TYPES OF STRATEGIES:Horizontal Integration, Michael Porter’s Generic Strategies

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Michael Porter's Generic Strategies

Michael Porter's Generic Strategies

Cost Leadership Strategies

Differentiation Strategies

Focus Strategies

Probably the three most widely read books on competitive analysis in the 1980s were Michael Porter's

Competitive Strategy, Competitive Advantage and Competitive Advantage of Nations. According to Porter,

strategies allow organizations to gain competitive advantage from three different bases: cost leadership,

differentiation, and focus. Porter calls these bases generic strategies. Cost leadership emphasizes producing

standardized products at very low per-unit cost for consumers who are price-sensitive. Differentiation is a

strategy aimed at producing products and services considered unique industry wide and directed at

consumers who are relatively price-insensitive. Focus means producing products and services that fulfill

the needs of small groups of consumers.

Porter's strategies imply different organizational arrangements, control procedures, and incentive

systems. Larger firms with greater access to resources typically compete on a cost leadership and/or

differentiation basis, whereas smaller firms often compete on a focus basis.

Porter stresses the need for strategists to perform cost-benefit analyses to evaluate "sharing

opportunities" among a firm's existing and potential business units. Sharing activities and resources

enhances competitive advantage by lowering costs or raising differentiation. In addition to prompting

sharing, Porter stresses the need for firms to "transfer" skills and expertise among autonomous business

units effectively in order to gain competitive advantage. Depending upon factors such as type of

industry, size of firm, and nature of competition, various strategies could yield advantages in cost

leadership, differentiation, and focus.

Cost Leadership Strategies

This strategy emphasizes efficiency. By producing high volumes of standardized products, the firm

hopes to take advantage of economies of scale and experience curve effects. The product is often a

basic no-frills product that is produced at a relatively low cost and made available to a very large

customer base. Maintaining this strategy requires a continuous search for cost reductions in all aspects

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of the business. The associated distribution strategy is to obtain the most extensive distribution

possible. Promotional strategy often involves trying to make a virtue out of low cost product features.

To be successful, this strategy usually requires a considerable market share advantage or preferential

access to raw materials, components, labour, or some other important input. Without one or more of

these advantages, the strategy can easily be mimicked by competitors. Successful implementation also

benefits from:

Process engineering skills

Products designed for ease of manufacture

Sustained access to inexpensive capital

Close supervision of labour

Tight cost control

Incentives based on quantitative targets

Market of many price-sensitive buyers

Few ways of achieving product differentiation

Buyers not sensitive to brand differences

Large number of buyers with bargaining power

Pursued in conjunction with differentiation

Economies or diseconomies of scale

Capacity utilization achieved

Linkages with suppliers and distributors

A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain cost

leadership benefits. But cost leadership generally must be pursued in conjunction with differentiation. A

number of cost elements affect the relative attractiveness of generic strategies, including economies or

diseconomies of scale achieved, learning and experience curve effects, the percentage of capacity

utilization achieved, and linkages with suppliers and distributors. Other cost elements to consider in

choosing among alternative strategies include the potential for sharing costs and knowledge within the

organization, R&D costs associated with new product development or modification of existing

products, labor costs, tax rates, energy costs, and shipping costs.

Striving to be the low-cost producer in an industry can be especially effective when the market is

composed of many price-sensitive buyers, when there are few ways to achieve product differentiation,

when buyers do not care much about differences from brand to brand, or when there are a large

number of buyers with significant bargaining power. The basic idea is to under price competitors and

thereby gains market share and sales, driving some competitors out of the market entirely.

A successful cost leadership strategy usually permeates the entire firm, as evidenced by high efficiency,

low overhead, limited perks, intolerance of waste, intensive screening of budget requests, wide spans of

control, rewards linked to cost containment, and broad employee participation in cost control efforts.

