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Abstract

In this article which is based on a marketing analysis of Michael Porter's definition of competitive strategies, the confusion present in marketing and strategic management texts as to the definitions of the three strategies of low cost, differentiation and focus is noted. The idea that using price to differentiate means a firm is using a low cost strategy is dismissed and the value of a definition of focus strategy as merely some degree of extreme differentiation is questioned. New definitions of the three strategies are proposed which are based upon the idea that firms react to, and take actions which influence, the structure of the market in which they operate. They influence market structure through determining the market's proximity level -the minimum level of marketplace performance which a firm must reach in order to compete across the broad marketplace. If a firm has the ability to reach this level and go further to excel in the provision of one or more benefits, it can implement a differentiation strategy. Alternatively, it can attempt to lift the market's proximity level or partake in imitative activity, which reduces the potential bases for differentiation in the market, a low cost strategy (only sensible for the firm with the lowest costs of production). If a firm lacks the ability to reach the proximity level, it must seek segments which do not require reaching proximity in order to serve them, a focus strategy.
4 MARKETING INTELLIGENCE & PLANNING 9,1
T
he three marketing strategies, cost
leadership, differentiation and focus,
having so far been misrepresented, are
given more precise meaning.
Competitive
Marketing
Strategy:
Porter
Revisited
Byron Sharp
Marketing Intelligence & Planning, Vol. 9 No. 1, 1991, pp 4-10,
© MCB University Press, 0263-4503
Introduction
In 1980 Michael Porter's
Competitive
Strategy:
Techniques for
Analysing Industries
and
Competitors
was published[1]. The
result of research on industrial economics Porter examined
why certain industries had higher average profit levels than
others and why certain firms within each industry earned
profits above that industry average. He developed a theory
of competitive pressure which determined the profitability
of firms in an industry and he categorised the activities of
firms who earned above-average profits in their respective
industries as following three generic stratgies. Porter formu-
lated a piece of marketing theory, his analysis of industry
structure was certainly economic work, but its outcome
competitive strategy
is theory which describes marketing
decisions, a fact which was quickly appreciated by marketing
academics and practitioners worldwide.
It appears, however, that those academics and practitioners
made no real attempt to apply critique and integrate Porter's
work into the existing framework of marketing theory until
relatively recently[2]. Porter was not a marketer, nor did
he ever claim to be. Unfortunately marketing and
management academics took Porter's theory merely as
it was and placed it into the accepted body of marketing
theory. Not surprisingly confusion exists amongst
marketing texts and academics as to the precise definitions
of the three generic competitive strategies and their
implications for marketing decision making. This article
reformulates these definitions from a marketing point of
view in the light of Porter's original assertion that
competitive strategy depends on, and has an effect on,
market structure.
Porter's Competitive Strategies
Porter described competitive strategies as "taking
offensive or defensive actions to create a defendable
position in an industry, to cope successfully with the five
competitive forces and thereby yield a superior return on
investment for the firm"[1]. His research concluded that
"there are three potentially successful generic strategic
approaches to outperforming other firms in an industry:
(1) overall cost leadership
(2) differentiation
(3) focus."
The following discussion of the definitions of each strategy
considers their fit within the framework of modern
marketing theory, so that they are true to Porter's original
findings; that "each generic strategy is a fundamentally
different approach to creating and sustaining a competitive
advantage"[3] (see Figure 1).
The discussion notes that differences between the
strategies of differentiation, low
cost
and focus have been
poorly presented and occasionally misrepresented in
marketing and strategic management texts. In addition,
Porter made several errors in logic with his definition of
the three strategies.
Figure 1. Three
Generic Strategies
Broad
target
Competitive
scope Narrow
Target
Competitive advantage
Lower cost
1.
Cost leadership
3A. Cost focus
Differentiation
2.
Differentiation
3B.
Differentiation
focus
COMPETITIVE MARKETING STRATEGY: PORTER REVISITED
5
Differentiation Strategy: Surely it is More
than Just Being Different?
The concepts behind the strategy of
differentiation
have
always appeared to sit at the very heart of modern
marketing theory and practice. The rise in interest in
marketing this century came as mass marketing practices
were gradually becoming ineffectual. Markets were
becoming increasingly competitive and consumers better
informed; suppliers needed a strategic response to the
fact that buyers were becoming more skilled and choosy.
