Michael Porter’s Generic Strategies – Strategic Management

Generic strategies

Generic strategies are fundamental techniques in strategic planning, which any business organization can adopt in any industry or market to upgrade its viable performance (Pearce & Robinson, 2010, pp. 25). It is worth noting that the three basic strategies of marketing are low cost strategy, focus strategy, and differentiation strategy. Michael Porter is the man who developed these strategies way back in 1980, and insisted that business organizations required applying them in order for them to acquire a competitive advantage in the market (Rothaemel, 2012, pp. 122). It is, also, worth noting that, although, these strategies are different, there is no mutual exclusivity that exists among them.

Low cost strategy is a pricing technique that a business organization employs by offering relatively lower prices than its competitors in the industry (David, 2012, pp. 201). This technique enables the business firm to stimulate demand, therefore, making it easy for it to gain a large market share. In most cases, this strategy is effective in situations where the product lacks a competitive advantage (Pearce & Robinson, 2010, pp. 25). In addition, the company can, also, employ it if it has the capacity to achieve economies of scale with production volumes that are high.   According to David (2012, pp. 201), the pursuit of proprietary technology, economies of scale, and treatment of raw materials in a preferential way as well as other factors can act as sources of cost advantage (Mckeown, 2010, pp. 66). The business can moderate the price to the average industry level price whenever it has the capacity to attain and maintain inclusive management cost. In this manner, the low cost position of the business can change into attractive yields. Mckeown (2010, pp. 80) insists that, in order to achieve a competitive advantage in business, the leading position of the business firm is influential and affects it especially if it is the cost leader in the enterprise (Rothaemel, 2012, pp. 131). The product quality of the business is the main basis of comparison with competitors. Whenever the product quality is above average, the implication is that the business is more competitive than its competitors. This, therefore, implies that companies that are leaders in cost obtain more returns on their products than other companies that are dragging in cost leadership (Rothaemel, 2012, pp. 137). The most significant feature of cost leadership strategy is that the company requires being the leader of cost in the enterprise. This strategy enables the company to achieve a competitive advantage through two main approaches according to Mckeown (2010, pp. 91):

  • The firm can increase the market share by charging lower prices than its competitors. This enables it to maintain its profitability on every sale because of the low costs of production.
  • Through cost reduction, the firm can increase its profit while charging average prices in the industry.

Mckeown (2010, pp. 101), also, maintains that a company that achieves and remains successful in cost leadership should meet the following factors:

  • It should have low foundational cost in terms of facilities, materials and labor. This also implies that the company should derive an approach of sustaining lower costs than those of the competitors.
  •  It should have efficient logistics to advance business operations with ease.
  • It should, also, have sufficient capital to invest in the technology that should assist it in reducing the cost of production.

Focus strategy entails concentration of the business on a segment that is narrow within which it works to attain differentiation or cost advantage (Porter, 1998, pp. 72). The confines of this strategy require that management can achieve the needs of the business by having an entire focus on them. Whenever a firm applies this strategy to its business management, it stands to achieve desirable levels of customer loyalty, which, in turn, makes it hard for other companies to engage in direct competition with it (North & Frank, 2010, pp. 53). Companies that experience success by applying this strategy to their operations have the capacity to adopt development strengths of a wide product range in a narrow market segment that they are conversant with (Day & Moorman, 2011, pp. 78). This narrow market focus enables the company to lower volumes. They, also, have low bargaining capacity with the supplying companies. On the contrary, companies that depend on a differentiation-focused approach have a high likelihood of passing high costs to their customers (Porter, 1998, pp. 88). This is because of lack of existence of replacement products similar to them in the market. However, in applying focus strategy, it is worth noting that there are risks that associate with it. The first risk is that the competitors are always watching and can easily imitate the firm and reduce its competitiveness especially when the target segments experience some changes (North & Frank, 2010, pp. 66). Secondly, it is possible and easy for the cost leader commanding large market to adopt its product and, therefore, engage in direct competition with it (Day & Moorman, 2011, pp. 85). The third risk is that other firms applying focus strategy can take over some sub-segments, which can even be of better service than those of other competitors (Day & Moorman, 2011, pp. 87).

