Course: Marketing Strategies

An Overview of Michael Porter Strategies with

Examples

Submitted By:
RAJESH
Explain Michael Porter’s three Competitive Strategies (such as Focus, Low Cost & Differentiation) with suitable
examples of applying those strategies in India for specific nature of product(s) and consumer segments

Michael Porter devised a category scheme consisting of three general types of strategies that are
commonly used by businesses to achieve and maintain competitive advantage. These three generic
strategies are
 Cost Leadership
 Differentiation
 Focus

The above strategies are defined along two dimensions: strategic scope and strategic strength.
Strategic scope is a demand-side dimension and looks at the size and composition of the target
market. Strategic strength is a supply-side dimension and looks at the core competency of the firm. In
essence he identified two competencies that were most important: product differentiation and product
cost with a clear focus on the target segment of the market to achieve success.

Porter’s Generic Strategies

This was later simplified to three best strategies, cost leadership, differentiation and market
segmentation
Based on Porter’s theory, firms with high market share were successful because they pursued a cost
leadership strategy and firms with low market share were successful because they used market
segmentation to focus on a small but profitable market niche. Firms in the middle were less profitable
because they did not have a viable generic strategy.
Combining multiple strategies is successful in only one case. Combining a market segmentation
strategy with a product differentiation strategy was seen as an effective way of matching a firm’s
product strategy (supply side) to the characteristics of target market segments (demand side). But
combinations like cost leadership with product differentiation were seen as hard (but not impossible) to
implement due to the potential for conflict between cost minimization and the additional cost of value-
added differentiation.
Research conducted later also backed this conclusion that firms having combination of strategies are
likely to more profitable or successful
Cost Leadership
This strategy involves the firm gaining market share by targeting cost-conscious or price-sensitive
customers. In other words, developing the "edge" helps in winning over the competitors. There are two
main ways of achieving this within a Cost Leadership strategy:
 Increasing profits by reducing costs, while charging industry-average prices.
 Increasing market share through charging lower prices, while still making a reasonable profit on
each sale due to cost reduction. R

Cost Leadership is about minimizing the cost to the organization of delivering products and services.
The Cost Leadership strategy is exactly that – it involves being the leader in terms of cost in your
industry or market. Simply being amongst the lowest-cost producers is not good enough, as there is a
gap wide open to attack by other low cost producers who may undercut the prices and therefore block
any attempts to increase market share. Companies that are successful in achieving Cost Leadership
usually have access to the capital needed to invest in technology that will bring costs down, very
efficient logistics and low cost base (labor, materials, and facilities).
There are three other ways to achieve cost leadership detailed as below:
1. The first approach is achieving a high asset turnover. In service industries, this may mean for
example a restaurant that turns tables around very quickly, or an airline that turns around flights
very fast. In manufacturing, it will involve production of high volumes of output. These
approaches mean fixed costs are spread over a larger number of units of the product or
service, resulting in a lower unit cost, i.e. the firm hopes to take advantage of economies of
scale and experience curve effects.
2. The second dimension is achieving low direct and indirect operating costs. This is achieved
by offering high volumes of standardized products offering basic no-frills products and limiting
customization and personalization of service. Production costs are kept low by using fewer
components, using standard components, and limiting the number of models produced to
ensure larger production runs. Overheads are kept low by paying low wages, locating premises
in low rent areas, establishing a cost-conscious culture, etc. Maintaining this strategy requires a
continuous search for cost reductions in all aspects of the business. This will include
a. Outsourcing,
b. Controlling production costs,
c. Increasing asset capacity utilization, and
d. Minimizing other costs including distribution, R&D and advertising.
3. The third dimension is control over the supply/procurement chain to ensure low costs. This
could be achieved by
a. Bulk buying to enjoy quantity discounts,
b. Squeezing suppliers on price,
c. Instituting competitive bidding for contracts,
d. Working with vendors to keep inventories low using methods such as Just-in-Time
purchasing or Vendor-Managed Inventory.

