Porter’s Generic Strategies

Porter’s Generic Strategies

In 1985, management professional Michael Porter formulated generic business strategies for the analysis of industries and competitors. These strategies are the options that a business has in successfully entering and competing within its industry. The choices proposed by Porter are low cost, differentiation, and focus (Porter, 1985). Any of these strategies can produce a capable, competitive advantage though not every strategy is possible for every business. A firm should aim at sufficiently executing a strategy to sustain its competitiveness in the market. The three business strategies are discussed in this paper. Do you need urgent assignment help ? Get in touch with us at eminencepapers.com.

Cost Leadership

The primary emphasis on cost leadership is the maintenance of low costs of operations as the key strategy. A business achieves this by either charging average prices while maintaining a profit margin that is high or by charging lower prices compared to its competitors to retain a market share that is high. The high profit margins are dependent on the difference between the lower production cost and the price of sold goods. Achieving these high margins also implies that a business is operationally efficient which is essential for success in the long term (Kaliappen & Hilman, 2013). Wal-Mart is a good example of a business that thrives on beating its competitors by offering goods and services at lower prices to attract and retain its customers (Stankevičiūtė, Grunda, & Bartkus, 2012).

Cost leadership is also the genesis of multinational companies outsourcing production in countries where the cost of manufacturing and shipping are lower in comparison to costs within the company’s parent country (Kaliappen et al., 2013). The cost leadership strategy is effectuated in different ways such as outsourcing as mentioned earlier. Additionally, companies may employ technologies with the aim of reducing the traditional structure of cost as observed with Wal-Mart. Also, Operations Managers employ theories of efficiency such as Lean Sigma to determine waste-cutting ways in the process of product manufacture

Differentiation Strategy

Differentiation strategy centers on a business doing things differently and in a better or distinct way compared to the competitors, the process notwithstanding (Banker, 2014). A straightforward approach to differentiation implies that the business should understand the broader market needs and proceed to offer services and products that are of superior quality, elite services or with attributes that are unique, and convey these advantages through sales and marketing. Highly competitive industries are characterized by this strategy with players who often make substantial investments in media advertisements as well as other efforts in marketing to attract attention from potential customers. Examples of differentiation strategies include customer support (customer service, guarantee, warranty), operational efficiency, novelty in innovation, brand image (such as luxury goods-Bentley, Rolex), functionality(features, ease of use), appearance, product durability, product quality, and performance of the product (strength, speed) (Tanwar, 2013).

The Focus Strategy

This category is defined by two sub-categories which modify differentiation strategy and cost leadership. In both cases, the strategy concentrates on customers who have unique needs referred to as the niche market. The customer focus level allows for the business to offer its product at a lower cost, or a product with characteristics and features that meet the focus market wants or needs (Magretta, 2011). A cost focus strategy could reveal ways of production of an item that is generally accepted but at a lower cost thus creating for the niche market customer, a cost advantage. The cost-focus strategy is a strategy that is challenging to implement as businesses in the niche market often have little bargaining power compared to larger market chains.

Differentiation focus is a derivation from differentiation and targets a more niche and smaller group of customers. The purpose of the strategy is to offer to a specific market, products, and services that have additional benefits and superior quality (Magretta, 2011). Smaller firms use this strategy to compete against larger organizations that offer similar products at lower prices. An example of a small business would be a firm that offers handcrafted decor and furnishings that would probably incur high production costs in comparison to a firm that mass produces the same, and the market is small for such products.

Organization Structure and Process

Organizations that operate in markets with price-responsive consumers such as retail markets will tend to take the cost leadership approach to remain competitive. An example of such an organization is Wal-Mart which has adopted its EDLP approach (everyday low process) that has gained success and popularity. Shoppers at Wal-Mart are able to save approximately 15% on a grocery cart in comparison to other retail markets. The EDLP involves a plan where suppliers ensure prices are at the lowest with minimal or no changes to the quality (DiPali, 2012)

Firms that operate businesses that have a large consumer base with an equally high number of suppliers often take the differentiation approach to surpass their competitors. Such organizations make their products better and charge a slightly higher price for the improved product. The value addition to the product requires robust marketing and research capabilities by the organization. One example of an organization that utilizes this strategy is Mcdonalds Ltd.  The first differentiation that the company has is providing fast-paced food services hence offering customers value, speed, and convenience. Other features include adding presents in meal-combos such as the children’s Mc-combo that comes with a toy for children (DiPali, 2012).

The focus strategy aims at satisfying the additional needs created by customers. Organizations narrow down the process of product or service provision to enhance quality and to get loyalty in return. The prices may be elevated which puts customers at a disadvantage for lack of substitutes. An example of an organization that has mastered the focused approach is PepsiCo. The company has specialized in its primary product, beverages, and has gained customer loyalty over the years (DiPali, 2012).

In conclusion, an organization can adopt any of the three generic strategies after carefully examining its potential customers, market potential, and existing competitors. Choosing the wrong strategy can result in significant losses and eventual closure of a business. Hence it is critical that managers within organizations carry out due diligence to ensure the right strategy adoption is undertaken to remain competitive in the industry.

References

Banker, R., Mashruwala, R., & Tripathy, A. (2014). Does a differentiation strategy lead to more sustainable financial performance than a cost leadership strategy? Management Decision, 52(5), 872-896.

DiPali (2012). Porter’s Generic Strategies with examples- Presentation Transcript: Porter’s generic strategies. http://www.slideshare.net/dipalij07/porters-generic-strategies-with-examples

Kaliappen, N., & Hilman, H. (2013). Enhancing organizational performance through strategic alignment of cost leadership strategy and competitor orientation. Middle-East Journal of Scientific Research, 18(10), 1411-1416.

Magretta, J. (2011). Understanding Michael Porter: The essential guide to competition and strategy. Harvard Business Press.

Porter, M. E. (1985). Competitive advantage free press. New York.

Stankevičiūtė, E., Grunda, R., & Bartkus, E. V. (2012). Pursuing a cost leadership strategy and business sustainability objectives: Walmart case study. Economics and Management, 17(3), 1200-1206.

Tanwar, R. (2013). Porter’s generic competitive strategies. Journal of business and management, 15(1), 11-17.

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Overview
A reliable and time-tested strategic framework can be applied to organization design in determining the overall structure and process. For this assignment, you will research Michael Porter’s three generic strategies (low cost, differentiation, and focus) and learn how they can be used as a starting point for organization design. For example, if an organization develops a strategy around low cost (for example, Walmart), they must subsequently design and structure the organization so that it supports low operating costs, thereby enabling providing lower prices for their target customers.
Instructions
Research the Capella library for articles on Michael Porter’s three generic strategies: low cost, differentiation, and focus.
In your paper:
• Explain each of Porter’s three generic strategies (low cost, differentiation, and focus).
• Provide examples of Porter’s strategies in action from business practice.
• Relate Porter’s strategies to organization structure and process.
• Apply ideas from peer-reviewed scholarship in your writing.