Porter wrote ' 'In a differentiation strategy, a firm seeks
to be unique in its industry along some dimensions that
are widely valued by
buyers"
[3].
Differentiation can be
achieved through a whole host of features such as better
quality, lower price (or higher price for that matter),
customer service, reputation, greater awareness, greater
availability. The marketing challenge is to identify different
features which will provide meaningful benefit to
consumers (such that a competitive advantage will be
gained). The benefit must be one which the company is
capable of delivering; one that will be difficult for a
competitor to copy or better
(i.e.
it should be a sustainable
advantage) and hopefully one for which customers will pay
a sufficient premium (enough to cover any increased costs
incurred in deliverying this added benefit.
Differentiation has been interpreted by marketing and
strategic management texts as "making the product
appear different'', ensuring that the offering is perceived
by the customer, as unique in some respect. The
inadequacy of this definition is apparent, in that logically
any new offering must be different in some way for
customers to buy it.
Low Cost Strategy: Is it Low Price?
Porter stressed that this strategy should be adopted only
if a firm possesses, or has the ability to gain, the lowest
costs of production within an industry. Hence the effective
adoption of this strategy is available only to one firm in
an industry at one time. By achieving a marketing mix
(including price) with some proximity to the offerings of
other firms this producer will enjoy higher than average
profits through its higher margin. A low cost position
therefore does not automatically encapsulate the tactic of
lowest price and it is hardly the primary aim of this
strategy; although during a price war the low cost producer
starts from an enviable position which may be exploited.
Porter's original definition of proximity has been ignored
by many marketing writers who have associated the low
cost strategy with an attempt to differentiate on price:
The primary focus of the cost leadership strategy is to
compete on price as the major marketing tool[4j.
The low cost company is in the best position to compete
on the basis of
price,
to defend against
price
war conditions,
to
use the appeal of lower
price...
and to earn above-average
profits where
price
competition thrives[5].
Overall Cost Leadership: here a company works hard to
achieve the lowest costs of production and distribution so
that it can price lower than its competitors
[6].
Cost leadership emphasizes producing standardized products
at very low per unit costs for many buyers who are
price-sensitive[7].
There is either confusion over the terms cost and price,
or a general failure to appreciate the concept of the whole
marketing mix, by implying that using price to differentiate
is different from using any other feature in any other part
of the mix. Most markets have a whole host of different
price, quality and volume offerings (to choose just three
features). Having a lower price with the same quality and
volume as other firms is simply one way of differentiating
your offering. Each element of the mix offers a potential
route to differentiating a firm's offering to the marketplace;
which is different from any other feature. The lowest cost
producer merely has the exclusive ability to go to a lower
price than all other competitors and it is worth noting that
it may have to go substantially below the price of a firm
which is effectively implementing a differentiation strategy,
possibly to the point of
losses.
Therefore being the lowest
cost producer does not necessarily translate to a superior
ability to differentiate.
A
cost leader ... cannot ignore the bases of differentiation.
If its product is not perceived as comparable or acceptable
by buyers, a cost leader will be forced to discount prices
well below competitors' to gain sales. This may nullify the
benefits of its favourable cost position[3].
If the primary focus of
low
cost strategy is simply to have
the lowest price there is no marketing argument to
consider differentiation and lost cost as different strategies.
In Porter's defence he did not actually write that the aim
of low cost was lowest price
he said that the essential
aim of a firm following a low cost strategy is not to
differentiate through low price, but to achieve a price as
high as competitors, whilst retaining lower costs of
production.
A True Cost Advantage is not Gained from
Differentiating "Downwards"
Here it is worthwhile to distinguish between a true cost
advantage and one which is simply derived from delivering
fewer benefits. A true cost advantage can derive from only
two sources, either having access to cheaper inputs
(including access to patents and expertise) or being more
efficient (having higher process quality)[8]. Savings in cost
through cutting back on the amount of service or features
given to the market does not give a true cost advantage;
it is an avenue available to all firms. For example, in the
retail grocery industry a number of firms have cost
advantages through their lower staff and service levels,
making shoppers pack their own purchases, etc. To
assume these firms have a low cost advantage and are
6 MARKETING INTELLIGENCE
&
PLANNING
9,1
using it to implement a low cost strategy would be
incorrect. Their provision of less service forces them to
give customers a compensation drop in prices (or at least
a perceived drop) and it enables them to differentiate and
gain a part of the market (note: this usually goes beyond
just the price-conscious segment). Their strategy is
obviously one of differentiation; focus can be ruled out
as it seems that targeting the purely price-conscious
segment does not appear to be viable as even these low
price supermarkets still stock luxury items and high price
brands which are supposedly not bought
by
this segment,
and a wide cross-section of the population shop at such
retailers. With virtually the same core costs of other
players in the industry they have decided to differentiate
downwards as opposed to upwards. Instead of
building
in
extra benefit and hoping it translates to customers being
willing to pay a premium they have cut benefits in order
to cut price (to differentiate themselves). They hope that
in order to retain customers they will not have to drop
price further than the cost savings they make.
