PORTER’S GENERIC STRATEGIES
INTRODUCTION
“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
Companies the world over are imaginative in conceiving competitive strategies to win customer favour. The aim of most of the companies is to do a better job of providing what buyers are looking for and thereby gain the upper hand over rivals.
A competitive strategy concerns the specifics of management’s game plan for competing successfully and achieving a competitive edge over rivals.
Pitts and Snow define a competitive advantage as “any feature of a business firm that enables it to earn a high return on investment despite counter pressure from competitors”.
A company achieves competitive advantage whenever it has some type of edge over rivals in attracting buyers and coping with competitive forces.
There are many routes to competitive advantage but they all involve giving buyers what they perceive as superior value-
A good product at a low price,
A superior product that is worth paying more for,
Or a best-value offering that represents an attractive combination of price, features, quality, service, and other appealing attributes.
Delivering superior value always requires performing value chain activities differently than rivals and building competencies and resource capabilities that are never matched.
THE FIVE GENERIC COMPETITIVE STRATEGIES
Each company employs varying strategies as the circumstances and variables affecting each company differ widely. Each company uses a strategy that is custom-made to fit in with its own culture, vision, mission, etc. However, when one strips away the details to get at the real substance, the biggest and most important differences among competitive strategies boil down to
Whether a company’s target market is broad or narrow, and
Whether the company is pursuing a competitive advantage linked to low costs or product differentiation.
There are five distinct competitive strategy approaches:
1) A low-cost provider strategy: appealing to a broad spectrum of customers by being the overall low-cost provider of a product or service.
2) A broad differentiation strategy: seeking to differentiate the company’s offering from rivals in ways that will appeal to a broad spectrum of buyers.
3) A best-cost provider strategy: giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest (best) costs and prices compared to rivals offering products with comparable attributes.
4) A focused (niche) strategy based on differentiation: concentrating on a narrow buyer segment and out competing rivals by serving niche members at a lower cost than rivals.
5) A focused (niche) strategy based on differentiation: concentrating on a narrow buyer segment and out competing rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals’ products.
The five generic competitive strategies:
Type of competitive advantage being pursued
Lower cost Differentiation
Broad
Target
Market
Narrow
Figure: The Five Generic Competitive Strategies – Each Stakes out a Different Position in the Marketplace
LOW-COST PROVIDER STRATEGIES
A company achieves low-cost leadership when it becomes the industry’s lowest cost provider rather than just being one of several competitors with comparatively low costs.
In striving for a cost advantage over rivals, managers must take care to include features and services that buyers consider essential – a product offering that is too frills-free sabotages the attractiveness of the company’s product and can turn buyers off even if it cheaper than competing products.
For example, Gujarat Cooperative Milk Marketing Federation (GCMMF), the country’s largest cooperative, probably known better by its brand name Amul, operates in the branded ice cream market on the lower –cost platform.
For making the low-cost advantage sustainable, the company must ensure that this advantage was attained in ways that rivals would find difficult to imitate. If rivals find it relatively easy or inexpensive to imitate the leader’s low cost methods, then the leader’s advantage will be too short-lived to yield a valuable edge in the market place.
The low cost leader in any markets gains competitive advantage from being able to produce at the lowest cost. Factories are built and maintained; labour is recruited and trained to deliver the lowest possible costs of production. Examples include low-cost airlines such as Easyjet and Southwest Airlines.
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.
Maintaining this strategy requires a continuous search for cost reductions in all aspects 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.
Two major avenues for achieving a cost advantage:
1) Out manage rivals in the efficiency with which value chain activities are performed and in controlling the factors that drive the costs of value chain activities.
2) Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.
Controlling the Cost Drivers
There are nine major cost drivers that come into play in determining a company’s costs in each activity segment of the value chain. They are discussed below:
1. Economies or diseconomies of scale.
Economies of scale arise whenever activities can be performed more cheaply at larger volumes than smaller volumes and from the ability to spread out certain costs like R&D and advertising over a greater sales volume. This can be a major source of cost savings. Simplifying the product line, scheduling longer production runs for fewer models, and using common parts and components in different models can usually achieve manufacturing economies. In global industries, making separate products for each country market instead of selling a mostly standard product worldwide tends to increase unit costs because of lost time in model changeover, shorter production runs, etc.
