Examples for Michael Porter’s Three Generic Strategies

1 Chau Trieu Luan | [email protected]

EXAMPLES FOR

MICHAEL PORTER’S

THREE GENERIC

STRATEGIES


I. Michael Porter’s Five Generic Strategies

Opening a firm is easy but operating a successful firm is a difficult task. This requires all

resources such as good human power, finance, accounting, marketing, R&D, productions,

distributions, logistics and so on. So in order to run a successful firm, the firm must have a

strategy for its direction. According to Porter, advantages of strategies will help enterprises

to achieve competitive advantages compared to their rivals. There are three different

models that firms can apply:

- Cost leadership

- Differentiation

- Focus Michael E. Porter’s Five Generic Strategy Model

Competitive advantage

Low Cost Differentiation

Broa

d Cost leadership Differentiation

Mar

ket s

cope

Nar

row

Focus (Low cost)

Focus (Differentiation)

Source: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and

Competitors (New York: Free Press, 1980)

1. Cost Leadership Strategy Any enterprises applying this model, they focus on producing standardized products and

sell products with a very low per-unit cost to consumers. This will attract consumers who

are sensitive to price. The strategy can be used to target at large markets. Firms can use

either a low-cost strategy or a best-value strategy. For a low-cost strategy, firms offer


products or services to customers at the lowest price compared to rivals on the market. For

a best-value strategy, firms offer products or services to customers at the best value

compared to rivals’ price at similar attributes of products on the market.

If a firm has a low-cost position, it will gain more returns although there are many strong

competitors in the industry. To achieve a low-cost position, firms are required to a high-

relative market shares or other advantages. The firms should produce relative products;

design an easy product to manufacture, and to sell in large volumes (Porter, 1998).

This strategy is effective as a market has many price-sensitive buyers. And there are few

ways to design product differentiation or customers do not care about differences between

brands, or there are a lot of buyers with powerful bargaining ability.

By underpricing competitors, this will thereby gain market share and sales and then driving

some competitors out of the market.

Companies applied cost leadership strategy must have competitive advantages that are

valuable, rare, hard to imitate, or not easily substitutable and difficult for competitors to

copy or match. If competitors find it easy or inexpensive to imitate the leader’s cost

leadership methods, the leaders’ advantage will not last long to yield a valuable advantage

in the marketplace.

In order to apply a cost leadership strategy successfully, a company must ensure that its

total costs of its whole value chain are lower than competitors’. There are two ways to

accomplish it. (1) Value chain activities are more efficiently than rivals. They are the plant

layout, new technologies, different products, product design, year-round full capacity, and


so on. (2) Reducing or eliminating cost-producing activities. They are suppliers,

distributors, products online sales, manufacturing facility relocation, and so on.

Cost leadership strategy can be effective under the following conditions:

1. Price competition among rivals is especially powerful

2. Products of rivals are identical

3. Few ways to achieve product differentiation

4. Most customers use the product in the same ways

5. Low switching costs

6. A lot of customers with bargaining power

7. Newcomers use low prices to attract buyers

2. Differentiation Strategy Firms using the model will produce differentiated products and services. And products can

be many degrees of differentiation. They can be different in design, brand image,

technology, features, customer service, dealer network, product performance, useful life,

ease of use and so on.

A firm must be careful to study buyers’ needs and preferences to determine the feasibility

before pursuing the differentiated strategy. And a firm can charge a higher price for its

differentiated product and to gain customer loyalty.

A risk of differentiation strategy is that products are not be valued good enough by

customers. When this happens, a cost leadership strategy easily will defeat a differentiation


strategy. Moreover, another risk of pursuing a differentiation strategy is that competitors

may quickly copy the differentiating features.

Differentiation opportunities can be developed anywhere in the firm’s value chain such as

supply chain activities, product R&D activities, production and technological activities,

manufacturing activities, human resource management activities, distribution activities, or

marketing activities.