Is Low Cost a Strategy?
When Porter wrote that firms following
a low
cost strategy
could not ignore the bases of differentiation, he meant that,
in order to achieve proximity in price, the low cost firm
has to be aware at
all
times of
all
elements of the marketing
mix and the value the market places on the benefits they
deliver. A firm implementing a low cost strategy usually
maintains a much greater degree of
inward
orientation (to
control costs and productivity levels) but
still
cannot ignore
the marketplace and its segments, and the differences
between the benefits valued
by
the marketplace (the bases
of differentiation).
Can low
cost be considered
a
separate marketing strategy?
Speed[2] argues that there is no reason to consider low
cost (as Porter defines it) as a separate strategy. This line
of thought maintains that
having
a
cost advantage is merely
a facilitator to differentiate, usually on
price.
He notes that
a low cost advantage "does not lead to any increased
benefits to the consumer unless costs lead to lower
prices''. Porter's definition of
low
cost is quite simply not
a strategy. Porter's research sought
to
identify firms which
earned profits higher than the industry
average.
The lowest
cost producer was naturally of particular interest. He
identified an operational circumstance which tended to
allow for above-average profits.
A New Definition of Low Cost Strategy
There is an argument for a new definition of a low cost
strategy where there is an essential difference between
the marketplace activities of a firm following a low cost
strategy and a firm following differentiation. A new
definition states that the
low
cost
firm
aims for the entire
market and does not avoid tactics which push the industry
down
the commodity
slide.
The thought of being precluded
from any part of the market for a
firm
following low cost
is quite foreign. The aim is to exploit in every segment
the extra marketing muscle given by a cost advantage.
Most importantly, the
low
cost
firm
fights
to remove bases
for differentiation, to reduce the differences between each
segment; whereas firms following differentiation aim to
build or at least preserve such bases.
The vital difference then between the
firm
which follows
low cost and those who follow differentiation and focus
is the way the firm approaches the market. Whether a
firm follows low cost, differentiation or focus strategies
it still has to offer something unique to the customer in
order to gain a sale. The difference between the three
competitive strategies is not just in the way they
differentiate; it has to do with how they try to influence
the nature of
the
market. The
low
cost firm has objectives
of proximity, maximum marketshare and reducing the
bases for differentiation. One
way
of achieving this removal
of bases for differentiation is to lift the standard of
proximity for the industry, thereby
making
a
differentiation
strategy very difficult to implement.
Lifting the Market's Proximity Level
Proximity or parity was defined by Porter as achieving
"an identical product offering
to
competitors, or
a
different
combination of product attributes that is equally preferred
by
buyers"
[9].
A
more useful definition is that proximity
is the minimum necessary level and
mix
of benefits which
a firm must provide if it is to compete right across the
market. Hence the proximity level in effect defines the
broad marketplace; for
example,
different proximity levels
distinguish the air travel market from the taxi market.
The proximity level tends to rise over time and can
sometimes rise very quickly with a price or advertising
war or when there is a major technological advance.
Eventually the rise in proximity can lead to a commodity
market, as has been the case
in
the domestic salt market.
The proximity level has become high enough to satisfy
most comsumers (who ask for free-flowing qualities,
availability, convenient packaging, iodine and low price)
leaving little room for differentiation. Hence each country
tends to have one main marketer of domestic salt with
a number of smaller firms confined to distinct segments
(supplying rock salt, sea salt, etc.).
Low Cost Strategy and the Influence on Market
Structure
The strategy of low cost would appear to be of little
consequence in most industries, since only one
firm
at most
can achieve the lowest costs of production necessary to
implement it. Even if there is a firm which is sure of its
cost advantage, it may still decide not to follow a low cost
strategy but follow
a
differentiation strategy instead (or even
focus,
though a firm with a true cost advantage would be
unlikely to want deliberately to limit potential market share).
