Generic Porter Strategies
Porter's generic strategies describe how a company can achieve competitive advantage over its competitors by outperforming theirs. For this, it differentiates two competitive advantages (low costs and differentiation), which can be divided into three or four through market segmentation.
The fundamental basis for obtaining this superior profitability is to achieve a sustained competitive advantage, and for this, a business strategy must be followed.
In 1980, Michael Porter sought to improve the theory of comparative advantage, which by advising countries to specialize in the product or service where they had comparative or absolute advantage, could relegate some countries to specialize in primary sector production, entering in a spiral of low wages and little wealth generation.
Porter defined three types of competitive advantages that a company can aspire to. These competitive advantages can be achieved throughout the industry:
- Cost leadership.
- Product differentiation.
- Market segmentation.
Market segmentation, although it is not considered another competitive advantage, is mentioned, since it simply uses one of the other two competitive advantages but in a smaller scope of the market, industry or country.
1. Cost leadership
A company achieves cost leadership when it has lower costs than its competitors for a product or service of similar or comparable quality. Thanks to the cost advantage, the company manages to lower its prices until it annuls its competitor's margin.
The cost leadership strategy is recommended when:
- The product is standardized (many products of the same quality and price are offered), and it is offered by multiple suppliers or companies.
- There are few ways to achieve product differentiation (try to make your product be perceived and provide different characteristics to the buyer) that are meaningful.
Sources of competitive cost advantage
It has been considered that the main source of the competitive advantage in costs is derived from the experience effect which has its origin in the learning effect.
- The learning effect consists in that the manufacturing time of a unit of product decreases as more units of that product are produced. This reduction in completion time implies a reduction in the unit costs of direct labor and the product.
- The experience effect causes the experience accumulated by the company to decrease in unit terms the real cost of the company's total added value. The experience effect constitutes a strong entry barrier for new competitors and a solid competitive advantage for the company that accumulates more experience effect. Also, the effect of economies of scale and economies of scope constitutes a greater competitive advantage and therefore greater entry barriers.
It is said that a company has a competitive advantage in product differentiation when it offers a product or service that, being comparable to that of another company, has certain attributes or characteristics that make it perceived as unique by customers. Therefore, customers are willing to pay more to obtain a product from one company than another.
In general, it can be said that for a product that is simple and that is produced with a specific standardized technique, the opportunities for differentiation are reduced.
On the contrary, the greater the complexity and variety of the characteristics of the products, the greater the possibilities of obtaining a competitive advantage of differentiation.
The product differentiation strategy is more appropriate when any of the following circumstances occur:
- Customers attach special importance to aspects such as quality, or use the product to differentiate themselves socially.
- The distinctive features are difficult to imitate, at least quickly and inexpensively.
The company that wants to be successful with a product differentiation strategy must undertake significant efforts to improve the offer of its competitors.
Sources of product differentiation
A company can differentiate its offering to customers in a large number of ways. The variables on which the advantage in differentiation can be built are related to the technical characteristics of a product, the characteristics of its markets, the characteristics of the company itself or other variables that are difficult to classify such as time or attention to the criteria of responsibility.
The variables for product differentiation are:
- Product characteristics, such as size, shape, technology, reliability, safety, consistency, durability, pre-sale and after-sale service.
- Market characteristics: They are the variety of needs and tastes on the part of consumers that can allow differentiation.
- Characteristics of the company: They are the way in which the company conceives or conducts its business, the way it relates to its clients, identity, style, values or reputation and prestige in front of clients.
- Other variables for differentiation: Two other additional variables are time and attention to social responsibility criteria.
The market segmentation strategy seeks that companies know the behavior of people when consuming a product or service and thus offer them what they really need. Try to get companies to focus on a few target markets rather than trying to target all of them.
It is a strategy often used for small businesses, since they usually do not have the necessary resources to attract the entire public, but rather it pays them to focus their efforts on one segment of the market. Companies that use this method often focus on the customer's needs and how the products or services could improve their daily lives. Also, some companies may allow consumers to participate in their product or service.
This being the case, the next step will be to classify individuals into audience segments that have the most similar response possible to the product offered.