The document discusses Porter's generic strategies of cost leadership, differentiation, and focus. It explains that cost leadership involves having the lowest costs in an industry to gain competitive advantage through lower prices. Differentiation requires making products or services unique in valued attributes to command premium prices. Focus narrows the target market and involves customizing for a niche through either low costs or differentiation. Examples provided are Walmart using cost leadership and Nike employing product differentiation.
The document discusses Porter's generic strategies of cost leadership, differentiation, and focus. It explains that cost leadership involves having the lowest costs in an industry to gain competitive advantage through lower prices. Differentiation requires making products or services unique in valued attributes to command premium prices. Focus narrows the target market and involves customizing for a niche through either low costs or differentiation. Examples provided are Walmart using cost leadership and Nike employing product differentiation.
The document discusses Porter's generic strategies of cost leadership, differentiation, and focus. It explains that cost leadership involves having the lowest costs in an industry to gain competitive advantage through lower prices. Differentiation requires making products or services unique in valued attributes to command premium prices. Focus narrows the target market and involves customizing for a niche through either low costs or differentiation. Examples provided are Walmart using cost leadership and Nike employing product differentiation.
The document discusses Porter's generic strategies of cost leadership, differentiation, and focus. It explains that cost leadership involves having the lowest costs in an industry to gain competitive advantage through lower prices. Differentiation requires making products or services unique in valued attributes to command premium prices. Focus narrows the target market and involves customizing for a niche through either low costs or differentiation. Examples provided are Walmart using cost leadership and Nike employing product differentiation.
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Unit 6: Porters Generic
Strategy & Value Chain
• Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage • The strategies relate to the extent to which the scope of a business' activities are narrow versus broad and the extent to which a business seeks to differentiate its products • The key strategic challenge for most businesses is to find a way of achieving a sustainable competitive advantage over the other competing products and firms in a market. • A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. • The Generic Strategies can be used to determine the direction (strategy) of your organization • These approaches are examples of "generic strategies," because they can be applied to products or services in all industries, and to organizations of all sizes • They were first set out by Michael Porter in 1985 in his book, "Competitive Advantage: Creating and Sustaining Superior Performance." • Michael Porter uses 4 strategies that an organization can choose from • He believes that a company must choose a clear course in order to be able to beat the competition • A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average • The fundamental basis of above average profitability in the long run is sustainable competitive advantage • There are two basic types of competitive advantage a firm can possess: low cost or differentiation • The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: • Cost leadership, • Differentiation, and • Focus • The focus strategy has two variants, • Cost focus and • Differentiation focus • Porter called the generic strategies • Cost Leadership (no frills), • Differentiation (creating uniquely desirable products and services) and • Focus (offering a specialized service in a niche market) • He then subdivided the Focus strategy into two parts: • Cost Focus and • Differentiation Focus The Cost Leadership Strategy • With this strategy, the objective is to become the lowest-cost producer in the industry. • The sources of cost advantage are varied and depend on the structure of the industry • They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors • A low cost producer must find and exploit all sources of cost advantage, if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average. • Porter's generic strategies are ways of gaining competitive advantage – in other words, developing the "edge" that gets you the sale and takes it away from your competitors • There are two main ways of achieving this within a Cost 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 because you've reduced costs • The Cost Leadership strategy is exactly that – it involves being the leader in terms of cost in your industry or market • Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to attack by other low-cost producers who may undercut your prices and therefore block your attempts to increase market share • 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 (labor, materials, facilities), and a way of sustainably cutting costs below those of other competitors. • The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to you, and that other competitors copy your cost reduction strategies • This is why it's important to continuously find ways of reducing every cost • The traditional method to achieve this objective is to produce on a large scale which enables the business to exploit economies of scale. • Why is cost leadership potentially so important? Many (perhaps all) market segments in the industry