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Strategic Management
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Nations, and On Competition. A seven-time winner of the McKinsey Award for the best
Harvard Business Review article of the year, Professor Porter is the most cited author in
Porter received numerous honors and awards for his pioneering work in the field of strategy
and competition. Some of his many honors include Harvard's David A. Wells Prize in
Economics (1973) for his research in industrial organization. He also received the Graham
and Dodd Award of the Financial Analysts Federation in 1980. Michael Porter's book
Competitive Advantage won the George R. Terry Book Award of the Academy of
influenced more executives - and more nations - than any other business professor on earth.
Now, he and an all-star team aim to rescue the U.S. economy.” (Colvin 2012)
Generic Competitive Strategies
Penned by Michael Porter in his book – “Competitive Advantage: Creating and Sustaining
Superior Performance” (1985), generic strategies list down different sustainable competitive
advantages that a firm can adopt to make more profits than industry average. These strategies
are called generic as they can be applied to any product or service in any industry.
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 (Porter 1985). These sustainable competitive
advantages can be categorized into 2 – Low cost and Differentiation. Considering the aspect
of market scope, generic strategies can be listed down as 4 in total – Low cost and
Differentiation in broad market scope; Cost focus and Differentiation focus in narrow market
scope (niche). Many consider generic strategies as only 3 in number, as they categorize
strategies with narrow market scope as just one strategy with two variants.
Fig –
While all the generic strategies have the same objective, i.e., to make the organization
profitable, not all organizations are profitable adopting these strategies. Many factors must be
considered before deciding the best strategy to be used for the particular organization in the
opportunities and threats. Both internal and external environment analysis needs to be
conducted to list all the elements in the SWOT profile. Internal analysis would give the
strengths and weaknesses while the external environment gives immediate opportunities and
Michael Porter’s 5 forces give a good start to industry analysis. They are –
The analysis differs from industry to industry; however, it does not differ from organization
Combining the results of step 1 and step 2 give an idea of the best strategy to adopt. A mix of
company’s swot and industry analysis results is always unique for each organization, hence
no two organizations can end up being the same. Once the results of step 1 and step 2 are
analysed, the firm can select the best suited generic strategy.
Following figure give an insight of the implications industry forces have on the choice of the
The above figure shows how industry forces effect the choice an organization makes
regarding the generic strategies. Every situation and every firm are different and hence the
Cost Leadership
Cost is leadership is one of the generic strategies formulated by Michael Porter to achieve
sustainable competitive advantage. The competitive advantage in this case is charging low
cost for their products. Low cost is generally synonymous to low or no profits, however,
firms adopting this strategy make profits through efficiency in systems and processes.
It is considered difficult to adopt and operate using this strategy successfully as it needs the
managers to cut costs at every level to maintain their competitive prices in the market.
For a company to successfully adopt cost leadership strategy, they would the following –
1990)
Offer no-frill options for services to cut down costs
Run services operations like factories
A company is said to be a cost leader when it is able deliver a given set of customer benefits
lower than the competitors or provide with a bundle of benefits that the rivals cannot match
This strategy works best for organizations selling standardized products with many rival
These kinds of products/industries make the customer price sensitive, which is the target
IKEA
IKEA is one of the world’s largest and most successful furniture retailer. Founded in Sweden
in 1943, it has gained popularity as a seller of self-assemble furniture, home decoration and
daily necessities. IKEA has consistently been a Cost Leader throughout its 77 years’ journey.
IKEA seeks for suppliers who could manufactures well-designed subassemblies at the lowest
costs and customers need to assemble the products themselves. This method could save
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. With the competitive price,
the company could receive a vast market and easily won the business. (Kristin 2016)
SpiceJet
SpiceJet is one of the Low-Cost Carriers (LCC) in India. It started as a small airline company,
however, it is now 4th largest airline company in terms of domestic passenger share. It has
consistently positioned itself as a pocket friendly airline. Cost leadership strategy has proven
successful for SpiceJet. It achieved low costs by offering no-frill services to customers. Price
sensitive customers preferred SpiceJet as it provided basic services and charged low prices.
Naivas
Naivas is a retail market chain in Kenya. It has established itself as a cost leader, targeting
mainly the middle- and low-income customers. Naivas aims to achieve low costs by
operational efficiencies. According to Muasa (2014), while Naivas has been established as the
cost leader, it needs to work on different aspects like high technology investment, consumer
focus, good relations with suppliers, in short – being more effective and efficient, which will
Advantages
High profits can be achieved if a cost leader has a high market share. This enables the
to higher margins. Over time these resources can be pooled in together to be used for
Disadvantages
Low prices might lead to perception of low quality. This may affect the sales of the
business.
The company must aim for large volume sales to make considerable profits as the
low.
Efficient processes and structures in place might be a hinderance to flexibility and
change.
