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Porter’s generic strategies Essay


Introduction

Porter’s generic strategies were designed to explain how firms achieve competitive advantage. Numerous industries have applied the three generic approaches, and thus illustrated that Porter’s model was accurate in explaining how firms become successful in their industries. Nonetheless, a few exceptions do exist.

Explanation of the model

Firms may adopt one of three generic strategies: cost leadership, differentiation or focus. Cost leaders are organisations that sell their goods or services at the lowest price in their industries. Companies can become cost leaders by acquiring and continually investing in capital so as to create or sustain a large market share.

High capital investments also create large economies of scale that allow firms to minimise unit costs of production. As a result, these businesses can pass on production savings to their consumers through low prices. They need to keep up with the latest developments in technology in order to control process-related expenses. Many cost leaders also have closely monitored overhead. They tend to reduce labour costs through commission-based pay.

Others can negotiate low prices for raw materials with their suppliers. Organisations may choose cost leadership because it can protect them against powerful buyers and suppliers. Furthermore, it hampers potential entrants from entering the market because they cannot match their economies of scale.

The differentiation strategy refers to provision of unique services or products to one’s clients. Some organisations may achieve differentiation through addition of certain qualities in their products. Others may simply work on brand perception while some may dwell on product design. Even the use of technology can become a source of differentiation. Companies may choose such a strategy because it allows them to enjoy high profit margins.

Customers tend to be loyal to differentiated firms, so they hardly pay attention to price adjustments among competitors. Differentiation also reduces buyers’ choices hence their power over the concerned firm. In order to achieve this feat, companies need to invest heavily in research and development.

They should also market their services or products effectively. In other words, they need to communicate to consumers the exceptional qualities of their products. Differentiated firms ought to have a fixed pay structure that enhances employee loyalty. Innovation and creativity are central features of this strategy. However, businesses in this category do not enjoy a large market share because the strategy focuses on exclusivity.

The last approach is called the focus strategy. Here, a company tailors its products or services to one market group. It can select a particular market segment on the basis of its geographical location, product preference or demographic factors. In this category, organisations can either be cost-focus strategists or differentiation-focus strategists. When they select one of the latter, then they can create competitive advantage in their industry.

Porter (1980) explained that firms cannot select a hybrid of the three strategies and still be successful. The generic strategies are contradictory in nature, so trying to implement more than one of them would cause firms to be stuck in the middle. For instance a company that wants to pursue both cost leadership and differentiation would need to cut down on overhead, but still invest in research and development.

Achieving these two objectives simultaneously would be close to impossible. Such firms have to contend with low profits because they lack the features needed to compete with low cost competitors or differentiated organisations. They also confuse customers who cannot identify one distinct feature about them. Unless a company employs different generic strategies across very separate and distinct business units, then it would not succeed in using a hybrid model.

Application of Porter’s generic strategies in various industries

Companies in the hotel industry have applied Porter’s generic strategies successfully and those who have not have ended up recording immense losses (Bordean et al. 2010). In the hospitality industry, companies achieve cost leadership by offering only basic services. They focus on attracting a large market segment by keeping their rooms inexpensive. Perhaps one of the most popular strategies pursued in the hotel industry is differentiation.

Companies may provide unique services such as wifi access, transportation from the airport, superior room furnishing and many more to create value. They eventually let travellers and visitors know that their services are superior, which leads to business success.

In the hospitality industry, most firms choose to pursue a differentiation focus strategy rather than a cost focus strategy because it is difficult to meet the needs of a certain market segment without some form of differentiation. Some hotels have achieved this through focus on elite clientele, married couples or Islamic clients.

Bordean et al (2010) carried out an analysis of the Romanian hotel industry by administering questionnaires to 69 hotels in the country. They had 26 strategic practices that participants needed to select. These findings would then be classified as cost leadership, differentiation or focus strategies.

The researchers found that several hotels utilised the differentiation strategy through brand identification, superior staff experiences as well as provision of certain technological advantages.

They also found that others used the focus strategy by offering speciality services and establishing a strong reputation of excellence in the industry. Cost leadership was not found to be a strong strategy among most hotels because clients frowned upon cost-cutting measures. In essence, these findings support Porter’s assertions concerning the unfeasibility of hybrid approaches.

Various industries have different manifestations of the three generic strategies because of the inherent characteristics within them. As described earlier, the hospitability industry rarely has firms that pursue cost leadership because of the nature of demand in that sector. However, other industries may be more inclined to cost leadership than others. Alternatively, they may depict differentiation strategies in different ways from other service industries.

One such case is the health service industry. Lamont et al. (1993) found that differentiation in hospitals occurs through use of technologically sophisticated services, expansion of the nature of services offered and provision of rare services. For instance, hospitals with cardiac catheterisation laboratories and lithotripters are differentiated through the use of technological sophistication.