are supplied with the emphasis placed on minimizing costs. If the achieved selling price can at least equal (or near) the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. • This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are readily acceptable to the majority of customers • Occasionally, a low-cost leader will also discount its product to maximize sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share. • A strategy of cost leadership requires close cooperation between all the functional areas of a business • It is natural that companies which adopt lower cost strategy need to handle the value chain in the most efficient way, in order to produce products or services with the lowest price without putting quality at risk • To be the lowest-cost producer, a firm is likely to achieve or use several of the following: • High levels of productivity • High capacity utilization • Use of bargaining power to negotiate the lowest prices for production inputs • Lean production methods (e.g. JIT) • Effective use of technology in the production process • Access to the most effective distribution channels Example • Wal-Mart Stores Inc. has been successfully using cost leadership strategy very well for over years • The store has been attracting buyers with low prices; the low prices are offered on each product sold by the store to attract customers • The products are offered at a cheaper rate than competitors consistently, not occasionally • Wal-Mart is able to carry on the gigantic business due to its large scale and efficient supply chain management • They source products from low-priced domestic suppliers and from low-wage foreign markets • This allows the company to sell their items at low prices and they earn profits through thin margins gained from high volumes of business • The retail giant is has thus achieved price leadership. The Differentiation Strategy • Differentiation involves making your products or services different from and more attractive than those of your competitors • How you do this depends on the exact nature of your industry and of the products and services themselves, but will typically involve features, functionality, durability, support, and also brand image that your customers value • In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers • It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs • It is rewarded for its uniqueness with a premium price • To make a success of a Differentiation strategy, organizations need: • Good research, • Development and • Innovation • The ability to deliver high-quality products or services • Effective sales and marketing, so that the market understands the benefits offered by the differentiated offerings • Large organizations pursuing a differentiation strategy need to stay agile with their new product development processes • They risk attack on several fronts by competitors pursuing focus differentiation strategies in different market segments Example • Nike’s product differentiation strategy is to establish the company as the standard in athletic wear • By focusing on their product line, they are able to produce high quality products that meet customer expectations • Nike’s product line is not wide: they offer athletic shoes, workout clothes and a very limited number of additional products • Their focus is clear: give the athlete the equipment they need to succeed • This single-minded focus has allowed them to develop efficient networks of suppliers and manufacturers who can provide high quality materials The Focus Strategy • The generic strategy of focus rests on the choice of a narrow competitive scope within an industry • The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others • Companies that use Focus strategies concentrate on particular niche markets and, by understanding the dynamics of that market and the unique needs of customers within it, develop uniquely low-cost or well-specified products for the market • 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 • As with broad market strategies, it is still essential to decide whether you will pursue Cost Leadership or Differentiation once you have selected a Focus strategy as your main approach: • Focus is not normally enough on its own • Whether you use cost focus or differentiation focus, the key to making a success of a generic focus strategy is to ensure that you are adding something extra as a result of serving only that market niche • It's simply not enough to focus on only one market segment because your organization is too small to serve a broader market (if you do, you risk competing against better-resourced broad market companies' offerings) • The focus strategy has two variants • In cost focus a firm seeks a cost advantage in its target segment, while in • Differentiation focus a firm seeks differentiation in its target segment • Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry • The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments • Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments • In Cost focus a business seeks a lower-cost advantage in just one 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" • 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 mean 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 • Differentiation focus is the classic niche marketing strategy • Many small businesses are able to establish themselves in a niche market segment using this strategy, achieving higher prices than un- differentiated products through specialist expertise or other ways to add value for customers Example • IKEA is one of the most successful and largest furniture retailers in the world, which sells self-assemble furniture, home decoration