|Industry forces||Generic strategy|
|Degree of Rivalry||High level of brand loyalty that maintains customers away from rivals||Can compete on price basis||Differentiation based focus. Here customer needs cannot be met by rivals|
|Threat of substitutes||Product features brought on by differentiation; endears customers and minimizes substitute threats||Low pricing protects company against substitutes||Core competency and specializing causes a protection against substitutes|
|Strength of suppliers||Can adjust increases in price brought on by suppliers to consumers||Has leverage against powerful suppliers||Differentiation based firms can pass high supplier prices to buyers|
|Strength of buyers||Few alternatives to choose from so buyers will negotiate less on price||Low prices appeal to strong buyers||Minimal alternatives cause low negotiation power|
|Barriers to new entry||Strong consumer loyalty discourages the entrance of new players||Can reduce prices to protect against the threat of new entrants||Core competencies through focus can be a barrier to new entry|
Porter’s Generic strategic model puts forward the notion that there are three dimensions to strategy in achieving competitive advantage. The first is differentiation, the second is product costs and the third is market segmentation (Porter, 1985). Market segmentation has a narrow scope while the other two are broad in nature. Research carried out by Porter found that firms at both ends of the scale were profitable; i.e. those that had a large market share and those with small market shares. However average firms were not doing very well. He postulated that the occurrence was brought on by large firms’ focus on cost leadership and small firms’ focus on a market niche that happened to be profitable. According to him, matching supply-side strategies with demand-side traits was the best bet at succeeding. For instance, one could combine product differentiation with market segmentation. On the other hand, using both demand and supply-side strategies at the same time could be detrimental to an organization. For example, if one tried combining cost leadership with product differentiation, likely, the firm will not do so well. In essence, Porter describes the latter strategy as ‘a caught in the middle’ situation.
Advantages of Porter’s Generic strategic model
This model holds that a firm must select only one kind of strategy to do well as this gives it focus. In the cost leadership strategy, firms attempt to expand or dominate market share by serving the needs of price-sensitive buyers. Many market leaders have utilized this strategy and reaped its rewards. The main objective is to utilize economies of scale such that fixed costs are distributed over a wide range of goods so that the company can afford lower prices. The main advantage here lies in the fact that big firms eventually create a barrier to new entry because the new players may not be able to produce in the same quantities that the cost leaders do. Consequently, such firms will be in a position to maintain their market leadership position. Additionally, these companies gain reputations as low-cost producers such that they can carry forward their low production costs to their commodity prices (Porter, 1985). Companies pursuing this strategy can easily be understood as firms that place customers first in terms of their needs over and above that of any other.
Another crucial advantage of the cost leadership strategy as found in porter’s generic strategy model is that it increases capacity utilization and eliminates wastage. Cost leaders often foster a culture of cost-consciousness by continually reducing wastage or by reducing overhead costs. In this regard, cost leaders may be prompted to outsource a series of their production functions. This implies that a firm will grow and develop other service providers in the marketplace. It will also be innovative and highly adaptable because of this quest for cost reduction.
A case in point was Dell computer which achieved cost reduction through their Just In Time model (JIT). Its major aim was to eliminate wastage through the minimization of their overhead costs. It should be noted that the kind of industry that Dell operates in is quite sensitive. Computers, by their very nature, are designed to lose value if they just sit in inventory. Consequently, it was in the best interest of this company to instill a culture of low inventory because certain computer parts would depreciate even up to one percent per week. This had a direct effect on the losses undergone by the organization and in order to survive financially, the company needed to work on that inventory. In the early 1990s, Dell possessed inventory that was worth ten weeks in their premises. However, after implementation of their JIT model, the company now possesses about three days worth of their inventory. This shows that in the early nineteen nineties, the company was facing an increase in expenses of about ten percent. However, with time, the company fostered the JIT model and has now reduced its operating expenses by about nine percent. This is definitely a smarter way of doing business. In this case, the company worked out a way of producing in smaller batches so that they could reduce the number of computers in inventory. Here, it was able to increase its cash flow because it did not have to invest too much money in capital unless it was needed. Furthermore, the company reduced: the need to take up too much space, the level of insurance obtained, obsolescence cases and also minimised its tax obligations. The company was in a position to trace all its costs so that inefficiencies in management could be detected as it went along. In the end, Dell has gained recognition worldwide for its efficient way of doing business. In this regard, it can be stated that the Porter’s strategic model of cost leadership through reduced costs has made Dell a market leader and therefore testifies to this model’s usefulness.
The model is advantageous because it offers an alternative for a saturated market (Porter, 1985). In other words, when an industry has reached such levels then price changes will yield relatively minimal results. Therefore, differentiation strategies come in, in order to overcome the limitations of the former. What this implies is that through differentiation a firm can be able to appeal to customers irrespective of price. Consumers would be willing to pay more because of the uniqueness of the product and this can insulate the organisation against excessive competition. Additionally, some clients may simply be in need of certain products or product features that are none existent in the current market (Porter, 1985). This means that those customers will be drawn to the company because of that need even despite competition from other players in the market. Therefore, this aspect in the porter’s generic model ensures that companies can attract greater customer or brand loyalty and remain profitable even in saturated markets. The beauty about this approach is that perceived uniqueness may be real or it may simply be created through brand image or advertising.
