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Porter's Model of Competitive Strategy: Cost Leadership, Differentiation, and Focus, Apuntes de Dirección de Empresas

Universitat de València (UV)Dirección de Empresas

An overview of Porter's Model of Competitive Strategy, which includes competitive argument, competitive scope, and competitive advantage. The model consists of four generic strategies: Cost Leadership, Differentiation, Focus on Cost, and Focus on Differentiation. the requirements, risks, and typology of each strategy, as well as the strategic clock model and the limitations of Porter's typology.

Tipo: Apuntes

2019/2020

Subido el 06/02/2020

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6. COMPETITIVE ADVANTAGE
6.1. Competitive argument
Competitive argument: based on costs; based on differentiation.
Competitive Strategies (Porter’s Model): based on two dimensions, competitive argument and
competitive scope:
Costs leadership
Differentiation
Segmentation or Focus on cost
Focus on differentiation
Competitive advantage: any characteristic of the company that differentiates it from
others, placing it in a higher relative position to compete. It’s related to a key success factor
in the sector; it generates a difference from competitors and is sustainable over time.
Bases of the capabilities that support the CA:
Cost efficiency: cost leadership
Generation of added value: differentiation
Competitive argument
Each activity of the firm’s value chain can provide a competitive advantage to the firm
There are some activities that are disjunctive activities. Thus, firms have to opt between
competitive argument
On cost: Obtaining differentiation but having superior cost than competitors or
On differentiation: Having better costs than competitor but having lower differentiation
than competitors
There are other activities that are not disjunctive activities. Thus, firms can opt for:
Obtaining differentiation without having superior cost than competitors or
Having better costs than competitor without having lower differentiation.
CA on cost: company A has lower costs than company B for a similar product, if A sells it at a
similar price, the Margin of A will be superior to the one of B.
CA on differentiation: company A manufactures a product/service with different
characteristics that are valued by customers and, therefore, can charge a higher price, even
when the unitary costs are a little higher than those of company B. The price increase offsets
the cost increase, and therefore, company A has a higher margin.
6.2. Generic strategies: Costs Leadership, Differentiation and focus
Competitive strategy: the way a firm faces its competitors in order to outperform them.
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6. COMPETITIVE ADVANTAGE

6.1. Competitive argument Competitive argument : based on costs; based on differentiation. Competitive Strategies (Porter’s Model): based on two dimensions, competitive argument and competitive scope:  Costs leadership  Differentiation  Segmentation or Focus on cost  Focus on differentiation Competitive advantage : any characteristic of the company that differentiates it from others, placing it in a higher relative position to compete. It’s related to a key success factor in the sector; it generates a difference from competitors and is sustainable over time. Bases of the capabilities that support the CA:  Cost efficiency : cost leadership  Generation of added value : differentiation Competitive argument Each activity of the firm’s value chain can provide a competitive advantage to the firm There are some activities that are disjunctive activities. Thus, firms have to opt between competitive argument  On cost : Obtaining differentiation but having superior cost than competitors or  On differentiation : Having better costs than competitor but having lower differentiation than competitors There are other activities that are not disjunctive activities. Thus, firms can opt for:  Obtaining differentiation without having superior cost than competitors or  Having better costs than competitor without having lower differentiation. CA on cost: company A has lower costs than company B for a similar product, if A sells it at a similar price, the Margin of A will be superior to the one of B. CA on differentiation: company A manufactures a product/service with different characteristics that are valued by customers and, therefore, can charge a higher price, even when the unitary costs are a little higher than those of company B. The price increase offsets the cost increase, and therefore, company A has a higher margin. 6.2. Generic strategies: Costs Leadership, Differentiation and focus Competitive strategy : the way a firm faces its competitors in order to outperform them.

