One of the greatest tools of use for a firm is being aware of it’s position within an industry. When a company is knowledgeable of where it stands, it can more accurately assess its strengths and weaknesses and what is, or has the potential to be, it’s competitive advantage. Michael Porter, believed that the basis for this advantage falls under 3 base strategies of Cost leadership, Differentiation and Focus. With the use of his generic strategy model, a firm, understanding where its competitive advantage lies, can then formulate and implement an effective business strategy geared towards the sustainability of this advantage.
The 3 bases, formed 5 generic strategies : Cost Leadership, strongly speaks towards the production of a lower price product. It appeals to consumers because of low cost. Type 1 strategy is Cost Leadership : low cost, that offers the product at the lowest price available on the market. Type 2 is best value, that offers the lowest price for value available on the market. A firm seeking to become a cost leader then, is attempting to gain a competitive advantage by producing at the lowest cost. For example, the automobile sector, in formulating a strategy must attempt to cut costs at every step of their value chain, whether it is using word of mouth over advertisements or engaging in vertical integration strategies in an attempt to control costs.
They must improve the efficiencies of their processes and because of its low cost nature, be prepared to be highly leveraged, if necessary, to maintain its position. Malaysia’s car makers Perodua and Proton are examples of cost leaders, but also of how this position is used to formulate strategy. The rival low cost maker, Perodua, entered the market and lowered prices further in retaliation and assumed market control, but then because of limitation of supplies and new government regulation Proton once more overtook Perodua. Thus the cost leader must constantly stay aware of the 5 forces, and it environment of business in order to maintain its competitive advantage.
Differentiation, Porter’s Type 3, calls for a product that possesses certain attributes that the customer perceives as both valuable and better than competitors. This position allows firms more leniency with regards to price as the focus is more heavily on value. This strategy will not only aid but guide a firm’s management activities as they incur greater costs which should be offset by sales revenue. This should allow the firm, in carrying out its strategic activities to realise the importance of brand loyalty, cost associated with aggressive sales and marketing tactics to establish that perceived value to consumers and the significance on the value chain of research and development. General Motors, at a time when Ford dominated the market, offered new features at premium prices to a higher class of public. The mission, a car for every purse and purpose, was exceeded as they became the leading company. New entrants were discouraged, buyers had low bargaining power due to the lack of alternatives, supplier increases could be passed on through sales price and substitutes and rivals were deterred because of the loyalty consumers had to GM’s exciting features.
A great example of how Porter’s strategy guided their activities and secured their competitive advantage. Type 4, low cost focus and Type 5, best value focus, offers products and services to a niche group at the lowest price available on the market and the lowest price for value available on the market, respectively. Type 4, for example the used car dealership, offers bargain hunters low cost vehicles for a few inconveniences such as their own maintenance. Type 5, for example Corvette, offer a higher price to niche group and maintain loyalty by offering an experience unlike any other. For this reason, Type 5 is sometimes referred to as focused differentiation. For types 4 and 5, strategic management must focus on the development of core competencies and use it as a potential barrier to entry and base for minimizing threats of substitutes, extensive analysis of the 5 forces, value chain and financial capabilities as targeting a niche group may be costly for a Type 5 strategy or may not produce enough revenue for the focused cost leader (Type 4).
Porter’s strategies, coined generic, because they are exactly that, have no particular application process but rather the firm using these strategies must develop the best way to sustain their competitive advantage. The firm must define its position and analyze its industry, after a strategy is selected, the firm must develop a plan to implement it then continuously monitor the market signals in order to keep up with the ever changing environment of business. Strategic management’s activities then will take into account the external environment, the organisation’s capabilities and select and develop strategies always bearing in mind the organisation’s purpose and direction. These strategies, closely paired with the 5 forces, focus on continuous improvement for an organisation to meet the challenges of global change, exactly what strategic management is centered on, the formulation, implementation and evaluation of plans to achieve organisational success.