COMPETITIVE MARKETING STRATEGY: PORTER REVISITED
7
What is really significant about this strategy is the fact
that low cost behaviour (e.g. copy-cat marketing,
advertising wars, price cutting) is observed in many
businesses (particularly smaller firms) which are unlikely
to
have
a cost advantage. It makes no sense for such firms
to concentrate on proximity. Without a cost advantage,
attempts to reduce or remove potential bases for
differentiation (through lifting the standard of the industry's
proximity
level)
are not
in
the firm's interests. Attempting
to reduce the bases for differentiation can be in the
interests of
only
one firm, the one with lowest
costs,
since
this firm will never lose its ability to outperform others
under these conditions.
It can be inferred that industry profitability is influenced
by the number and ratio of firms following the low cost
strategy, effectively attempting to reduce the industry to
a commodity market. Interestingly, this situation is not
undesirable for the least cost producer, so such a firm
need not discourage other firms from attempting to
implement a low cost strategy. This contradicts Porter's
assertion that the low cost
firm
must discourage actively
or pre-empt other firms from adopting this strategy.
Unless
one
firm
can
gain a cost lead
and
"persuade" others
to
abandon
their
strategies,
the
consequences for profitability
(and
long-run industry structure)
can be
disastrous,
as they
have been in the petrochemical industries. Thus cost
leadership is a strategy particularly dependent on
pre-emption[3].
Focus Strategy: Is it Just Super
Differentiation?
Focus,
the third generic competitive strategy identified
by Porter has been defined essentially according to
competitive scope. A firm following a focus strategy
' 'selects a segment or group of segments in the industry
and tailors its strategy to serving them to the exclusion
of others"
[3].
The concept of segmentation has become
a
vital,
analytical
tool for effective marketing and is included in all basic
marketing
texts.
Increasingly the concept of target or niche
marketing has been the basis of marketing strategy and
tactics development in recent years. Focus is dependent
on effective use of this technique.
What the actual difference is between this approach and
a differentiation approach seems to have quite naturally
confused marketing writers. Surely the successful
outcome of using one feature (or more) to differentiate
a
firm's
offering
will
be to capture one part of the market?
"Since differentiation usually implies that the product has
a particular appeal, then the maximum market share is
limited"
[2].
So what is the difference between the strategies of focus
and differentiation? Are they both simply target marketing?
Is it essentially a matter of degree, of how small is that
part of
the
market (target segment) to which you appeal?
Uncertainty over these issues has resulted in many
marketing writers taking the approach of
all
but ignoring
this third strategy.
Some of the blame must also lie with Porter's use of a
matrix (see Figure 1) to illustrate the three strategies
which inherently suggests focus is not really a strategy
in its
own right. The matrix reduces the definition of focus
to a tactic of a firm merely working in one segment,
because a decision to adopt low cost or differentiation still
needs to be made after deciding upon a focus strategy.
New Definitions of Focus Strategy and
Differentiation Strategy
Can focus be redefined or expressed
in a
different manner
so that it can be considered a strategy in its own right?
Porter gave a clue when he discussed the difference
between differentiation and what he referred to as
differentiation-focus
[3].
Focus does involve differentiating but Porter suggested
that
a
differentiation strategy used widely valued attributes
only as differentiating factors, whereas focus uses
segment-specific attributes. When examined along with
the concept of proximity, quite robust definitions are
suggested. Differentiation involves gaining proximity to
other producers
in
the provision of most benefits desired
by the market and then involves differentiating through
exceeding them in the provision of at least one benefit.
A
superiority in providing this benefit which
will
hopefully
translate to consumers being willing to pay a premium.
In many cases to implement differentiation successfully
a firm needs to capture the position associated with
providing this benefit, in all customers minds, e.g. Volvo
owns the position of providing safety.
With this new definition a clear distinction can be made
between the strategic aims and activities of firms following
differentiation and firms following focus. Focus does not
require outperforming all other competitors in the
provision of one (or few) benefit(s); it simply requires
getting the balance of benefits a firm offers to match
perfectly (or meaningfully better than any other offering)
the demands of the customers in one segment. Porter
quite rightly pointed out the difficulties of one firm
attempting to apply the strategy of focus to more than
one segment because of the internal confusion and lack
of direction this has the potential to cause. Some firms
have succeeded, although usually through using separate
business units, which can really be considered as separate
firms, to handle each different segment. A
firm
following
a focus strategy is concerned with its own one segment
and is not concerned with gaining full proximity.