Differentiation strategy entails product and service development in a way that presents unique features, which customers can value and perceive as being different from or better than other products from competitors (Porter, 1998, pp. 99). In this regard, the firm may have the capacity to charge premium prices for the products because of their uniqueness. This way, the management believes that, by charging a higher price, it becomes possible to cover the excessive costs spent in adding unique features to the products (North & Frank, 2010, pp. 66). These unique features are, also, a resource to the firm because, if the supplies increase raw material prices, then customers of the firm, unknowingly, pay for the extra cost especially if they cannot access replacement products in an easy manner. However, for the firm to be successful through application of a differentiation strategy, Day and Moorman (2011, pp. 101) asserts that it requires having certain internal strengths as follows:

  • Its innovation and quality should have corporate reputation
  • It should have a fine-skilled team of sales people that have the capacity to communicate to customers about the strengths of the product in a successful manner.
  • It should have a creative and a fine-skilled team in charge of product development.
  • It should have the ability to find and implement significant scientific researches.

There are, however, a few risks that associate with differentiation strategy. Changes in taste among customers can affect the business in an adverse manner. Imitation by competitors can reduce the competitive advantage of the business. Rothaemel (2012, pp. 127) further contends that other companies, which adopt focus strategies, can have the capacity to attain great levels of differentiation in the segments of the market.

Choosing the correct generic strategy

In most cases, choices regarding the kind of generic strategy to implement and pursue settle above all other strategic decisions that a company can make (Mckeown, 2010, pp. 67). Therefore, it requires more time in order to make the correct decision. However, Porter warns that business companies do not have to make decisions regarding this issue. He advises against following more than one strategy. This is because, depending on the activities a company intends to perform, each strategy appeals to various types of customers (Mckeown, 2010, pp. 83). It is, therefore, advisable for a firm to evaluate its strengths and competencies when making a choice from the three strategies. According to North and Frank (2010, pp. 99), the following steps can be of great assistance in this regard:

  • Step one: in regard to each of the generic strategies, the firm requires performing a SWOT Analysis to establish its strengths and weaknesses (Magretta, 2011, pp. 121). This enables it to identify the opportunities as well as threats that will lay ahead for each generic strategy if adopted.
  • Step two: the firm requires applying Five Forces Analysis in order to comprehend the nature in which it intends to operate (Magretta, 2011, pp. 122). These tools are essential for identification of power position in a business situation. This enables the company to avoid taking steps in the wrong direction. These tools entail assessment of supplier power (North & Frank, 2010, pp. 122). This provides a clue of how easy it is for supplies to increase prices. Threat of any new entry, which may cost little time and money for competitors to join the industry requires assessment. The firm should, also, identify any threat of substitution that may cause customers to develop a different approach of doing what the firm does North and Frank (2010, pp. 123). Assessment of competitive rivalry is essential for establishing the capabilities and number of a firm’s competitors. Analysis of buyer power is essential because it enables the firm to understand how easy it is for buyers to push prices downwards.
  • Step three: the company should establish how it will use each strategic option to block new entries, eliminate substitution, be ahead of competition, manage the customer power and, finally, manage the supplier power (Magretta, 2011, pp. 124). Therefore, an organization has a responsibility of choosing the generic strategy, which offers it a set of options that are the strongest.

