Basic development strategies (according to M. Porter)

Michael Porter's Basic Strategies

Harvard professor Michael Porter presented his three strategies for strengthening a company's competitiveness back in 1980 in the book “Competitive Strategy.” Since then, Porter's strategies have not lost any of their relevance. Of course, many entrepreneurs believe that they have enough general form. But wait, Michael Porter is a professor, a consultant - his task is precisely to collect general methods and present them to the general public. And practical details are a personal matter for every businessman.

Porter described his strategies at a time when the concept of positioning, described by Jack Trout and Al Rice, was just gaining popularity. The main essence of Michael Porter's strategies is that for a company to function successfully, it needs to somehow stand out from its competitors so as not to be seen as everything to everyone by consumers, which, as we know, means nothing to anyone. To cope with this task, the company must choose the right strategy, which it will subsequently adhere to. Professor Porter identifies three types of strategy: cost leadership, differentiation and focus. Moreover, the latter is further divided into two: focusing on differentiation and focusing on costs. Let's look at each strategy in detail.

Cost leadership

This strategy is extremely simple. To succeed, a company must reduce costs and become a leader in this indicator in its industry. Typically, this type of strategy is understandable to absolutely all employees of the company, especially if its activities are related to the production of any goods. But being the leanest company in the industry is not simple task. Firstly, for this you will have to use all the most modern equipment and try to achieve maximum process automation. Accordingly, a company trying to become a cost leader needs the highest quality personnel possible, who will do their job faster and better (while earning more).

In order to have low costs, the company will have to serve many different market segments. This is logical, since the larger the scale of production, the lower the costs. This, according to Michael Porter, is the most important aspect of this strategy.

In order to remain a cost leader at all times, the company will have to constantly look for new opportunities to save money by introducing new management techniques, the latest technical developments. In addition, the principles of differentiation cannot be ignored, since there is a possibility that customers will find the quality of the company's products not worthy of them. And therefore, you need to understand that low costs are not synonymous with low-quality products, and are not even synonymous with cheap products. With proper positioning, no one is stopping you from selling products at the same price as competitors. And due to low costs, the company will be able to earn higher profits.

The cost leadership strategy involves constant monitoring of the current situation. This strategy is very dangerous, since there is a high probability that sooner or later competitors will appear who can make their costs even lower. All this is possible both due to better marketing and due to such factors as: distribution network, technological progress, management know-how, external factors in the country and the world, the entry of larger global players into the market, loss of motivation by employees, and so on.

One of the main temptations for a cost leader is to expand the product range. But it’s worth resorting to it after thinking 10 times, since such an expansion can destroy all cost advantages, thereby ruining the company. Another factor that should not be lost sight of is consumers. They can be the factor that can force a company to lower prices, which will destroy the entire advantage of being a cost leader.

Differentiation

Differentiation used to be based on the concept of uniqueness. trade offer. This is no longer the case. In principle, with proper marketing, a company's product may be typical of the industry, but in the minds of consumers it will be special. Differentiation lies precisely in occupying a unique place in the minds of consumers, using some unique property of the product.

Differentiation, however, can relate not only to the product or marketing itself, but also to the distribution system (for example, Tinkoff bank credit cards can only be obtained through direct mail) and so on. This strategy allows you to create products that will cost end consumers much more than competitors' products (we are talking about luxury goods). But don’t get carried away; when differentiating, it is very important to monitor finances all the time, since if managed incorrectly, it may turn out that the company goes to the bottom.

Among the successful examples of differentiation, we should note the strategy of the 7Up company, which presented its drink as “not Cola”. 7Up was a runaway success that would have only continued to grow if the company, for reasons that no one understands, had not temporarily abandoned its “no cola” strategy and moved to “America chooses 7Up.” The Volkswagen Beetle is one of best examples differentiation. This car was introduced at a time when there was a fashion in the United States for large, beautiful and often expensive cars. The Beetle did not fit any of these definitions and quickly became the best-selling car in the United States. True, then failure followed. This was due to the fact that Volkswagen decided to become everything to everyone by changing its differentiation strategy.