2. Learning curve effects.
The cost of performing an activity can decline over time as the experience of company personnel builds. Learning curve economies can stem from debugging and mastering newly introduced technologies, finding ways to improve plant layout and work-flows, and making product design and modifications that streamline the assembly process. Speed and knowledge accrue from repeatedly citing and building new plants, retail outlets, or distribution centers.
3. Cost of key resource inputs
How well a company manages the costs of acquiring key resource inputs is often a big driver of costs. Input costs are a function of four factors:
a. Union versus non-union labour
Avoiding the use of union labour is often a key to keeping labour input costs low, not just because unions demand high wages but also because union work rules can stifle productivity.
b. Bargaining power vis-à-vis suppliers
Many large enterprises (e.g., Wal-Mart, Home Depot) have used their bargaining clout in purchasing large volumes to wrangle good prices on their purchases from suppliers. Having greater buying power than rivals can be an important source of cost advantage.
c. Locational variables
Locations differ in their prevailing wage levels, tax rates, energy costs, inbound and outbound shipping and freight costs, etc. Opportunities may exist for reducing costs by relocating plants, field offices, warehousing, or headquarters operations.
d. Supply Chain Management expertise
Some companies have more efficient supply chain expertise than others and are able to squeeze out savings via partnerships with suppliers that lower the costs of purchased materials and components, e-procurement systems, and inbound logistics.
4. Links with other activities in the company or industry value chain.
When the cost of one activity is affected by how other activities are performed, costs can be managed downward by making sure that linked activities are performed in a cooperative and coordinated fashion. For example, when a company’s materials inventory costs or warranty costs are linked to the activities of suppliers, cost savings can be achieved by working cooperatively with key suppliers on the design of parts and components, quality assurance procedures, JIT, and integrated materials supply. The costs of new product development can often be managed downward by setting up cross-functional task forces (including representatives of suppliers and key customers) to work on R&D, product design, manufacturing plans, materials handling, outbound shipping, and packaging.
5. Sharing opportunities with other organisational or business units within the enterprise.
Different product lines or business units within an enterprise can often share the same order processing and customer billing systems, maintain a common sales force to call on customers, share the same warehouse and distribution facilities, or rely on a common customer service and technical support team. Also, the know-how gained in one division or geographic unit can be used to help lower costs in another.
6. The benefits of vertical integration versus outsourcing.
Vertical integration (both backward and forward) allows a firm to bypass suppliers or buyers with considerable bargaining power. Vertical integration has potential if there are significant cost savings from having a single firm perform adjacent activities in the industry value chain. But more often, it is cheaper to outsource, or hire outside specialists to perform certain functions and activities, since by virtue of their expertise and volume these specialists can perform these functions more cheaply than the company can perform them in-house.
7. First-mover advantages and disadvantages.
Sometimes the first major brand is able to establish and maintain its brand name at a lower cost than later brand arrivals. Examples are eBay, Amazon.com, Yahoo. On other occasions such as when technology is developing is fast, late purchasers can benefit from waiting to install second or third generation equipment that is more cheaper and more efficient; first generation users often incur added costs associated with debugging and learning how to use an immature and unperfected technology.
8. The percentage of capacity utilization.
Capacity utilisation is a big cost driver for those value chain activities associated with substantial fixed costs. The more capital intensive a business is, or higher the percentage of fixed costs as a percentage of total costs, the more important this cost driver becomes because there is such a stiff unit cost penalty for under-utilising existing capacity.
9. Strategic choices and operating decisions.
A company’s costs can be driven up or down by a fairly wide assortment of managerial decisions:
Adding/cutting the services provided to buyers.
Incorporating more/fewer performance and quality features into the product.
