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Strategic Management

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Strategic Management ­ MGT603
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
Strategic Management ­ MGT603
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.
Strategic Management ­ MGT603
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".
Strategic Management ­ MGT603
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
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".
Table of Contents:
  1. NATURE OF STRATEGIC MANAGEMENT:Interpretation, Strategy evaluation
  2. KEY TERMS IN STRATEGIC MANAGEMENT:Adapting to change, Mission Statements
  3. INTERNAL FACTORS & LONG TERM GOALS:Strategies, Annual Objectives
  4. BENEFITS OF STRATEGIC MANAGEMENT:Non- financial Benefits, Nature of global competition
  5. COMPREHENSIVE STRATEGIC MODEL:Mission statement, Narrow Mission:
  7. EXTERNAL ASSESSMENT:The Nature of an External Audit, Economic Forces
  8. KEY EXTERNAL FACTORS:Economic Forces, Trends for the 2000ís USA
  9. EXTERNAL ASSESSMENT (KEY EXTERNAL FACTORS):Political, Governmental, and Legal Forces
  10. TECHNOLOGICAL FORCES:Technology-based issues
  11. INDUSTRY ANALYSIS:Global challenge, The Competitive Profile Matrix (CPM)
  12. IFE MATRIX:The Internal Factor Evaluation (IFE) Matrix, Internal Audit
  13. FUNCTIONS OF MANAGEMENT:Planning, Organizing, Motivating, Staffing
  14. FUNCTIONS OF MANAGEMENT:Customer Analysis, Product and Service Planning, Pricing
  15. INTERNAL ASSESSMENT (FINANCE/ACCOUNTING):Basic Types of Financial Ratios
  16. ANALYTICAL TOOLS:Research and Development, The functional support role
  18. TYPES OF STRATEGIES:The Nature of Long-Term Objectives, Integration Strategies
  19. TYPES OF STRATEGIES:Horizontal Integration, Michael Porterís Generic Strategies
  20. TYPES OF STRATEGIES:Intensive Strategies, Market Development, Product Development
  21. TYPES OF STRATEGIES:Diversification Strategies, Conglomerate Diversification
  22. TYPES OF STRATEGIES:Guidelines for Divestiture, Guidelines for Liquidation
  23. STRATEGY-FORMULATION FRAMEWORK:A Comprehensive Strategy-Formulation Framework
  27. BOSTON CONSULTING GROUP (BCG) MATRIX:Cash cows, Question marks
  28. BOSTON CONSULTING GROUP (BCG) MATRIX:Steps for the development of IE matrix
  30. GRAND STRATEGY MATRIX:Preparation of matrix, Key External Factors
  31. THE NATURE OF STRATEGY IMPLEMENTATION:Management Perspectives, The SMART criteria
  33. ORGANIZATIONAL STRUCTURE:Divisional Structure, The Matrix Structure
  34. RESTRUCTURING:Characteristics, Results, Reengineering
  36. MARKET SEGMENTATION:Demographic Segmentation, Behavioralistic Segmentation
  37. MARKET SEGMENTATION:Product Decisions, Distribution (Place) Decisions, Product Positioning
  40. STRATEGY REVIEW, EVALUATION AND CONTROL:Evaluation, The threat of new entrants
  41. PORTER SUPPLY CHAIN MODEL:The activities of the Value Chain, Support activities
  42. STRATEGY EVALUATION:Consistency, The process of evaluating Strategies
  43. REVIEWING BASES OF STRATEGY:Measuring Organizational Performance