MBA 613 – International Management

Strategies

Porter's Generic
Strategies

Professor : Ester V . Tan ,

ED . D

Prepared by : Christian A .
Diaz
Michael Eugene Porter
qHarvard Business School University Professor

qhe is a leading authority on company strategy and

the competitiveness of nations and regions

qauthor of 18 books and numerous articles including

Competitive Strategy, Competitive Advantage,
Competitive Advantage of Nations, and On Competition

qhe is generally recognized as the father of the

modern strategy field, and his ideas are taught in
virtually every business school in the world

qhe 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

qsix-time winner of the McKinsey Award for the best

Harvard Business Review article of the year
 Porter's Generic Strategies
Target Scope Advantage

Low Cost Product Uniqueness

Cost Leadership Differentiation

Broad Strategy Strategy
(Industry Wide)

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.

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
leadership often have the following
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

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
•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
Strategy
•imitation by competitors
•changes in consumers tastes
•various firms pursuing focus strategies may be able to
achieve even greater differentiation in their market
segments

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.

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
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

BARRIERS TO ENTRY  THREAT OF SUBSTITUTES 

Absolute cost advantages -Switching costs
Proprietary learning curve -Buyer inclination to
Access to inputs substitute
Government policy -Price-performance
Economies of scale trade-off of substitutes
Capital requirements
Brand identity
Switching costs
Access to distribution
Expected retaliation
Proprietary products

  BUYER POWER  DEGREE OF RIVALRY 

Bargaining leverage -Exit barriers
Buyer volume -Industry concentration
Buyer information -Fixed costs/Value added
Brand identity -Industry growth
Price sensitivity -Intermittent overcapacity
Threat of backward integration -Product differences
Product differentiation -Switching costs
Buyer concentration vs. industry -Brand identity
Substitutes available -Diversity of rivals
Buyers' incentives -Corporate stakes
Rivalry
§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 be
competitive .
 Rivalry
In pursuing an advantage over its rivals , a firm can
choose from several competitive moves :

vChanging prices - raising or lowering prices to gain a

temporary advantage.

vImproving product differentiation - improving features,

implementing innovations in the manufacturing process and in the
product itself.

vCreatively 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.

vExploiting 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.
 Rivalry
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.
 Rivalry
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 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 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 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 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
Entry
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
Entry
§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 : Difficult to Enter if there is :

•Common technology •Patented or proprietary know-how

•Little brand franchise •Difficulty in brand switching

•Access to distribution channels •Restricted distribution channels

•Low scale threshold •High scale threshold

Easy to Exit if there are : Difficult to Exit if there are :

•Salable assets •Specialized assets

•Low exit costs •High exit costs

•Independent businesses •Interrelated businesses

The End