Increasing/decreasing the number of channels used in distributing the firm’s product.
Lengthening/shortening delivery times to customers.
Putting more/less emphasis than rivals on the use of incentive compensation, wage increases and fringe benefits to motivate employees and boost worker productivity.
Raising/lowering the specifications for purchased materials.
Revamping the value chain
Dramatic cost advantage can emerge from finding innovative ways to eliminate or bypass cost-producing value chain activities. The primary ways companies can achieve a cost advantage by reconfiguring their value chains include:
1. Making greater use of Internet technology application
Internet has become a powerful and pervasive tool for reengineering company and industry value chains. For instance, Internet technology has revolutionized supply chain management. Using software package from any of several vendors, company procurement personnel can- with only a few mouse click within one seamless system- check material inventories against incoming customer orders, check suppliers stocks, check the latest prices for parts and components at auction and e-sourcing website, and check FedEx delivery schedules.
Electronic data interchange software permits the relevant details of incoming customer orders to be instantly shared with the suppliers of needed parts and components. All this lays the foundation for just-in-time deliveries of parts and components and for the production of parts and components to be matched closely to assembly-plant requirements and production schedules-and such coordination produces savings for both suppliers and manufacturers.
Various e-procurement software packages streamline the purchasing process by eliminating much of the manual handling of data and by substituting electronic communication for paper documents such as requests for quotation, purchase orders, order acceptances, and shipping notices.
2. Using direct to end user sales and marketing approaches
Costs in the wholesale retail portions of the value chain frequently represent 35-40 percent of the price final consumers pay. Software developers are increasingly using the internet to market and deliver their products directly to buyers, allowing customers to download software directly from the internet eliminates the costs of producing and packaging CDs and cuts out the host of activities, costs and markups associated with shipping and distributing software through wholesale and retail channels.
By cutting all these costs and activities out of the value chain, software developers have the pricing room to boost their profit margins and still sell their products below levels that retailers would have to charge.
The major airlines have stopped paying commissions to travel agents on ticket sales, thereby saving hundreds of millions of dollars in commissions. Airlines now sell most of their tickets directly to passengers via their web sites, ticket counter agents, and telephone reservation systems.
3. Simplifying product design
Using computer assisted design techniques, reducing the number of parts, standardizing parts and components across models and styles, and shifting to an easy to manufacture product design can all simplify the value chain.
4. Stripping away the extras
Offering only basic products or services can help a company cut costs associated with multiple feature and options. Stripping extras is a favorite technique of the no-frills airlines like southwest airlines.
5. Shifting to a simpler, less capital- intensive or more streamlined or flexible technological process:
Computer assisted design and manufacture or other flexible manufacturing systems can accommodate both low cost efficiency and product customization.
6. Relocating facilities
Moving plants closer to suppliers, customers both can help curtail inbound and outbound logistics costs.
7. Dropping the “something for everyone” approach
Pruning slow selling items from the product lineup and being content to meet the needs of most buyers rather than all buyers can eliminate activities and costs associated with numerous product versions.
Companies noted for their successful use of low cost provider strategies include Lincoln Electric in arc welding equipment, Briggs & Stratton in small gasoline engines, Bic in ball pint pens, Black &Decker in power tools, Stride Rite in footwear, Beaird- Poulan in chain saws, and General Electric and Whirlpool in major home appliances.
Conditions under which low cost provider strategy is used
A competitive strategy predicated on low cost leadership is particularly powerful when:
Price competition among rival sellers is especially vigorous:
Low cost providers are in the best position to compete offensively on the basis of price, to use the appeal of lower price to grab sales from rivals, to remain profitable in the face of strong price competition, and to survive price wars.
The products of rival sellers are essentially identical and supplies are readily available from any of several eager sellers
Commodity- like products and/or ample supplies set the stage for lively price competition in such markets; it is less efficient, higher cost companies whose profits get squeezed the most.
There are few ways to achieve product differentiation that have value to buyers
When the differences between brands do not matter much to buyers, buyers are nearly always very sensitive to price differences and shop the market for the price.
