3.2.1 Critically appraise strategies for competitive advantage.

(J11) Q4
Michael Porter developed the notion of generic strategies in the context of approaches to
achieving a sustainable competitive advantage.
(a) Explain the meaning of generic strategies.
Generic Strategies
It is now some years since Michael Porter developed his notion of 'generic strategies. The
notion of generic strategies centers on Porters proposition that a company must choose just
one broad route to achieving a sustainable competitive advantage. Porter suggested three
alternative broad routes to competitive advantage namely: Cost Leadership, Differentiation
,and Focus which he labelled generic strategies. He suggested that these three generic
strategies are mutually exclusive and that a company can therefore only pursue one if it is to
be successful. Trying to pursue two or more generic strategies at the same time, Porter
suggested, would result in what he termed being stuck- in the middle According to Porter a
recipe for corporate failure.
Despite criticisms, such as for example that it is too simplistic, or that it is not consistently
supported by empirical evidence, Porters notion of generic strategies was and continues to be
a major influence on management thinking and practice in the area of corporate strategic
planning
Each of Porters generic strategy routes has different requirements in order to pursue them
successfully, and also each of them has their own relative advantages and disadvantages as
strategic options for competing.
The characteristics of each, together with the main
requirements for successful implementation and their relative merits are outlined below.

(b) Critically evaluate each of the following strategies for achieving a sustainable
competitive advantage. Give examples to support your answer.
(i) Cost Leadership
(ii) Differentiation
(iii) Focus

(i) Cost Leadership: Low cost

In this generic strategy a company sets out to compete on low cost. In fact, for this strategy to
be effective Porter goes further and suggests that in order to be sustainable a company should
have the lowest costs in the industry i.e. be the cost leader. The company will have a broad
scope and serve many industry segments, and may even operate in related industries. The
sources of cost advantage are varied and depend on the particular industry and its structure.
They may include, for example, the achievement of economies of scale, proprietary
technology, preferential access to raw materials, and especially 'no frills' products and
services. However, the low cost producer must find and exploit all sources of potential cost
advantage.
Examples of companies competing on low cost include Aldi, the German supermarket chain,
and Ryanair in the airline industry.
Offering the same, or even lower prices than its competitors a cost leader's low cost position
translates into higher returns. A cost leader however, cannot ignore customer needs and the
bases of potential differentiation. If a cost leader's product or service is not perceived as
comparable or acceptable by buyers, a cost leader will be forced to discount prices well below
competitors to gain sales. According to Porter, a cost leader must achieve parity or proximity
in areas such as product quality and design relative to its competitors for it to survive, even
though it relies on cost leadership for its competitive advantage. This means that the cost
leader can translate its cost advantage into higher profits than competitors.
The principal danger of a cost leadership strategy is that it is essentially a finance based
strategy rather than a customer based one, and therefore can leave a company which is
pursuing cost leadership vulnerable to competitors who pursue a differentiation strategy. In
addition, by definition, there can be only one cost leader in an industry and where several
companies attempt to pursue this strategy there may be intense price competition and hence
low profits for everyone in the industry.
(ii) Differentiation
Porter suggests that in a differentiation strategy a firm seeks to be unique in its industry along
some dimensions that are widely valued by buyers. A company selects one or more attributes
that buyers in an industry perceive as important and uniquely positions itself to meet those
needs thereby differentiating itself from its competitors. It is rewarded for its uniqueness with a
premium price.
The means for differentiation are many and varied, and are often particular to each industry.
Differentiation can for example be based on: the product itself; the delivery system by which it
is sold; the marketing approach or brand image; the levels of service offered. For example
Caterpillar Tractor, bases its differentiation strategy on product durability, service, spare parts
availability and an excellent dealer network. Bang and Olufson on the other hand differentiates
itself essentially on product design.

Although there are many ways to differentiate, the basis selected for differentiation should, as
already mentioned, be one which customers value or can be persuaded to value. The basis
should also be difficult to copy by competitors.
Porter suggests that a company that can achieve and sustain differentiation will earn above
average profits in an industry if its price premium exceeds the extra costs incurred in achieving
the differentiation. A differentiation strategy therefore must always be based on ways of
differentiating that lead to a price premium which is greater than the cost of differentiating.
The principal danger of pursuing a differentiation strategy is that very often successful
differentiation strategies are quickly copied by competitors.
(iii) Focus
A focus strategy is quite different to both low cost and differentiation in as much as it rests on
the choice of a narrow competitive scope within an industry. Essentially, it involves
concentrating on particular segment(s) in a market. Porter suggests that by targeting specific
segments in a market a company can achieve a competitive advantage in these selected
target segments where it would otherwise not possess a competitive advantage overall.
The focus strategy has two variants. The first one is a cost focus where a firm seeks a cost
advantage in its selected target segment(s). The second variant is a differentiation focus
which involves a company differentiating from its competitors but again only in particular
selected target segments.
Examples of focus strategies are product specialisation and market specialisation. So, for
example, Toys 'R' Us have been very successful by concentrating only on toys and hence
reaping the advantages of specialisation without competing with some of the very large
department and variety stores. Another company which competes by focusing is the Tag Heur
Watch company which focuses only on the exclusive end of the market.
The principal danger in a focus strategy is that the company is very vulnerable to changes in
the market segments being targeted, e.g. changes in fashion, drops in demand etc. Similarly,
the focuser is vulnerable to attacks from other larger companies who may decide to
themselves enter a market segment which has proved to be attractive and profitable to the
smaller companies in these segments.
As previously mentioned, Porter suggests that these three generic strategies are mutually
exclusive and a company must therefore choose only one of them. In recent years many have
criticized Porters notion of generic strategies but nevertheless this model still remains useful
and relevant to the issue of strategic choice