and daily necessities • It was founded in Sweden in 1943 and has been triumphant for 73 years • Based on Porter’s Generic Strategies, IKEA mainly follows the “Cost Leadership Strategy” • IKEA looks out for suppliers who can manufacture well-designed subassemblies at the lowest costs and customers need to assemble the products themselves • This process saves delivery costs for both producers and customers • It allows manufacturers reducing a lot of costs as soon as customers could pay for the products on a much lower price with high quality and therefore, to receive different segments of customers • This is also IKEA’s “Focus Strategy” on low costs. With the competitive price, the company could receive a vast market and easily won the business Stuck in the Middle: Neither Inexpensive nor Differentiated • A firm is said to be stuck in the middle if it does not offer features that are unique enough to convince customers to buy its offerings and its prices are too high to effectively compete on based on price • Firms that are stuck in the middle generally perform poorly because they lack a clear market or competitive pricing • Some firms fail to effectively pursue one of the generic strategies • A firm is said to be stuck in the middle if it does not offer features that are unique enough to convince customers to buy its offerings, and its prices are too high to compete effectively based on price • Michael Porter proposed a new term that is “Stuck in the Middle” for those organizations that are unable to make a choice between a cost leader and differentiation or focus, or uses all of these strategies simultaneously • Porter argued that there is fourth state of affairs in business-level competitive strategy; he labelled it "stuck in the middle" It is not a deliberate strategy per se • Rather, it is the result of not being able to successfully pursue any of the three generic strategies • The result of not having the lowest costs, not being really differentiated in the minds of the consumer, or not successfully targeting a market segment results in a weak profitability and market picture • The firm stuck in the middle is almost always associated with lower profitability and mediocre market share • The firm stuck in the meddle must make a fundamental strategic decision • Porter argues that a firm which is stuck in the middle is likely to fail because it will not be able to sustain a competitive advantage for a longer period of time, and its consequence might be a poor financial performance • Because a company which is stuck in the middle have no strategy at all, and if a company is in this position it can be successful for a shorter period of time, but in the long run it’ll fail • A firm must, therefore, make a choice between cost-leadership and differentiation strategies or it will land into ‘stuck-in-the middle’ • Each firm needs consistency and logic in implementing strategies. In other words when firms fail to effectively pursue one of the generic strategies, it is said to be stuck in the middle Example • IBM’s personal computer business offers an example • IBM tried to position its personal computers via a differentiation strategy • In particular, IBM’s personal computers were offered at high prices, and the firm promised to offer excellent service to customers in return • Unfortunately for IBM, rivals such as Dell were able to provide equal levels of service while selling computers at lower prices • Nothing made IBM’s computers stand out from the crowd, and the firm eventually exited the business Example • In the airlines business customers opt for a choice of carrier that is able to offer high standard quality service, on-time arrival and low fares • The difference between a low-cost and a full-service carrier is simple; low-cost airlines sell only the core product i.e. a seat to travel from one point to another to the passenger for the airfare, and passengers need to pay separately for the additional frills • Full-service airlines offer passengers a host of value added services, including in-flight meals, free beverages, and lounge for frequent fliers, among others but generally at a higher fare as these elements are packaged together • In India, airlines such as IndiGo, SpiceJet and GoAir operate as low-cost airlines. These airlines operate on low-cost model in domestic markets for two-three hours flight nicely • But, in the international segment, airlines such as Air Canada, Hainan Airlines, Korean Air, Lufthansa, Qantas and Singapore Airlines have subsidiaries with long-haul low-cost operations • The model is not yet mature enough to have reached in all parts of the world, at the moment it is stuck in the middle. Value Chain • Value chain refers to all the activities undertaken by a company from initially purchasing raw materials and then manufacturing a product, to placing it on the market ready to be bought by consumers • All the value-adding activities in the value chain are interlinked, and are designed to make the best possible product or service, thus giving the commercial enterprise a competitive advantage in the marketplace • Activities involved in a company’s value chain include those in the design, production, marketing and distribution of a product or service, as well as after sales service • The term refers to everything a business goes through to bring a good or service from conception to delivery, and maintaining customer loyalty • If a company produces goods, its value chain starts with the raw materials it uses to make its products, plus everything that is added to it before consumers purchase it What Is a Value Chain? • Value chain management is the process of organizing all those activities • Its goal