DON’T GET CAUGHT IN THE MIDDLE - MIDDLE PORTER’S GENERIC STRATEGIES
 IN CONTEXT FOCUS Business strategy KEY DATES 1776 UK economist Adam Smith introduces the concept of comparative advantage, where one party has the ability to produce a particular good or service at a lower marginal cost than another. 1960 US economist Theodore Levitt says that rather than finding a customer for their existing product, businesses should find out what customers want, and produce it for them. 1985 Michael Porter publishes Competitive Advantage. 2005 Professors W. Chan Kim and Renée Mauborgne recommend a “blue ocean” strategy for generating growth and profits, in which new demand is created in an uncontested market space.Consumers have choice. And different consumers will choose differently— some like to pay the most for the luxurious option, while others will always opt for the cheapest. Companies recognize this and pitch their business at a particular group of consumers. This is because it is never wise for a company to be caught between groups of customers. Harvard Business School professor Michael Porter proposed “generic strategies” for gaining competitive advantage, explaining his idea in Competitive Advantage: Creating and Sustaining Superior Performance (1985). Porter used a four-celled matrix to represent the four different generic strategies in his theory. Companies generally choose between two generic strategies: either “cost leadership,” where they aim to be the cheapest in the market; or “differentiation,” where they create unique products or services. However, there is another element that can be added to these two generic strategies: a company might choose to pursue a “focus strategy,” offering a specialized service in a niche market. This position can be applied to both of the initial generic strategies, resulting in a cost-focus strategy (where the company aims to be cheapest within a niche market) or a differentiation-focus strategy (where the company offers unique products or services within a niche market). Cost-leadership strategy Companies pursuing a costleadership strategy have two options. They can choose to sell products at average industry prices to earn a greater margin than competitors; or sell at below industry prices to gain more market share. Some supermarkets, such as German retailer Aldi and UK company Tesco, take the low-price approach to cost leadership. They achieve this by purchasing large volumes from closerelationship suppliers, and offer the customer “deep discounts.” Their slogans— Tesco’s “Every little helps” and Aldi’s “Like brands, only cheaper”—convey their drive to pass savings on to the consumer. Porter suggests that to pursue a cost-leadership strategy, a company has to be the leader in terms of cost in their industry or market, rather than be among a group of low-cost producers, because this makes them vulnerable. With fierce competition there is always the chance for other low-cost producers to reduce prices, and so take market share. Companies that choose cost Bose Systems is an audio specialist that pursues a differentiation strategy. It distinguishes itself from competitors through research and development, which results in innovative technology leadership have to be confident that they can both achieve the number one position, and also maintain it. Several requirements must be met to achieve this, including: a low cost base (across labor, materials, and facilities); efficient technology; efficient purchasing; well-organized and cost-effective distribution; and access to capital for any required investment, to keep costs down. These low-cost principles are not exclusive to any one company, however, and the risk is that they are easily replicated. Companies pursuing a cost-leadership strategy have to build in continuous improvement in all their processes to ensure the company can keep costs below those of other competitors. Differentiation strategy A company that pursues a differentiation strategy has to make markedly different products or services from competitors, so they have greater appeal to consumers. This strategy is more appropriate in markets where products are not price sensitive, and customers’ needs are typically underserved. It also means being able to satisfy those needs in ways that are difficult to copy. Bose Systems is a company that pursues a differentiation strategy. A privately owned US audio electronics company, it consistently reinvests profits to fund innovation. Customer-focused research has led to Bose’s dominant position; their noise-canceling headphones and stylish speakers have become aspirational items. The approach to differentiation will vary according to the products and services, and the nature of the particular industry, but typically involves additional features and functionality, enhanced durability, and better customer service. Companies that choose to pursue this strategy require certain fundamentals in place, including ❯❯ good research and development, an innovative culture, and the ability to deliver consistently high-quality products or services. This needs to be supported by effective marketing, so