Wal-Mart is famous for squeezing its suppliers to ensure low prices for its goods. Dell Computer
initially achieved market share by keeping inventories low and only building computers to order. Other
procurement advantages could come from preferential access to raw materials, or backward
integration
There is a general assumption that cost leadership strategies are only viable for large firms with the
opportunity to enjoy economies of scale and large production volumes. However, this takes a limited
industrial view of strategy. Small businesses can also be cost leaders if they enjoy any advantages
conducive to low costs.
For example, a local restaurant in a low rent location can attract price-sensitive customers if it
offers a limited menu, rapid table turnover and employs staff on minimum wage.
Innovation of products or processes may also enable a startup or small company to offer a cheaper
product or service where incumbents' costs and prices have become too high. An example is the
success of low-cost budget airlines who despite having fewer planes than the major airlines, were able
to achieve market share growth by offering cheap, no-frills services at prices much cheaper than those
of the larger incumbents. A cost leadership strategy may have the disadvantage of lower customer
loyalty, as price-sensitive customers will switch once a lower-priced substitute is available. A
reputation as a cost leader may also result in a reputation for low quality, which may make it difficult
for a firm to rebrand itself or its products if it chooses to shift to a differentiation strategy in future.

Example of Companies in India applying cost leadership

strategies successfully
India’s largest steel company Tata Steel, the cost leader in the steel manufacturing sector owns raw
material assets such as coaland limestone mines through joint ventures or completely, with the assets
spread across countries such as Australia, Oman and Mozambique. Tata Steel has largely been able
to withstand raw material price fluctuations due to captive iron ore mines.
The key factors that work for TATA Steel are as follows:
Cost of raw material in India is much cheaper when compared to other countries; specially China
India also has the cheapest labor costs for a company. Although, Brazil and South Africa have cheaper
raw material cost, they have a higher labor cost to compensate. TATA Steel has access to one of the cheapest
labor markets and hence is in a very strong position in minimizing its cost of production
Management is confident of passing on to customers the impending raw material cost in-creases
Another important factor adding to the operating expenses of the company includes transportation and
freight charges. Since TATA Steel has to source its raw materials from many points such as Australia and
Africa, freight becomes a major component of its cost. Also, it has production facilities in multiple locations and
sourcing becomes an important concern. It has been observed that these have been on the rise yet have been
volatile. To neutralize this effect superior cost control in the areas where it possible is highly important. While on
one hand, there are uncontrollable costs, it is the controllable costs that the company must aim to cut back on.
In this area, TATA Steel has been highly successful

Organizing to implement a cost leadership strategy requires particular consideration to the

organizational structure, management controls, compensation policies, and implementing cost
leadership strategies. The organizational arrangements and implementation tools should not only fit
but reinforce the strategy. Porter has divided requirements of overall cost leadership strategy into
“commonly required skills and resources” and “Common organizational requirements”. Commonly
required skills and resources when implementing overall cost leadership are sustained capital
investment and access to capital, process engineering skills, in-tense supervision of labor, products
designed for ease in manufacture, and low-cost distribution systems. Common organizational
requirements constitute of tight cost control, frequent, detailed control reports, structured organization
and responsibilities, and incentives based on meeting strict quantitative targets.

Other Examples of Indian Companies that have successfully applied cost leadership strategy are:
Reliance Industries has become a global leader in various business activities based on innovation
and cost by achieving more efficient production arising from experience and economies of scale, innovation
in production methods, and differential Low-Cost Access to Productive Inputs.
Kwality Group of Industries, which includes Kwality Electronic Industries and Kwality Photonics Pvt.
Ltd. is India's largest producer of Light Emitting Diodes (LEDs), LED Displays & Opto Electronic Products.
Kwality is not only the pioneer, being the first Indian Company to have successfully established LEDs
production in India but also commands the highest market share in domestic sales. Kwality is a Technology
Leader - able to deliver state of art products, Quality Leader - having obtained ISO 9001:2000 and
consistently achieving near 100% yields, and Range leader - offering over 600 types of LEDs, LED
Displays & Optoelectronic Products. Kwality is reckoned as a Price Leader too - offering most Competitive
Prices and Best Value for money. The Optoelectronic products include LEDs (Light Emitting Diodes), LED
Displays, LED Lamps, IREDs (Infrared Emitters), Photo Transistors, Photo Detectors, Flasher LEDs, HI
Voltage LEDs, Low Battery Indicator LEDs, Hi- flux LEDs, LED Clusters and Filament Lamp retrofits
Nirma who was the industry leader in the detergent industry, and T Series the Cassette Manufacturer
are impressive in their ability to sell inexpensively vis. a vis. their competition. This ability is driven by their
extremely low cost of manufacture which also gave them cost leadership