is to make sure that within each stage, those in charge are liaising with each other, so that their product is being delivered to customers as rapidly and seamlessly as possible. • For companies that produce goods, a value chain comprises the steps that involve bringing a product from conception to distribution, and everything in between— such as procuring raw materials, manufacturing functions, and marketing activities • A company conducts a value-chain analysis by evaluating the detailed procedures involved in each step of its business • The purpose of a value-chain analysis is to increase production efficiency so that a company can deliver maximum value for the least possible cost • Because of ever-increasing competition for unbeatable prices, exceptional products, and customer loyalty, companies must continually examine the value they create in order to retain their competitive advantage • A value chain can help a company to discern areas of its business that are inefficient, then implement strategies that will optimize its procedures for maximum efficiency and profitability • Michael E. Porter, of Harvard Business School, introduced the concept of a value chain in his book, Competitive Advantage: Creating and Sustaining Superior Performance • He wrote: "Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product" Components of a Value Chain • In his concept of a value chain, Porter splits a business's activities into two categories, "primary" and "support," whose sample activities we list below • Specific activities in each category will vary according to the industry • Primary Activities • Support Activities • The idea is to divide the activities into • Primary activities (those activities that relate to core operations, sales, marketing, and customer service), and • Support activities, which are activities related to human resource management, firm infrastructure management, information technology & technology development, and procurement& then to identify which activities add value and which don’t • Presumably each activity adds some value. Primary Activities • Primary activities consist of five components, and all are essential for adding value and creating competitive advantage: • Inbound logistics include functions like receiving, warehousing, and managing inventory • Operations include procedures for converting raw materials into a finished product Primary Activities • Outbound logistics include activities to distribute a final product to a consumer • Marketing and sales include strategies to enhance visibility and target appropriate customers—such as advertising, promotion, and pricing • Service includes programs to maintain products and enhance the consumer experience—like customer service, maintenance, repair, refund, and exchange Support Activities • The role of support activities is to help make the primary activities more efficient • When you increase the efficiency of any of the four support activities, it benefits at least one of the five primary activities • These support activities are generally denoted as overhead costs on a company's income statement: • Procurement concerns how a company obtains raw materials. Support Activities • Technological development is used at a firm's research and development (R&D) stage—like designing and developing manufacturing techniques and automating processes • Human resources (HR) management involves hiring and retaining employees who will fulfill the firm's business strategy and help design, market, and sell the product • Infrastructure includes company systems and the composition of its management team—such as planning, accounting, finance, and quality control Value Chain and Competitive Advantage • When analyzing a value chain in terms of competitive advantage, the idea is to compare the aspects of the business’s chain to the aspects of the value chains of competitors • The value-creating activities in a company’s value chain contribute to competitive advantage when they meet one of two criteria • The activity is not performed by competitors • The activity is performed superiorly than similar activities performed by competitors Value Chain and Supply Chain • According to Michael Porter, a value system is the interconnected system of value chains along a supply chain. Participating in a strong value system can increase the competitive advantage of a business • The concept of the value system is similar to the value chain but on a broader scale • The idea is to maximize value created by the value system while minimizing costs • Therefore, analyze the entire system with the objective of creating and capturing value throughout the entire system • Optimizing a value system for increased efficiency and lower cost makes the overall system more valuable than the sum of its contributing value chains and adds value to the end consumer of the products Value chain analysis • The aim of value chain analysis is to gain an edge over one’s competitors. In the world of business, it is both an essential and extremely valuable tool • It is a process where companies identify their primary support activities that add value to their finished products, and then analyze each activity carefully to minimize costs and increase differentiation • It represents a firm’s internal activities associated with transforming inputs into outputs – transferring what comes in (raw materials) to what goes out (finished products) • Value chain analysis relies on the fundamental economic principle of advantage – commercial enterprises are best served by operating in sectors and areas where they have a relative production advantage over their competitors
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