The differentiation strategy can be effective in the following conditions:

1. There are many ways to differentiate products or services and many buyers

perceive these differences as having value

2. Buyer needs and uses are diverse

3. Few rival firms are following a similar differentiation approach

4. Technological change is fast

3. Focus Strategy Firms applying the model will produce products and services to serve a particular group of

consumers. They aim at small markets. There are two types of focus strategies. (1) Firms

offer products or services to a niche group of customers at the lowest price compared to

rivals’ on the market. (2) Firms offer products or services to a niche of customers at the

best value compared to rivals’ price on the market. This will help to offer best value

products or services to meet customers’ tastes better than rivals’ do and the price can be

higher than rivals’.


If firms apply a focus strategy, they just concentrate on a narrow market like particular

group of customers, geographic markets, or on particular product-line segments. They will

serve customer in the narrow market better than competitors or choose a target with least

vulnerable to substitute. A successful focus strategy depends on an industry segment of

sufficient size, good growth potential. Market penetration and market development are

advantages. If midsize and large firms pursue focus-based strategies together with

differentiation or cost leadership strategies, they will get more chance for success.

Moreover, focus strategies are most effective as consumers have distinctive preferences;

and rival firms do not intend to focus on the same target segment.

However, there are risks when firms pursue a focus strategy. Competitors will recognize

the successful focus strategy and copy it or consumer preferences will be changed.

A focus strategy can be attractive under the following conditions:

5. Target market niche is large, profitable, and growing

6. Industry leaders do not consider the niche to be crucial to their own success

7. Industry leaders consider it too costly or difficult to meet the specialized needs

8. Industry has many different niches and segments

9. Few rivals are attempting to specialize in the same target segment


II. Examples of Cost Leadership Strategy

Example 1: Reetech air-conditioner uses cost leadership strategy for its development. It

offers a lowest price for every segment in the market. For example, with product line of 1.5

hp, Reetech RT12-CH/RC12-CH is selling at VND6,900,000 while Daikin FTE35KV1 at

VND8,900,000, LG S12ENA at VND8,490,000, and SHARP AH-A12PEWS at

VNĐ,300,000.

Example 2: Also in motorcycle industry, SYM used cost leadership strategy. Its products’

price is cheapest on the market. It is the third large motorcycle manufacturer in Vietnam in

terms of market share and revenue. Every segment, rivals’ product such as Wave of Honda,

Sirius of Yamaha and X-bike of Suzuki, SYM’s EZ10 offers the cheapest price.

Example 3: On Oct 29, 2013, Haier brand surprisingly announced its quad-core smart

phone just VND2,000,000. Haier is a famous consuming electronics company. Haier

smartphones for Vietnam market in this event have strong CPU at quad-core 1.2 Ghz. With

the same CPU, other brands like Samsung, LG, Nokia, Sony have a higher price. Haier is

the new entrance, so it applies cost leadership strategy to enter the smartphone market.

Because it enters the market late, so if there are no any differentiated features, Haier has to

use cost leadership strategy to enter. It is the right strategy for the late entrance.

Example 4: Wal-Mart is a giant in retail in the USA. Wal-Mart is a pioneer in supply chain

management. Its distribution channels are managed efficiently and effectively. It controls

manufacturing, inventory, and distribution effectively. Besides, It always offer the lowest

price compared to rivals. Because Wal-Mart buys with a huge volumes from suppliers,

Wal-Mart often gain the best prices.


Example 5: Within product line of cheap LCD TV, TCL applies cost leadership strategy.

Its selling price is cheapest on the market. TCL LCD 32B330’s price is VND4,700,000

while Panasonic LCD 32C4 at VND5,000,000, LCD Toshiba 32HV10 at VND4,9000,000,

and LG 32LK312 at VND4,900,000.

