Porter's Generic Strategies (Essay Sample)

PORTER’S GENERIC STRATEGIES By (Name) Course Tutor Institution City/State Date Introduction The general definition of strategy is given as the pattern integrating the major policies, goals and sequences of action that a company has in place into one whole cohesive unit serving to advance the company’s ultimate agenda. If well formulated, the strategy is capable of marshaling the resource at a firm’s disposal and allocating them in such a manner as to position it optimally based on its unique combination of internal strengths and shortcomings in view of anticipated shifts in the environment and moves by opponents CITATION Min92 \l 1033 (Mintzberg & Quinn, 1992). Given, there are numerous companies with numerous combinations of competencies and weaknesses and resource levels competing for the same finite market. There is therefore a dire need for each company to get their strategies right so as to stay in business and ahead of competition. Michael E. Porter opined that for a company to come up with a competitive strategy that will yield result they must consider four key limiting factors of which two are internal and two are external CITATION Cra03 \l 1033 (Fleisher & Bensoussan, 2003). The internal ones are the company’s strengths and weaknesses, which cover its assets, finances, technological advancement, brand value, staff among others relative to the competition’s. The external factors include existent opportunities and threats that embody the competitive environment in the market. They emerge in the government policy, societal concerns, competitors’ behavior among others. Porter suggests that a firm only set out to develop a strategy once it has understood these four factors comprehensively. He also recommends the approach of first establishing what strategy the firm is following currently and the underlying assumptions to come up with feasible strategies to adopt for improvement CITATION Mar99 \l 1033 (Markides, 1999). He developed a theory that broadly groups the numerous strategies needed in the market into three categories: differentiation, cost leadership and focus CITATION Min92 \l 1033 (Mintzberg & Quinn, 1992). Thus emerged the Porter’s generic strategies for gaining competitive advantage. He proclaimed that most companies employed variants or combinations of the three strategies for a sustainable in their respective industries. He went on to declare that companies not targeting their efforts at either of the strategies ran the risk of being stuck in the middle and hence having low profitability and lacked competitiveness CITATION Por80 \l 1033 (Porter, 1980). This essay primarily aims to explore the three strategies, taking examples of companies that have utilized them to draw up a conclusion of what the results of the implementation are. Differentiation A company that uses the strategy of differentiation looks to come up with products or services that are considered unique only to that company within the whole industry CITATION Ger08 \l 1033 (Johnson, et al., 2008). Owing to the large number of competitors and hence similar products in the market, differentiating companies study the market for lines along which they may set their products apart CITATION Min92 \l 1033 (Mintzberg & Quinn, 1992). These avenues of differentiation may include the features or design of a product, technology used in the product, distribution mode, customer service, brand image, among others. Many of the world’s major brands have successfully undertaken the differentiation strategy including Nike athletic shoes, BMW, Apple computers, Hero, among others. The differentiation strategy is best targeted at consumers whose primary concern is not the pricing of the products, a market scene that is highly saturated or the consumers have highly specific needs that are not served sufficiently in the current market situation CITATION Cra03 \l 1033 (Fleisher & Bensoussan, 2003). Most importantly in this situation is that the differentiating company has the relevant resources to meet the underserved needs and successfully sustain the production and marketing of the differentiated products. The primary aim of differentiation is to lure customers to a particular seller who offers products that meet their needs so much more specifically than the competition that they would not mind paying the premium price for it. Differentiation seeks not to produce mass sales but to perpetuate exclusivity among the clientele CITATION Mar99 \l 1033 (Markides, 1999). Successfully doing so ensures that the company creates such customer loyalty to the brand that it produces big enough margins to sustain the product line. The strategy of differentiation is not one that is suitable for companies targeting large market shares CITATION Por03 \l 1033 (Porter, 2003). This is because a majority of the market will most probably not afford the prices of differentiated products and if they afforded them, they would lose the exclusivity that appeals to the target market. However, the profit margins that are lost in mass sales are made up for in the higher prices of the differentiated products. There are two variant models of the differentiation strategy namely the shareholder value model and the unlimited resources model. The shareholder value model states that timing and use of knowledge that is specialized creates an advantage in differentiation for as long as the knowledge remains unique to the firm. It offers that customers buy from a firm to get access to its privileged information CITATION Wil72 \l 1033 (Fruhan, 1972). The unlimited resources model, on the other hand, takes advantage of a company’s large resource base so that the more endowed company is able to last longer than lesser competitors and sustain the differentiation model. This is only a temporary advantage since a firm stands to lose their competitive advantage if they are not sufficiently endowed to maintain their competitive advantage CITATION Wil72 \l 1033 (Fruhan, 1972). A French wine company called OVS used to sell wine differentiated on the grounds of age and origin in the UK market. However, competition increased from non-differentiated wine from Australia that was of good quality. Thus, OVS lost its competitive advantage and was unable to sustain the differentiation. Instead, it turned to production of new wine brands for the masses in order to be able to sustain itself in the market and to compete on the same level as the Australian brands CITATION Ger08 \l 1033 (Johnson, et al., 2008). This is an illustration of the risk that differentiation as a strategy holds if a company is not sufficiently endowed. BMW, on the other hand is a company that has successfully differentiated its produces as illustrated by its high-end Rolls Royce line of products. As indicated on their website, BMW understand what each of their brands represent, study their market, identify potential opportunities and launch products targeted at those opportunities CITATION BMW16 \l 1033 (BMW, 2016). The result is evident in the astounding success of the Rolls Royce Brand. Overall Cost Leadership Strategy This is a strategy focused mainly on winning the company a majority share in the market CITATION Ger08 \l 1033 (Johnson, et al., 2008). This is made possible by appealing to the consumers that are sensitive to the price. Success in this pursuit is achieved by the company having the lowest prices for a given value in the target section of the market. Success comes to such companies as are enforcing this strategy only if they can manage to move the largest volumes in sales CITATION Sus97 \l 1033 (Oliver, 1997). This is because the margin of profit from every unit of product is at a minimum and value accrues to the company from the cumulative amount of units sold. The other option to maximizing profits among competitors is for a company to ensure that it incurs the lowest costs in production. There are three means by which a company may minimize its production costs. First, a company may aim to achieve a high rate of asset utilization CITATION Joh05 \l 1033 (Johanson, et al., 2005). A restaurant, for instance, may do so by turning tables around at a high rate while in the aviation industry an airline may do so by making sure that flights turn around as fast as possible. This would ensure that fixed costs are divided among a large number of unit income avenues and therefore lower cost per unit produced. The same principle of economies of scale applies for industrial firms producing physical goods. The more units they produce in a given time using their machinery the less it costs them to produce per unit. The company that produces the biggest mass of goods incurs the least cost per unit produced. Second, firms can aim for low levels of operating costs. This is possible by mass-producing standardized products, limiting customization and basic no frills products CITATION Sus97 \l 1033 (Oliver, 1997). These measures minimize the costs of production as fewer production components are used, and those that are used are standard components. Producing fewer models of each product also ensures that there are longer production lines. Low wage levels, producing goods in low rent areas and propagating a cost conscious tradition in the organization so ensures that overhead costs stay low, contributing to an overall lower production costs. In this strategy, every activity should be focused on keeping production costs as low as possible CITATION Sus97 \l 1033 (Oliver, 1997). Quality is not of the biggest importance here. The final measure would entail exerting tight control over the value chain of all functional groups to keep costs low CITATION Joh10 \l 1033 (Wood & Wood, 2010). Procurements should be made on a large scale to make sure that the com...