Companies pursuing a differentiation strategy may fall prey to problems such as large cost differences with the industry leader. This may lead to a situation where the company becomes irrelevant, despite all its positioning. Also, there is a high probability that the company's product will be copied by competitors. In this way, all the differentiating advantages of the company (if it is related to the product) can disappear. Finally, it is worth noting that a company pursuing a differentiation strategy must keep a close eye on costs. The emergence of a Japanese luxury car under the Lexus brand was a big blow to the positions of American and European giants such as Cadillac and Mercedes. The Japanese also positioned themselves as a luxury car, but due to lower costs it was much cheaper than similar Cadillacs.

Focusing

A focus strategy is to select a specific segment in an industry and target it exclusively so that that specific group of buyers will differentiate the company from its competitors. Accordingly, the company’s task is to look attractive specifically for this segment of buyers. Michael Porter divides the strategy of focusing into two parts. The first is a cost focus. Moreover, it is associated with focusing on costs in working with one industry segment selected by the company. Due to lower costs, the company will be able to achieve a high competitive advantage in the eyes of its target group. The second branch of the strategy is to focus on differentiation. The company’s task in this case becomes to present its product as attractive as possible to a specific target audience. In this case, it is important to choose a narrow target audience (not in quantity), which will be significantly different from the rest of the audience.

The problems with this strategy are that when working with a small target audience, a company will have higher costs than one that works for the entire industry. Finally, Michael Porter identifies another important threat - competitors may find a narrow market segment in the segment in which the company operates, thereby seriously complicating its life.

According to Michael Porter, any of these strategies gives a company a competitive advantage. The worst thing is if the company is delayed halfway through choosing a strategy. In this case, it will gradually lose market share, its costs will rise, which will not allow it to work with large buyers. Also, the company will not be able to grab narrow niches and compete with other products that have surpassed it due to differentiation. When choosing one of Porter's basic strategies, it is very important to understand what the company ultimately wants to achieve. After all, focusing and differentiation strategies can even contribute to a serious decrease in revenue (but not profit). All this leads to the fact that when choosing a strategy for an existing company, a full-fledged reorganization may be necessary, which will inevitably entail layoffs.

Michael Porter's basic strategies are management classics and have served as the basis for many current strategies. I hope that this article was useful for you too.

"Strategy competition“,” writes Porter, “are defensive or offensive actions aimed at achieving a strong position in the industry, successfully overcoming the five competitive forces, and thereby achieving higher returns on investment.” Although Porter admits that companies have shown a lot different ways To achieve this goal, he insists that outperforming other firms can be achieved with just three internally consistent and successful strategies. These are typical strategies:

Minimizing costs.
Differentiation.
Concentration.
Cost minimization strategy

In some companies, managers pay great attention to cost management. Although they do not neglect the issues of quality, service and other necessary things, the main thing in the strategy of these companies is to reduce costs compared to the costs of competitors in the industry. Low costs provide these companies with protection from the five competitive forces in several ways. Porter explains: “The cost position of such a firm provides it with protection from rival rivalry, since lower costs mean that the firm can generate revenues long after its competitors have exhausted their profits through competition.”

Advantages of this strategy.

Low costs protect this firm from powerful buyers because buyers can only use their power to force its prices down to the level of those offered by a competitor that is behind the firm in efficiency.
Low costs protect the firm from suppliers, providing greater flexibility to counter them as input costs rise.
The factors that lead to low costs also tend to create high barriers to competitors entering an industry—economies of scale or cost advantages.
Finally, low costs usually place a firm in an advantageous position relative to substitute products.
Thus, a low-cost position protects a firm from all five competitive forces because the competition for profitable terms a transaction can reduce its profits only until the profits of the next most efficient competitor are destroyed. Less efficient firms will be the first to suffer in the face of increased competition.

Of course, the lowest cost strategy is not suitable for every company. Companies wishing to pursue such a strategy must control larger market shares relative to competitors or have other advantages, such as better access to raw materials. Products need to be designed to be easy to manufacture; In addition, it is wise to produce a wide range of interrelated products in order to evenly distribute costs and reduce them for each individual product. Next, a low-cost company needs to reach a broad consumer base. Such a company cannot be content with small market niches. Once a company becomes a leader in cost minimization, it gains the ability to maintain high level profitability, and if it wisely reinvests its profits in modernizing equipment and enterprises, it will be able to maintain leadership for some time. Porter mentions Briggs & Stratton, Lincoln Electric, Texas Instruments, Black & Decker, and Du Font as examples of companies that have done this.