Most buyers use the product in the same ways
With common user requirements, a standardized product can satisfy the needs of buyers, in which case low selling price, not feature or quality, becomes the dominant factor in causing buyers to choose one seller’s product over another’s.
Buyers incur low costs in switching their purchases from one seller to another
Low switching costs give buyers the flexibility to shift purchases to lower priced sellers having equally good products or to attractively priced substitute products. A low cost leader is well positioned to use low price to induce its customers not to switch to rival brands or substitutes.
Buyers are large and have significant power to bargain down prices
Low cost providers have partial margin protection in bargaining with high volume buyers, since powerful buyer are rarely able to bargain price down past the survival level of the next most cost- efficient seller.
Industry newcomers use introductory low prices to attract buyers and build customer base
The low cost leader can use price cuts of its own to make it harder for a new rival to win customers; the pricing power of the low cost provider acts as a barrier for new entrants.
As a rule, the more price sensitive buyers are, the more appealing a low cost strategy becomes. A low cost company’s ability to set the industry’s price floor and still earn a profit erects protective barriers around its market position.
Benefits of Cost-Leadership Strategy
Cost advantage is possibly the best insurance against industry competition.
The threat of cheaper substitutes can be offset to some extent by lowering prices.
Cost advantage acts as an effective entry barrier for potential entrants who cannot offer the product/service at a lower price.
Powerful suppliers possess a higher bargaining power to negotiate price increase for inputs. Firms with low cost can absorb the price increase to some extent.
Powerful buyers possess a higher bargaining power to effect price reduction. Firms with low cost can offer price reduction to some extent in such a case.
The Pitfalls of low cost provider Strategy
Perhaps the biggest pitfall of a low cost provider strategy is getting carried away with overly aggressive price cutting and ending up with lower, rather than higher profitability.
A second pitfall is not emphasizing avenues of cost advantage that can be kept proprietary or that relegate rivals to playing catch-up. The value of a cost advantage depends on its sustainability. Sustainability, in turn, hinges on whether the company achieves its cost advantage in ways difficult for rivals to copy or match.
A third pitfall is becoming too fixated on cost reduction. Low cost cannot be pursued so zealously that a firm’s offering ends up being too features poor to generate buyer appeal.
Technological shifts are a great threat to a cost leader as these may change the ground rules on which an industry operate. Technological breakthroughs can upset cost leadership strategies.
Lower Cost is always relative to what the competitors have to offer. Low cost by itself is not absolute. Cost advantage has to come essentially by operational effectiveness. Such a cost advantage should also be sustainable i.e. it should not be easily duplicable by the rivals.
DIFFERENTIATION STRATEGIES
When the competitive advantage of a firm lies in special features incorporated into the product/service, which are demanded by the customers who are willing to pay for those, then the strategy adopted is differentiation strategy.
Differentiation involves creating a product that is perceived as unique. The unique features or benefits should provide superior value for the customer. For Example, Orient fans, a Calcutta based company offers premium ceiling fans based on product innovation and superior technology. The product attributes for differentiation are extra-wide blades, heavy duty motor, high velocity and maximum area coverage.
Differentiated goods and services satisfy the needs of customers through a sustainable competitive advantage. These allow company to focus on values that generate high price and a better margin.
There are additional costs associated with the differentiating product features and this could require a premium pricing strategy. Such extra costs may include high advertising spending to promote a differentiated brand image for the product, which in fact can be considered as a cost and an investment.
There is also the chance that any differentiation could be copied by competitors. Therefore there is always an incentive to innovate and continuously improve.
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. In an interesting case, packaging became the differentiator for Parle Agro when, in 1985, it launched Frooti, a nonaerated, natural, fruit-based drink, in a tetra pack. The customer perceived glass-bottled drinks to be synthetic. Frooti went on to become generic to the category of tetra packed fruit drinks.