Differentiation Strategy
Differentiation is aimed at the broad market that involves creation of a product or services that is
perceived throughout the industry as unique. This specialty can be associated with design, brand
image, technology, dealers, network, or customer service.
Differentiation is a viable strategy for earning above average returns in a specific business because
the resulting brand loyalty lowers’ the customers’ sensitivity to price
Differentiate the products in some way in order to compete successfully. In a differentiation strategy a
firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. For
example, a quality strategy is a differentiation strategy for a product or a service may be rewarded with
a premium price.
According to Porter there can be more than one successful differentiation strategy in a given industry
as opposed to a cost leadership which usually is only one.
A differentiation strategy is appropriate where the target customer segment is not price-sensitive, the
market is competitive or saturated, customers have very specific needs which are possibly under-
served, and the firm has unique resources and capabilities which enable it to satisfy these needs in
ways that are difficult to copy.
These could include
a. Patents or other Intellectual Property (IP),
b. Unique technical expertise (e.g. Apple's design skills or Pixar's animation prowess),
c. Talented personnel (e.g. a sports team's star players or a brokerage firm's star traders), or
d. Innovative processes.
e. Successful brand management also results in perceived uniqueness even when the physical
product is the same as competitors. (This way, Starbucks could brand coffee, and Nike could brand
sneakers. Fashion brands rely heavily on this form of image differentiation)

Differentiation involves making your products or services different from and more attractive those of
your competitors. This depends on the exact nature of the industry and of the products and services
themselves, but will typically involve features, functionality, durability, support and also brand image
that your customers value. To make a success of a Differentiation strategy, organizations need:
 Good research, development and innovation.
 Ability to deliver high-quality products or services
 Effective sales and marketing, so that the market understands the benefits offered by the
differentiated offerings.
Large organizations pursuing a differentiation strategy need to stay agile with their new product
development processes.
A key to business success is the ability to develop a niche in the market place and determine what
makes the business unique and incorporate that feature into the marketing strategy. By making use of
differentiation marketing strategies, business can stand out in a crowded competitive marketplace.
Some of the ways to achieve differentiation strategy
Pricing
Differentiate business through a unique pricing strategy. By pricing products or services below that of
the competition will help to cut into the competitor’s market share by stealing some of their customers.
Higher pricing can help cultivate an image of quality or prestige. However, employing a low-price
strategy also should ensure profitability. Alternatively by offering higher prices, also provide additional
services to attract customers, such as free delivery or extended business hours.
Products or Services
Another way to stand out from the pack is to offer different products or services than the competition.
For example, be the first in the town to open a gourmet coffee shop or a Thai restaurant. The key to
this type of strategy is to conduct market research to ensure that the unique products or services will
be accepted by the local community. Later product mix can be expanded to include items that the
competitors do not carry.
Convenience
Emphasize the convenience of the business to set apart from the competition. As a smaller business,
it may be able possible to reduce the time it takes for customers to get in and out. The location may
also make it easier for customers. Perhaps operating a computer repair service where travelling to
homes or business in addition to allowing people to drop off their machines. In an age where people
are in a hurry, positioning the business as the convenient alternative can help establish a niche.
Expertise
Personal or business experiences or credentials may also allow to market product/service expertise. If
the business is technical in nature, such as working with electronic equipment, that expertise can
make the business a more attractive choice.
Few examples of successful use of differentiation strategy are
1. Hero Honda
2. Asian Paints
3. HLL
4. Nike Shoes
5. Apple computers
6. Mercedes Benz Automobiles