Disadvantages of the porter’s five forces
One of the major disadvantages of this model is that success in firms often comes at the expense or at the loss of other parties in the supply chain. For instance, in order to become cost leaders, organisations often have to control stakeholders in the supply chain so as to minimise their procurement costs (Wright et. al, 1990). For example, firms like Walmart have been known for demanding or pushing their suppliers to the ‘wall’ for low prices. Since their size is so large, it is likely that suppliers have to buckle under their pressure and this causes a lot of disgruntlement.
In fact, a thorough examination of Walmart’s policy of everyday low prices will reveal some unsettling issues. First, Walmart often demands that its suppliers redesign the packaging of the commodities that they make just so that the materials used may be minimised or so that cheap supplements may be used. However, this may compromise on the marketability of the commodity since product packaging plays an essential role in determining marketing efficiencies. Walmart therefore causes its suppliers to compromise on their full potential because they must comply with this large seller’s wishes. As if this is not enough, Walmart will often dictate to its suppliers the kind of technology or IT systems it can use. It normally does this in order to cause their overhead costs to go down so that the suppliers can afford Walmart low prices. This large chain store has also been known to scrutinise financial records of suppliers and tell them what they need to cut back on or what they need to maintain. In this regard, suppliers are forced to become less profitable just so that they keep Walmart as one of their customers. This high handed way of doing business has led to so many complaints about Walmart. It seems as though Walmart’s cost leadership or their ‘everyday low prices’ have come at the expense of everyone else who does business with them.
Another challenge with this model is that sometimes pursuance of one strategy such as cost leadership will often come at the price of other issues such as product differentiation (Wright et. al, 1990). For instance, Walmart often strives to improve its processes rather than its products. It is often assumed that the products have already been proven and that the latter is not a concern. However, this is not always true; sometimes consumers still want both. This means that they may be looking for low prices as well as quality products. Therefore, the latter chain store may be compromising on another aspect while pursuing its cost leadership. Cost leaders often forget one important thing; that customer value proposition is just as important as low prices. Customers from niche markets can provide a sound target base for some value additions. For instance, it may be possible that a company may already be spending so much on an additional feature when customers are not really interested in it. If the company went out to understand its customers then it can eliminate those frills that are not really valued and thus pursue cost leadership while differentiate their products to their market segments. A case in point was Southwest Airlines. The latter company decided that it would focus on prompt schedules and low prices. It focused on a differentiation strategy where it understood its niche market and thus gave them what they wanted. This organisation illustrated that it was indeed possible to achieve cost cutting and differentiation. This contradicts the porter’s strategic model and therefore offers an alternative (Wright et. al, 1990).
It should also be noted that sometimes pursuing a cost strategy or a differentiation strategy as suggested by Michael Porter may tarnish the organisation’s name to consumers. For example, cost leaders may not always appeal to value sensitive customers because they may acquire a reputation of low prices regardless. This means that even when the quality of their commodities is low, such organisations will still be willing to do business so as to keep those prices down. Even when such firms choose to re brand or change their strategies, it may be likely that the public may view this with suspicion. They would still have the baggage of its low value and low price image. Furthermore, pursuing such a strategy would also put a company in danger of always frantically chasing after consumers interested in low prices yet those consumers by their very nature tend to possess very low loyalty levels. In other words, it is likely that there may be a competitor who can match those low prices and this would create a crisis for the cost leader.
The major disadvantage with the differentiation strategy in the Porter’s generic model is that sometimes companies may be susceptible to copy cats. Here, a rival company can imitate all the unique features that had previously differentiated a market leader. This may make all the resources put into research and development to go to waste and may eventually take away vital buyers. In this regard, companies may not be in a position of gaining from the additional differentiation strategies that they employ because customers will no longer see their uniqueness. Therefore, such organisations would need to think of a feature that cannot be easily imitated and this is definitely a hard task. As if this is not enough, differentiation strategies may not always work in all industries because some are vulnerable to changes in consumer taste. This implies that such organisations would need to be highly aware of those changes so as to keep up. Once business respond to these varied tastes, then the company may no longer seem peculiar to buyers because what they had previously associated it with may no longer be true (Wright et. al, 1990). This was the case with Ralph Lauren apparel.
This model has also proven to be inapplicable to other firms because they have effectively combined product differentiation and cost leadership. One such company is Nike. In 1998, Nike’s market share dramatically reduced because its competitors in shoe manufacture had been able to offer the market cheaper shoes. Nike embarked on both a differentiation and cost reduction strategy. The latter was achieved by eliminating less well known endorsers and retaining only the large ones such as Michael Jordan. Also, it cut down on employee payments by letting go of a number of them. It enacted some changes in inventory and overall company processes. However, the company also differentiated itself from other firms by creating new and unique shoes. This translated into an increase of seventy percent in its annual revenue during the following year. The latter company’s success therefore shows that contrary to Porter’s opinion of choosing one over the other, it is possible to be a cost leader and a differentiated company and thus be ahead of the pack. To this end, the latter strategic model has its limitations.
The Porter’s strategic model is quite useful because it has created a mechanism for understanding competitive advantage within the market place. Its simplicity and applicability make it quite useful. On the other hand, the model is limiting because lots of challenges can occur along the way. Furthermore, there are firms that combine differentiation and cost leadership and still manage to do relatively well.
Porter, M. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. NY: Free Press.
Wright, P., Kroll, M., Kedia, B. and Pringle, C. (1990). Strategic Profiles, Market Share, and Business Performance. Industrial Management, pp.23-28.