To maintain differentiation strategy the firm should have:
Strong Research & Development skills
Strong product engineering skills
Strong creativity skills
Good cooperation with distribution channels
Strong marketing skills
The ability to communicate the importance of the differentiated product attributes
Stress continuous improvement and innovation
For example, McDonalds is differentiated by its very brand name and brand images of Big Mac and Ronald McDonald.
For Achieving Differentiation, a firm can incorporate features that
Offer utility for the customers and match their tastes and preferences.
Lower the overall cost for the buyer in using the product/service.
Raise the performance of the product.
Increase the buyer satisfaction in tangible or non-tangible ways.
Can offer the promise of high quality of product/service
Enable the customers to claim distinctiveness from other customers and enhance their status and prestige among the buyer community.
BMW, Ralph Lauren, and Rolex have differentiation-based competitive advantages linked to buyer desires for status, image, prestige, upscale fashion, superior craftsmanship, and the finer things in life
Types of Differentiation Themes
Companies can pursue differentiation from many angles –
A unique taste, multiple features
Wide selection and one-stop shopping
Superior service, spare parts availability
Engineering design and performance
Prestige and distinctiveness, product reliability
Quality manufacture, technological leadership
A full range of services, a complete line of products and top-of-the-line image and reputation.
The most appealing approaches to differentiation are those that are hard or expensive for rivals to duplicate. Indeed, resourceful competitors can clone almost any product or feature or attribute. This is why sustainable differentiation usually has to be linked to core competencies, unique competitive capabilities, and superior management of value chain activities that competitors cannot readily match.
Example: Intel uses speed, innovation and manufacturing techniques as basis for uniqueness
Conditions under which differentiation is used
• Large Market: The market is too large to be catered by few firms offering standardized product/service.
• Diversified needs & preferences: The customers’ needs and preferences are too diversified to be satisfied by a standardized product/service.
• Charge Premium Price: It is possible to charge a premium price for differentiation that is valued by the customer.
• Nature of Product/service: The nature of product/service is such that brand loyalty is possible to generate and sustain.
• Scope of increasing sales: There is ample scope for increasing sales for the product/service on the basis of differentiated features and premium pricing.
• Fast-paced Technology change: Rapid innovation and Frequent introductions of next versions help maintain buyer interest and provide space for companies to pursue differentiating paths.
Benefits of Differentiation Strategy
Command a premium price for its product because of providing the unique features which no other firm in the industry is providing.
Increase unit sales because additional buyers are won over by the differentiating features
Gain buyer loyalty to its brand because some buyers are strongly attached to the differentiated features.
Less Competitive rivalry because the firm following differentiation strategy distinguish themselves successfully and customers are brand loyal.
Differentiation is a Market and Customer Focused strategy.
The differentiation strategy acts as Entry Barrier because differentiation is an expensive proposition and the new firms cannot compete with already established firm which is following differentiation strategy.
The Pitfalls of Differentiation Strategy
Trying to differentiate on the basis of something that does not lower a buyer’s cost or enhances a buyer’s well-being, as perceived by the buyer.
Trying to charge too high a price premium which customers are not willing to pay.
Being timid and not striving to open up meaningful gaps in quality or service or performance features vis-à-vis the product of rivals – tiny differences between rivals’ product offerings may not be visible or important to buyers.
First mover advantages with differentiation are limited because resourceful competitors can copy the differentiated product/service.
In case of several differentiators adopting similar differentiation strategies, the basis for distinctiveness is gradually lessened and ultimately lost.
The ultimate success of a differentiation strategy lies in its ability to identify a tangible basis for customers to latch on to the product/service a firm offers. Yet, there is a paradox here that the more tangible the basis is, the greater are the chances that a competitor will be able to copy it. So, a firm has to rely on its core or distinctive competencies to offer a not so tangible differentiation which a customer could easily relate to and that could be sustained at a price that he or she is willing to pay.
BEST- COST PROVIDER STRATEGIES
Best- Cost provider strategies aim at giving customers more value for the money. The objective is to deliver superior value to buyers by satisfying their expectations on key quality/service/features/performance attributes and beating their expectations on price.
