Strategic Management Essay — Porter's Generic Strategies and Strategic Clock
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Using either Porter’s generic strategies or the Strategy Clock, identify examples of organisations following strategies of differentiation, low cost or low price, and stuck-in-the middle or hybrid. How successful are these strategies?
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Strategic Management Essay — Porter's Generic Strategies and Strategic Clock
- 1. Introduction Organizations operate in a challenging and very competitive business atmosphere where there is a certain level of uncertainty of what will happen in the future. For this reason, it is crucial for businesses to understand the strategic environment in order to identify the competitive advantage of the company in question. In order to achieve competitive advantage, an organization has to develop a specific strategy, which can be defined as the “identification of the purpose of the organization and the plans and actions to achieve that purpose” (Lynch, 2012). Consequently, for the purpose of this essay, I will utilise Porter’s generic strategies as a basis of assessing and evaluating a strategy positioning to achieve competitive advantage in the business field in question. In particular, I will look at strategies of differentiation, cost leadership, focus and hybrid by applying the relevant theories to practical examples of existing firms. The essay will conclude with a brief discussion of Porter’s theory compared to others in order to understand how comprehensive and useful this framework can be and whether specific improvements can be possibly made. Porter’s generic strategies Porter’s generic strategies describe the ways in which and how an organization seeks competitive advantage across its chosen market scope. These strategies were first presented by Porter (1980) and primarily include cost leadership, differentiation and focus. Pursuant to Porter (1996), in order to avoid “the inherent contradictions of different strategies” (Porter, 1996), an organization should make a clear selection between differentiation and cost leadership strategy. As Acquaah & Ardekani (2008) suggest, if this clear distinction/choice is not made by the firm, it risks to become stuck-in- the middle without a coherent strategy. However, as it will be later explored, there is also the possibility of having a hybrid strategy which blends the two previously mentioned strategies in such a way that infers the advantages of each generic strategy without becoming stuck-in-the middle. The table below provides a graphical representation of the different sectors and sources of achieving competitive advantage within an organization by following Porter’s generic strategies:
- 2. 2 In order to thoroughly understand Porter’s generic strategies framework, we shall analyse each segment (differentiation, cost leadership, focus and hybrid) accompanied with a relevant practical example. Given the confusion of researchers in distinguishing “focus strategy” from the other two generic strategies, it shall be first specified that a company can take either a broad or narrow approach to cost leadership and differentiation strategies (Dess & Davis, 1984). Differentiation A differentiation strategy involves “uniqueness along some dimension that is sufficiently valued by customers to allow a price premium” (Moraes, 2017). As Peng (2014) writes, the unique attributes of a product such as quality, prestige and sophistication, are essential to attract customers willing to pay premiums and therefore achieve a competitive advantage. However, this constitutes also the main risk of this strategy because products can be valued not good enough or customers may not feel that added value. To implement an effective differentiation strategy, a firm must be able to balance product costs and product benefits for the consumer relative to competitive offerings (Slater & Olson, 2001). In addition, as Morschett et al (2006) write, organizations following this type of strategy aim to produce and market unique products for varied customer segments by fulfilling
- 3. 3 their needs/demands in the hope to develop customer loyalty for which ultimately can be used to charge premium prices for the company’s products. Apple is a perfect example of a company successfully using a differentiation strategy. By designing and producing in-house software and physical products, the company is able to charge premium prices for its superior quality, performance and design. Apple has always been very successful in their differentiation strategy as they are able to create huge demand for their products over their competitors by giving power over prices to the company. As Nielson (2014) writes, “by focusing on customers willing to pay more and maintaining a premium price at the cost of unit volume, Apple also set up an artificial entry barrier to competitors”, resulting in a strong competitive advantage over its competitors like Samsung. As a consequence, it can be said that Apple seeks to create the perception to customers that its products have superior characteristics in terms of quality, design, reputation/image and reliability, as Sashi & Stern (1994) ‘s theory points out, proving their strategy’s success. Cost Leadership Cost leadership can be simply explained as a strategy that involves achieving the lowest costs in the industry in order to gain competitive advantage. As Li & Li (2008) point out, “cost-leadership strategy strives to supply a standard, no-frills, high-volume product at the most competitive price to customers” (Li & Li, 2008). Having this statement in mind, in order to gain a greater market share against its competitors through the delivering of products at a lower price, an organization must be able to source the production from cost-efficient suppliers. As a consequence, lower production costs increases the potential success of the correspondent low-priced product. Primarily, there are four main cost drivers that can help deliver cost leadership: (1) lower input costs, (2) economies of scale, (3) experience, and (4) product/process design. Companies must be able to assess which cost driver(s) to focus on in order to gain a significant market share and competitive advantage. Ryanair is one of the most known and best low-cost airlines in Europe. It has been able to deliver low ticket prices to customers given the low cost that the company faces and chose to pursue. In fact, Ryanair specialises in short-haul flights across Europe using just one type of aircraft produced by Boeing. It gets 50% more flying hours than its high-price competitors and it flies to secondary airports to achieve lower landing costs. Additional seats comfort, food and luggage have to be paid