Hospitals with rare services include those one that provide alcoholism services, birthing rooms or burn care. Conversely, hospitals may also pursue cost leadership by cutting down on their expenses. If the total operational costs per bed and the salary adjusted for each patient is low, then one ought to classify that hospital as a low cost facility.

When Lamont et al. (1993) measured the financial performance of all hospitals (total margin and net operational revenue); they found that muddling organisations were the least profitable. These were companies who neither had low cost strategies or differentiation.

Experts suggest that differentiated hospitals are better suited to discontinuous environment because differentiators give customers unique service. They use new technologies or foresee customer reactions and tailor services to meet those new needs. In a dynamic environment where factors alter frequently, hospitals pursing a differentiation strategy will be better able to cope with unpredictable occurrences. Cost leaders, on the other hand, thrive in predictable environments.

A dynamic environment creates diseconomies of scale and undermines attempts at cost control or efficiency. Furthermore, if the institution’s environment changes then the institution should consider changing its generic strategy. In the healthcare industry, firms’ strategic options are not curved in stone. They can be oriented to fit their environment. However, if a hospital already has a proper organisation-environment fit, then there is not need to alter its Porter generic strategy.

Torgovicky et al. (2005) also carried out a study in the healthcare industry. They collected performance data from the Israeli ambulatory health care system, and compared this with the generic strategies pursued by the different businesses. It was found that organisations that did not fall neatly into any of the three categories were not financially viable. These findings further supported the assertions made by Porter.

In the airline industry, one can also find instances of the Porter generic strategic models across the board. Cost leaders work by offering no frills; they only provide standard services. A good example of such an airline is Britain’s Easy Jet. The company merely provides clients with a seat and leg room, and thus cuts down on costs. It then eliminates the need to charge customers for any extra features. The strategy has built a large market share for the company and this has also increased its high income streams.

Differentiators in the airline industry aim at providing additional features such as a diverse and satisfying menus, strong customer service and personal television viewing. Focus strategies in the airline industry are manifested through various ways. Some may dwell on offering differentiated flights in small airports. Alternatively, others may choose to fly to local destinations and may offer their services as low costs (Peters 2008).

Several consumers in the airline industry will not pay high prices for short-distance flights. Consequently, cost leaders have taken advantage of this situation and dominated short-distance flights. Some airlines have suffered tremendously owing to poor application of the Porter generic strategies. British Airways recorded losses of approximately 300 million pounds owing to its insistence on offering frills in short distance flights.

One may liken frills to differentiation generic strategies because consumers must pay more for certain in-flight perks. Conversely, short distance flights may be likened to the cost leadership strategy. Therefore, British Airways was trying to pursue two simultaneous strategies in this business unit, and failed dramatically. The company has since learnt that the two approaches should be separated in order to foster financial sustainability.

Perhaps one of the most obvious depictions of Porter’s generic strategies is the basic industrial goods sector, such as steel making (Bennet & Cooper 1979). It is preferable to employ cost leadership strategies in this sector owing to a number of reasons. First, the steel industry has minimal opportunities for differentiation. The goods being prepared are quite basic and will eventually be used to make other commodities.

Therefore, organisations are only left with process manipulation as the only way of maintaining a competitive advantage. The steel making industry often relies on the use of technology in order to boost production processes; this is a symptom of cost leadership. One of the ways in which these companies have reduced production costs is through computer inventory systems, which ensure that no company resource goes to waste during manufacture.

Steel makers also work hard to ensure that their purchasing, and sales management techniques are in order. This would ensure that they produce their goods at very low prices. The companies also struggle to improve economies of scale through joint ventures because the overall outcome is plain steel.

Sometimes joint ventures may occur between firms within the same supply chain. In other words, vertical integration of suppliers and manufacturers often takes place in the steel industry. Companies that engage in these joint ventures aim at minimising the cost of acquiring raw materials like iron ore or steel shreds. The high capital investments in basic industries also explain why price wars are common in the industry.

Since organisations invest so much in opening up their businesses, then they try as much as possible to cut down on costs. The same strategies in the steel industry are also applied in other industries such as aluminium, plastic or paper. Such organisations do not diversify their goods, so the only option available to them is the price alternative.

Weaknesses of Porter’s generic model

While Porter’s strategic model may have garnered wide application in a number of industries, reports also shows that some industries or organisations do not follow Porter’s recommendations to the letter. It is possible for firms to become cost leaders through the use of differentiation. A case in point is the automobile industry. General Motors was recognised as a cost leader even during the same decade that Porter created the generic strategy model.