The firm following Best Cost Strategy has the ability to incorporate attractive attributes at a lower cost than rivals. Best Cost strategy is a middle ground between pursuing a low-cost advantage and a differentiation advantage and between appealing to the broad market and a narrow market niche
Best- Cost strategies are hybrid, balancing a strategic emphasis on low cost against a strategic emphasis on differentiation.
To become a best-cost provider, a company must have the resources and capabilities to
• achieve good-to-excellent quality,
• Incorporate appealing features,
• Match product performance and
• Provide good-to-excellent customer service – all at a lower cost than rivals.
The competitive advantage of a best- cost provider is lower cost than rivals in incorporating good-to-excellent attributes, putting the company in a position to under price rivals whose products have similar appealing attributes.
A best-cost provider strategy can be quite powerful in markets
• where buyer diversity makes product differentiation the norm and
• where many buyers are sensitive to price and value.
Example: Toyota has used a best cost approach with its Lexus models.
Risks of Best- Cost provider strategies
The danger of a best cost provider strategy is that a company using it will
• Squeeze between the strategies of firms using low cost and differentiation Strategies
• Have fewer customers: Low cost leaders may be able to siphon customers away with the appeal of a lower price. High end differentiators may be able to steal customers away with the appeal of the better product attributes
To be successful, a best cost provider
• must offer buyers significantly better product attributes in order to justify a price
• has to achieve significantly lower costs in providing upscale features
FOCUSED (OR MARKET NICHE) STRATEGIES
Focus Business Strategy essentially relies on either cost leadership or differentiation but cater to a narrow segment of the total market. Thus, focus strategies are niche strategies.
Where an organization can afford neither a wide scope cost leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable. Competitive advantage is generated specifically for the niche.
Examples of firms that concentrate on a well-defined market niche include eBay (in online auctions); Porsche(in sports cars); Cannondale (in top of the line mountain bikes); Jiffy Lube International (a specialist in quick oil changes and simple maintenance for motor vehicles); Google (a specialist in internet search engine software); Pottery Barn Kids (a retail chain featuring children’s furniture and accessories); and Bandag (a specialist in truck tire recapping that promotes its recaps aggressively at over 1,000 truck stops). Microbreweries, local bakeries, bed-and-breakfast inns, and local owner managed retail boutiques are all good examples of enterprises that have scaled their operations to serve narrow or local customer segments.
The more commonly used bases for identifying customer groups are the demographic characteristics – age, gender, income, occupation; geographic segmentation – rural/urban or Northern/Southern India; or lifestyle – traditional/modern.
For the identified market segment a focused firm uses either the lower cost or differentiation strategy. With a cost focus a firm aims at being the lowest cost producer in the niche or segment. With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment.
Achieving Focus
Focus is essentially concerned with identifying a narrow target in terms of markets and customers. The firm seeking to adopt a focus strategy has to locate a niche in the market where the cost leaders and the differentiators are not operating.
These are the following measures that a focused firm can adopt:
Choosing specific niches by identifying gaps not covered by cost leaders and differentiators
Creating superior skills for catering to such niche markets
Creating superior efficiency for serving such niche markets
Achieving lower cost/differentiation as compared to the competitors while serving niche markets
Developing innovative ways to manage the value chain which are different from the ways prevalent in an industry.
A Focused Low Cost Strategy
A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment. Cost focus is unachievable with an industry depending upon economies of scale. For Example, Telecommunications.
Focused low cost strategies are common. Producers of private-label goods are able to achieve low costs in product development, marketing, distribution, and advertising by concentrating on making generic items imitative of name brand merchandise and selling directly to retail chains wanting a basic house brand to sell to price sensitive shoppers.
