Porter generic strategies

The competitive matrix is introduced by Michael E. Porter 1980 concept, which is also known under the name of generic strategies. It aims at developing strategies for the determination of product policy in marketing for individual business segments of a company. Porter tries so a systematization of the possible strategies that can track a company to gain a competitive advantage in the relevant market. Porter arranges the competitive strategies of the possible strategic objective ( "What does the company do " ) and after the appointed by the company strategic advantage ( " As the company wants to achieve this goal " ) and receives three basic strategy types ( see figure) in the are explained below.

  • 5.1 Bridge to resource theory

Cost leadership ( price - quantity strategy )

Cost leadership ( engl. cost leadership ) describes the strategy of a company, to obtain lower costs a competitive advantage. Porter explains this with the observation that such a company after a price war even can make profit when all other competitors have fallen into the red zone. Note: Cost leadership does not mean price leadership, however, is often a prerequisite for this.

To achieve this goal calls Porter various methods. A more complete list of these supplies Robert M. Grant. He distinguishes eight methods for cost leadership strategies:

  • Economies of scale (English economies of scale)
  • Composite effects ( engl. economies of scope )
  • Experience effects
  • Process ( experience curve, Eng. Economies of learning)
  • Product Design
  • Process design
  • Capacity utilization
  • Input costs (factor costs)
  • Residual effects of the operational effectiveness

Among the residual effects of operational effectiveness Grant summarizes the effects that are less influenced, for example, natural monopolies, location advantages, and any unexplained by the above effects competitive advantage.

Differentiation strategy

Under the differentiation strategy (English differentiation ) refers to the strategy of a company to distinguish itself in the eye of the consumer by other competitors. Henry Mintzberg et. al (1995 ) perform six methods of differentiation on:

  • Price
  • Image
  • Support / Support
  • Design
  • Undifferentiated or non- differentiated

For you to describe the possibility of companies through price leadership (not to be confused with cost leadership, see above), brand name, etc. to differentiate from competitors. There a monopolistic price sales function is thus created for a certain price range. In this price range, the provider can determine the price quasi itself and the customers walk until in a significant price difference to the competition.

According to Porter, a differentiation strategy may exclude a large market share in certain circumstances, for example, because the perception of exclusivity can not be reconciled with high market shares. An actual difference is less important than the perceived difference. He describes differentiation strategies as a trade-off between the cost and the expensive activities to achieve differentiation.

Niche strategy ( focusing)

Niche strategies (English focus) - also called " strategy of focusing on priority areas " - are strategic focus on specific customer groups, segments or geographic markets. As differentiation can take many forms niche strategies. They are based on the assumption that a company can provide the basis of the narrow target this more effectively with products or services, as a broad competing competitors. As a result, the company either high differentiation achieved by the needs of a target group be better served or a more favorable cost situation, or both.

Risks of competitive strategies

Porter describes two ways in which the strategies can fail:

Risks of cost leadership

Cost leadership requires investment in modern manufacturing equipment under the same merciless ( ruthlessly ) the elimination of superfluous, avoidance of line extensions and constant attention to technological developments. Cost reductions in high production volume ( learning curve) are not self-evident, nor can you achieve all of the available economies of scale without constant attention. Cost leadership is threatened constantly by the following factors:

  • Technological innovation that makes previous experience or learning void
  • "Cheap " learning through new entries or by imitation or copycat investment in the latest production technology
  • Inability to recognize product changes, because you focus on costs
  • Cost increases that reduce the company's ability to compensate for the differentiation advantage of competitors.

Risks associated with the differentiation

Also, differentiation strategies are subject to risks:

  • The cost difference between firms with cost leadership strategies and differentiation strategies is so large that the loyalty of the customer suffers. If a differentiation strategy to seriously neglected the cost, the cost advantage is out of hand at some point.
  • The need of the customers for the differentiation advantage is, for example, because the experience of customers increases.
  • Imitation may reduce the perceived difference - a common operation when industries mature.

Risks of niche strategy

Even niche strategies involve risks

  • The cost differential between large providers and niche providers can expand and neutralize the advantage of niche provider.
  • The difference between the products in the broad market and the niche markets decreases.
  • Competitors find sub-niches within the niches and caves served the niche.

Conclusions

Porter describes the competition matrix following its industry structure analysis ( engl. five forces ) as a means to influence the five factors.

The three competitive strategies according to Porter are ways to deal with the structural forces. The implication is that a company which fails to develop its strategy along at least one of these strategies, occupying an untenable position. Porter calls this position Stuck in the Middle - an extremely weak strategic position because it lacks such a company to market and investments in order to win in the cost game can and on the other hand, it lacks the differentiation to bypass the low - cost game.

" The company is caught in the middle of low profitability almost guaranteed ... "

Porter assumed such companies a distorted corporate culture and organizational rules and motivational systems that are in conflict. He claims that leaving this position requires considerable time and effort and it can be empirically observed that companies in and out of such positions waver.

Bridge Resource Theory

The Canadian economist Danny Miller dealt with the resource base on which the competitive advantages are built. In his view, cost leadership and differentiation in the way, as the means of production ( engl. assets) distinguish be used. Thus, to achieve cost leadership means of production are selected and used that the efficiency is maximized. He calls this position means of production intensity ( engl. asset intensity ). On the other hand he sees differentiation as a strategy where production means produces a maximum range of a minimum of input use. This position he calls the means of production - economy ( engl. asset parsimony ). Thus, Miller shows that the system based on an organization influenced the strategy and vice versa, the strategy affects the asset base.

Classification of the model

Porter, with its competition matrix, a simple and immediately accessible view. The model is not without controversy. Main criticisms are:

  • The oversimplification,
  • The point of view of the industry from, without consideration of interdependencies with other industries
  • Statements about the ( non-) compatibility of differentiation and cost leadership,
  • The minimal development of niche strategies.

Examples of strategies

Typical cost leadership strategies can be found in markets with highly standardized goods, such as steel, chemical industry, cement, etc. The pressure to reduce costs has led to a concentration of businesses and promotes the emergence of oligopolies.

An example of a cost leadership strategy in the consumer goods sector is Aldi in the economies of scale and the absence of brand products ( differentiation). The example is not without controversy, as the name " Aldi " as a brand (german brand ) is understood and well is to differentiate themselves from competitors.

Especially in the consumer goods sector differentiation strategies are operated. Thus, for example, Coca Cola, Hugo Boss and C & A brand name that are aimed at a very broad market segments. Said Porter Not need a high absolute market share can be observed in brands such as Louis Vuitton and Porsche clarify which are positioned in the premium segment. In addition, there are brands such as Eyewear manufacturer, where from the outset, the customer base is limited by the specific product characteristics.

Grant mentions example, two companies with niche strategies, Devro International plc, a manufacturer of sausage casings with a market share of 56 % and UST Inc, a manufacturer of chewing tobacco (market share 78 % ROE in 1996 about 165 %, ROE 1995 approximately 145 %). Both companies are in market niches and achieve through this niche position cost or differentiation advantages.

Michael Porter Porter's generic strategies Experience curve effects Danny Miller (economist)
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