Example 6: In the auto industry, small cars with cheap price are consuming increasingly

these years in Asian countries. Manufacturers in Thailand and Indonesia are pushing their

plans to produce small cars with cheap price for the region (Mỹ Anh, 2013). On Vietnam

market, Chevrolet is applying cost leader ship strategy for its product of small cars. Selling

price of Spark is cheapest on the market. Its price is VND 349,000,000 while Kia Morning

is VND 365,000,000, Hyundai i10 at VND 380,000,000.

Spark VND349,000,000

Kia Morning VND365,000,000

Hyundai i10 VND380,000,000

Example 7: Also in air-conditioner industry, LG uses cost leadership strategy (best-value

strategy) for its development. For example, with product line of 1.5 hp, LG S12ENA offers

a price at VND8,490,000 higher than Reetech RT12-CH/RC12-CH at VND6,900,000, but

LG offers more features and benefits than its rivals. LG provides 3-layer filter and ability

of automatic cleaning while its rivals offer 1-layer filter only. Beside, LG offers more 12-

month warranty if buying from Oct to Nov 2013, meaning 2-year warranty in total more

than its rivals’.


Example 8: Acer is one of largest PC manufacturers in the world. Its markets are around

the world. Its PC products are selling at the lowest price compared to rivals. Acer uses cost

leadership strategy to a large range of customers (Taylor & Nichols, 2010, p.27). Acer uses

cost leadership strategy. With the same features, Acer laptops are always cheaper than its

rivals. For example, ACER E1 is selling at VND 6,990,000 equally to HP CQ45 and lower

than Lenovo G400. However, ACER E1 531 offers bigger screen at 15.6 inches and HDD

at 500GB more storage capacity than HP CQ45’s HDD at 320 GB only. It brings more

features and benefits to buyers than rivals do. This strategy gives Acer a competitive

advantage in gaining and maintaining its market shares.

ACER E1 531 HP CQ45 Lenovo G400

CPU Intel, Pentium, B960, 2.20 GHz

Intel, Pentium, B960, 2.20 GHz

Intel, Pentium, 2020M, 2.40 GHz

RAM DDR3, 2 GB DDR3, 2 GB DDR3, 2 GB HDD HDD, 500 GB HDD, 320 GB HDD, 500 GB Screen 15.6 inch, HD 14 inch, HD 14 inch, HD PIN/Battery Lithium-ion 6 cell Lithium-ion 6 cell Lithium-ion 6 cell Price VND 6,990,000 VND 6,990,000 VND 7,070,000

Example 9: P&G applied cost leadership strategy for its development. It produces many

related products and variety of line products for customers. We can see shampoos Pantene

(P&G) and Dove (Unilever). Price of Pantene is lower than Dove. P&C is aiming the cheap

detergent Tide Simply Clean and Fresh and it will be launched in 2014 (Thúy An, 2013).

Example 10: In motorcycle industry, manufacturers coming form Japan, Suzuki follows the

cost leadership strategy. The selling price always is lowest compared to products with the

same features from Honda and Yamaha.


Suzuki Hayate 125 VND21,500,000

Honda Air Blade Fi VND35,500,000

Yamaha Nouvo SX VND33,000,000

Example 11: Also in the auto industry, Hyundai Elnatra is directly competing Corolla Altis,

Honda Civic, Ford Focus, Kia K3, and Mazda3. Selling price of Hyundai Elnatra is

VND726,000,000. It is cheaper than others such as Honda Civic at VND 725,000,000,

Focus at VND689,000,000. Its price is just higher than Kia K3 at VND638,000,000.

However, Hyundai Elnatra offers more feature than other competitors. Hyundai Elnatra

follows cost leadership strategy. It is charged higher price than Kia K3 but it offers more

feature. It brings more benefits for buyers. As we can see that although its price is lowest,

its features are more than its rivals as below.

Source: Thegioibonbanh.com

Example 12: Samsung uses cost leadership strategy for its product line of LED TV with

selling price under VND7,500,000 in Vietnam market.


