Michael Eugene Porter is an American economist who received the 1998 Adam Smith Award. And this is no coincidence, since Porter investigated the laws of competition, a theme which has been covered since the time of Smith. The Porter model involves several competitive strategies that are worthwhile.
The essence of Porter's strategies
Porter's strategies are designed to make products manufactured by a firm or company more competitive. There are four types of strategies: cost leadership, differentiation, focus on costs, focus on differentiation. These strategies are divided into seeking 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
Basic Porter strategies have their advantages and disadvantages. This article covers all the basic types.
Cost minimization strategy
Porter's model of cost leadership strategies is used by large companies that produce mass 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, and distribution through channels tested for reliability. But this does not negate the fact that concessions to competitors regarding the quality of this product are unacceptable.
When costs are low, production costs are reduced, and then profitability. But the company becomes well protected from competitors, and profit decreases only when the depletion of profit of a less effective competitor has not yet occurred. Such competitors are the fastest to leave this game in the “cost war”. The company has protection against countermeasures that both buyers and suppliers are trying to provide. Competitors have to face a high threshold before entering this industry. The company using the strategy is in the most favorable position among companies producing similar products.
Consequently, the application of the low-cost strategy creates strong armor through which the influence of all existing competitive forces does not leak out, since the struggle connected with the profit from the transaction helps to reduce profit only until the profit of less efficient companies issuing similar products.
Differentiation strategy
Classification of strategies according to Porter 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 using methods related to 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, in some ways they can be reduced. Consumers have the opportunity to give money for this uniqueness only at the beginning. Then, when products with the same quality appear, preference is given to cheaper ones.
The company that works with this strategy is trying to ensure that the products have some kind of uniqueness (in terms of material, reliability, quality of ingredients, etc.).
Since different products have different distinctive features, several companies can coexist in competition at the highest level and 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 costs for quality and technology. Therefore, you must very carefully choose the strategies of Porter.
This strategy protects against competitors by the fact that those consumers who managed to fall in love with this brand are unlikely to change this manufacturer, for example, Apple lovers who can not be replaced by any other brand. If uniqueness turns out to be unprotected by patents, then a product that has undergone differentiation involves obstacles for other players.
Suppliers also can not interfere. Profitability at a high level makes it possible to accumulate finances for the acquisition of other suppliers. Replace the goods with some analogues is not possible.
As a result, consumers cannot bring down the price of this product. According to Porter’s strategy, marketing should “go” according to the specific situation. In different situations, different strategies will work. However, there are certain costs.
In the case when the price of a product for companies that minimized costs is much lower than for those adhering to the second strategy, consumers sometimes prefer companies with lower production costs. It is possible that the buyer would prefer cost reduction to branded parts, uniqueness, comfortable services.
It is likely that tomorrow will not help what was an advantage before. In addition, customers tend to change their tastes. Uniqueness sooner or later loses its appeal.
Cost-cutting competitors can successfully simulate the products of companies that practice differentiation. For example, Harley-Davidson, a motorcycle manufacturer with a huge engine, runs the risk of suffering damage from Japanese manufacturers who focus on products that mimic Harley, but at the same time charge a lower price for it.
Focus strategies
The focusing strategy is based on the choice of a narrow niche and the achievement of advantages only in this segment. Focus can be on both costs and differentiation. But it is important 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 success.
A focusing strategy can be dangerous in that, over time, the difference between the needs of the industry and the needs of its segment may decrease, and that other competitors have the opportunity to find even smaller segments within this particular segment. That is, focusing will occur within focusing.
But still, this is a very effective method that has been tested by life in the same way as other strategies proposed by Porter.
Examples of using competitive strategies
Porter's core competitive strategies are applied in many countries.
For example, in the field of shipbuilding, firms in Japan have chosen differentiation. Japanese ships are manufactured using advanced technologies and are of exceptional quality. And while the choice of such vessels is very large.
Korean firms are adhering to lower costs. Their ships have lower cost, but they are still of high quality and sold like hot cakes. Korean technologies are not as advanced as Japanese ones, but they also do not lose ground in the global market.
Scandinavian shipyards practice focused differentiation. They create ships for specific purposes, for example, icebreakers or cruise liners, which are made using special technologies.
Types of Competitive Advantages
Porter's strategies offer certain advantages. According to him, competitive advantages are divided into advantages of a lower and higher order.
Low order benefits
The advantages of low order are based on the use of fairly inexpensive resources. Among them are labor, raw materials, energy, etc. They are unstable and easily lost after raising general prices or wages or due to the availability of cheap resources for competitors.
High order benefits
The advantages of a high order include the uniqueness of products, the use of the most advanced technologies, an unsullied reputation, excellent management, in a word, what you need to apply more abilities for.
Conclusion
So, economist Michael Eugene Porter made an extremely important contribution to the economy 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 involve certain benefits, but you must be able to focus on their material and intellectual resources. Then success will surely be ensured for the enterprise.