- 4. 4 extra and seatback spaces are rented to advertisers. The infamous CEO Michael O’Leary has announced plans to charge customers £1 to use the restroom, introduce standing cabins like the bus and suggested that only one pilot is needed to fly the aircrafts (Gillette, 2010). All these aspects will greatly decrease operational costs leading to continued low prices but sacrificed comfort for customers, thus confirming Ryanair as the king of low-cost airlines. Focused Strategy A focus strategy, as defined by Porter (1980), is a “strategy built around serving a particular target very well, and each functional policy is developed with this in mind” (Porter, 1980). Essentially, this strategy makes sure that companies serve their narrow strategic target more effectively or efficiently than competitors who are competing in a broader way. This can be done by either offering products or services to a niche at a lower price or at a higher value compared to competitors. As Baroto et al (2012) explain, “the focus strategy is only existence in the particular segment, and can be implemented in the customers’ perception of being unique and or being low cost provider” (Baroto, et al., 2012). If implemented with the right prepositions, this strategy can be very effective. Bentley and Bugatti from Volkswagen Group are great examples of the integration of differentiation focus strategies. By narrowing their market focus, these two companies aim to create a Unique Selling Proposition (UPS) which cannot be imitated by larger competitors and also aim to provide a product (and service) which satisfies the customers’ needs. Essentially, they focus on wealthy customers who are looking to drive something different from the other car offerings. As a consequence, these companies are able to successfully charge higher prices to a specific niche. Hybrid strategy From the previous graphical representation of Porter’s generic strategies, we can see at the centre of the diagram a “stuck-in-the middle/hybrid” section. To gain a better understanding, it has to be made clear the distinction between hybrid and stuck-in-the middle, as it may cause confusion. The former refers to when a firm is capable to involve with emphasis cost leadership and differentiation strategies simultaneously, whereas the latter refers to a firm that fails to successfully pursue both differentiation and cost leadership (Acquaah & Ardekani, 2008). In recent years, it has been argued
- 5. 5 that a hybrid strategy has been adopted by more and more companies worldwide in order to take advantage of the combination of both differentiation and cost leadership strategies. Simply put, a hybrid strategy aims to achieve low prices and high differentiation relative to competitors. Ikea is a great instance of how the hybrid strategy should be put into work without the danger of becoming stuck-in-the middle. It is the ultimate demonstration of a company blending cost leadership, differentiation and also focus in their competitive strategy. In fact, it sells a wide range of products at a young customer base who is looking to buy fashionable and stylish furniture at a fraction of the cost of what local stores offer. The main reason why Ikea is able to keep costs at a minimum is that customers assemble themselves the products, creating innovation upstream and downstream, which helps suppliers to save costs as self-assembly becomes a large cost saver for customers (Aresu, 2013). In addition, customers also have to transport the furniture themselves, thus eliminating transportation costs, and products are designed internally by Ikea’s designers and engineers avoiding third-party suppliers/manufacturers. Regarding differentiation, Ikea offers a wide range of products that displays in such a way that the customer can see the combination of furniture in single rooms. As a consequence, the perceived value by the customers is extremely high because they can appreciate the products’ design, quality and comfort in a relaxed and easy to buy environment. Generally, it can be said that Ikea is a very successful brand that was able to manufacture and offer products in a cost-efficient way by also providing a product differentiation focus that targets young customers with a wide range of quality products. Discussion From the analysis of Porter’s generic strategies, it can be said that the framework provides a well- rounded overview of how a business should focus its strategy. As Hambrick (1983) stated, “Porter's typology of generic strategies seems especially useful, because (1) it builds on previous findings and (2) it is appropriately broad, but not vague”, suggesting that it provides a strong basis for strategy formulation. However, this framework has been criticized or questioned during the years, making it difficult for an individual to properly assess the relevance of it because of its unclear nature. For instance, according to Porter (1980), different competitive strategies such as differentiation and cost leadership cannot be implemented simultaneously but only under rare conditions. In contrast, Murray (1988) explains that generic strategies are not mutually exclusive one from another and that
- 6. 6 different strategies can be successfully used together. Hambrick (1983) also argues that given the broad theory of the generic strategies it is difficult to determine if they are equally viable within an industry. However, one should be aware that Porter talked about “generic” strategies, which imply a generic but appropriate view on the main competitive strategies. As a consequence, as we have examined in the essay, I believe that by utilising Porter’s generic strategies one can effectively determine the strategic positioning of a company and, in turn, the company can understand how to remain on point with their strategy selection. Conclusively, in this essay we have explored Porter’s generic strategies by identifying the companies which best adapted the chosen strategy relative to their business objectives. Through the identification of different theories, we understood that Porter’s framework is very effective in identifying generic strategies within an organization and provide a strong basis for assessment and evaluation. However, there are still some contradictions, as for example to Porter’s theory that strategies are successful only if applied singularly and that if this does not occur, a company will become stuck-in-the middle. Clearly, in these constantly changing market conditions, purely relying on Porter’s generic strategies can be considered to be unwise as firms/individuals need to investigate on different options, yet it still provides an effective starting point for evaluation and understanding of competitive strategies.