Several small printer-supply manufacturers have begun making low cost clones of the premium priced replacement ink and toner cartridges sold by Hewlett-Packard, Lexmark, Canon and Epson; the clone manufacturers dissect the cartridges of the name-brand companies and then reengineer a similar version that would not violate patents. The components for remanufactured cartridges are acquired from various outside sources, and the clones are then marketed at a price as much as 50 percent below the name brand cartridges. Cartridges remanufactures have been lured to focus on this market because replacement cartridges constitute a billion-dollar business with considerable profit potential given their low costs and the premium pricing of the name-brand companies.
A Focused Differentiation Strategy
A focused strategy based on differentiation aims at securing a competitive advantage by offering niche members a product they perceive as well suited to their own unique tastes and preferences.
Successful use of differentiation strategy depends on the existence of a buyer segment that is looking for special product attributes or seller capabilities and on a firm’s ability to stand apart from rivals competing in the same target market niche.
Companies like Godiva, Chanel, Gucci, Rolex, Rolls-Royce, employ successful differentiation based focused strategies targeted at upscale buyers wanting products and services with world class attributes. Indeed, most markets contain a buyer segment willing to pay a big price premium for the very finest items available, thus opening the strategic window for some competitors to pursue differentiation based focused strategies aimed at the very top of the market pyramid.
Conditions under which focus strategies are used
The following are the conditions where the focus strategy is used:
There is some type of uniqueness in the segment, which could be geographical, demographic or based on lifestyle. Only specialized attributes and features could satisfy the requirements of such a segment.
There are specialized requirement for using the products or services that the common customers cannot be expected to fulfill.
It is costly or difficult for multi segment competitors to put capabilities in place to meet the specialized needs of the target market niche and at the same time satisfy the expectations of their mainstream customers.
The niche market is big enough to be profitable for the focused firm.
There is a promising potential for growth in the niche segment.
The major players in the industry are not interested in the niche as it may not be crucial to their own success.
The focusing firm has the necessary skill and expertise to serve the niche segment.
Benefits of Focus Strategies
A focused firm is protected from competition to the extent that the other firms which have a broader target do not possess the competitive ability to cater to the niche markets. In other words, a focused firm provides products/services that the other firms cannot provide or would not find it profitable to provide.
The competence of the focused firm acts as an effective entry barrier to potential entrants in the niche markets.
The specialisation that focused firm is able to achieve in serving a niche market acts as a powerful barrier to substitute products/services that might be available in the market.
Powerful buyers are less likely to shift loyalties as they might not find others willing to cater to the niche markets as the focused firms do.
Risks associated with focus strategy
Serving niche markets requires the development of distinctive competencies to serve those markets which may be a long-drawn and difficult process.
Being focused means commitment to a narrow market segment. It may be difficult for the focused firm to move onto other segments of the market.
The costs for the focused firms are higher as the markets are limited and volume of production and sales small.
Niches may become attractive enough for the bigger players to shift attention to them which pose a threat to the focused firms.
Rivals may out focus the focused firms by devising ways to serve the niche markets in a better manner.
CONCLUSION
Porter’s generic strategies framework suggests that a company can maximize performance by striving to be the cost leader in an industry, by differentiating its products or services from those of other companies, and by focusing on a narrow target in the market.
Each of the five generic competitive strategies positions the company differently in its market and competitive environment. Each establishes a central theme for how the company will endeavor to out compete rivals. Each creates some boundaries and entails differences in terms of product line, production emphasis, marketing emphasis and means of sustaining the strategy.
Each of the generic strategies has advantages and inherent risks that should be analysed carefully with respect to the company and its competitors. It is noted that in practice, most successful companies make use of a combination of low cost and differentiation strategies, which is true even in the context of online business.
It is seen that Porter’s generic strategies can be effective in defending against competitive forces in the industry. But, analysts must use the generic strategies analysis as only a part of a broader strategic analysis.
It is important to conduct the analysis with an open mind, and to explore the relative advantages, disadvantages, and risks that the various strategies may offer to a company vis-à-vis the competition and overall business environment.
Having a competitive edge over rivals is the single most dependable contributor to above-average company profitability. Hence, by making a strong and unwavering commitment to one of the five generic strategies, a company can achieve sustainable competitive advantage.
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