Porter defines Competitive Strategy as “taking offensive or defensive actions to create a protected position in an industry to face successfully with the 5 competitive forces and, thus, obtain a superior return on the investment for the firm”. Competitive Strategies are defined for each of the Strategic Business Units (SBU) of a firm. Models of competitive strategies  Porter’s Model: Generic strategies. Four generic strategies: Cost leadership, differentiation, focus on cost or Focus on differentiation. Point 6.2.  Strategy Clock Model. Nine different routes. Porter’s typology : Generic competitive strategies Cost leadership strategy : it consists in obtaining an advantage in cost over competitors through achieving lower costs in firm’s activities.  The attributes of the company offer must be similar to the ones of the competitors’  It can be complemented with a low-price strategy - but costs and prices are different concepts

  1. Requirements:  Budget control  High production volumes and investments
  2. Factors that favor the strategy of cost leadership  Economies of scale: diminish unitary costs  Experience effect and learning experience  Innovation process improving process technology, process redesign or product redesign  Favourable access to raw materials and other resources  Appropriate location (e.g. reducing transport costs)  Cooperation with customers and/or suppliers  High cost control by the company  Flexibility in adapting production capability to actual demand
  3. Conditions for applying  Customers are especially high-sensitive and cost of change are low  Competition on prices must be relevant  Standardized products that are offered by many companies  It is not easy to find ways of differentiation  High bargaining power of clients
  4. Risk of a cost leadership strategy  Excess focus on experience effect  Substitutes may appear  Customer preferences change to products of higher quality  Cost reduction may be better for focused competitors  There may be limits to cost reduction Differentiation strategy : it implies to offer products or services with characteristics or attributes that customers perceive as unique and they are willing to pay more for them  Some parity on cost with competitors must be achieved (trying to reduce costs on areas where they do not loss differentiation)  Higher prices can be used for covering higher costs

 is not key for competitors

  1. Risks  Segment enlargement : competitors may meet our customers’ needs  Segment disappearance : preferences and needs of our customers may change towards the ones in the mainstream market  New competitors in the segment: the segment may become attractive to other companies Porter’s model  Cost leadership and differentiation are incompatible  The organization can become ‘stuck in the middle’ Superiority of generic strategies in front to those “stuck in the middle” Limitations of Porter’s typology  “Cost leadership” and “low prices” are not interchangeable concepts: cost is an internal variable and price is an external variable  There is only one cost leader company, several can follow low prices  A company with low costs does not necessarily reduces prices  Differentiation does not necessarily translate into a price increase  Differentiation and costs leadership are not incompatible  There are companies that base their success in a good relation quality-price 6.3. Strategic clock Strategic clock model: it tries to define the competitive strategy of a SBU (or a company) taking into account two dimensions,  The perceived product or service price  The perceived added value of the product or service

Route 1. “No Frills” Strategy : Low price; Low perceived product/service benefits; Focus on price-sensitive market segment.  Commodity-like products or services  Price-sensitive customers  High buyer power and/ or low switching costs  Small number of providers with similar market shares  Avoiding the major competitors Route 2. Low price strategy  Lower price than competitors  Maintain similar product/service benefits. Pitfalls of low price strategy  Margin reduction (competitor reaction)  Inability to reinvest: leading to loss of perceived benefit of product Requirements: need a low cost base  Low cost itself not a basis for advantage  Low cost achieved in ways that competitors cannot match to give sustainable advantage Route 3. Hybrid Strategy : Simultaneously achieving differentiation and a price lower than competitors.  It needs to achieve greater volumes  Clarity about activities on which differentiation can be built (core competences)  Be able to reduce costs on other activities  Entry strategy in market with established competitors Route 4 & 5. Differentiation Strategies  Offering benefits different from competitors  Widely valued by buyers  Better products/services at same or higher price Success depends on  Identification of strategic customers and knowing what they value  Knowing the competitors  2 differentiation strategies o Narrow competitor base – focused differentiation. o Wide competitor base – address bases of differentiation valued by customers Route 5. Focused Differentiation: high perceived product/service benefits to selected market segment (niche) ; Premium products, heavily branded  Choice to be made between focused differentiation and broad differentiation if growth required  Difficult when the focus strategy is only part of an organisation’s overall strategy  Possible conflict with stakeholder expectations

Declining sectors: Options