Porter's Generic Strategies
Porter's Generic Strategies
Porter's Generic Strategies
Strategies
Porter's Generic
Strategies
Prepared by : Christian A .
Diaz
Michael Eugene Porter
qHarvard Business School University Professor
Focus Focus
Narrow Strategy Strategy
(Market Segment) (low cost) (differentiation)
Cost Leadership Strategy
•This strategy involves the firm attractive market share by
appealing to cost-conscious or price-sensitive customers. This
is achieved by having the lowest prices in the target market
segment, or at least the lowest price to value ratio (price
compared to what customers receive). To succeed at offering the
lowest price while still achieving profitability and a high
return on investment, the firm must be able to operate at a
lower cost than its rivals.
There are three main ways to achieve this.
Focus Strategy
•In adopting a narrow focus, the company ideally focuses on a few
target markets, a distinct groups with specialized needs. The choice
of offering low prices or differentiated products/services
should depend on the needs of the selected segment and the
resources and capabilities of the firm. 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
product innovation and/or brand marketing rather than efficiency.
•Target market segments that are less vulnerable to substitutes or
where a competition is weakest to earn above-average return on
investment.
Focus Strategy
Example:
Southwest Airlines, providing short-haul point-to-point flights
in contrast to the hub-and-spoke model of mainstream carriers,
and Family Dollar.
Examples:
Wal Mart has a broad scope and adopts a cost leadership
strategy in the mass market.
Pixar also targets the mass market with its movies, but
adopts a differentiation strategy, using its unique
capabilities in story-telling and animation to produce
signature animated movies that are hard to copy, and for which
customers are willing to pay to see and own.
Apple also targets the mass market with its iPhone and iPod
products, but combines this broad scope with a differentiation
strategy based on design, branding and user experience that
enables it to charge a price premium due to the perceived
unavailability of close substitutes.
Firms that succeed in focus strategy
often have the following internal
strengths:
•Firms using a focus strategy often enjoys a high degree of
customer loyalty, and this deep-rooted loyalty discourages other
firms from competing directly.
•Firms pursuing a focus strategy have lower volumes and
therefore less bargaining power with their suppliers.
•Firms pursuing a differentiation-focused strategy may be able
to pass higher costs on to customers since close substitute
products do not exist.
•Firms that succeed in a focus strategy are able to tailor a
wide range of product development strengths to a relatively
narrow market segment that they know very well.
Risks Associated with Focus
Strategy
•imitation and changes in the target segments
•trouble-free for a broad-market cost leader to adapt its
product in order to compete directly
•other focusers may be able to create sub-segments that they
can serve even better
Generic Strategies and Industry
Forces
Industry Generic Strategies
Force Cost Leadership Differentiation Focus
Entry Ability to cut price in Customer loyalty can Focusing develops core
Barriers retaliation prevents discourage potential competencies that can act
potential entrants. entrants. as an entry barrier.
Buyer Ability to offer lower price Large buyers have less Large buyers have less
Power to powerful buyers. power to negotiate power to negotiate
because of few close because of few
alternatives. alternatives.
Supplier Better insulated from Better able to pass on Suppliers have power
Power powerful suppliers. supplier price increases to because of low volumes,
customers. but a differentiation-
focused firm is better able
to pass on supplier price
increases.
Threat of Can use low price to Customer's become Specialized products &
Substitutes defend against substitutes. attached to differentiating core competency protect
attributes, reducing threat against substitutes.
of substitutes.
Rivalry Better able to compete on Brand loyalty to keep Rivals cannot meet
price. customers from rivals. differentiation-focused
customer needs.
Diagram of Porter's 5 Forces
SUPPLIER POWER
Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in industry
The threat of new entries will depend on the extent to which there
are barriers to entry. These are typically: