The word Strategic is an adjective derived from the word Strategy. The word strategy refers to a plan or actions based on the plan with the aim of achieving a particular goal or goals. A business strategy refers to how the business plans to achieve its long-term objectives. Johnson and Scholes in the book Exploring Corporate Strategy, define strategy as ” the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations”. In other words, strategy has to do with decision making on; which markets to operate in, how to get a competitive advantage over other market players, resources needed by your business and so on.
The word management refers to the practice of effectively organizing and controlling available resources in order to achieve set objectives. Strategic management is the practice of analyzing the factors associated with the external business environment (the customers and competitors) and the organization itself (the internal environment) in order to formulate better management practices that facilitate achieving better alignment of corporate policies and strategic priorities. Porter outlined three main strategies that an organization can use to achieve sustainable competitive advantage. This paper will evaluate strategic management and the competitive strategies put forward by Porter. What is strategic management and why is it needed? In the recent past and currently, competition in business has increased making it difficult for some businesses to outdo their rivals.
This high competition has been caused by many factors. They include, increase in the number of businesses, high pressure by shareholders on companies to make more profits, cheaper transportation and communication resulting in more global trade and awareness, improved technology resulting in lower production costs and so on. All this has resulted in increased interest in strategic management. Strategic management is all about policy formulation and implementation in an attempt to establish and maintain a competitive advantage over rival firms. It can be viewed from three perspectives the traditional perspective, the resource-based and the stakeholders’ perspective.
In the traditional view, a business is perceived as an economic entity, that is, a unit with costs and incomes and the difference being profit. Competitive advantage is attained by capitalizing on the business’s strengths and opportunities and overcoming its weaknesses. Under the resource-based perspective, the business is viewed as a collection of skills and resources. Here the competitive advantage is attained by acquiring superior skills and resources to those of competitors. A good case where this perspective can be used is in the entertainment or news industry. Under the stakeholders’ perspective, the business is viewed as an interconnection of relationships between the firm and its stakeholders and competitive advantage is achieved through better relationships with stakeholders.
Who is Porter? Michael Eugene Porter is an American academic who specializes in management and economics. He is an author, management consultant and professor at Harvard Business School. Porter was born in Ann Arbor, Michigan in 1947. His academic qualifications include a BSE in Aeronautical Engineering from Princeton University, an MBA from Harvard Business School and a PhD in Business Economics from Harvard University. Porter specializes in the area of corporate success strategy and competition.
His publications include; Competitive Strategy, Competitive Advantage, Cases in Competitive Strategy, Strategy and the Internet, Redefining Health Care and many more. His most significant work is the formulated Five Forces Analysis which constitutes the strategic groups, the value chain, Porter’s clusters of competencies for regional economic development, the strategies market positioning of which encompass variety based, needs-based and access based techniques and the famous Diamond model. Porter has other achievements and accreditations.
He has won the best Harvard Business Review article of the year six times. He is a co-founder of the Monitor Group, a firm that provides consultation and capacity-building services to companies, governments, non-profit organizations and other businesses on management. He created and chairs the Harvard program for newly appointed CEOs (Chief Executive Officers). He has also been an adviser to the United States government on many occasions.
What are the generic strategies of competitiveness? This refers to the three general plans that a business can use to establish and maintain a competitive advantage over the businesses it competes with. According to the website tutor2u.net, “competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices”.
The generic strategies were created by Michael Eugene Porter in 1980. Porter stated that one of the main factors that determine a firm’s profitability is the position that the firm occupies in that industry. A firm can strategically position itself in the industry under two factors. These factors are product differentiation and cost advantage. The firm can utilize product differentiation and cost advantage in a narrow scope or a broad scope resulting in the three generic strategies. These strategies are cost leadership, differentiation and market segmentation/focus.
Originally there were twenty-seven possible strategies. However, most of the twenty-seven had no practicable application and Porter reduced them to the best three. These are the three strategies mentioned above (cost leadership, differentiation and market segmentation or focus). Porter published the three strategies in his famous book “Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1980. These strategies are applicable in any industry and that’s why they are referred to as generic.
Product differentiation and cost advantage are the two basic techniques applied to obtain a competitive advantage. Product differentiation is the process and act of making your product more attractive to customers by providing unique qualities from rival products. Product differentiation is all about making your product offer more than its substitute products. It can be achieved by adding more features to your product, creative packaging, creative advertising and so on. There are two categories of product differentiation in a market which are vertical and horizontal differentiation.
In Vertical differentiation, some products are better than others and the products can be ordered from the best to the poorest. For example cars in the market can be ranked on features like fuel consumption, safety, speed and so on. On the other hand in horizontal differentiation, products differ in features that cannot be ranked against each other. For example in an ice-cream market strawberry ice cream cannot be ranked against vanilla ice cream. Cost advantage or cost efficiency refers to the ability to produce your product at a lower cost than the rival products. It can be achieved through more efficient production methods, utilizing economies of scale and so on.
The next thing is the issue of scope. This refers to the extent to which the firm wants to apply the strengths of cost efficiency and product differentiation. When a firm applies the power of cost efficiency and product differentiation in a small part of the industry, then that is referred to as the narrow scope while when the same is done across the whole industry, the essence of broad scope is exemplified. Applying the two strengths (cost efficiency and product differentiation), in different scopes results in the three competitive strategies. These strategies are cost leadership, differentiation and focus (cost focus and differentiation focus). This is explained by the diagram below.
The above three generic strategies enable the firm to achieve above-average performance in a given industry. Strategy one: cost Leadership. In cost leadership, a firm aims at having the lowest cost of production in that industry. That is having the lowest cost of production per unit at a particular quality level. The firm aims at minimal cost in all areas e.g. Labor, advertising, raw material costs and so on.
The firm either prices its products averagely in order to get a higher profit margin or sells products at a lower cost with the aim of making more sales. Therefore firms applying this strategy will not always sell their goods or services at a lower cost than other producers. In other words, the firm aims at being a leader where costs are concerned. According to sm.au.edu, the website of Au School of Management, firms in that industry have a strong incentive to compete on cost and not price.
Therefore, firms enjoying cost advantages typically face strong competitive pressures on their cost positions. Examples of firms that use the cost leadership strategy are Ryan Air, Wal-mart, Tesco, Asda and Easyjet airline. The firms using this strategy target a large market so that large sales volume can offset costs.
The organizations that use cost leadership successfully often have features such as access to large capital amounts for significant investment in production assets, skills inefficient manufacturing, and efficient distribution channels. According to sm.au.edu, Wal-Mart is one firm that has always applied this strategy.
The firm had two sources of cost advantage: one was the growth pattern of rural locations surrounding distribution centers, the second was information technology. The use of rural locations created cost advantages because of relatively cheap land and provided cheaper distribution because Wal-Mart’s distribution trucks could easily get to these locations from interstate highways.
However, the stores were able to attract many customers who were in search of low prices and a wide variety of products Wal-Mart’s computerized information systems enabled it to achieve lower costs than its competitors. These systems enabled the company to know which items were selling and which were not. It knew how much of which products were needed and where they were needed. They could then distribute these products quickly and efficiently. Today Wal-Mart has emerged as the largest company, in terms of revenues, in the world. What are the limitations of the cost efficiency strategy? First, other firms may also choose to lower their cost causing your firm to lose its competitive edge which was its initial aim.
Secondly, other firms in the industry may focus on small portions of the market and satisfy them successfully. These are markets that are comfortable with their prices and perhaps have the notion that pricy products equate to quality. These firms combined may take over a large share of the market.
The second strategy is differentiation. In this strategy, firms aim at making their product different from the rest of the market. The product satisfies the needs of the customer in a special way compared to the substitute products. Product differentiation can be achieved through additional features, better product performance, higher product quality, better after-sale service, increased product durability and so on. If the consumer values these features, it gives the producing firm a competitive advantage.
The firm can then charge the consumer for the extra differentiated value. The firm will have to incur more costs in differentiating its product. This extra cost then has to be recouped by making enough sales which can be achieved in various ways. One way is by establishing consumer brand loyalty. Another way is by satisfying the consumer’s need in a way that the rival products cannot. Thirdly is by using the product’s differentiation as a barrier to entry by new products. There are a number of risks associated with product differentiation as a way of giving a company an upper hand over its rivals.
To start with, differentiation features or features may be copied by a rival company after the patent expires or through some other means of which loyalty and employee integrity are a point something to consider.
This causes firms that use differentiation as a competitive strategy to continually try and improve current features or invent new features, which equates to additional expenses and at times a high staff turnover in a bid to search for innovativeness. The third risk is that the extra cost may push consumers away from your product. Fourthly, the product’s method of differentiation may no longer provide value to the consumer, e.g. an existing customer may develop a better taste or feel that the changes are not fit for him or her.
The third competitive strategy is the focus, also known as the niche strategy. In this case, the firm focuses on a particular segment of the market and tries to achieve a competitive advantage either through cost advantage or differentiation.
In other words, focus applies one of the other two strategies but to a limited area of the market. Opportunities arise in concentrating on a small area because of many reasons. One, the present firms may overlook certain market areas, focusing on an area may result in better product or service delivery, Present companies may lack the ability to serve the entire market and so on. Under focused cost leadership strategy the firm offers its product to consumers who buy in small quantities
A good example of a firm that applies this strategy is IKEA. IKEA is a furniture company that offers low-cost furniture for customers. Under a focused differentiation strategy, the firm produces unique goods for a small proportion of the market. The firms here succeed if the market falls in either one of the following two conditions. One, if the quantities demanded are too small for large for industry-wide competitors to provide economically. Two, when the extent of product differentiation wanted by consumers is cannot be met by the industry-wide differentiator. Porter argued that these three strategies should be mutually exclusive.
That is a firm should apply only one strategy at a time. He argued that if a company tries to use more than one strategy at the same time, it would not get any benefit at all. He called this being “stuck in the middle”. For example, if a firm wants to be a low-cost producer in the industry but still wants to produce a differentiated product will find itself not succeeding in either strategy. Products that are differentiated are relatively costly to produce, in other words, a company cannot the most differentiated product at the lowest production cost.
Another reason is that attempts at different strategies simultaneously would send mixed messages about your product to the consumer. This would affect the products marketing and consequently its sales.
Strategic management is about setting or placing the firm in a position to fulfill long-term goals. Competition is part of all businesses. For a business to make more than average profits it should have an advantage over other firms in the industry. Michael Eugene Porter published three strategies that a firm can use to get this competitive advantage. These are cost leadership, differentiation and focus. Porter published these three strategies in his famous book “Competitive Strategy: Techniques for Analyzing Industries and Competitors”.
The three strategies are based on two basic sources of competitive strengths; cost efficiency and product differentiation. Each of the strategies has its risks or limitations. It is vital to note that strategic management is multidimensional and situational. In competitive strategy, Porter utilizes enterprise techniques and the structure of the industry as keys to obtaining it. He, therefore, proposes that it is best to select a strategy to maximize one’s competitive edge based on an analysis of how well the economic market is positioned at the time. Finally, a firm should apply one strategy at a time. If the firm tried to apply more than one strategy at a time it does not benefit from any of them, it is more like obeying the law of diminishing returns where at some
level in production addition of a specific input actually results in less of the output if other inputs are held constant. However, it is a little different in strategic management in that we are neither investing so much financially nor are we comparing inputs but rather investing in a technique at a time.
‘Cost leadership’. Au School of Management. 2009. Web.
Johnson, G, Scholes, K, & Whittington, R. Exploring Corporate Strategy, 8th edn, Pearson Education Limited, Essex. 2008.
Porter, M. Leading authority on competitive strategy’, a finance website. 2009. Web.
‘Porter’s Five Forces: A model for industry analysis’, quickmba website. 2009. Web.
‘Porter’s Generic Strategies: Choosing Your Route to Competitive Advantage’, mindtools. 2009. Web.
‘Product Differentiation’, Investopedia website, 2009. Web.
‘Strategy – competitive advantage’, tutor2u. 2009. Web.