Porter's Generic Porter's Generic StrategiesStrategies

– MBA 613 International ManagementStrategies

: . , Professor Ester V Tan.ED D

: . Prepared by Christian ADiaz

Michael Eugene Porter Michael Eugene Porter

q Harvard Business School University Professor

q he is a leading authority on company strategy and the competitiveness of nations and regions

q author of 18 books and numerous articles including , , Competitive Strategy Competitive Advantage , Competitive Advantage of Nations and On Competition

q he is generally recognized as the father of the , modern strategy field and his ideas are taught in

virtually every business school in the world

q he has served as strategy advisor to numerous . . , leading U S and international companies including

, & , - , Caterpillar Procter Gamble Scotts Miracle Gro , Royal Dutch Shell and Taiwan Semiconductor

q - six time winner of the McKinsey Award for the best Harvard Business Review article of the year

Porter's Generic StrategiesPorter's Generic Strategies

Target Scope Advantage

Low Cost Product Uniqueness

Broad(Industry Wide)

Cost LeadershipStrategy

DifferentiationStrategy

Narrow(Market Segment)

FocusStrategy (low cost)

FocusStrategy (differentiation)

Cost Leadership Strategy 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

.1 achieving a high asset turnover

.2 achieving low direct and indirect operating costs

.3 / control over the supply procurement chain to ensure low costs

Firms that succeed in cost Firms that succeed in cost

leadership often have the following leadership often have the following internal strengths:internal strengths:

• Access to the capital required making a significant investment ; in production assets this investment represents a barrier to

.entry that many firms may not overcome• , Skill in designing products for efficient manufacturing for

, example having a small component count to shorten the assembly.process

• .High level of expertise in manufacturing process engineering• .Efficient distribution channels

Risks Associated with Cost Risks Associated with Cost

Leadership Strategy Leadership Strategy• .Other firms may be able to lower their costs as well• , As technology improves the competition may be able to leapfrog

, the production capabilities thus eliminating the competitive. advantage

• Several firms following a focus strategy and targeting various narrow markets may be able to achieve an even lower cost within .their segments and as a group gain significant market share

Differentiation Strategy Differentiation Strategy • A differentiation strategy calls for the development of a

product or service that offers unique attributes that are valued by customers and that customers perceive to be better

.than or different from the products of the competition

• This strategy is appropriate where the target customer segment is -not price sensitive , the market is competitive ,

customers have very specific needs which are possibly-under served , and the firm has unique resources and

capabilities which enable it to satisfy these needs in ways that are difficult to copy .

Firms that succeed in differentiation strategy often have the following

:internal strengths • .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

Risks Associated with Differentiation Risks Associated with Differentiation StrategyStrategy• imitation by competitors• changes in consumers tastes• various firms pursuing focus strategies may be able to

achieve even greater differentiation in their marketsegments

Focus Strategy 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 StrategyFocus 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

In adopting a broad focus , : scope the principle is the same the firm must ascertain the needs and wants of the mass

, ( ) market and compete either on price low cost or ( , ) differentiation quality brand and customization depending on

.its resources and capabilities

: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 Firms that succeed in focus strategy

often have the following internal often have the following internal strengths: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 Risks Associated with FocusStrategyStrategy

• 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 Generic Strategies and Industry ForcesForces

  IndustryForce

Generic Strategies

Cost Leadership Differentiation Focus

EntryBarriers

Ability to cut price in retaliation prevents 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.

Rivalry Better able to compete on price.

Brand loyalty to keep customers from rivals.

Rivals cannot meet differentiation-focused customer needs.

Diagram of Porter's 5 ForcesDiagram 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

 

BARRIERS TO ENTRY  Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products

THREAT OF SUBSTITUTES -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes

  BUYER POWER  Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available Buyers' incentives

DEGREE OF RIVALRY  -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes

RivalryRivalry§ Economists measure rivalry by indicators of  industry

.concentration§ Concentration Ratio ( ) CR is one which measures rivalry in a

.particular industry§ CR indicates the percent of market share held by the four

, , , largest firms in addition CR's for the largest 8 25 and 50 .firms in an industry also are available

§ The Bureau of Census periodically reports the CR for major ( )Standard Industrial Classifications SIC's

A high concentration ratio indicates that a high . concentration of market share is held by the largest firms With

, only a few firms holding a large market share the competitive landscape is less competitive .

A low concentration ratio indicates that the industry is , characterized by many rivals none of which has a significant

. market share These fragmented markets are said to becompetitive .

