Three Generic Strategies For Competitive Advantage
Michael Porter came up with the idea that companies could compete using three generic strategies. This idea can be further developed into a five generic strategies framework. These frameworks provide a useful way of thinking about strategy. However they should not be thought of as the only possibilities as several others have suggested that Porter’s ideas are too restrictive especially in a rapidly changing business environment. This means that the definition of mass market and niche market can change dramatically – in some cases such as with the various kinds of mobile phones this change can take place in a matter of months. Another criticism is that it doesn’t take into account markets that don’t exist. Take social networking and other internet based communication for example. These have both created new kinds of businesses and completely upturned older business models. It can be argued that firms that stick to generic strategic thinking models become “married” to these models and become less able to respond to new and emerging market conditions.
On the whole though, the generic strategy models serve as useful frameworks for thinking about strategic problem. This is especially true in cases where the industry or the market is not experiencing dramatic change.
Porter’s Three Generic Strategies: Cost leadership
In order to carry out a cost leadership strategy effectively a firm should be able to create and maintain a lower cost base than its competitors. This might be difficult in the long run in international markets where the firm is engaging in exporting products to markets. For example changes in currency valuations or labor costs can erode a firm’s competitive cost structure. We are beginning to see this happen in China; as Yuan begins to appreciate and labor costs increase many Western buyers are beginning to turn to other countries to buy shoes and clothes. Of course several Chinese manufacturers have responded to these changes in conditions by relocating their factories to countries such as Vietnam and Cambodia.
International firms might however be able to compete in foreign markets based on a cost leadership strategy if import their skills in cost leadership to the foreign market. Take the supermarket sector in China as an example. Both Wal-Mart and Carrefour have been able to establish strong market positions by bringing their expertise in logistics and technology to Chinese supermarket sector. This expertise is not subject to exchange rate movements. Furthermore, as wages rise in China the efficiencies that these firms are able to achieve should allow them to enjoy have an even greater advantage over local competitors.
Porter’s Three Generic Strategies: Focus
The idea behind a focused strategy is that the firm becomes expert in one or a few narrow niches. Firms that follow this kind of strategy can become market leaders either in their own “home” territory or even across the world. Many firms in the German Mittelstand exemplify this strategy. They are often world leaders in a very narrow, highly specialized field of manufacturing. This allows them to compete with foreign firms both in Germany and in the foreigners’ own countries. However, firms should note the key term for being internationally competitive is “highly specialized” – meaning the firm is in a niche that can only effectively be serviced by a handful of expert firms.
The great risk of focus though is that the very specialism that brings success can mean doom if a new technology or changing market needs make the firm’s niche skills redundant. Even if the firm survives such changes in the short term, the focus that they gave to the niche make it very difficult to switch to a new niche both in terms of competences available within the firm and credibility in the market.
Porter’s Three Generic Strategies: Differentiation
Many students and managers get confused about the difference between focus and differentiation. The key difference is that differentiation is the creation of a perception of product difference from the customer’s point of view. The product itself can be a mass-market product. For instance, look at the family car market. Basic mid-sized family cars produced by most of the world’s car companies satisfy the same needs. Car companies compete by creating the impression of difference and persuading a particular segment of customers that their car satisfies their particular need. (Of course there are some genuine points of difference, but these tend to be few and far between – no hate mail from automobile manufacturers please.)
The advantage of a differentiation strategy is that you might be able to compete against a cost leader on some benefits that they are unable to either provide or provide with credibility. The disadvantage is that the firm has to invest significant resources to maintain the real or perceived point of differentiation.