Consumer feedback is given less importance as there is minimal scope of
Differentiation
A firm adopting differentiation strategy seeks to be unique in the industry. The firm picks a
few attributes that are widely valued by buyers and uniquely positions itself to meet those
needs. The firm is rewarded for its creativity and innovation by charging premium prices.
(Porter 1985). Along with premium prices, the firm also enjoys customer loyalty to the
product/ service or firm as such. In this case, the sustainable competitive advantage of the
The differentiating factor differs from industry to industry and from firm to firm. The firm
Differentiation strategies work best in some markets circumstances where there are many
ways to differentiate the company’s offerings from that of rivals and many buyers perceive
It should be stressed that the differentiation strategy does not allow the firm to ignore costs,
but rather they are not the primary strategic target. (Porter 1980)
To adopt and succeed using differentiation strategy, a firm needs the following –
Main rivals for large firms pursuing differentiation strategy are firms that adopt focus
differentiation strategy. Big firms need to be vigilant and agile to identify and capture
Starbucks
Starbucks is a highly popular coffee store. It has gained popularity and market share through
one of the generic strategies – differentiation. Starbucks is known for high quality products
and highly customisable coffee. One example of that – rule of serving expresso within 23
seconds of brewing. Starbucks has taken full advantage of their brand reputation by making
strategic alliances with organizations like Pepsico and Jim Beam to serve markets other than
just coffee consumers. Consumers recognize the Starbucks logo in supermarkets selling
bottled coffee beans and now know it is synonymous to high quality. While Starbucks has
successfully differentiated itself by its products, it has also emphasized the differentiation
other aspects as well, like the warm and friendly ambience, its sustainable and responsible
sourcing policy completing the package with a healthy company culture. (Thompson 2017)
Hindustan Unilever (HUL) is an FMCG company based in India. It has a wide range of
products and brands, and hence is highly competitive in the Indian market, along with other
markets. HUL has a highly innovative Research and Development team that is continuously
working on new products and brands. HUL also invests huge sums of money on marketing
and sales distribution processes that help in positioning the brand appropriately. One example
in that aspect is that of Dove – though it is priced above average, it has an impressive market
‘cleaners’. Thus, this generic strategy also satisfies HUL’s vision and mission statement, i.e.,
American Express
more and more markets. Founded in 1850, it has evolved and come a long way since.
Currently it earns $15.6 billion in terms of net income and $32.8 billion in terms of annual
revenue. American Express has seen its share of ups and downs, however, its competitive
advantage remained fairly sustainable, i.e., differentiation. It has recognized different
segments in the market and created products that are most suitable for each segment. For
example, a student has different needs when compared to a person with higher education and
higher self-worth. Hence, they made different products for different demographic groups.
(Bhasin 2018). The brand reputation – being a premium brand has helped American Express
to be highly favoured and this helped it sustain the ups and downs of the economy and the
market.
Advantages
When done right, companies using differentiation strategies gain customer loyalty at a
broad base.
Adoption of differentiation strategies helps in evolution of market, hence creating
produce.
It leads the companies into non-price competition – competition based only on real
value to customer.
Companies adopting differentiation strategy enjoy the customers’ perception of their
Disadvantages
protected.
It is a challenge for the organizations to continuously come up with unique ideas.
Some innovations by the company may be considered too unique or too bold, i.e., the
customer may not believe it is true or the customer may not understand its benefits.
As the strategy enables organizations to compete on a non-price basis, it is difficult
for the organizations to come up with the optimal price that can be sustained in the
long term.
Over differentiation might exclude a big chunk of consumers, hence affecting the
Focused strategies are those that are targeted towards markets with narrow scope (niche).
These are further categorized into focused cost leadership and focused differentiation.
reality, focus strategies enable companies to serve a specific set of customers in the most
optimal way (Tanwar 2013). This enables companies to tap into the market’s full potential
For a company to be profitable while adopting focused strategy, 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 main objective of any company adopting focus strategies is to become a market leader in
their own specific target market as it can be more efficient and effective focusing all its
resources towards the specific market. However, it cannot reap benefits by just narrowing the
size of the market. The company needs to offer something extra to its customers. This is
where the company chooses either cost leadership (focusing on cost sensitive/ cost insensitive
group) or differentiation (producing something unique that the customers want). Narrow
market with something extra, i.e., one of the generic strategies, helps the company achieve its
According to Thompson and Strickland (1984), this strategy is best used in the following
circumstances –
There is no other rival attempting to serve the market, as it is difficult for multi-
market.
There are gaps in the market that are not covered by cost leaders and differentiators.
(Zaware 2016)
Mercedes-Benz
Mercedes-Benz has a world-wide presence and is known for its quality. Though it is known
for luxury in most markets, it has all kinds of cars from SUV to sedans to sports models.