that the differentiation is positioned and communicated to customers. Brand image is integral, and is often strengthened by the nature of the differentiation. Focus strategy Companies pursuing a focus strategy choose a particular niche market. They have to understand the dynamics of that market and the unique needs of customers within it, and then develop either low-cost or well-specified products or services. They also tend to serve their customers well, and so build strong brand loyalty. This makes their particular market segment less attractive to potential new entrants. Ferrari is an example of a company in a niche market that has chosen to differentiate itself. The company targets the limited highperformance sports-car segment, and its cars are differentiated through high-spec design, highperformance, and the company’s Grand Prix association. Whichever focus a company chooses, it must do so on the basis that it can successfully compete on the strength of a particular ability or competence that will help it in its chosen market niche. If the company aims for cost leadership in a niche market, for example, it has to be based on distinctive relationships that have been developed with specialized suppliers. If the company goes for differentiation in a niche market, on the other hand, it has to be on the strength of a deep understanding of customer needs. However, a company that chooses to focus on a small market segment because it is too small to serve the larger market risks being sidelined by bigger companies with distinctive abilities, which enable them to better position their offerings. Airline strategies The airline industry illustrates Porter’s idea. Consumers have a choice when they book an airline ticket. They can choose between a no-frills airline or a more expensive operator offering better service, quality, and comfort. There may also be a third option: a small airline that offers only a few routes. Airlines tend to focus on a particular group of travelers as an effective way of achieving competitive advantage in a crowded market, for example by offering discounted travel or a more luxurious traveling experience. Low-cost, Ireland-based airline Ryanair has championed the idea of cost leadership, and describes itself as “Europe’s only ultralow cost carrier.” The notion of a lowcost airline was pioneered by Texas-based Southwest Airlines, and Ryanair followed with similar principles: use a single plane type to keep costs down, constantly review overheads, turn aircraft around as quickly as possible, and do not offer a loyalty plan. Ryanair bought 100 Boeing 737- 800 passenger jets at a significant discount in 2002. Starting with newer, more fuel-efficient planes than many rivals, Ryanair could afford to fill its planes with passengers buying low-price tickets. However, Ryanair could make a profit because passengers would also spend money on areas such as on-board food and hotel reservations. Ryanair is able to increase profits year after year since it continually looks for ways to keep costs down and charge customers for extras. Singapore Airlines’ customer service ethic is personified by “The Singapore Girl,” who portrays the idea of Asian hospitality. Her image has become a successful brand icon. These include being the first airline to implement baggage charges; working to eliminate the need for check-in desks (by offering online check-in facilities); and charging for options such as seat reservation and priority boarding. This consistent search for new ways to transform costs is the essence of the cost-leadership strategy. In the 12 months ending March 31, 2013, Ryanair transported nearly 80 million passengers and announced record profits of $753 million, despite a rise in fuel costs. Singapore Airlines (SIA) by contrast, pursues a differentiation strategy. The brand’s major drivers are groundbreaking technology, innovation, quality, and excellent customer service. It maintains the youngest fleet of aircraft among major air carriers, and keeps to a stringent policy of replacing older aircraft with newer, better models. SIA has always been first to take delivery of new aircraft types. Singapore Airlines recognizes that innovation is short-lived in the airline industry. New features and ideas can easily be copied by other airlines, so it continues to invest heavily in innovation and technology as an integral part of achieving its differentiation strategy. The airline runs a comprehensive and rigorous training program for cabin- and flight-crew to ensure the customer’s in-flight experience is consistently excellent. The success of its brand strategy and its entire positioning around service excellence mean that customers are more than happy to pay a premium price. Porter’s generic business strategies can be used by any company to achieve a competitive advantage. However, the competitive environment consists of more than just present rivals; changes in the industry and environment add to a constantly changing business context. For this reason, strategy choice must be regularly reviewed and checked. ■ |
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