Heinz launched a reduced calorie soup range in Australia
in the mid-1970s, adopting incorrectly, a differentiation
8 MARKETING INTELLIGENCE & PLANNING 9,1
strategy. They were conscious of gaining proximity and did
so by marketing a full-flavoured range (they have the
technology to remove calories without removing the flavour)
of tinned, condensed soups under the Heinz brand. The
soups were positioned in the usual soup section of the
supermarket and featured traditional varieties (e.g. beef
broth) and standard Heinz advertising (at the time using
rotund English actor Robert Morley). Heinz's market
research indicated that a substantial proportion of the
population were concerned about maintaining or losing
weight; having fewer calories was, it seemed, a base for
differentiation. Heinz gained proximity and excelled in the
provision of this feature. The soup range failed in the
marketplace, while Trim (by a Heinz rival) continued to
earn profits. Trim was a dried sachet packaged soup,
perceived as slightly watery by consumers, and sold only
in the diet section of the supermarket. In the Australian
soup market in the mid-1970s the diet segment was a
distinct segment where few aspects of proximity were
relevant; Heinz failed to appreciate the true nature of the
market to their detriment.
Gaining proximity is a necessary prerequisite to gaining
a large market share in any market (if it were not, the
definition of what constituted that market would obviously
be in error). Full proximity is therefore necessary for both
low cost and differentiation strategies but not for focus.
So what must be recognised is that the successful
implementation of focus depends on the nature of the
market (as do all the competitive strategies). A clear
segment must exist which can be catered for without
having to gain full proximity.
A firm implementing a focus strategy is vulnerable to
changes in the market and consumer demands which may
mean a segment is no longer viable or that the differences
between segments disappear. The chosen segment
therefore must be well defined, which means it will usually
be small, although not necessarily so. Speed[2] presents
the interesting idea of two versions of focus, one where
a distinct segment is targeted (target marketing) and
another where the segment chosen is so small it can only
accommodate one firm (niche marketing).
The difference between a firm following a focus strategy and
one following a differentiation strategy still can appear fine
at times. Both can appear to be targeting the needs of a
specific segment but the orientation of firms following these
strategies should differ. The effect of differentiation can be
to capture one segment (the segment which values highly
the particular benefit they excel in providing); this, how-
ever, reflects clumsy execution of a differentiation strategy.
The Competitive Advantage of Focus Strategy
Lies in Understanding One Segment's Needs
Many firms are tempted to go beyond their chosen segment,
particularly if they have been successful within
it; it
is
a difficult decision to take deliberately, to limit potential
sales volume. Porter gives the example of how Laker
Airways focused on the price-sensitive segment (always a
difficult segment to cater for at a profit!) and was
exceptionally successful with its no-frills operation in the
North Atlantic market. Over time the temptation to tap into
other segments became too great and Laker began adding
frills and new routes; it blurred its image and no longer
served its segment so well, and eventually went bankrupt.
Porter[l] actually wrote that a firm following a focus strategy
could focus on a market segment or "a segment of the
product line". Having a narrow product line is merely a
feature of the marketing mix used to target a small part
of the total market; the firm is still operating in one market
segment. To concentrate on the narrow product line rather
than the narrow part of
the
market to which it appeals would
be to have a production orientation. Always dangerous and
myopic, but surely a fatal mistake for a firm following a focus
strategy where much of
its
strategic competitive advantage
lies in understanding the segment's needs.
Focus can be powerful competitive strategy but it involves
a deliberate sacrifice of potential sales volume. It is a
particularly useful strategy for firms with limited resources;
they often cannot cope with a large market and, more
importantly, they do not have the ability to reach proximity
(let alone go further to excel in providing one benefit which
is meaningful to a large part of the market). A well
implemented focus strategy, though, can provide a premium
in profit margin which covers the higher costs of catering
so well to a segment.
A Fourth Strategy
Kotler
et al.[6]
quite rightly pointed out that Porter actually
developed a fourth competitive strategy, which is unlike the
others in that it is a strategy for failure. Porter[l] described
this as stuck-in-the-middle, where a firm attempts to
implement more than one strategy and therefore does not
achieve any of the competitive advantages since "each
generic strategy is a fundamentally different approach to
creating and sustaining a competitive advantage". There have
been a number of critiques of this statement (e.g. [10]).