However, consumer reports also indicate that the company’s large luxury vehicles were the preferred consumer brand between 1976 and 1982. Similarly, the organisation’s midsize compact category was also at the top of their list between 1977 and 1982 (Datta 1996). The compact and large luxury automobile was one of the most profitable car segments at the time. These findings illustrate that General Motors differentiated its product offerings despite being a cost leader. Its profitability came from its perfection of the two models and its pursuance of low prices. Some firms may pursue more than one generic strategy, albeit at a milder level with one of them.

The latter assertions are supported by numerous studies; one such example was a research done by Chan and Wong (1999). The two authors sought to examine the relationship between the competitive strategies adopted by organisations in the banking sector and their performance. They found that companies with multi-strategy approaches were more financially successful than the ones who only chose on of Porter’s three generic strategies.

Chan and Wong (1999) explained that these strategies were possible because those banks had ample resources to synergise seemingly incompatible generic strategies. The organisations achieved this feat because they had strong organisational capabilities. Most of their managers were committed to their companies and carefully analysed the relationship between business activities and the organisational system.

Porter argued that firms may choose to pursue differentiation or cost leadership in order to garner success. He treats these two approaches in an equal manner and believes that they can both provide tangible results for companies that select them. However, some analysts have found that differentiation is a superior strategy to cost leadership. Customers and their perception of quality within a certain company make a company more competitively placed than a cost leader.

This explains why many US-based firms in the electronics industry became bankrupt. They failed to innovate and paid minimal attention to the quality of their commodities. Differentiation is superior to cost leadership because it is more focused towards customer needs. These firms listen to their buyers and are keen on using technology or any other means needed to meet consumer needs.

According to Porter, differentiation is not well suited to low cost. However, this statement may not always be true. Differentiation is often associated with high quality and value creation. Nonetheless, in an attempt to meet consumer demands through quality improvement, some companies may end up minimising costs, which may be passed on to consumers through lower prices. For instance, in 1997, Toyota wanted to improve its Camry model by increasing its speed impact.

However, after achieving that objective, the company found that the product had fewer parts and thus better performance (Krebs 1996). In the mobile phone industry, companies instated quality assurance procedures in order to boost mobile device performance. However, these quality processes, which were differentiation strategies, ended up reducing costs of the products. Therefore, differentiation and low costs may work hand in hand, contrary to Porter’s claims.

Conclusion

Porter’s generic strategies have an impact in numerous industries across the board. Most of these organisations tend to have low levels of differentiation and are relatively secure industries. However, other firms may challenge the assumptions in Porter’s model when they exist in dynamic industries such as international banking.

References

Bennet, R & Cooper, R 1979, ‘Beyond the marketing concept’. Business Horizons, June, p. 76-83.

Bordean, O, Borza, A, Razvan, N, & Catalina, M. 2010, ‘The use of Michael Porter’s generic strategies in the Romanian hotel industry’, International Journal of Trade, Economics and Finance, vol. 1 no. 2, pp. 173-177,

Chan, R & Wong, Y 1999, ‘Bank generic strategies: does Porter’s theory apply in an international banking centre?’, International Business Review, vol. 8 no 5, pp. 561-590.

Datta, Y 1996, ‘Market segmentation: An integrated framework’, Long Range Planning, vol. 29 no. 6, pp. 797-811.

Krebs, M 1996, ‘1997 Toyota Camry: Indeed, less is more’ New York Times, 26 October, p.15.

Lamont, B, Marlin, D, & Hoffman, J 1993, ‘Porter’s generic strategies, discontinuous environments and performance: A longitudinal study of changing strategies in the hospital industry’, Health Services Research, vol. 25 no. 5, pp.623-64.

Peters, K 2008, ‘Generis strategies: A substitute for thinking?’ The Ashridge Journal, Spring, p. 1-5

Porter, M, 1980, Competitive strategy: Techniques for analysing industries and competitors, Free Press, New York.

Torgovicky, R, Goldberg, A, Shvarts, S, Bar, D, Onn, E, Levi, Y, & Bardayan, Y. 2005, ‘Application of Porter’s generic strategies in ambulatory healthcare: a comparison of managerial perceptions in two Israeli sick funds’, Healthcare Management Review, vol. 30 no. 1, pp 17-23.

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1. Yuliana O. "Porter’s generic strategies." IvyPanda (blog), May 5, 2019. https://ivypanda.com/essays/porters-generic-strategies-essay/.


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O., Yuliana. "Porter’s generic strategies." IvyPanda (blog), May 5, 2019. https://ivypanda.com/essays/porters-generic-strategies-essay/.

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O., Yuliana. 2019. "Porter’s generic strategies." IvyPanda (blog), May 5, 2019. https://ivypanda.com/essays/porters-generic-strategies-essay/.

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O., Y. (2019) 'Porter’s generic strategies'. IvyPanda, 5 May.

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