Example of Companies in India applying differentiation

strategy successfully
Titan Watches have made available to the Indian consumer products that have an international
look, carry the image of premium quality and therefore are able to set their prices higher than their
competitors in the Indian watch market.
Timex Watches in India faced with the absolutely dominant position of Titan Watches in the Indian
watch market, launched a complete range of Plastic watches that offered a refreshing product
alternative to the market particularly to the youth market ( 18 to 35 age group) and was able to achieve
a staggering sales volume of 2 million watches in just two years,- a figure that the market leader took
more than five years to reach in considerably less competitive conditions
Foundations of the Brand
Titan found out through extensive consumer studies that Indian customers preferred watches made
abroad (foreign watches). A detailed study was conducted to examine major gaps in service,
showroom interiors and retailing trends in watch industry. The analysis led to the establishments of
exclusive showrooms along with a chain of retail outlets. The company took initiatives to convince its
consumers about its model variety, product quality, and service excellence.
Variety
Titan wanted to establish a brand with a unique and distinctive style. It introduced a large variety of
models, compared to the competitors at that time. As the models increased, the reputation of the
brand got further enhanced.
Quality
The brand stressed on the importance of quality of product, right from manufacturing stages to the
retail stages. For example, in a tropical country like India, gold-plated watches lose their shine within a
few months of usage. Titan identified the problem and decided to go for vacuum technology which
would increase the life of the product. Minimizing the number of returns during warranty period was set
as a goal for the company.
Service excellence
Sustainability of brand excellence comes from excellent service quality. To provide excellent shopping
experience to the customers, Titan employed trained service personnel in its service Centres. With
excellent post- sales service, the
brand captured the customer confidence. The service quality in the Titan outlets set the standards for
the entire industry.
Change in Positioning Focus
Durability to Sophistication
a. Earlier the customer’s desire was: “Durable, timeless watches which can be handed over
generations”. The then Indian customer preferred foreign watches especially Swiss watches, as a style
statement and also for the reputation of the quality.
b. Titan recognized the need in the market and introduced the Titan quartz range of watches in 1987.
With its heavy advertising campaigns and introduction of multiple varieties, Titan induced the customer
to own multiple watches and also targeted un-penetrated segments like first-time buyers.
c. Today, the customer’s desire is “Classic, understated and elegant”. These define the characteristics
of the young executive of the present day corporate world. Customers are looking for a product which
would act as fashion as well as a status symbol.
d. Besides Titan has catered to the youth segment by the introduction of the Fasttrack which is an
affordable brand for a large number of consumers. All steel look and multi-dial models have been
introduced for the adult male category. For the women executives, it has brought out the brand Raaga,
with its feminine positioning.
e. One of the important considerations for buying a watch is the attractiveness of the strap. Titan
watches come up golden, silver and leather straps (with different colours).
f. Yet another consideration for the customers is the dial – both size and colour. Titan watches come
with large size, mid –size and small size (especially for ladies watches) dials. Big dials are preferred
by boys and men. Titan has also introduced golden, white, blue and black dials. Today the younger
generation is looking for trendy and stylish watches, and Titan is trying to meet their tastes.
Other examples of product differentiation
Form: Here the product is differentiated by changing the size, shape or physical structure Aspirin, for
example can be differentiated by dosage size shape, action time etc.
Features: These are characteristics that supplement the products basic functioning. Example Maruti 800.
This stripped down version costs Rs 1,89,000 . The 800 standard has added features such as air
conditioning, multi-point injection, Euro 1 complaint fur gears targeted at non –metros at Rs 2,09,000. The
800 standard for metros comes with air conditioning multi point injection Euro II complaint five gears
costing Rs 2,33,000.
Performance quality: Buyers of costly products generally compare the performance characteristics of
different brands. They will pay more for better performance (Leo Coffee, Surf Excel detergent powder,
Parker pen, etc.) as long as the higher price does not exceed the higher perceived value.
Durability: Buyers are willing to pay more for durable product (durability is a measure of the product’s
expected operating life). Of course is not very expensive and is not subject to high fashion or technological
obsolescence (e.g. Hero cycles, Duracell batteries, Ambuja cement, etc.)
Reliability: Buyers are willing to pay a premium for more reliable (that is, the product will not malfunction or
fail within a specified time period) products (e.g. Godrej steel almirah, Castrol Engine Oil)
Reparability: The ease with which a buyer is able to fix the fault and repair a part of the product that does
not work properly (either personally or through a company’s repair person) – also influences buyers to pay
more or less for a product (e.g. Whirlpool’s electric alliances, Maruti cars)
Style: Describes how well the product looks ad feels the buyer. Style has the advantage of creating
product distinctiveness that is difficult to copy (e.g. Tanishq Jewellery, fasttrack watches).
Design: Design is the totality of features that affect how a product looks and works in terms of customer
requirements (pleasing looks; easy to open, install operate and repair easy to dispose of etc.). For example
Kinetic Honda with electronic ignition avoiding Kick start, Titan watches with gold studded gems, stones,
Titan Slim watch, etc.
Service differentiation:
The key service differentiation includes:
Ordering ease: How easily the customer is able to place an order with the company for e.g. ICICI’s Home
loan.
Delivery how well the product or service is delivered to the customer for e.g. Books for Flipkart.com
Installation: The work done to make a product operational in its planned location or e.g. Installing
Whirlpool refrigerators, LG’s air conditioners.
Customer training: Getting the employees of the customer trained in the use of vendor’s equipment for
example training hospital staff before installing general electric’s X ray equipment, requiring franchisees to
attend Hamburger University for two weeks in case of McDonalds etc.
Repair: quality of repair service available to buyers of the company’s product for example LG’s home
appliances, Samsung’s electronic items etc.
Personnel Differentiation:
Companies can stay ahead of their rivals through hiring and training better people; For example Wal-Mart’s
store employees; McDonald’s courteous service producers, Airtel’s customer service staff etc. (better
trained people have requisite skills and knowledge courteous, trustworthy reliable responsive and
understand customer’s needs and respond properly.
Advantages Associated with Differentiation Strategy:
a. Large buyers have less power to negotiate because of few close alternatives.
b. Better able to pass on supplier price increases to customers
c. Customer’s become attached to differentiating attributes, reducing threat of substitutes
d. Brand loyalty to keep customers from rivals
Risks Associated with Adopting Differentiation Strategy:
a. Differentiation strategy is risky too, as there may be competitors to imitate the product. It will be more
risky to the new comers to the market.
b. Second risk associated with differentiation strategy is the frequent shift/Changes in customer tastes.
c. Other risks also associated with differentiation strategy like Customer loyalty can discourage potential
entrants