LED Samsung UA32F4100

LED LG 32LN541B

LED Sony 32R402A

LED Toshiba 32P2300

- LED 32 inches - HD 1366 x 768 - CMR 100 Hz - HDMI x 2 - USB x 2 - 2-year warranty

- LED IPS 32 inches - HD 1366 x 768 - USB 1-year warranty

- LED 32 inches - WXGA1280 x 720 - XR 100 Hz - HDMI x 2 - USB x 1 - 2-year warranty

- LED , 32 inches - HD 1366x768 - ARM 100 Hz - HDMI x 3 - USB x 1 1-year warranty

VND7,190,000 VND6,800,000 VND6,900,000 VND6,290,000 As we can see although selling price of Samsung is highest at VND7,190,000, Samsung

offers more features than its rivals (Toshiba and LG) such as 2- year warranty. Beside,

Samsung offers electric saving and friendly environment ability while its rivals do not.

Within the price range, Samsung offers more features and create more value for its

customers.

Example 13: In the fast food section, Jollibee in Vietnam pursues the cost leadership

strategy. Jollibee offers the lowest price on the market. It targets a mass market in Vietnam

with a menu variety and cheapest price. To gain the success on the market, Jollibee applied

the formula of FSC: Food quality, Service and Cleanliness to compete with giant rivals.

Example 14: In the beer section, Sabeco uses the cost leadership strategy for its 333 canned

beer. The selling price of 333 is lowest on the market. It targets mid-low incomers. The

products can be consumed in the whole of Vietnam including big cities and towns of

provinces.

Example 15: Media Vietnam is a Chinese electronics company. It operated a manufacturer

in Vietnam in 2007. Its products are accepted by Vietnamese customers. With the cheapest

price of products on the market, Media Vietnam gradually gains customers’ belief.


Products sold in Vietnam is manufactured in Vietnam, so Media’ product cost is low.

Taking the advantage, Media Vietnam offers the lowest price for its products to compete

successfully on the market.


III. Examples of Differentiation Strategy

Example 16: Apple uses differentiation strategy in doing business. Apple uses its own

platform for its products lines. Iphones go with iOS; Ipads go with iOS; and Macbook

Laptops go with Mac OS. The platforms are coded by Apple themselves. And hardwares of

the devices are designed and manufactured to use their own software. So their perfect

compatibility makes Apple’s devices run smoothly. Until now competitors have not

imitated. Apple brings more benefits and satisfaction for its customers and gains

customers’ loyalty through the differentiation strategy.

Example 17: In order to gain customers’ loyalty and increase revenue and market shares,

ASUS provides 2-year warranty for its laptop more while others just provide 1-year

warranty. In 2011 ASUS decided to offer a program of home warranty in Vietnam market

(Asus, 2011). By this differentiation strategy, ASUS will gain more advantages compared

to its rivals. It added more feature and improve service quality to serve consumers better.

Example 18: Samsung is directly competing Apple in the smart phone industry. In order to

attract more customers and gain market shares, Samsung use the differentiation strategy in

its innovated products development. For example, Galaxy Note 3, S-Pen was designed and

attached to the Galaxy. It is a stylus but more convenient and smarter. Moreover, wider

screen of Galaxy Note 3, higher pixel camera, and longer battery make a big differentiation

compared to other rivals’ products.

Example 19: In real estate sector, GS E&C, a Korean developer, uses the differentiation

strategy to develop the residential project named Xi Review Palace in HCMC. The project

is a hi-end apartment. It is differentiated with other projects. Its design is very good as only


four units per floor while others at six or eight or twelve units. New technology was

installed in the apartment. It is called Home Network System. Owners can turn on/off gas

and lights outside their apartment. Moreover, its management service is the best compared

to others such as good security, quick response, cleanness, profession. Buyers of Xi are

satisfied with their apartments. And of course the selling price is in top five highest selling

price in HCMC.

