Review Michael Porter\'s Five Competitive Strategies Identify two companies that

Question

Review Michael Porter's Five Competitive Strategies Identify two companies that employ each of the strategies and cite the specific tactics/processes and strengths that the companies employ to implement their strategy. For example, Wal Mart uses a low-cost broad differentiation strategy to compete in its market. The have excellent supply-chain management capabilities and processes that ensure low cost products on their shelves. That's two companies for overall low cost, two companies that use a broad differentiation strategy, two companies that use narrow low cost, two companies that use narrow differentiation and two companies that use best cost provider strategy.

Explanation / Answer

Porter is considered by many as the most influential strategist in the field of businessstrategy.Eng (1994) for example estimates that “the arguments underlying the generic strategies advocated in Porter’s, Competitive Strategy (1980) have influenced much of the current thinking in strategy formulation.” In effect, Porter’s model has been widely tested (e.g. Hambrick, 1983; Dess & Davis, 1984; Akan et al, 2006; Reitsperger et al, 1993; Calingo, 1989) but despite criticism and efforts to modify, expand or combine the strategy typology with others’ (i.e. Miles & Snow’s (1987) typology), the original model has remained the most commented, analysed and tested contribution. It is has been praised for being easy to understand, appropriately broad without being vague, and building upon previous findings. Porter’s (1980) model of generic strategies addresses practitioners with an analytical technique for gaining understanding of industries and competitors. By “practitioners” Porter implies “managers seeking to improve the performance of their businesses, advisors to managers, teachers of management, security and analysts or other observers trying to understand and forecast business success or failure, or government officials seeking to understand competition in order to formulate public policy.”20 The reason why strategic planning is a primary concern to business managers in particular but also other practitioners is that it may lead to significant benefits for a firm. In effect, an explicit process of strategy formulation can determine a firm’s long-run competitive strength and generate a persistently higher rate of profit than its rivals by creating a sustainable competitive advantage. However, in order to compete successfully in the long-run a firm must first choose an appropriate positioning. Porter proposes three different approaches to gaining or strengthening competitive advantages (competitive strategies) proposed: 1.Overall cost leadership, 2.Differentiation, and 3.Focus

All three strategies have the potential to result in above-average profits; however, all three strategies may not be equally suitable for a firm. The reason is that the three strategies differ on a number of dimensions and pose different requirements, for example in terms of resources, skills, organizational arrangements, control procedures, incentive systems and management style. Profitability may vary depending on the wellness of fit between the firm and the selected strategy, which make the decision of which strategy to adopt key to the benefits of strategic planning and requires that the choice be well founded. The challenge lies in selecting the strategy that best suits the firm’s strengths and resources and is least replicable by competitors and this in turn necessitates knowledge about the firm, its business environment and competitors. With an explicit technique for analysing industry structure and competition, practitioner may gain better understanding and knowledge of both elements. Porter’s (1980) model facilitates the decision making process and improves the probability for a firm that chooses an appropriate strategy.

2.3 Overall Cost Leadership Strategy

Low cost relative to competitors is the theme running through the entire overall cost leadership strategy and the objective is clearly overall industry cost leadership. Attaining cost leadership typically requires aggressive construction of efficient scale facilities and vigorous pursuit of cost reductions through experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, etc. When attempting to achieve an overall cost leadership position, low cost relative to competitors is the theme running through the entire strategy.

To understand how overall cost leadership strategy may generate superior profitability, it is necessary to identify the benefits of a low-cost position. As suggested by Porter “[a low-cost position] gives a firm a defense against rivalry from competitors, because its lower costs mean that it can still earn returns after its competitors have competed away their profits through rivalry. A low-cost position defends the firm against powerful buyers because buyers can exert power only to drive down prices to the level of the next most efficient competitor. Low cost provides a defense against powerful suppliers by providing more flexibility to cope with input cost increases. The factors that lead to a low-cost position usually also provide substantial entry barriers in terms of scale economies or cost advantages. Finally, a low-cost position usually places the firm in a favorable position vis-à-vis substitutes relative to its competitors in the industry.” Because scale economies and cost advantages tend to defend a firm against powerful buyers and suppliers and provide substantial entry barriers, achieving a low overall cost position often requires a high relative market share. In other words, cost advantages can create value for a firm by reducing the five threats of entry, rivalry, substitutes, suppliers and buyers.

