Michael Eugene Porter is an American economist who received the 1998 Adam Smith Prize. And this is no coincidence, since Porter explored the laws of competition, the topic of which has been covered since the time of Smith. Porter's model suggests several competitive strategies that pay off.
The essence of Porter's strategies
Porter's strategies are designed to make a product manufactured by a firm or company more competitive. There are four types of strategies: cost leadership, differentiation, cost focus, and differentiation focus. These strategies are divided into looking for cost or product advantage, as well as focusing on a wide or narrow market. Porter's competition strategies were developed in the last century. Now they are still relevant and easily accessible.
Types of Porter strategies
Porter's basic strategies have their advantages and disadvantages. This article covers all major types.
Cost minimization strategy
Porter Model of Leadership Strategyin costs are used by large companies that produce mass-produced products. The main sources of these advantages are an economical attitude to resources and scale, the highest possible access to raw materials, technologies that are ahead of progress, distribution through reliable channels. But this does not negate the fact that concessions to competitors regarding the quality of this product are unacceptable.
When costs are low, the cost of production decreases, and then profitability. But the company becomes well protected from competitors, and profits decrease only when there has not yet been a depletion of the profits of a less efficient competitor. Such competitors are the fastest to leave this game in a “cost war”. The company is protected from countermeasures, which are trying to provide both buyers and suppliers. Competitors have to face a high threshold before entering the industry. The company using the strategy is in the best position among companies that produce similar products.
Hence, the application of a low cost strategy creates a strong armor through which the effects of all existing competitive forces do not leak, since the struggle associated with the benefits of the transaction contributes to reducing profits only until the profits from less efficient companies producing similar products.
Porter's classification of strategies highlights another strategy -differentiation. This strategy is usually chosen by those firms that have a chance to produce a product with high uniqueness for a wide range of consumers. Differentiation is carried out in various ways. Uniqueness is achieved by conditions of methods associated with non-price competition. Differentiation is not always contained in the properties of the product itself. Costs tend to get higher. But at the same time, they can be reduced in some ways. Consumers have the opportunity to give money for this uniqueness only at the beginning. Then, when products with the same quality appear, cheaper ones are preferred.
The company that works with this strategy tries to ensure that the products have some kind of uniqueness (in terms of material, reliability, quality of ingredients, etc.).
Because different products have different distinctive features, in competition at the highest level, several firms can coexist, which take this strategy as the basis of their work. It is important to note that the possibility of using the first mentioned strategy is excluded here, since differentiation implies an increase in the costs of quality and technology. Therefore, Porter's strategies must be chosen very carefully.
This strategy protects against competitors by the fact that those consumers who managed to fall in love with this brand will most likely not betray this manufacturer, for example, we can cite Apple lovers who will not be replaced by any other brand. If uniqueness turns out to be unprotected by patents, then the productdifferentiated implies obstacles for other players.
Suppliers can't interfere either. Profitability at a high level makes it possible to accumulate finance for the acquisition of other suppliers. It is not possible to replace the product with any analogues.
Consequently, consumers cannot bring down the price of this product. According to Porter's strategy, marketing should "go" in accordance with a specific situation. Different strategies are suitable for different situations. At the same time, there are certain costs.
When the price of a product from companies that have minimized costs is much lower than that of those adhering to the second strategy, consumers sometimes prefer companies with lower production costs. It is possible that the buyer will prefer cost reduction to branded details, uniqueness, comfortable services.
It is likely that tomorrow what was an advantage before will no longer help. In addition, buyers tend to change their tastes. Uniqueness sooner or later loses its appeal.
Competitors who practice cost cutting can successfully imitate the products of companies that practice differentiation. For example, Harley-Davidson, a motorcycle company with huge engines, is at risk of being hurt by Japanese manufacturers that target products that imitate Harleys, but charge a lower price for them.
Focus strategy is based on choicenarrow niche and achieve advantages only in this segment. The focus can be on both cost and differentiation. But the important thing is that this type of strategy is very convenient, since all resources, all mental and physical forces hit only one point - to improve products in a specific narrow area, which allows you to succeed.
A focus strategy can be dangerous in that over time the gap between the needs of the industry and the needs of its segment may narrow, and in the fact that other competitors are able to find even smaller segments within this particular segment. That is, there will be focusing within focusing.
But it is still a very effective method that has been tested by life just like other strategies proposed by Porter.
Examples of using competitive strategies
Porter's core competitive strategies are applied in many countries.
For example, in the shipbuilding industry, firms in Japan have chosen to differentiate. Japanese vessels are manufactured using advanced technologies and are of exceptional quality. And at the same time, the choice of such vessels is very large.
Korean firms keep cutting costs. Their ships have a lower cost, but they are still of high quality and sold like hot cakes. Korean technologies are not as developed as Japanese ones, but they are also not losing ground in the global market.
Scandinavian shipyards practice focused differentiation. They create vessels for specific purposes, such as icebreakers or liners.for cruises made with special technologies.
Types of competitive advantage
Porter's strategies offer certain advantages. According to it, competitive advantages are divided into advantages of a lower and higher order.
Low order benefits
Low-order benefits are based on the use of fairly inexpensive resources. Among them are labor, raw materials, energy, etc. They are unstable and easily lost after an increase in general prices or wages, or due to the availability of cheap resources for competitors.
High order benefits
High order advantages include product uniqueness, application of the most advanced technology, untarnished reputation, excellent management, in a word, something that needs more ability.
Thus, economist Michael Eugene Porter made an extremely important contribution to economics by proposing a model of behavior in competition, while identifying four main types of strategies, depending on the orientation to a wide or narrow market, to costs or to the product itself. Each of these strategies paid off. All Porter's strategies imply a certain benefit, but one must be able to focus on one's material and intellectual resources. Then success will definitely be ensured for the enterprise.