Example 20: Vnexpress.net pursues a differentiation strategy. The electronic newspaper is

very famous in Vietnam. It serves readers who can use the internet for seeking news.

Vnexpress.net does not provide a printed copy like other newspapers such as Tuoitre,

Thanhnien. Just with a PC, a laptop, or a smartphone or a tablet, readers can read news on

Vnexpress.net free at at any time and any where.

Example 21: Thế Giới Di Động is one of famous retailers in electronics in Vietnam. It is a

good example of differentiation strategy in brand identity. It uses two main colors: deep

yellow together with black to differentiate itself from rivals. The colors are on staff

uniforms that showing its professional selling. Further more, the two colors are on its

billboards, main gates, walls, bags, website, and shelves used for displaying products.

Example 22: Heineken beer is positioned for high income users. It serves a small market of

rich people. The selling price is higher than other brands such as Tiger beer, 333 beer,

Sapporo beer. Its flavor tastes better than others. It show stylish image for users. Heineken

beer uses strategy of differentiation.


Example 23: Metro Cash & Carry Vietnam is a good example of a differentiation strategy.

The Metro just focuses on customers who are enterprises. Unlike other rivals such as Big

C, Co-Op Mart concentrates on individuals. Moreover, the Metro targets huge volume of

customers every time they go shopping.

Example 24: Sony applies the differentiation strategy. Whenever hearing Sony, customers

recognize durable, good brand image, and high price products. Sony follows the

differentiation strategy. Recently, Sony provides variety of products to serve all segments

but Sony still keeps its famous identity of differentiation in terms of brand image,

durability, and high price.

Example 25: Honda is very popular to Vietnamese. Honda motorcycles are considered

durability, and they are not decreased value much when customers want to re-sell their

motorbikes. Honda uses the differentiation strategy. Honda differentiates itself via

providing good products and keeping the value of products to secure customers.

Example 26: Lexus is a brand of Toyota Motor Company. It is a famous for luxury cars. Its

rivals are BMW and Mercedes-Benz. Lexus is a perfect example for a focus strategy.

Lexus is positioned for a group of rich people. Both a differentiation and a low cost

leadership strategy are applied. Toyota offers the same benefits as competitors but lowest

price for its Lexus on the market.

Example 27: Mercedes-Benz is famous for luxury cars. It focuses on a narrow market and

gets huge profit margins at the hi-income and upscale segment. A best-value focus strategy

is used. On the market, selling price of Mercedes-Benz is charged higher than Toyota


Lexus with the same basic features, but offers more advanced technology and design for

customers.

Example 28: Sao Bac Dau Company pursues the differentiation strategy. Sao Bac Dau

focuses on providing excellent package services of information technology for its

customers. Unlike PhongVu Company, HoanLong Company, and others, Sao Bac Dau

targets at small segments of enterprises that needs a whole package of information

technology equipments such as PCs, laptops, servers, hubs, installations, and complex

service of IT. Sao Bac Dau differentiates itself via its complicated technical skills and

quality of services.

Example 29: Phuong Trang Transportation Company follows the differentiation strategy. In

long-distant transportation, it differentiates itself with rivals via service quality. The selling

price of tickets is the same as competitors but the service of transport is better. It provides

shuttle buses to pick up clients to and from their home. Beside, service attitude of staff is

better than rivals. They are friendly and helpful. Clients are happy and Phuong Trang is

very successful in gain loyalty of customers.

Example 30: Pho 24 is famous with Vietnamese. It pursues the differentiation strategy. It

offers a modern, youth, luxury atmosphere for consumers. Consumers always feel

comfortable whenever in Pho 24 restaurants with friendly staff, professional service, and

good food. Its consumers are office servants, managers, CEO, etc with higher income.


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Examples for Michael Porter’s Three Generic Strategies

Marketing

Transcript of Examples for Michael Porter’s Three Generic Strategies