Ever wondered what is that Mc Donalds do, to have such a huge and ever-increasing customer base? Or why Rolls-Royce is highly profitable despite the heavy prices? Or even better, how does Walmart survive in the market if it charges such low-prices?
“Strategy is about setting yourself apart from the competition. It is not a matter of being at what you do- it’s a matter of being different at what you do.”
– Michael Porter, known for theories on economics, business and strategies.
Any student of business studies or any field related to commerce and strategies must be familiar with ‘Michael Porter’s Generic Strategies’.
Michael Porter reiterates the necessity for strategies to establish a position in market and have an upper hand on competitors. His ‘generic strategy’ concentrates on two aspects, namely- competitive scope and competitive advantage.
To generate and maintain consistent performance he introduced the following three approaches:
– Cost Leadership
Focus is further bifurcated into – Cost Focus and Differentiation Focus. Many consider this as the fourth approach.
The generic strategies aim at classifying target into broad and narrow.
Prior the application/ implementation of any strategy, the corporations must carry out a thorough cost-benefit analysis.
Cost Leadership Strategy
This strategy is majorly applicable for organisations and business units that deal with consumers who are price-sensitive. The main aim as per cost leadership strategy is to produce low-cost per unit products and/or services. All efforts are taken to manufacture standardized products so at to reduce the operational expenses.
Reduction in costs, not only provides incremental profits but also gives a leeway to investors. Low costs have an impact on the share value of the organization as well.
Cost Leadership Strategy considers the below listed factors:
– Current and future demand of products and/or services.
– Behavioral impact of cost reduction on consumers and workers and other office personnel.
– Whether the competitors follow a similar strategy.
– Whether the cost reduction will be lower than that of other prevalent competitors.
– Achievement of economies of scale that allow lower per unit cost of product/service.
– Availability of machines and other cost-saving technologies
– Price quoted by raw material suppliers
– Maximum asset deployment
– Greater the control over the value chain, easier is the implementation of successful cost leadership strategy.
It shall be noted that Cost Leadership Strategy emphasizes on minimizing the cost of production of the company. It does not necessarily mean cost or price charged to consumers.
As can be interpreted from the name, this strategy means to be the leader in terms of cost in the industry. However, as good as it may sound in theory, in real life, being the lowest cost producer is very arduous task.
It must be noted that cost leadership is long term strategy.
Common characteristics observed in entities using this strategy comprise of little to no tolerance for waste caused due to human errors, efficient logistics systems, heavy personnel to deployment to manage budgeting and monitor cost control activities.
Here costs not only include production costs but also overhead expenses such as electricity payments, operational costs associated with indirect labour provisions, legal fees, rent, administrative costs insurance, interest on borrowed funds, expenditure related to travel etc.
The main demerit of Cost Leadership Strategy is that it can be easily replicated by competitors, and hence it is a continuous process. The actions in the direction of cost reduction cannot be a one -time thing, rather they must be updated regularly.
A very prominent and unique example of company that has implemented this Cost Leadership Strategy is that of Walmart. The United Nations based multinational retail corporation have super marts located in multiple countries. Its major point of attraction is that Walmart sells branded products at minimal rates.
Another easily related example is that of Mc Donalds. It rose to success in India due its famous ad campaign highlighting the availability of Mc. Aloo Tikki at just rupees twenty five. Mc Donalds has been successful in cost leadership due to vertical integration and high asset utilization.
This strategy involves the provision of exceptional and irreplaceable products and/or services to the consumers. The differentiation can be based on:
– Brand image
– Product design in terms of size, shape, color etc.
– Customer service
– Unique portfolio of the company
– After sales services
– Distinctive features of the product
– Latest technology
– Product/ Service Pricing
– Product durability and reliability
Carefully charted out marketing plans need to be formulated so that there is awareness among consumers- current and prospective in relation to the differentiated offerings.
Often the target audience catered by through Differentiation Strategy are not price sensitive. On the flip side, in fact, business charge premium for such unique product and/or service.
It includes various processes carried out under product development objectives. This strategy also gives a chance to build brand loyalty as customer often prefer the differentiating factors and do not prefer trying new substitutes.
It is often observed that differentiated products have fewer substitutes, thus giving a lead in the market place.
However, it must be noted that differentiation strategy required rapid product innovation to keep up with continuously changing environment. Moreover, it is not possible to sustain inimitability for long periods of time.
A frequently given example given of differentiation strategy is that of Apple. It has made its presence in the Big Five among with other giants like Google, Facebook and Microsoft. It is stands out in the industry for providing innovative products consisting of iPod, iPad, iPhone, Mac Pro etc. Apple’s products are stylish and have an aesthetically appealing user interface. The design is not it; Apple also offer a different operating system. Consumers are ready to pay exactly for this classiness irrespective of the price of the commodities.
Another company that can be cited for Differentiation Strategy is that of Emirates airlines. Originated in Dubai, United Arab Emirates, Emirates is known for its above average customer service. Its differentiation strategy includes in-flight provision of entertainment through movies and music and what not! What’s more is that Emirates’ flights also provide on-board Wi-Fi. As a matter of fact, Emirates was recognized as the World’s Best First Class 2020. In short, their unique selling point is customer-centric services.
Lastly, Harley Davidson also put to use the differentiation strategy to survive in the extremely competitive bike market. It successfully created a perception of royalty and coolness in driving a Harley Davidson bike that eventually built brand loyalty.
The objective of focus strategy is centering marketing strategies around niche markets. It comprises of dual strategies of market development hand in hand with market penetration. Focus strategies vary depending on Focused Cost Leadership and Focused differentiation. These strategies are more applicable where distinctive target customer groups are available. The main goal is to fulfil the need and demand of narrow markets.
For instance, Porsche specializes in niche market of sports cars and Rolls Royce sells limited number of high-end customized cars.
In conclusion as Michael Porter rightly quoted, “The essence of strategy is choosing what not to do”.