Wednesday, June 29, 2011

Porter’s Generic Strategies

This blogpost by the team of would explain about the Porter’s Generic Strategies. Companies follow a particular strategy to gain sustainable competitive advantage. According to Porter, companies can get a competitive position by following only a certain generic strategies that he termed as cost leadership, differentiation and focus. Cost leadership and differentiation strategies target a large share of market while focus strategy targets a narrow segment of the market. All these strategies require unique kind of organization structures, procedures, control systems, and incentive systems for companies and what particular strategy is to be followed should be decided with a detailed and through internal and external analysis. Porter strongly argued that a company should follow only one of these three strategies.

Cost leadership strategies are followed by companies in such a way that every part of the organization is geared towards keeping the cost minimum, achieving the highest efficiency and meeting the quality standards as per the consumer expectations. Wal-Mart is one company that has executed this strategy quite successfully. McDonald is another company that pursues cost leadership strategy by having standardized processes and tighter management control with minimum management staff. Toyota is another example of a company that follows cost leadership strategy. However it is important to understand that it is not just about offering the products or services at the minimum prices to customers but it is about reducing costs at all aspects of the value chain of the organization, eliminating wastes, innovating at every step and effective leadership and management orientation for this kind of strategy.

Differentiation is another generic strategy in which companies differentiate their offerings on certain aspects of the products’ features that customers give not only product preference to differentiated product but also are willing to pay more. Companies structure the whole organization and its actions in such a way that its products’ perceived value is higher for its consumers with respect to competitor’s products. Companies can strategies to create product differentiation. Companies focus on higher margins than high market share through this kind of strategy. Companies need to have innovative product development and effective marketing strategies for pursuing differentiation strategy.

Another generic strategy is focus strategy that focuses on a niche or narrow segment of the market and offer its products/services to that narrow segment. These offerings could be either following cost leadership or differentiation strategy. Basically by the following this strategy, companies attempt to fulfill the need of a particular segment better that the companies targeting a large market share. Companies try to build strong loyalty of its consumers with its brand.

Michel Porter argues that for the companies to create sustainable competitive advantage in the long run, they need to follow either one of the generic strategy and cannot follow stuck in the middle approach. However, practically there has been some companies who have successfully executed more than one generic strategies. To take this model further, Bowman introduced strategy clock to introduce more options for viable generic strategies for the companies.

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