Porter's Generic Competitive
Strategies (ways of competing)
A firm's relative position
within its industry determines whether a firm's profitability is above or below
the industry average. The fundamental basis of above average profitability in
the long run is sustainable competitive advantage. There are two basic types of
competitive advantage a firm can possess: low cost or differentiation. The two
basic types of competitive advantage combined with the scope of activities for
which a firm seeks to achieve them, lead to three generic strategies for
achieving above average performance in an industry: cost leadership,
differentiation, and focus. The focus strategy has two variants, cost focus and
differentiation focus.
1. Cost Leadership
In cost leadership, a firm sets
out to become the low cost producer in its industry. The sources of cost
advantage are varied and depend on the structure of the industry. They may
include the pursuit of economies of scale, proprietary technology, preferential
access to raw materials and other factors. A low cost producer must find and
exploit all sources of cost advantage. if a firm can achieve and sustain overall
cost leadership, then it will be an above average performer in its industry,
provided it can command prices at or near the industry average.
2. Differentiation
In a differentiation strategy a
firm seeks to be unique in its industry along some dimensions that are widely
valued by buyers. It selects one or more attributes that many buyers in an
industry perceive as important, and uniquely positions itself to meet those
needs. It is rewarded for its uniqueness with a premium price.
3. Focus
The generic strategy of focus
rests on the choice of a narrow competitive scope within an industry. The
focuser selects a segment or group of segments in the industry and tailors its
strategy to serving them to the exclusion of others.
The focus strategy has two
variants.
(a) In cost focus a firm seeks
a cost advantage in its target segment, while in
(b) differentiation focus a
firm seeks differentiation in its target segment. Both variants of the focus
strategy rest on differences between a focuser's target segment and other
segments in the industry. The target segments must either have buyers with
unusual needs or else the production and delivery system that best serves the
target segment must differ from that of other industry segments. Cost focus
exploits differences in cost behaviour in some segments, while differentiation
focus exploits the special needs of buyers in certain segments.
Competitive advantage
Porter's Competitive Advantage
Competitive advantage (CA) is a
position that a firm occupies in its competitive landscape.
Michael E. Porter posits that a competitive advantage, sustainable
or not, exists when a company makes economic rents, that is, their earnings
exceed their costs (including cost of capital). That means that normal
competitive pressures are not able to drive down the firm's earnings to the
point where they cover all costs and just provide minimum sufficient additional
return to keep capital invested. Most forms of competitive advantage cannot be
sustained for any length of time because the promise of economic rents drives
competitors to duplicate the competitive advantage held by any one firm.
A firm possesses a Sustainable
Competitive Advantage (SCA) when it has value-creating processes and positions
that cannot be duplicated or imitated by other firms that lead to the production
of above normal rents. An SCA is different from a competitive advantage (CA) in
that it provides a long-term advantage that is not easily replicated. But these
above-normal rents can attract new entrants who drive down economic rents. A CA
is a position a firm attains that lead to above-normal rents or a superior
financial performance. The processes and positions that engender such a position
are not necessarily non-duplicable or inimitable.
Analysis of the factors of
profitability is the subject of numerous theories of strategy including the five
forces model pioneered by
Michael E. Porter of the Harvard Business School.
In marketing and strategic
management, sustainable competitive advantage is an advantage that one firm has
relative to competing firms. The source of the advantage can be something the
company does that is distinctive and difficult to replicate, also known as a
core competency -- for example Procter & Gamble's ability to derive superior
consumer insights and implement them in managing its brand portfolio. It can
also be an asset such as a brand (e.g. Coca Cola) or a patent, such as Viagra.
It can also simply be a result of the industry's cost structure -- for example,
the large fixed costs that tend to create natural monopolies in utility
industries. To be sustainable, the competitive advantage must be:
-
distinctive, and
-
proprietary
In the past decades, IT is
becoming more and more important. Especially the internet plays a major role in
today�s world and not to forget in businesses.The ability to effectively manage
information helps organizations dealing with changes in the environment, which
can result in a competitive advantage over other firms. An example of gaining
competitive advantage: Organizations make information available for each other
in an efficient way in order to reduce all difficulties of purchasing, marketing
and distribution
In 2006, Jaynie L. Smith
authored Creating Competitive Advantage (Doubleday). This book outlines how
companies fail to understand their own existing competitive advantages and use
them in sales/marketing. She provides a framework for how companies can evaluate
their own operations and develop competitive advantage/competitive positioning
statements to better hone their sales/marketing messages. Competitive advantage
statements help distinguish companies by highlighting what they offer to the
customer using tangible terms and concepts. The next step is to test those CA
statements through independent market research. This allows a company to
understand their customers' hierarchy of buying criteria in an objective
indepenedent context. From there, companies can tailor their CA statements to
speak directly to the buying interests of the customer.
Competitive Advantage
Competitive Advantage: a
company is said to have a competitive advantage over its rivals when its
profitability is greater than the average profitability of all other companies
competing for the same set of customers.
Sustainable Competitive
Advantage
Sustainable Competitive
Advantage: a company has a sustained competitive advantage when its strategies
enable it to maintain above-average profitability for a number of years.
Competitive advantages vary
from situation to situation and from time to time. Some basic examples of CAs
can be divided in 4 main global areas:
Cost: Low-cost
operations
Quality: High
quality, Consistent quality
Time: Delivery
speed, On-time delivery, Development speed
Flexibility:
Customization, Volume flexibility, Variety
References
(Competitive Advantage)
http://en.wikipedia.org/wiki/Competitive_advantage
http://www.ifm.eng.cam.ac.uk/dstools/paradigm/genstrat.html
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