Some risks of pursuing cost leadership are that competitors may imitate the strategy, thus driving

overall industry profits down; technological breakthroughs in the industry may make the strategy

ineffective; or buyer interest may swing to other differentiating features besides price. Several example

firms that are well known for their low-cost leadership strategies are Wal-Mart, BIC, McDonald's, Black

and Decker, Lincoln Electric, and Briggs and Stratton.

Low Cost Producer Advantages

The first point depends upon the condition of the price fluctuation in the market; this can also be

understood with the help of elasticity of demand. In any market, the demand is sensitive to price this is

called price sensitivity of demand.

For example, if price of any commodity increases, the customer carry on to buy the things. It means

these customers neither are price sensitive. Other is the case where customers move towards the

alternates with an increase in demand.

The second is the case where there are few ways of achieving product differentiation either by changing

features, price, cost or quality of the product.

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Where there are high end products, there are the customers who are brand sensitive, because, people

want to express their choices or personality through that brand.

In Bargaining power, low price products have more customers, more suppliers and more bargaining but

high priced products there are low bargaining power due to the fewer customers.

Differentiation Strategies:

Differentiation involves creating a product that is perceived as unique. The unique features or benefits

should provide superior value for the customer if this strategy is to be successful. Because customers

see the product as unrivaled and unequaled, the price elasticity of demand tends to be reduced and

customers tend to be more brands loyal. This can provide considerable insulation from competition.

However there are usually additional costs associated with the differentiating product features and this

could require a premium pricing strategy.

To maintain this strategy the firm should have:

Strong research and development skills

Strong product engineering skills

Strong creativity skills

Good cooperation with distribution channels

Strong marketing skills

Incentives based largely on subjective measures

Be able to communicate the importance of the differentiating product characteristics

Stress continuous improvement and innovation

Attract highly skilled, creative people

Greater product flexibility

Greater compatibility

Lower costs

Improved service

Greater convenience

More features

Differentiation strategies Allow firm to charge higher price gain customer loyalty

In the differentiation focus strategy, a business aims to differentiate within just one or a small number

of target market segments. The special customer needs of the segment means that there are

opportunities to provide products that are clearly different from competitors who may be targeting a

broader group of customers. The important issue for any business adopting this strategy is to ensure

that customers really do have different needs and wants - in other words that there is a valid basis for

differentiation - and that existing competitor products are not meeting those needs and wants.

Focus Strategy - Cost Focus

In this strategy the firm concentrates on a select few target markets. It is also called a focus strategy or

niche strategy. 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, you can better meet the needs

of that target market. The firm typically looks to gain a competitive advantage through effectiveness

rather than efficiency. It is most suitable for relatively small firms but can be used by any company. As a

focus strategy it may be used to select targets that are less vulnerable to substitutes or where a

competition is weakest to earn above-average return on investments.

Industry segment of sufficient size

Good growth potential

Not crucial to success of major competitors

Consumers have distinctive preferences

Rival firms not attempting to specialize in the same target segment

Here a business seeks a lower-cost advantage in just on or a small number of market segments. The

product will be basic - perhaps a similar product to the higher-priced and featured market leader, but

acceptable to sufficient consumers. Such products are often called "me-too's".

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Niche strategies

Here the organization 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 succeeds by being a low cost producer or differentiator within that particular

segment.

Recent developments

Michael Treacy and Fred Wiersema (1993) have modified Porter's three strategies to describe three

basic "value disciplines" that can create customer value and provide a competitive advantage. They are

operational excellence, product innovation, and customer intimacy.

Criticisms of generic strategies

Several commentators have questioned the use of generic strategies claiming they lack specificity, lack

flexibility, and are limiting. In many cases trying to apply generic strategies is like trying to fit a round

peg into one of three square holes: You might get the peg into one of the holes, but it will not be a

good fit.

In particular, Millar (1992) questions the notion of being "caught in the middle". He claims that there is

a viable middle ground between strategies. Many companies, for example, have entered a market as a

niche player and gradually expanded. According to Baden-Fuller and Stop ford (1992) the most

successful companies are the ones that can resolve what they call "the dilemma of opposites".

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