Porter’s typology assumes that firms can succeed through either cost leadership or differentiation. Starbucks is a good example of a differentiator: it makes coffee, but its customers are willing to pay premium prices for a cup of Starbucks coffee because they value the restaurant atmosphere, customer service, product quality, and brand. These efforts guarantee that the successful differentiator can still profit even though its production costs are higher than a cost leader’s. Research and development efforts focus on innovation, customer service is excellent, and marketing bolsters the value of the firm brand. At each step in the value chain, the differentiator increases the quality, features, and overall attractiveness of its products or services. ![]() While firms do not look to spend as much as possible to produce their output, firms that differentiate try to add value to their products and services so they can attract customers who are willing to pay a higher price. A differentiation strategy is exactly the opposite of a cost-leadership strategy. Not all products or services in the marketplace are offered at low prices, of course. Walmart is the master of cost leadership, offering a wide variety of products at lower prices than competitors because it does not spend money on fancy stores, it extracts low prices from its suppliers, and its pays its employees relatively low wages. A cost leader must spend as little as possible producing a product or providing a service so that it will still be profitable when selling that product or service at the lowest price. Supplier relationships are managed to guarantee the lowest prices for parts, manufacturing is conducted in the least expensive labor markets, and operations may be automated for maximum efficiency. ![]() To achieve a competitive advantage over rivals in the industry, the successful cost leader tightly controls costs throughout its value chain activities. When pursuing a cost-leadership strategy, a firm offers customers its product or service at a lower price than its rivals can. He called the strategies “generic” because these ways of organizing can be used by any firm in any industry. Michael Porter (the same Harvard professor who developed the Five Forces Model) defined three generic business-level strategies that outline the basic methods of organizing to compete in a product market. Business-level strategy is the general way that a business organizes its activities to compete against rivals in its product’s industry. When discussing business strategy, a business is a firm or a unit of a firm that centers its activities around one primary type of product or service line. Generic Business-Level Competitive Strategies A firm achieves a competitive advantage by adding value to its products and services or reducing its own costs more effectively than its rivals in the industry. Firms use PESTEL to understand what consumers are interested in and use VRIO to evaluate their own resources and capabilities so that they can figure out how to offer products and services that match those consumer interests and that are better in quality and price than the products offered by their competitors.Ī firm is described as having a competitive advantage when it successfully attracts more customers, earns more profit, or returns more value to its shareholders than rival firms do. In any industry, multiple firms compete against each other for customers by offering better or cheaper products than their rivals. Porter’s Five Forces model is centered around rivalry, a synonym for competition. It is also unlikely that a firm planning to launch a new product they are not equipped to make will be successful. ![]() ![]() Managers cannot successfully plan to compete in an industry if they don’t understand its competitive landscape. The analytical tools we discuss here are part of the strategic planning process. Strategy is the process of planning and implementing actions that will lead to success in competition. This means that businesses must find ways to attract customers to their products and away from competitors’ products. Businesses rarely exist alone in an industry competition is a usually a key part of any marketplace. Businesses exist to make profits by offering goods and services in the marketplace at prices that are higher than the costs they incurred creating those goods and services. Now that you understand more about the environment that businesses operate in, let’s take a deeper look at exactly how they operate. What does it mean to compete with other firms in a business environment, what does it mean when a firm has a competitive advantage over its rivals, and what generic strategies can a firm implement to gain advantage over its rivals?.
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