Short lecture notes on competitive strategy

1. COMPETITIVE BUSINESS STRATEGY (PORTER’S GENERIC STRATEGY)
Porter's generic strategies framework constitutes a major contribution to the
development of the strategic management literature. Generic strategies were first
presented in two books by Professor Michael Porter of the Harvard Business
School (Porter, 1980). Porter suggested that some of the most basic choices faced
by companies are essentially the scope of the markets that the company would
serve and how the company would compete in the selected markets. Competitive
strategies focus on ways in which a company can achieve the most advantageous
position that it possibly can in its industry . The profit of a company is essentially
the difference between its revenues and costs. Therefore high profitability can be
achieved through achieving the lowest costs or the highest prices facing the
competition. Porter used the terms ‘cost leadership' and ‘differentiation', wherein
the latter is the way in which companies can earn a price premium.
Main aspects of Porter's Generic Strategies Analysis
According to Porter, there are three generic strategies that a company can
undertake to attain competitive advantage: cost leadership, differentiation, and
focus.

2. i) Low-Cost Strategy: It is the ability of a company or a business unit to design,
produce and market a comparable product more efficiently than its competitors. It
is a competitive strategy based on the firm’s ability to provide products or services
at lower cost than its rivals. It is formulated to acquire a substantial cost advantage
over other competitors that can be passed on to consumers to gain a large market
share. As a result the firm can earn a higher profit margin that result from selling
products at current market prices.
Eg: Whirlpool has successfully used a low-cost leadership strategy to build
competitive advantage.
ii) Differentiation Strategy: It is the ability to provide unique and superior value to
the buyer in terms of product quality, special features or after-sale service. It is a
competitive strategy based on providing buyers with something special or unique
that makes the firm’s product or service distinctive. The customers are willing to
pay a higher price for a product that is distinct in some special way. Superior value
is created because the product is of higher quality and technically superior which
builds competitive advantage by making customers more loyal and less-price
sensitive to a given firm’s product or service
Eg: Mercedes and BMW have successfully pursued differentiation strategies.
iii) Focus Strategy: It is designed to help a firm target a specific niche within an
industry. Unlike both low-cost leadership and differentiation strategies that are
designed to target a broader or industry-wide market, focus strategies aim at a
specific and typically small niche. These niches could be a particular buyer group, a
narrow segment of a given product line, a geographic or regional market, or a niche
with distinctive special tastes and preferences.
Eg: Solectron is a highly specialized manufacturer of circuit boards used in PCs and
other electronic devices which has adopted a well-defined focus strategy.
Combination (Stuck in the middle)
According to Porter, a company's failure to make a choice between cost leadership
and differentiation essentially implies that the company is stuck in the middle.
There is no competitive advantage for a company that is stuck in the middle and
the result is often poor financial performance. However, there is disagreement
between scholars on this aspect of the analysis. Kay (1993) and Miller (1992)
have cited empirical examples of successful companies like Toyota and Benetton,
which have adopted more than one generic strategy. Both these companies used
the generic strategies of differentiation and low cost simultaneously, which led to
the success of the companies.