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PORTER’S GENERICPORTER’S GENERIC STRATEGY MODELSTRATEGY MODEL
EFFORTS BY:EFFORTS BY:GAURAV TULIGAURAV TULIPARUL ARORAPARUL ARORA
ANKITA SHARMAANKITA SHARMAAPEKSHA BAJAJAPEKSHA BAJAJ
Porter's Generic Porter's Generic StrategiesStrategies
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 StrategyCost Leadership Strategy◦Relatively standardized products
◦Features acceptable to many customers
◦Lowest competitive price
Cost Leadership StrategyCost Leadership Strategy
Low cost producer
Given level of quality
Average industry prices to earn a profit higher than that of rivalsBelow the average industry prices to gain market share
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 StrategyCost Leadership Strategy ScenariosScenarios
Cost Leadership StrategyCost Leadership StrategyCost 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 How to Obtain a Cost AdvantageAdvantage
Determine Determine and control and control
Cost Cost DriversDrivers
Reconfigure Value Value Chain Chain if needed
Alter production Alter production processprocess Change in automationChange in automation
New distribution New distribution channelchannel New advertising New advertising mediamedia Direct sales in place of Direct sales in place of indirect salesindirect sales
New raw materialNew raw material Forward integrationForward integration Backward integrationBackward integration
Change location Change location relative to suppliers relative to suppliers or buyersor buyers
Cost LeadershipCost Leadership
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing
firms
Bargaining power of buyers
Threat of substitute products
Key Strengths Required for Cost Key Strengths Required for Cost LeadershipLeadership
Access to the capital
Skill in designing products for efficient manufacturing
High level of expertise in manufacturing process engineering
Efficient distribution channels
Risks InvolvedRisks 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 STUDYCASE STUDY
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
Cost LeadershipCost Leadership
Differentiation StrategyDifferentiation StrategyAn 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 StrategyDifferentiation 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 How to Obtain a Differentiation AdvantageAdvantage
Control Cost Cost DriversDrivers if needed
ReconfiguReconfigure re Value Value
ChainChain to to maximizemaximize
Lower buyers’ costsLower buyers’ costs Raise performance of product or serviceRaise performance of product or service Create sustainability through:Create sustainability through:
Customer perceptions of uniquenessCustomer perceptions of uniqueness Customer reluctance to switch to Customer reluctance to switch to
non-unique product or servicenon-unique product or service
Differentiation Strategy: Differentiation Strategy: CompetitorsCompetitors
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing
firms
Bargaining power of buyers
Threat of substitute products
Key RequirementsKey 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 Competitive Risks of DifferentiationDifferentiation
Imitation by competitors and changes in customer tastes
The price differential between the differentiator’s product
and the cost leader’s 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
firm’s products.
Various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments.
CASE STUDYCASE 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 today’s 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 StrategiesFocus StrategiesAn integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment.◦ Particular buyer group—youths or senior
citizens
◦ Different segment of a product line—professional craftsmen versus do-it-yourselfers
◦ Different geographic markets—East 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 differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist.
Factors That Drive Focused Factors That Drive Focused StrategiesStrategies
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 StrategyFirms that succeed in a Focus Strategy often often
have the following internal strengths: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 InvolvedRisks InvolvedImitation 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 firm’s niche market.
Customer preferences in niche market may change to more closely resemble those of the broader market.
CASE STUDYCASE 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)
IndustryForce
Generic Strategies
Cost Leadership Differentiation Focus
EntryBarriers
Ability to cut price in retaliation deters potential entrants.
Customer loyalty can discourage potential entrants.
Focusing develops core competencies that can act as an entry barrier.
BuyerPower
Ability to offer lower price to powerful buyers.
Large buyers have less power to negotiate because of few close alternatives.
Large buyers have less power to negotiate because of few alternatives.
SupplierPower
Better insulated from powerful suppliers.
Better able to pass on supplier price increases to customers.
Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.
Threat ofSubstitutes
Can use low price to defend against substitutes.
Customer's become attached to differentiating attributes, reducing threat of substitutes.
Specialized products & core competency protect against substitutes.
RivalryBetter able to compete on price.
Brand loyalty to keep customers from rivals.
Rivals cannot meet differentiation-focused customer needs.
Generic Strategies and Industry Forces
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