Porter himself has softened his stance to say that low cost
and differentiation are merely "usually inconsistent, because
differentiation is usually costly"[3]. Differentiation and low
cost are not incompatible under Porter's original definitions,
which made no distinction between having lowest costs of
production and implementing a low cost strategy. (For an
example of how this concept has been embraced see
[11,
p.
113].) Under the new definitions in this article these two
strategies are clearly at odds.
Peter Wright and A. Parsina[7] cite several examples of
corporations implementing both focus and differentiation
strategies. Since these strategies are not at odds in that
COMPETITIVE MARKETING STRATEGY: PORTER REVISITED
9
they both respect the Bases for differentiation within the
industry, this is feasible.However, there is
nothing
in
this
argument which refutes Porter's assertion that separate,
autonomous management is required for divisions
implementing different strategies.
Summary: Each Strategy Reads to, and Tries
to Influence, Market Structure in a Different
Way
This article has examined Porter's competitive strategies
in a marketing context, an exercise which has produced
new definitions of these strategies, definitions in which
the differences between the three competitive strategies
do not depend purely
on
scope of activity or whether price
is used
to
differentiate. Instead
it is
argued that competitive
strategy concerns the way
firms
work within, and try to
influence, the nature of the market.
At
the base of competitive marketing strategy
is
the concept
of market nature or market structure. Market nature
describes how much a market differs from a commodity
market and the degree of fragmentation in the market.
Market nature is influenced to a significant degree by the
strategies adopted by the firms within the market. The
activities of firms influence market nature through
determining the market's level of proximity. In a broad
sense a market can be defined by its core benefit (e.g.
communication, nutrition, power/energy), for practical
purposes. However, markets or industries are defined by
the current bundle of benefits which a firm must deliver
in
order
to
be considered
a
direct,
industry-wide competitor.
This bundle of benefits and the level to which they must
be supplied are the market's proximity level (similar to but
not to be confused with "key success factors", which are
commonly used to describe factors within
a
firm necessary
in order to gain proximity, rather than describing the level
of performance in the marketplace).
If
a
firm reaches this level of proximity and then exceeds
it in the provision of one (or few) widely appreciated
benefit(s) (e.g. quality, number of features, price, etc.),
then it is implementing a differentiation strategy. The aim
is to gain a sustainable position in the market and earn a
premium for this extra performance, hopefully enough to
offset any additional costs incurred in offering this benefit.
Differentiation strategy depends on viable bases for
differentiation
existing.
A
firm implementing this strategy
encourages the development of such
bases.
Differentiating
firms in an industry will do best if they recognise one
another's respective positions and therefore do not
embark on "copy-cat" behaviour. Firms following a low
cost strategy take the exact opposite approach.
A firm following a low cost strategy like a differentiator
attempts to gain maximum market share. Unlike a
differentiator, it attempts to reduce or remove possible
bases for differentiation, essentially through lifting the level
of proximity which firms must first gain in order to
differentiate. In effect the
low
cost
firm
undertakes activity
which will help push the industry down the commodity
curve. Logically, a firm should consider attempting this
only if it has the lowest costs of production, but lowest
costs of production
do
not force
a
firm
to
follow
a low
cost
strategy. The term low cost strategy is potentially
misleading; a better name perhaps is proximity or
commodity strategy.
If
a
firm
does not have the ability to gain proximity it can
follow a focus strategy. A firm following a focus strategy
attempts to provide the right balance of benefits (the right
marketing mix) to a particular segment of the market in
order to match their needs and wants perfectly (or
meaningfully better than other competitors. A firm
following focus is not concerned with gaining full proximity
(see Figure 2).
Focus strategy depends on a
firm
finding
viable, distinct
segments which
do
not require
proximity.
A
firm
following
this strategy attempts to encourage the formation and
continued existence of such segments.
The competitive advantage of focus lies in the superior
knowledge of one segment's needs and wants.
Figure 2.
Risks
of
the Generic Strategies
Risks of low cost
Cost leadership is
not sustained
Level of proximity
drops.
Bases for
differentiation
become very
pronounced,
allowing
differentiators and
focusers to
increase share.
Market becomes
fragmented.
Proximity level is
very low.
