What is Michael Porter’s Generic Strategies for Business Success?

Michael Porter identifies three strategies which the business can adopt regarding demand and supply side. Demand side concentrates on market size and composition (Age, sex, wealth). Supply side concentrations on business core capabilities. Porter has identified two types of core capabilities which are cost-efficiency and differentiation. Its identified strategies represents extreme positions. In practice strategies can be combined to find ideal strategy for business. Some combination are conflict like cost leadership and differentiation, while strategy like focused differentiation make sense.

Michael Porter's Generic Strategies

What is Cost Leadership?
Cost leadership is one of the basic strategies. Business targets large number of price sensitive customers.
 It aims to earn profits by gaining market share by sell products at low prices but delivering the same value to customers compared to competitors. To earn profits and return on investment, business to reduce its cost by gaining cost efficiencies through their policies and processes, but not compromising on quality.

Business has to utilize its assets efficiently. This means achieving higher sales level in same amount of investment. It will reduce its fixed cost per product by achieving volume growth that will spread fixed cost over larger number of products. Like depreciation expense will be spread over more products, saving to heating or cooling and lighting costs as these will used to make more products. To achieve this business may have to incur one-off training cost.

Policies can play an important role in cost savings. Business can restructuring its downside supply chain to reduce cost ex, by removing intermediaries commissions. This can done by supply its product to large supermarkets in greater quantities, so that delivery cost can be reduced or open its own retail out lets to control prices directly. Similarly business adopt its polices regarding upside supply chain to achieve cost savings. This will reduce its variable cost by manufacturing or purchasing few number of products on large scale. This can result in economies of scale ex, by obtaining bulk purchase discounts, learning curve effect (labor become more efficient by working more).

Savings can be made by reducing discretionary (optional) costs. Like advertising, research and development expenditure. Avoiding luxurious office furniture and equipments. Ex. CRT monitor can be used instead of LCD monitor, this will reduce cost will not reduce value of the product to the customer.

What is Differentiation Strategy?
Differentiation strategy is to sell innovative or unique product not offered by any competitor. It target the whole market and premium can be charged to customers who want to buy this unique product to be the earlier persons in the society. Product costs higher to the business because of development cost associated with products. Material wastages cost and labor cost per product can be high as workers unfamiliar and still gaining experience (learning curve effect). Workers need to be trained and advertising expenditure is necessary to spread awareness of the product. More workers will need to be recruited to answer customer enquiries. All these factor erodes the attractiveness of this strategy.

Differentiation strategy is appropriate for innovative field like electronics and medical industries. Where secrete formulas can lead to business success. Recruitment and maintenance of expert personnel and brand should be perceived of higher value (brand management) are key to success.

What is Focus?
Focus is to target specific market segment. It is suitable for small business who cannot compete with large business in terms of economies of scale and innovation. Focus is about identification of gap between demand and supply (in general sense), this gap can be filled by supply the products targeted toward specific customer needs. This gap may be available because of its unattractiveness to large businesses who are interested in capturing large markets to make use of their large production capacity.

Advertisement expenditure may be so necessary due to demand already exists which may be sufficient for business to make use of its full capacity or alternative they can advertise their products in special magazines and places which can give targeted advertisements of its products. Ex, small ACCA tuition providers may find it use to advertise on local newspaper than national television.

What is Focused-Differentiation?
Focused differentiation is the combination of Differentiation and focus. It has the same properties like they have individually. Focused differentiation is about supply a unique product to specific market segment. Ex, could be of the small software firm specialize in customized software of medical laboratories. Large software companies will find this market segment unattractive because this will not make them enough profits as compared to other software like business management software which can be sold to large number of customers.

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