RivalryRivalry , In pursuing an advantage over its rivals a firm can

:choose from several competitive moves

v Changing prices - raising or lowering prices to gain a .temporary advantage

v Improving product differentiation - , improving features implementing innovations in the manufacturing process and in the

.product itself

v Creatively using channels of distribution - using a . distribution channel that is new to the industry

for example , - with high end jewelry stores reluctant to carry its, - watches Timex moved into drugstores and other non traditional - .outlets and cornered the low to mid price watch market

v Exploiting relationships with suppliers for example , , . from the 1950's to the 1970's Sears Roebuck and Co

. dominated the retail household appliance market Sears set high quality standards and required suppliers to meet its demands for .product specifications and price

RivalryRivalry The intensity of rivalry is influenced by the following

:industry characteristics

.1 A larger number of firms increase rivalry because more firms .must compete for the same customers and resources

.2 Slow market growth . causes firms to fight for market share

.3 High fixed costs result in an economy of scale effect that . increases rivalry

.4 High storage costs or highly perishable products cause a . producer to sell goods as soon as possible If other producers

, are attempting to unload at the same time competition for .customers intensifies

.5 Low switching costs . increases rivalry When a customer can freely switch from one product to another there is a greater .struggle to capture customers

.6 A low level of product differentiation is associated with .higher levels of rivalry

.7 Strategic stakes are high when a firm is losing market . position or has potential for great gains This intensifies.rivalry

.8 High exit barriers place a high cost on abandoning the. . product The firm must compete High exit barriers cause a firm

, to remain in an industry even when the venture is not.profitable

RivalryRivalry. 9 A diversity of rivals , , with different cultures histories . and philosophies make an industry unstable There is greater

. possibility for misjudging rival's moves Rivalry is volatile and . can be intense. 10 Industry Shakeout elimination of some competing

, , ., businesses products etc as a result of intense competition in a . market of declining sales or rising standards of quality

An event that eliminates the weak or unproductive elements from a. system

Threat of SubstitutesThreat of Substitutes A threat from substitutes exists if there are alternative products

with lower prices of better performance parameters for the same. purpose They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for . existing players

,example 1 The price of aluminum beverage cans is constrained by , , . the price of glass bottles steel cans and plastic containers , These containers are substitutes yet they are not rivals in the

.aluminum can industry

, example 2 , To the manufacturer of automobile tires tire retreads . , are a substitute Today new tires are not so expensive that car

. owners give much consideration to retreading old tires But in the trucking industry new tires are expensive and tires must be . , replaced often In the truck tire market retreading remains a

.viable substitute industry

Threat of SubstitutesThreat of Substitutes , Similarly to the threat of new entrants the threat of :substitutes is determined by factors like

§ Brand loyalty of customers§ Close customer relationships§ Switching costs for customers§ The relative price for performance of substitutes§ Current trends

Buyer PowerBuyer Power

. This is how much pressure customers can place on a business If one customer has a large enough impact to affect a

, company's margins and volumes then the customer hold . substantial power

: Here are a few reasons that customers might have power

§ Small number of buyers§ Purchases large volumes§ ( ) Switching to another competitive product is simple§ ; The product is not extremely important to buyers they can do

without the product for a period of time§ Customers are price sensitive

Supplier PowerSupplier Power

. This is how much pressure suppliers can place on a business If one supplier has a large enough impact to affect a company's

, . margins and volumes then it holds substantial power

:Here are a few reasons that suppliers might have power§ There are very few suppliers of a particular product§ There are no substitutes§ ( ) Switching to another competitive product is very costly§ - The product is extremely important to buyers  can't do without it

§ The supplying industry has a higher profitability than the buying industry

Barriers to Entry / Threat of Barriers to Entry / Threat of EntryEntry Barriers to entry can exist as a result of government

( , intervention industry regulation legislative limitations on new, , .), firms special tax benefits to existing firms etc or they can . occur naturally within the business world Some naturally

occurring barriers to entry could be technological patents or , , patents on business processes a strong brand identity strong .customer loyalty or high customer switching costs

The threat of new entries will depend on the extent to which there . :are barriers to entry These are typically

§ ( Economies of scale minimum size requirements for profitable)operations

§ High initial investments and fixed costs§ Cost advantages of existing players due to experience curve

effects of operation with fully depreciated assets§ Brand loyalty of customers§ , .Protected intellectual property like patents licenses etc§ , . . Scarcity of important resources e g qualified expert staff§ Access to raw materials is controlled by existing players§ Distribution channels are controlled by existing players

Barriers to Entry / Threat of Barriers to Entry / Threat of EntryEntry § , . . -Existing players have close customer relations e g from long

term service contracts§ High switching costs for customers§ Legislation and government action

Industry's entry and exit barriers can be summarized as:follows

:Easy to Enter if there is • Common technology• Little brand franchise• Access to distribution channels• Low scale threshold

:Difficult to Enter if there is • -Patented or proprietary know how• Difficulty in brand switching• Restricted distribution channels• High scale threshold

:Easy to Exit if there are • Salable assets• Low exit costs• Independent businesses

:Difficult to Exit if there are • Specialized assets• High exit costs• Interrelated businesses

The End