While its parent company Daimler has presence in many segments like power trains, financial
services, etc., Mercedes is only focused on cars, specifically for the upper-class market, who
need classy style, safety and efficiency, complete with modern technology. Mercedes is able
to take out its competitors like Volvo, Audi and BMW in a very easy way, especially in the
developing countries, due to its low operational costs. It has strategically placed plants and
has the immense advantage of its diverse parent company, which helps in its advance
technological innovations. With help of these internal capabilities, Mercedes moved from a
product centric to customer centric company, focusing on a specific customer group and tailor
Chipotle
Chipotle is a Mexican grill ‘fast-casual’ type eatery. It has adopted focused differentiation
strategy to carve itself a niche of Americans who wanted to combine fast food and casual
dining. Chipotle’s brand campaign is “Food with Integrity”, which points towards their
animal and farmer friendly food sourcing. This attracted a segment of consumers who are
environmentally friendly and organic food is costly and hence passes these costs to their
consumers, charging premium prices for high quality food. In this way, it has created a niche
Claire’s
Claire’s is an American cost sensitive store that sells jewellery targeted specifically towards
cost sensitive teenage girls. It has adopted the cost focus strategy. It initially started with one
or two stores, which now has expanded to have a presence in 95% of the malls in the United
States. It mainly sells small trinkets, inexpensive jewellery, tattoos and piercings that the
teenage girls generally need. It does not compete with high end stores, hence does not spend
as much on promotions and other marketing activities. This way Claire’s has been able to
manage costs and sustain their cost advantage over rivals, creating themselves a niche.
Advantages
Entry to the market is easy as the requirement of resources like capital and machinery
creating more value than profit for the consumer and the firm.
It helps in restoration or the reputation of a brand that is affected by negative events or
critics.
Disadvantages
Company adopting focused strategy would not be able to enjoy economies of scale as
segment.
It is easier for the big firms to enter the focused segments and capture the market
are limited.
execute any of the generic strategies successfully. It is illustrated through the following
figure.
It is not a strategy that is picked by the organization, however, an organization might end up
being in the ‘stuck in the middle’ space when the chosen strategy is not implemented in the
At this stage, the company is neither providing a competitive price, nor any unique product
both in the narrow and broad market, hence, such organizations generally have low
Some firms end up in the ‘stuck in the middle’ space not because of poor strategy execution
but their intent of being ‘everything’ (all 3 generic strategies), however, they end up being
nothing.
Examples of organizations stuck in the middle
Levi’s
Levi’s is a textile company that mainly offers jeans and other casual clothing for men and
women. Prior to restructuring in the US, Levi’s followed focus strategy where it focused on
upper markets who wish to buy premium quality products at the premium prices. Levi’s
restructured their operations by shifting most of their productions offshore where the cost of
labour and other costs is much lesser compared to the US. Around this time, on one hand
Levi’s cut down its costs and now has huge margins and one the other hand, its rivals moved
into low cost strategy. Levi’s was not able to capture the market with their premium prices
and hence had to follow suit of its rivals and go into cost leadership. This left Levi’s stuck in
the middle where they neither have a competitive price, nor are focused on a niche.
Holiday Inns
Holiday Inns are a series of motels. They are mainly known for their average price and
average quality of their motel rooms. After the 1970s, where the world started shifting
towards customer centricity, Holiday Inn found itself stuck in the middle. It was neither
offering differentiation like resort features, customised benefits, nor was it a cost leader,
offering no frill services. Hence, Holiday Inn had a huge restructuring lined up to get out of
Arby’s is a chain in the US owned for a short period of time by Wendy’s. They found
themselves to be stuck in the middle when they realised they were not offering anything
unique and not providing competitive prices. This lead to a restructuring when their profits
were at the lowest. They changed the menu items and operational processes so that they can
Porter has been considered a management guru since his book about Competitive Advantage
in 1980. However, there have been many critical evaluations of the same, questioning his
ideas and assumptions based on which he formulated the generic competitive strategies.
Following are a few points that have been raised by the critiques –
While Porter presents his generic strategies as a choice presented to every company,
Wright (1987) argues that the smaller firms would have resources only for the focus
success of these strategies meant superior profit. (Dawes and Sharp 1996)
One of the requirements for the successful adoption of the strategy requires ‘heavy
state-of-the-art equipment’ (Porter 1996), this leads to the question of whether the
organizations were expected to invest such huge amounts without any guarantee of
market share. The question here is how would a company achieve this high market
distributions etc.
Other than the above mentioned points, there have been several other criticisms of the generic
competitive strategy model and its application in today’s world. When Porter came up with
the model in the last parts of 20th century, it was considered brilliant and appropriate at the
time. However, the question remains if that is still applicable in the 21st century where the
world has turned into a global village and market places have turned into market space.
(Mekic 2014)
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