Source: [3, p. 21]
Risks of
differentiation
Ability to gain
proximity, then
excel in the
provision of one
benefit, is not
sustained
Level of
proximity rises,
Bases for
differentiation
become less
important to
consumers.
Proximity is very
low. Market
becomes
fragmented to
the point that
focusers steal
the whole
market, segment
by segment.
Risks of focus
Understanding of
the segment's
unique
characteristics is
lost
Target segment
becomes
unattractive.
Target segment's
differences from
other segments
disappear.
New focusers
sub-segment the
market.
10 MARKETING INTELLIGENCE & PLANNING 9,1
Porter's work on competitive strategy was exciting,
although certainly not complete. It was new marketing
theory but in its original form displayed a number of errors
which become evident when examined in a marketing
context. That this was not done in a decade of marketing
teaching and practice is a sad reflection on the unscholarly
haste in which apparently useful theories were placed into
the body of marketing theory (and textbooks).
This article, whilst critical of Porter's definitions of generic
competitive strategy, does attempt to emphasise Porter's
great contribution to marketing strategy
the concept
of market nature and the realisation that this nature is
influenced by the strategies adopted by firms operating
within the market. This theory represents a landmark in
the development of competitive marketing strategy and
has profound implications for the traditional works in this
area. Many other marketing writers' competitive
strategies appear to be highly simplistic, a collection of
tactics without a strategic framework. Competitive
marketing tactics and strategy now will have to be
rethought in the light of the concepts of market nature
and proximity, and the evolutionary (sometimes
revolutionary) process of change in market nature.
References
1.
Porter, M.E.,
Competitive
Strategy:
Techniques
for
Analysing Industries
and
Competitors,
Free Press, New
York, 1980.
2.
Speed, R.J., "Oh Mr Porter! A Reappraisal of
Competitive Strategy", Marketing Intelligence &
Planning, Vol. 7 No. 5/6, 1989.
3.
Porter, M.E.,
Competitive
Advantage:
Creating and
Sustaining
Superior
Performance,
Free Press, New York,
1985.
4.
Brown, L.,
Competitive Marketing
Strategy:
Developing,
Maintaining and Defending Competitive
Position,
Thomas
Nelson (Australia), South Melbourne, 1990.
5.
Thompson, A. and Strictland, A.J., Strategic
Management:
Concepts
and
Cases,
(4th ed.), Business
Publications, Inc., Texas, USA, 1987.
6. Kotler, P., Chandler, P., Gibbs, R. and McColl, R.,
Marketing in Australia, (2nd ed.), Prentice-Hall,
Australia, 1989.
7.
Wright, P. and Parsina, A., "Porter's Synthesis Of
Generic Business Strategies: A Critique", Industrial
Management
(USA), May-June, 1988, p. 20.
8. Balan, P., "Quality as International Competitive
Advantage" unpublished working paper, University of
South Australia, 1990.
9. Porter, M.E., "Michael Porter
on
Competitive Strategy",
Harvard Business School Video
Series,
1988.
10.
Mathur, S., "How Firms Compete:
A
New Classification
of
Generic
Strategies'',
Journal
of
General
Management,
Vol. 14 No. 1, Autumn 1988, pp. 30-57.
11.
McDonald, M.H.B., How to
Prepare Marketing
Plans,
Heinemann, London, 1988.
Bibliography
Aaker, D.A.,
Strategic Market
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(2nd ed.), John
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Kotler, P.,
Marketing
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Analysis,
Planning
and
Control,
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Kotler, P. and Singh, R., "Marketing Warfare in the 1980s",
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of
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Strategy,
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30-41.
Porter, M.E., "How Competitive Forces Shape Strategy",
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Porter, M.E., "Reflections and Round Table Discussion",
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Porter, M.E., The
Competitive Advantage
of
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Quinn, J.B., Mintzberg, J.M. and James, R.M., The
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A. and Trout, J.,
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Byron Sharp is lecturer in Marketing, University of South Australia, Adelaide, Australia.