As you might expect, Porter warns, cost leadership comes with some costs, inconveniences, and dangers. Although increasing production volumes often leads to lower costs, economies of scale do not occur automatically, and managers of low-cost companies must be constantly vigilant to ensure that potential savings are actually realized. Managers must immediately respond to the need to dismantle obsolete assets, invest in technology - in short, do not lose sight of costs. Finally, there is the danger that some new or old competitor will take advantage of the leader's technology or cost management techniques and win. Cost leadership can be an effective response to competitive forces, but it does not provide any guarantee against defeat.

Differentiation strategy

As an alternative to cost leadership, Porter suggests product differentiation, i.e. its difference from the rest in the industry. A firm pursuing a differentiation strategy is less concerned about costs and more concerned about being seen as unique within its industry. For example, Caterpillar emphasizes the durability of its tractors, availability of service and parts, and an excellent dealer network to differentiate itself from its competitors. Jenn-Air does the same thing by installing unique parts on the units it produces. Coleman produces high quality outdoor equipment. Unlike cost leadership, which allows for the presence of a single true leader in an industry, a differentiation strategy allows several leaders to exist within the same industry, each of which retains some distinctive feature of your product.

Differentiation requires a certain increase in costs. Companies following this strategy must invest more in research and development than cost leaders do. Companies pursuing a differentiation strategy should have products best design. They need to provide higher quality and often use more expensive raw materials. They need to invest heavily in customer service and be prepared to give up some market share. While everyone can recognize the superior products and services offered by companies pursuing differentiation, many consumers are unable or unwilling to pay a premium for them. For example, a Mercedes is not a car for everyone.

What are the benefits of this strategy for the firm?

Consumer commitment to a particular brand is, to a certain extent, a defense against competitors.
The uniqueness of the goods or services offered by firms that implement a differentiation strategy serves as a sufficient obstacle to the entry of new competitors.
The higher profitability created by differentiation provides a certain protection from suppliers, because it allows you to have financial reserves to find alternative sources of inputs.
The products and services offered by firms pursuing a differentiation strategy are not easily replaced.
Consequently, consumers have limited choice and limited ability to negotiate prices.

At the same time, differentiation carries with it certain risks, as does the leadership strategy in minimizing costs.

If the product price of firms that have minimized costs is much lower than that of firms pursuing a differentiation strategy, consumers may prefer the former. It is possible that the buyer will decide to sacrifice some of the parts, services and uniqueness offered by the second group of firms in order to achieve lower costs.
What makes a company different today may not work tomorrow. And the tastes of buyers are changeable. The unique feature offered by a firm pursuing a differentiation strategy will eventually become obsolete.
Competitors following cost minimization strategies are able to successfully imitate the products of firms pursuing a differentiation strategy in order to attract consumers and switch them to themselves. For example, Harley-Davidson, which has a clear differentiation strategy in the production of large-engine motorcycles and has a well-known brand name around the world, may suffer from competition from Kawasaki or other Japanese motorcycle manufacturers that offer Harley-like products at a lower price.
Concentration strategy

A company pursuing such a strategy focuses its efforts on satisfying a specific customer, a specific product line, or a specific market. geographical region. “Although cost minimization and differentiation strategies are aimed at achieving industry-wide goals, a total focus strategy is built on serving a specific customer very well.” For example, Porter Paint focuses its efforts on serving only professional painters and leaves the mass market to other paint companies. The main difference between this strategy and the previous two is that a company choosing a concentration strategy decides to compete only in a narrow market segment. Instead of attracting all customers by offering them either low-cost or unique products and services, a company pursuing a concentration strategy serves customers completely certain type. Operating in a narrow market, such a company may attempt to become a cost leader or pursue a differentiation strategy in its segment. At the same time, it faces the same advantages and losses as leaders in cost minimization and companies that produce unique products.