Read also CVS Pharmacy Generic and Diversification Strategies

History and evolution of generic strategies

Michael porter is the founder and father of generic strategies. He discovered and launched them in 1980 leading to the age of generic strategies (Schaede, 2008, pp. 77). According to Magretta (2011, pp. 139), Michael Porter derived generic strategies from a well conventional theory that regarded profit and performance, firm strategy, and industry structure. As the case always is, it is only time that is the most crucial factor for evidencing the significance of any form of theoretical framework. Time, in most cases exposes the theory to criticism, acceptance, deployment, adjustment and development by different researchers with similar or varying interests (Mckeown, 2010, pp. 93). After Porter proposed the generic strategies, it became easy to comprehend and apply such a taxonomic work because they are the only generic strategies, which gained acceptance and became popular despite criticism. Porter proposed the name generic for these strategies because any company can adopt and apply them even if they belong to the same industry.  These competitive strategies as defined by Porter in the 1980s relate to the industrial structures within which most companies operate (Mckeown, 2010, pp. 98). He then developed an analysis model that would help in evaluating the profit potentialities of such companies. According to David (2012, pp. 223), porter developed the industrial structure analysis from his previous economic works about performance, corporate behavior and environmental relations. It is, therefore, worth emphasizing the significance of industrial analysis because companies can achieve high gains if they sustain generic strategies in relation to other competing companies within the same industry (David, 2012, pp. 226).

The relevance of generic strategies to today’s business challenges

Most companies that adopt one of the three generic strategies stand a high chance of performing well in the contemporary business environment. During the development of his model, Porter applied the assumptions of Chandler, which claimed that every structure follows a particular strategy Rothaemel (2012, pp. 181). This implies that every company requires varied sets of structural characteristics in order to accommodate either differentiation or low cost strategy. Therefore, by selecting one of the generic strategies, the management of the business acquires the capacity to lead the business into the right direction in the market (Schaede, 2008, pp. 80). This is significant for assisting the business to achieve internal steadiness between recruiting policy, reward system and management style. Another relevance of generic strategies is because the best strategy does not exist yet. Therefore, choices regarding a strategic position for a business are dependent upon circumstance and time (David, 2012, pp. 227). However, the company management should be consistent in implementation after the selection of the appropriate strategy. It is, also, worth noting that the generic strategies covered and solved the tension that existed between differentiation and cost (Rothaemel, 2012, pp. 150). In most cases, organizations base their operations on high costs especially when they embark on production of premium products to which customers attach a lot of value.

The generic strategies also have a proper application to well established companies that have high costs of investment. In the current business environment; for instance, differentiation strategy enables the company to stand out of the rest through production of products that appeal to customers. This strategy enables companies to appeal to their customers and clients through product quality, customer support and functionality (Rothaemel, 2012, pp. 151). Focus strategy, on the other hand, enables companies to concentrate their efforts on certain market segments, and strive for popularity through provision of particular products and services to such segments (David, 2012, pp. 233). This enables them to acquire a competitive advantage by catering for market specific needs. Cost leadership strategy is relevant to a contemporary business company because it helps it to become the lowest producer of cost and distributor in the industry (Porter, 1998, pp. 123). This strategy creates a competitive advantage for the business through decrease of costs of production.

Application of generic strategies in Huawei Technologies

In most contemporary companies, a lot of changes exist in terms of growth and business views. Apart from the traditional visions and missions of wanting to make profits, most companies compete for an international player and market leader position. They, also, desire to develop the images of their brands to desirable levels. According to Helms (1997, pp. 689-703), exterior transformations in the world economics do have immense contribution to the stiff competition that most telecommunication firms face; however, Huawei Technologies continues to remain at the top. In most cases, avoidance of competition in business is inevitable due to the emergence of knowledgeable and demanding customers (Parnell, 2006, pp. 1139-1154). The adoption of generic strategies by Huawei Technologies came as a result of the challenges that the company faces in the telecommunication industry. The challenges, in this regard occur following the changing situations in competition such as the current financial crisis, an in the number of knowledgeable customers, globalization and economic liberalization (Helms, 1997, pp. 689-703). At some point, these changes appeared difficulty following the availability of forces that alter industrial competition. Competing rivals; however, remain as the main forces that influence competition in the industry within which Huawei Technologies operate. The presence of replacement products and the buyers’ bargaining power are, also, other challenges that affect Huawei Technologies (Nandakumar, 2011, pp. 222-251). Other challenges include poaching of well skilled staffs by competitors, communication challenges between customers and Huawei employees, and reduction of prices by competitors (Nandakumar, 2011, pp. 222-251).

