular buyer groupyouths or senior citizens
Different segment of a product line professional craftsmen versus do-it-yourselfers Different geographic marketsEast coast versus West coast

The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly.

Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers However, firms pursuing a differentiationfocused strategy may be able to pass higher costs on to customers since close substitute products do not exist.

Factors That Drive Focused Strategies

Large firms may overlook small niches. A firm may lack the resources needed to compete in the broader market. A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors. Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage.

Firms that succeed in a Focus Strategy often have the following internal strengths:

The

firm is able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well.

Risks Involved
Imitation and changes in the target segments It may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly Other focusers may be able to carve out sub-segments that they can serve even better. A focusing firm may be outfocused by its competitors.

A large competitor may set its sights on a firms niche market.

Customer preferences in niche market may change to more closely resemble those of the broader market.

CASE STUDY

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 products (July 1998), South Beach Beverage Company (October 2000) and Quaker Oats (December 2000)

Generic Strategies and Industry Forces Industry Generic Strategies Force Cost Leadership Differentiation
Entry Barriers Buyer Power
Ability to cut price in retaliation deters potential entrants. Ability to offer lower price to powerful buyers. Customer loyalty can discourage potential entrants. Large buyers have less power to negotiate because of few close alternatives.

Focus
Focusing develops core competencies that can act as an entry barrier. Large buyers have less power to negotiate because of few alternatives. Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases. Specialized products & core competency protect against substitutes.

Supplier Power

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Threat of Substitutes

Can use low price to defend against substitutes.

Customer's become attached to differentiating attributes, reducing threat of substitutes.

Brand loyalty to keep customers from rivals.

Rivalry

Better able to compete on price.

Rivals cannot meet differentiation-focused