The “stuck in the middle” position

So, any company can choose one of three strategies: achieving leadership in cost minimization, differentiation and concentration. The latter, in turn, includes two options - cost minimization and differentiation. According to Porter, these strategies are three in highest degree viable approaches to counteracting competitive forces, with Porter cautioning all business leaders that it is best to take only one of these approaches. Failure to follow just one will leave managers and their companies stuck in the middle without any coherent, defensible strategy. Such a firm would not have the "market share, investment, and determination to play the cost minimization game or differentiation within the industry necessary to avoid it in a narrower market segment." Such a company will lose both customers who purchase products in large volumes and demand low prices, and customers who demand unique products and services. A firm stuck somewhere in the middle will have low profits, blurred corporate culture, contradictory organizational structures, weak motivation system, etc. Rather than risk such desperate circumstances, Porter argues, managers should heed the good advice of choosing one of three strategies.

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Famous American professor Harvard Business School M. Porter proposed basic strategic models based on consideration of the relationship between two important factors - the size of the target market and competitive advantages. Based on these factors, M. Porter identified three basic competitive strategies:
1) Leadership strategy through cost savings. This basic strategy is typical for firms or SBAs that have broad market coverage by offering a standard product at a relatively low price. This strategy is based on high productivity and low production costs. These advantages may come from economies of scale, high technology, or advantageous access to raw materials.
2) Differentiation strategy. According to Porter, this means that the firm seeks to give the product unique properties, which may be important to the buyer and which distinguish the product from competitors' offerings. Thanks to distinctive features product and its uniqueness, the company receives significant competitive advantages. Differentiation may lie not only in the qualities of the product itself, but also in the image, brand, methods of delivery of goods, after-sales service and other parameters. Typically, differentiation strategies come with higher production and distribution costs. Despite this, firms using this strategy make a profit due to the fact that the market is willing to accept a higher price. This strategy requires greater marketing costs compared to the cost leadership strategy, as it is associated with the need for greater efforts to promote the product and explain its distinctive features to consumers.
3) Specialization (focusing) strategy. Using this strategy, a company seeks to focus on one segment or small group of customers and serve it (them) better and more efficiently than its competitors. There are two types of focusing strategy. Within a chosen segment, a firm seeks to achieve advantages either through low costs or through differentiation.
Each of the basic strategies has specific risks.
Cost leadership risk is characterized by the fact that the firm experiences constant pressure from competitors. Sources of risk may be:
technological advances that invalidate prior know-how and investments;
new competitors who achieve the same result through imitation;
failure to recognize the need for product changes due to an exaggerated focus on costs;
cost-push inflation, which undermines a firm's ability to maintain price gaps.
The risk associated with differentiation is caused by the main sources:
the gap in costs between a firm using this strategy and firms using a leadership strategy cost reduction, turns out to be so large that it cannot maintain customers’ commitment to a special assortment, brand, prestige of the product, etc. Thus, differentiation exceeds price differences, i.e. prices for most buyers become unreasonably high;
the role of the differentiation factor decreases as the level of consumer awareness increases and as the product becomes familiar;
differentiation appears to be less significant due to the emergence of imitation products.
The risk associated with focusing is due to the following reasons:
the price gap in relation to non-specialized goods becomes too large, i.e. the price level exceeds the effect achieved by focusing;
differences in requirements for a product from the target segment and the market as a whole are reduced, due to which the focusing strategy becomes impractical;
competitors find even narrower groups of consumers (subsegments) within the target segment chosen by the company

By general strategies, Porter means strategies that have universal applicability or are derived from some basic postulates. In his book “Competitive Strategy,” M. Porter presents three types of general strategies aimed at increasing competitiveness. A company that wants to create a competitive advantage must make strategic choices so as not to “lose its face.”

For this there are three basic strategies:

1) leadership in cost reduction;

2) differentiation;

3) focusing (special attention).

To satisfy the first condition, the company must keep costs lower than those of its competitors.

To provide differentiation, it must be able to offer something unique of its own.

The third strategy option proposed by Porter involves the company focusing on a specific group of customers, a specific part of the product, or a specific geographic market.

Leadership in cost reduction, perhaps the most characteristic of all three general strategies. It means that the company strives to become a low-cost manufacturer. The deliveries provided by the company differ great variety, and serve many industry segments. This scale is often the key to cost leadership. The nature of these types of advantages depends on the structure of the industry, and may be a matter of economies of scale, advanced technology, or access to raw material sources.

