Porter’s Generic Strategies: Cost Leadership, Differentiation, and Focus
Michael Porter’s Generic Strategies
Competitive Strategies
Def: To take offensive or defensive actions to establish a defensible position in an industry and effectively deal with the five competitive forces:
- Market entrance
- Risk of substitution
- Bargaining power of buyers
- Bargaining power of suppliers
- Rivalry among existing competitors
Three Generic Strategies:
- Cost leadership
- Differentiation
- Focus (or concentration)
While using one strategy is ideal, some companies successfully use more than one.
Effective implementation requires full commitment and organizational support. These strategies aim to overcome the five competitive forces.
Cost Leadership
Benefits:
- Above-average industry yields
- Defense against competitor rivalry
- Protection against powerful buyers
- Defense against powerful suppliers
This strategy favors entry barriers from economies of scale or cost advantages.
- Companies gain an advantage over competitive substitutes.
To achieve cost leadership:
- Obtain a relatively large market share or other benefits (e.g., preferential access to raw materials).
- Expect upfront capital investment in modern equipment, aggressive pricing, and initial losses.
Cost leadership offers high-profit margins, reinvestable in equipment and facilities. It can revolutionize industries where competition is based on different factors and competitors are unprepared.
Differentiation
This strategy involves creating a unique product or service, perceived as such by the entire industry. Differentiation can be achieved through:
- Design or brand image (e.g., Mercedes-Benz)
- Technology (e.g., Coleman camping equipment)
- Features
- Customer service
- Distribution networks
- Etc.
Successful differentiation leads to above-average yields. It provides protection against competition due to brand loyalty and reduced price sensitivity. Entry barriers are raised, and the company favorably positions itself against suppliers and substitutes, reducing buyer power.
Challenges:
- Achieving significant market share (through perceived exclusivity)
- Weakened cost leadership due to costly research, product design, high-quality raw materials, or strong customer support.
Focus or Concentration
This strategy focuses on a specific group of buyers, a segment of the product line, or a geographic market.
Unlike low-cost and differentiation strategies that target the entire industry, focus strategies prioritize excellent service to a particular market.
Strategic Planning Matrices
Strategic planning involves three stages, each using specific matrices:
- Information Creation, Evaluation, and Selection: EFE, MPC, EFI
- Adjustment Stage: SWOT, SPACE, BCG, IE, Main Strategy Matrix
- Decision Stage: MPEC
Indecopi Analysis
What is Indecopi?
The National Institute for the Defense of Competition and the Protection of Intellectual Property (INDECOPI) is a specialized government agency reporting to the Presidency of the Council of Ministers. It has functional, technical, economic, budgetary, and administrative autonomy.
Indecopi’s Strategic Analysis
a) MPC: INDECOPI was initially located in the third quadrant, indicating a lower per capita budget and lower reliability. While its position was deemed better than SUNAT and OSIPTEL, it fell short of SBS and BCRP in terms of confidence.
b) Matrices Used: EFE, EFI, BCG, SWOT
- EFE: Evaluates opportunities and threats from the external environment.
- EFI: Assesses organizational strengths and weaknesses.
- BCG: Analyzes the performance of different areas within the institution (IP jurisdiction and administration) based on revenue share and growth rate.
Indecopi’s Strategic Objectives
Two strategic objectives concluded by Indecopi include:
- Promoting nationwide access to INDECOPI’s services.
- Improving Indecopi’s market positioning and building confidence.
- Enhancing the institution’s human capital.