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Book
With the publication of his best-selling books "Competitive Strategy (1980) and "Competitive Advantage (1985), Michael E. Porter of the Harvard Business School established himself as the world's leading authority on competitive advantage. Now, at a time when economic performance rather than military might will be the index of national strength, Porter builds on the seminal ideas of his earlier works to explore what makes a nation's firms and industries competitive in global markets and propels a whole nation's economy. In so doing, he presents a brilliant new paradigm which, in addition to its practical applications, may well supplant the 200-year-old concept of "comparative advantage" in economic analysis of international competitiveness. To write this important new work, Porter and his associates conducted in-country research in ten leading nations, closely studying the patterns of industry success as well as the company strategies and national policies that achieved it. The nations are Britain, Denmark, Germany, Italy, Japan, Korea, Singapore, Sweden, Switzerland, and the United States. The three leading industrial powers are included, as well as other nations intentionally varied in size, government policy toward industry, social philosophy, and geography. Porter's research identifies the fundamental determinants of national competitive advantage in an industry, and how they work together as a system. He explains the important phenomenon of "clustering," in which related groups of successful firms and industries emerge in one nation to gain leading positions in the world market. Among the over 100 industries examined are the German chemical and printing industries, Swisstextile equipment and pharmaceuticals, Swedish mining equipment and truck manufacturing, Italian fabric and home appliances, and American computer software and movies. Building on his theory of national advantage in industries and clusters, Porter identifies the stages of competitive development through which entire national economies advance and decline. Porter's finding are rich in implications for both firms and governments. He describes how a company can tap and extend its nation's advantages in international competition. He provides a blueprint for government policy to enhance national competitive advantage and also outlines the agendas in the years ahead for the nations studied. This is a work which will become the standard for all further discussions of global competition and the sources of the new wealth of nations.
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The essence of strategy formulation is coping with competition. Yet it is easy to view competition too narrowly and too pessimistically. While one sometimes hears executives complaining to the contrary, intense competition in an industry is neither coincidence nor bad luck.
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Michael Porter presents a comprehensive structural framework and analytical techniques to help a firm to analyze its industry and evolution, understand its competitors and its own position, and translate this understanding into a competitive strategy to allow the firm to compete more effectively to strengthen its market position. The introduction reviews a classic approach to strategy formulation, one that comprises a combination of ends and means (policies), factors that limit what a company can accomplish, tests of consistency, and an approach for developing competitive strategy. A competitive strategy articulates a firm's goals, how it will compete, and its policies for achieving those goals. Competitive advantage is defined in terms of cost and differentiation while linking it to profitability. Part I, "General Analytical Techniques," provides a general framework for analyzing the structure of an industry and understanding the underlying forces of competition (and hence profitability). Five competitive forces act on an industry: (1) threat of new entrants, (2) intensity of rivalry among existing firms, (3) threat of substitute products or services, (4) bargaining power of buyers, and (5) bargaining power of suppliers. Looking at industry structure provides a way to consider how value is created and divided among existing and potential industry participants. One competitive force always captures essential issues in the division of value.There are three generic competitive strategies for coping with the five competitive forces: (1) overall cost leadership, (2) differentiation, and (3) focus. There are risks with each strategy. A firm without a strategy is "stuck in the middle." This framework for examining competition transcends particular industry, technology, or management theories. Building on this framework, techniques are presented for industry forecasting, analysis of competitors, predicting their behavior, and building a response profile. Essential for a competitive strategy are techniques for recognizing and accurately reading market signals. Implications of structural analysis for buyer selection and purchasing strategy are presented. Game theory provides concepts for responding to competitive moves. Using the concept of strategic groups, structural analysis can also explain differences in firm performance (profitability), provide a guide for competitive strategy, and predict industry evolution. Part II, "Generic Industry Environments," shows how firms can use the analytical framework to develop a competitive strategy in industry environments, which reflect differences in industry concentration, state of industry maturity, and exposure to international competition. These environments determine a business's competitive strategic context, available alternatives, and common strategic errors. Five generic industry environments are examined: fragmented industries (where level of industrial concentration is low), emerging industries, transition to industry maturity, declining industries, and global industries. In each, the crucial aspects of industry structure, key strategic issues, characteristic strategic alternatives (including divestment), and strategic pitfalls are identified. Part III, "Strategic Decisions," draws on the analytical framework to examine important types of strategic decisions confronting firms that compete in a single industry: vertical integration, major capacity expansion, and new business entry. Additional use of economic theory and administrative consideration of management and motivation helps a company to make key decisions, and gives insight into how competitors, customers, suppliers, and potential entrants might make them. Appendix A discusses use of techniques for portfolio analysis applied to competitor analysis. Appendix B provides approaches to conducting an industry study, including sources of field and published dat
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