Focus or Strategic Scope

This dimension is not a separate strategy per se, but describes the scope over which the company
should compete based on cost leadership or differentiation. The firm can choose to compete in the
mass market (like Wal-Mart) with a broad scope, or in a defined, focused market segment with a
narrow scope. In either case, the basis of competition will still be either cost leadership or
differentiation.
Companies that use Focus strategies concentrate on particular niche markets and, by
understanding the dynamics of that market and the unique needs of customers within it, develop
uniquely low cost or well-specified products for the market. Because they serve customers in their
market uniquely well, they tend to build strong brand loyalty amongst their customers.
This makes their particular market segment less attractive to competitors. As with broad market
strategies, it is still essential to decide whether you will pursue Cost Leadership or Differentiation once
you have selected a Focus strategy as the main approach
Focus is not normally enough on its own. But whether Cost Focus or Differentiation Focus is used,
the key to making a success of a generic Focus strategy is to ensure that something extra is added as
a result of serving only that market niche.
In adopting a narrow focus, the company ideally focuses on a few target markets (also called a
segmentation strategy or niche strategy). These should be distinct groups with specialized needs.
The choice of offering low prices or differentiated products/services should depend on the needs of the
selected segment and the resources and capabilities of the firm.
The firm typically looks to gain a competitive advantage through product innovation and/or brand
marketing rather than efficiency. It is most suitable for relatively small firms but can be used by any
company. A focused strategy should target market segments that are less vulnerable to substitutes or
where a competition is weakest to earn above-average return on investment.
Examples of firm using a focus strategy include Southwest Airlines, which provides short-haul point-to-
point flights in contrast to the hub-and-spoke model of mainstream carriers, and Family Dollar.
In adopting a broad focus scope, the principle is the same: the firm must ascertain the needs and
wants of the mass market, and compete either on price (low cost) or differentiation (quality, brand and
customization) depending on its resources and capabilities.
For example, Wal Mart has a broad scope and adopts a cost leadership strategy in the mass
market.
Apple also targets the mass market with its iPhone and iPod products, but combines this broad
scope with a differentiation strategy based on design, branding and user experience that enables it to
charge a price premium due to the perceived unavailability of close substitutes.

Examples of Companies in India applying focus or niche

strategy successfully
Ashok Leyland manufactured heavy duty vehicles almost exclusively in India constituted a niche
market segment and product group for the company
Satyam Cinemas totally redefined the movie watching experience by focusing on brand new
infrastructure and introduced the concept of Dolby Sound and multiplex in Tamilnadu. Satyam
Cinemas are the best theatres in Chennai for movies. They focused on movies segment only and
priced the tickets slightly higher to create a niche area for themselves by redefining the movie
experience. With cinema halls centrally located within the city and excellent car parking and online
tickets and food booking facilities created one of the best environment for moviegoers