Organizing to implement a cost leadership strategy requires particular consideration to the organizational structure, management controls, compensation policies, and implementing cost leadership strategies. The organizational arrangements and implementation tools should not only fit but reinforce the strategy. Porter (1980) has divided requirements of overall cost leadership strategy into “commonly required skills and resources” and “Common organizational requirements”. Commonly required skills and resources when implementing overall cost leadership are sustained capital investment and access to capital, process engineering skills, intense supervision of labor, products designed for ease in manufacture, and low-cost distribution systems. Common organizational requirements constitute of tight

Differentiation strategy

Differentiation consists in differentiating the product or service offered by the firm, in other words, creating something that is perceived industry-wide as being unique. Differentiation may be achieved in various ways, for example through design, brand image, technology, features, customer service, and dealer network. Bases of differentiation may be sorted into three categories. Firstly, to implement differentiation, a firm may focus directly on product (or service) attributes, i.e. product features, product complexity, timing of product introduction, or location. Secondly, a firm may focus on the relationship between itself and its customers, for example through product customisation, consumer marketing and product reputation.

Finally, differentiation may be implemented by focusing on the linkage within or between firms, which includes linkage within functions of a firm, linkage with other firms, product mix, distribution channels and service support. Ideally, the firm should differentiate itself along several dimensions. There may also be other ways for firms to differentiate than the examples mentioned above. In fact, Barney & Hesterley (2006) argues that, “product differentiation is ultimately an expression of the creativity of individuals and groups within the firms. It is limited only by the opportunities that exist, or that can be created, in a particular industry and by the willingness and ability of firms to creatively explore ways to take advantage of those opportunities.

Benefits of differentiation

According to Porter differentiation may generate superior profitability for the reason that “[it] provides insulation against competitive rivalry because of brand loyalty by customers and resulting lower sensitivity to price. It also increases margins, which avoids the need for a low-cost position. The resulting customer loyalty and the need for a competitor to overcome uniqueness provide entry barriers. Differentiation yields higher margins with which to deal with supplier power, and it clearly mitigates buyer power, since buyers lack comparable alternatives and are thereby fewer prices sensitive. Finally, the firm that has differentiated it to achieve customer loyalty should be better positioned vis-à-vis substitutes than its competitors.” Besides reducing the five threats of entry, rivalry, substitutes, suppliers and buyers, differentiation creates value by enabling a firm to charge a premium price that is greater than the extra cost incurred by differentiation.

Focus Strategy

Considering that this paper focuses on the combination of between overall cost leadership and differentiation, it does not serve the purpose of the paper to describe the focus strategy in detail. In brief, the focus strategy aims at serving a particular target or segment of the industry well, as opposed to both overall cost leadership and differentiation strategies seek to achieve their objectives industry-wide. For example, a firm may choose to serve a particular buyer group, segment of the product line or geographic market. Thus a focus strategy sets out to achieve a low cost or differentiation position, or both, from the perspective of its narrow market segment.

The Combination Strategy

The Porter Generic Competitive Strategies (1980, 1985) of overall cost-leadership, differentiation and focus on strategic management research cannot be overemphasized. Low cost and differentiation strategy may be compatible approaches in dealing with competitive forces (Allen & Helms, 2006; Miller, 1992; Spanos, et al., 2004), and postulated the pursuit of what has been termed ‘hybrid’, ‘mixed’, ‘integrated’, or ‘combination’ strategies (Kim et al., 2004; Spanos et al., 2004), These ‘hybrid’ strategies are the ones which combine low cost and differentiation elements (Gopalakrishna & Subramanian, 2001; Proff, 2000),

A combination competitive strategy involving high level of emphasis on both cost-leadership and differentiation strategies simultaneously should be distinguished from “stuck-in-themiddle” strategy where a firm fails to successfully pursue both cost-leadership and differentiation strategies (Acquaah & Ardekani, 2006), A combination strategy has been shown to be viable and profitable (Kim et al., 2004; Miller & Dess, 1993; Wright et al., 1991), Since cost-based and differentiation-based advantages are difficult to sustain, firms that pursue a combination strategy may achieve higher performance than those firms that pursue a singular strategy. Pursuit of a differentiation strategy for low-cost firms will help minimise

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