Despite all these challenges; however, Huawei’s decision to adopt generic strategies enabled it to survive the competition. Cost leadership strategy, differentiation strategy, and customer focus strategy are the main strategies implemented by the company. Through focus strategy, for instance, Huawei decided to upgrade its function in market enterprise through targeting the ICT enterprise solutions as well as pursuing integration on a global scale (Low, 2007, pp. 138-144). In the strategic development plans of the company, the enterprise market continues remaining as an essential element for revenue increment in the near future. This idea provoked the company to invest in enterprise wireless technology, unified communication and collaboration, information technology, and enterprise markets (Parnell, 2006, pp. 1139-1154). As an established enterprise, it, also, has a commitment to ICT solutions due to its strong infrastructural focus in the main markets. According to Low (2007, pp. 138-144), Huawei implements focus strategy better than most telecommunication companies. It spends most of its resources in developing a single technology and product at a time. In this manner, it projects that high and intense investment levels will cause success in the areas of interest (Helms, 1997, pp. 689-703). Through differentiation strategy, Huawei acquired the capacity to develop a consistent production of differentiated products in wireless technology, router, intelligent network, transmission, and digital switch technologies (Parnell, 2006, pp. 1139-1154). In the past few years, Huawei embarked on fusion strategy in order to be able to work in close relations with its partners. This decision gave it the capacity to create realistic solutions that customers can appreciate as a way of upgrading business efficiency.

Through application of generic strategies Huawei Technologies overcame its challenges and started experiencing success due to the following factors:

Vibrant ICT industry-the University of New South Wales displays some of the main projects from Huawei Technologies (Parnell, 2006, pp. 1139-1154). In March 2012; for instance, Huawei Technologies Co. Ltd in Australia was proclaimed as the main dealer partner following Optus release of a mobile technology known as 4G long-term-evolution across Newcastle and its environs (Helms, 1997, pp. 689-703).

Acquisition of a skilled labor force- the company focused its resource to acquiring skilled employees in order to counter the competition challenge (Nandakumar, 2011, pp. 222-251). Winning a contract with Vodafone, also, motivated the company to increase the number of its skilled staffs in order implement the contract within the set time frame (Nandakumar, 2011, pp. 222-251).

Through partnerships-Huawei consistently chooses to hire the brightest and the best students in technology in order to maintain its position as a global leader in modern patent applications (Helms, 1997, pp. 689-703). For instance, Huawei sought partnership with the Engineering department of Macquarie University to host students through experience process of the industry (Parnell, 2006, pp. 1139-1154).

Through application of generic strategies, Huawei Technologies endeavors to cater for the needs of end users of its products. Apart from applying cost leadership strategy, Huawei, also, ensures that the users are aware of their products and have access to them (Parnell, 2006, pp. 1139-1154). The company, also, continues to produce products that add value to the lives of people who use them. Besides, the company embraces the application of Software as Service (SaaS), which is more efficient than traditional business models (Nandakumar, 2011, pp. 222-251). This particular business model complies with the general needs of the industry. It, also, provides low costs to Huawei to offer better services and easy to use products.

Conclusion

Generic strategies are fundamental techniques in strategic planning, which any business organization can adopt in any industry or market to upgrade its viable performance. These three basic strategies of marketing are low cost strategy, focus strategy, and differentiation strategy. Low cost strategy is a pricing technique that a business organization employs by offering relatively lower prices than its competitors in the industry. Focus strategy entails concentration of the business on a segment that is narrow within which it works to attain differentiation or cost advantage. Differentiation strategy entails product and service development in a way that presents unique features, which customers can value and perceive as being different from or better than other products from competitors. Differentiation strategy enables the company to appeal to their customers and clients through product quality, customer support and functionality. Apart from the traditional visions and missions of wanting to make profits, most companies compete for an international player and market leader position. Huawei’s challenges occurred following the changing situations in competition such as the current financial crisis, an in the number of knowledgeable customers, globalization and economic liberalization. However, Huawei’s decision to adopt generic strategies enabled it to survive the competition. Cost leadership strategy, differentiation strategy, and customer focus strategy are the main strategies implemented by the company.

You can order a unique paper written by our professional writers at an affordable price. 

Share with your friends
Order Unique Answer Now

Add a Comment