What is Michael Porters 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 costefficiency 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.

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.

Related posts: What is Michael Porter's Generic Diamond Model For Competitive Advantage of Business?

What is Michael Porters Diamond Model for Competitive Advantage of Business?

Porter's diamond is the framework explains the reasons behind the competitiveness of nations in particular industry. E.g. Japan is well-known for consumer electronics, Germany is well-known for Cars and United Kingdom is well-known for financial service provision. These elements are inter-related availability or not of one can influence the availability or not of others.

Factor Conditions. It means availability of resources and opportunities such as natural resources, atmosphere and geo-locations which are pre-requisite of operating in particular sector. Like natural resources such as flowers help France to become leading quality fragrance supplier in the world. Similarly, atmosphere as summer helped Saudi Arab to grow quality dates and geo-locations provides seas, mountains to develop tourism industry as in Switzerland popular in it lush green sceneries. All these factors are beyond the control of the business. These

factors provides competitive advantage as those other business and industries situated around the world cannot buy or develop such factors. Some factor necessary for businesses like skilled labors, machinery and investment can be arranged, to achieve competitive advantage but this can be copied by other businesses also if everybody has got these controllable factor than they will no longer provide competitive advantage.

Demand Conditions. It means customer cleverness and knowledge of the industry and products. More sophisticated your customer, quality will be more important for business success. Customer demands and attitudes regarding the quality and ability to adopted new thing forces the business to develop innovative products to achieve competitive advantage over local and foreign suppliers. This ultimately leads to business effectiveness and growth that can be used to offer products in new markets where demand exists for that quality standards of products. In countries where customer are less educated and demanding does not motivates business research and develop new products. History of the people in a region, education level of the people all influence customer demand conditions. Demand conditions can change but it takes time and business cannot do much to change customer attitudes. In fact, businesses are influenced by demand conditions.

Firm strategy, structure and rivalry. It means market condition i.e. monopoly or perfect competition. Having monopoly in the market gives business no incentive to gain efficiency, on the other hand presence of successful rivals in the industry leads to efficiency. government regulations can influence competition in particular industry like by giving subsidies and tax relief for business operating in that industry. This factor is not in the control of individual businesses, but governments and law can attract or detract new entrants to overcome this factor in long term. Firm (sound) strategies to address needs of all key stakeholders make business operate effectively and grow without any interruption. Identification of key processes can enable business to allocate their resources wisely. Sound structure taking into account environmental and cultural factors lead to fluent and efficient operations. These factor can be changed by business through learning from already successful businesses. Some business has inherently environment and cultural advantages to which lead to that kind of practicable strategies and business structures. Like in Japan ability to work in teams, flexible timings, no retirement ages limit and use of marginal cost plus pricing helped them to become leading consumer electronics supplier. Some of these properties of Japanese cultures of adopted by several countries.

Related and supporting industries. It means infra-structure i.e. energy, transportation, communication and sewerage. Resources mentioned above as factor conditions can also be discussed here. Availability of transportation be help business to supplier their goods, like airport near farms make it possible to supply groceries across the world without getting its

perished. Business Competitors can be an indication of presence of support in the region in the way that employees changing their employer can transfer expertise related to industry to other employer. Business requires upside and downside vertical value chain to be present to be operate successfully. Availability of support from other business help the business to focus on core capabilities and activities while outsourcing its weaknesses to supporting business. Ex. Natural juices manufacturer requires fruit pulp, but they are not good at farming fruits itself, if agriculture and farming industry is strong in that country they can acquire fruits from farmer and solely concentrate on its core activity i.e. extraction of juices from pulps. http://www.cpa.bz/videos-acca-p-introduction-to-porters-five-%5BuDi1VWSEBpA %5D.cfm