Low-cost production is about more than simply moving down the experience curve. The product manufacturer must find and exploit every opportunity to gain cost advantages. Typically, these advantages are obtained by selling standard products without added value, when mass-market goods are produced and sold and when the company has strong distribution chains.

Porter goes on to point out that a company that has achieved cost leadership cannot afford to ignore the principles of differentiation. If consumers do not consider the product to be comparable or acceptable, the leader will have to discount prices to weaken its competitors and thereby lose its leadership. Porter concludes that a cost leader in product differentiation must be on par with, or at least not far behind, its competitors.

Differentiation, according to Porter, means that the company strives for uniqueness in some aspect that is considered important big amount clients. It selects one or more of these aspects and behaves in such a way as to satisfy the needs of consumers. The price of this behavior is higher production costs.

From the above it follows that the parameters of differentiation are specific to each industry. Differentiation may lie in the product itself, delivery methods, marketing conditions, or some other factor. A company focusing on differentiation must find ways to improve production efficiency and reduce costs, otherwise it risks losing competitiveness due to relatively high costs. The difference between price leadership and differentiation is that the former can only be achieved in one way - by establishing effective structure costs, while differentiation can be achieved in different ways.

The third type of strategy is focusing efforts on any aspect of activity. It is radically different from the previous two and is based on choosing a narrow area of ​​competition within an industry.

Meaning focusing is to select a segment industry market and serve it with your strategy better and more efficiently than your competitors. By optimizing its strategy for a selected target group, the company that chooses this course tries to achieve competitive advantages in relation to the selected group.

Exist two types of focusing strategies.

A company within a selected segment is either trying to achieve cost advantages or increasing product differentiation in an attempt to differentiate itself from other companies in the industry. Thus, it can achieve competitive advantage by focusing on specific market segments. The size of the target group depends on the degree rather than the type of focus, and the essence of the strategy in question is to work with a narrow group of consumers that differs from other groups.

According to Porter, any of the three main types of strategy can be used as effective remedy achieving and maintaining competitive advantages.

The problem of choosing the most appropriate competitive strategy is quite challenging task, requiring consideration of a number of circumstances. Thus, the choice of the most appropriate competitive strategy depends on what capabilities the operating company has. target market company. If it has outdated equipment, insufficiently qualified managers and employees, does not have promising technical innovations, but its wages are not too high and other production costs are high, then the most appropriate strategy in this case is “cost orientation.”

If raw materials are very expensive, but the enterprise has good equipment, excellent design developments or inventions, and employees are highly qualified, then it is possible to apply a strategy to ensure competitiveness by organizing the production of unique goods or with such a high level of quality that will justify the high price in the eyes of buyers.

All types of competitive advantages of a company, depending on the complexity of their achievement, can be divided into two groups:

• low order advantages;
• high order benefits.

The advantages of low order are associated with the real possibility of using relatively cheap resources:

• work force;
• materials (raw materials), components;
• various types of energy, etc.

Low order competitive advantages are usually due to the fact that they are very unstable and can easily be lost either due to rising prices and wages, or because cheap production resources can be used (or bought up) by the main competitors in the same way. In other words, low-order advantages are advantages with low sustainability, unable to provide advantages over competitors for a long time.

High-order advantages usually include: the presence of unique products; use of the most advanced technologies; high level of management; excellent reputation of the company.

If this is achieved, for example, through the release to the market of unique products based on our own design developments, then in order to overcome such an advantage, competitors need to either develop similar products, or offer something better, or get the secrets at the lowest cost. All these ways require a lot of expense and time from the competitor. This means that for some time an enterprise that has entered the market with a fundamentally new product finds itself in a leading position and out of reach of competitors. This is also true for unique technologies, know-how, and highly qualified specialists. They are difficult to reproduce quickly enough.

Another very important advantage in the market is the reputation (image) of the company. This competitive advantage is achieved with great difficulty, over a fairly long period, and requires a lot of money to maintain it.

So, we can state that fairly reliable competitive strategies are those that are based on such strategic advantages as the uniqueness of the product (services, works) and leadership in its quality.

M. Porter identifies the main competitive strategies:

Cost leadership strategy. Its meaning is to strive to become a low-cost manufacturer to produce products at the lowest cost in the industry.

Its meaning is to strive to differentiate products and services to better satisfy the needs and demands of consumers, which in turn implies a higher price level.

Its meaning is to focus attention on the main market segments to satisfy the needs and demands of a strictly defined circle of consumers, either through low prices or high quality.

Classification of competitive strategies according to L.G. Ramensky

According to the so-called biological approach proposed by Russian scientist L.G. Ramensky, distinguish strategies to ensure the organization's competitiveness:violent, patient, commutative, explerent(Table 1).

Violent strategy It also involves supplying the market with products of acceptable quality for consumers at low production costs, which allows manufacturers to set low prices based on a significant volume of demand. The violent strategy is characteristic of large companies, dominating the market and outstripping competitors due to low production costs (and, consequently, low prices) and high labor productivity, which is possible when organizing mass (large-scale) production of goods aimed at the average buyer. Large organizations with a strong reputation that have gradually captured significant market segments can carry out a violent strategy.

Patent strategy consists of servicing narrow market segments with specific needs on the basis of organizing specialized production of products with unique characteristics, designed to conquer and retain relatively narrow market niches, within which exclusive goods of special purpose and very high quality are sold. Manufacturers and sellers of such goods sell them on the market at high prices, counting on wealthy buyers, which makes it possible to make significant profits with small sales volumes. Competitiveness is achieved by the sophistication of the product, satisfying delicate tastes and demands, and quality indicators that exceed the quality of similar competitors' products.

Commutative strategy is designed to satisfy not rare, but rapidly changing, short-term needs of consumers of goods and services. The commutative strategy is aimed at adapting to conditions of limited demand local market, meeting rapidly changing needs, imitating new products. Therefore, the commutative strategy is characterized primarily by high flexibility, which places special demands on the restructuring of production to produce periodically updated products. Typically, this strategy is followed by non-specialized organizations with fairly universal technologies and limited production volumes, when the implementation of this strategy is not aimed at achieving high quality and selling at high prices.

Exploratory strategy focused on radical innovation and entering the market with a new product. The exploratory strategy is based on achieving the competitive advantages of the organization through the implementation of constructive and technological innovations that allow it to stay ahead of competitors in the production and delivery of fundamentally new types of products to the market by investing capital in promising but risky ones. innovative projects. Such projects, if successfully implemented, allow not only to surpass competitors in the quality of products presented on the market, but also to create new markets where for a certain time they may not fear competition, since they are the only producers of a unique product. The implementation of such a strategy requires significant initial capital, scientific and production potential, personnel highly qualified. The introduction of innovations is one of the radical means of gaining competitive advantages, contributing to market monopolization. Discoveries, inventions and other innovations make it possible to create new market with perspective rapid growth and great opportunities for the company. Absolute majority modern leaders market appeared precisely as a result of the development and use of innovations leading to revolutionary changes in the market situation. An example would be leaders in the aviation, automotive, electrical industries, as well as in the field of computer technology, development software, which arose from small pioneer enterprises whose innovations at one time literally “blew up” existing markets.

The main advantage of the innovation implementation strategy is blocking the entry of competitors into the industry (for a certain time) and guaranteeing high profits. The lack of substitute products and high potential demand for innovation create favorable market conditions for an innovative company.

However, as experience shows, due to large risks caused by the market’s unwillingness to accept innovations, and in some cases, technical and technological imperfections and lack of experience in replication and other reasons, 80% of these companies go bankrupt. But the prospects of becoming a leader in the industry, in the market and related economic benefits create an incentive for the development of innovative activities.

Those implementing an exploratory strategy, as a rule, have highly qualified personnel, a project management structure, and a venture business organization based on initial stages innovation process.

Prerequisites for applying such a strategy: lack of analogues (products, technology, etc.); the presence of potential demand for the proposed innovations.

Advantages of the exploratory strategy:

• blocking entry into the industry during the validity of the rights to innovation;
• the possibility of large sales volumes and excess profits. Risks of the exploratory strategy:
• great uncertainty about the commercialization of an innovation;
• the danger of imitation and rapid development of similar products by competitors;
• the market's unwillingness to accept innovation;
• lack of distribution channels for new products;
• design, technological and other defects of innovation.