Porter calls the following basic competitive strategies. M. Porter's strategies. Cost minimization strategy. Benefits of this strategy

15.03.2020

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Cost minimization strategy

In some companies, managers pay great attention to cost management. Although they do not neglect quality, service and other necessary things, the main strategy of these companies is to reduce costs compared to those of competitors in the industry. Low costs protect these companies from the five competitive forces in several ways. Porter explains: "The position that such a firm occupies in terms of its costs provides it with protection from the rivalry of competitors, since lower costs mean that the firm can earn profits after its competitors have already exhausted their profits in the course of rivalry."

The benefits of this strategy.

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

Of course, the minimum cost strategy is not suitable for every company. Companies wishing to pursue such a strategy must control large market shares relative to competitors or have other advantages, such as the most favorable access to raw materials. Products should be designed to be easy to manufacture; in addition, it is reasonable to produce a wide range of interconnected products in order to evenly distribute costs and reduce them for each individual product. Next, low-cost companies need to win a broad consumer base. Such a company cannot be satisfied with small market niches. As soon as a company becomes a leader in minimizing costs, it acquires the ability to maintain high level profitability, and if it wisely reinvests its profits into upgrading equipment and plants, it can hold the lead for some time. As examples of companies that have done just that, Porter mentions Briggs & Stratton, Lincoln Electric, Texas Instruments, Black & Decker, DuFont.

As you might expect, Porter warns, cost leadership comes with some setbacks, inconveniences, and dangers. Although increasing production often leads to lower costs, economies of scale do not happen automatically, and low-cost managers must be constantly on the lookout to ensure that potential savings are actually realized. Managers must respond quickly to the need to dismantle obsolete assets, invest in technology - in short, keep an eye on 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 provides no guarantee against defeat.

Differentiation strategy

As an alternative to cost leadership, Porter proposes product differentiation, i.e. differentiating it from the rest in the industry. A firm pursuing a differentiation strategy is less concerned about costs and more eager to be seen as something unique within the industry. For example, Caterpillar emphasizes the durability of its tractors, the availability of service and spare parts, and an excellent dealer network to stand out from the competition. Jenn-Air does the same by installing unique parts on the units it manufactures. Coleman manufactures high quality camping equipment. Unlike cost leadership, which allows for a single true leader in an industry, a differentiation strategy allows multiple leaders to exist within an industry, each retaining some distinctive feature of its product.

Differentiation requires a certain increase in costs. Companies following this strategy should invest more in research and development than cost leaders do. Companies pursuing a differentiation strategy should have products the 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 anyone can recognize the superiority of products and services offered by companies that pursue a path of differentiation, many consumers are unable or unwilling to overpay for them. For example, a Mercedes is not a car for everyone.

What is the benefit of this strategy for the firm?

Consumer loyalty 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 new competitors.
The higher profitability created by differentiation provides a certain protection against suppliers, because it allows you to have financial reserves to search for alternative sources of inputs.
The goods and services offered by firms with a differentiation strategy are not easy to replace.
Consequently, consumers have limited choice and limited ability to bring down prices.

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

If the cost-minimizing firms have a product that is much less expensive than the differentiating firms, consumers may prefer the former. It is possible that the buyer will decide to sacrifice some of the details, services and uniqueness offered by the second group of firms in order to achieve cost reduction.
What makes a company different today may not work tomorrow. And the tastes of buyers are changeable. A unique feature offered by a firm pursuing a differentiation strategy will somehow become obsolete.
Competitors pursuing cost minimization strategies are able to imitate the products of firms pursuing a differentiation strategy quite well in order to lure consumers and switch them to themselves. For example, Harley-Davidson, which clearly pursues a strategy of differentiation in the production of large-displacement motorcycles and has a world-famous brand name, may suffer from competition with 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 the satisfaction of a particular customer, on a particular range of products, or in a market in a particular geographic region. "While cost minimization and differentiation strategies are aimed at achieving industry-wide goals, a full concentration strategy is built on very good service to a particular customer." For example, Porter Paint focuses on serving only professional artists and leaving the mass market to other paint companies. The main difference between this strategy and the previous two is that a company that chooses a concentration strategy decides to compete only in a narrow market segment. Instead of attracting all customers by offering them either cheap or unique products and services, a concentration strategy company caters to a specific type of customer. Operating in a narrow market, such a company may attempt to become a leader in minimizing costs or pursue a strategy of differentiation in its segment. In doing so, it faces the same benefits and losses as cost leaders and unique product companies.

Stuck in the middle position

So, any company can choose one of three strategies: achieving leadership in minimizing costs, differentiation and concentration. The latter, in turn, includes two options - cost minimization and differentiation. According to Porter, these strategies are three highly viable approaches to countering competitive forces, with Porter admonishing all business leaders that it is better to use only one of these approaches. Failure to follow just one of them will leave managers and their companies "stuck somewhere in the middle" and without any coherent, sound strategy. Such a firm will not have "the market share, the investment, and the determination to play the cost minimization or differentiation within the industry necessary to avoid it in a narrower market segment." Such a firm will lose both customers who buy products in large quantities and demand low prices, and customers who demand uniqueness of products and services. A firm stuck somewhere in between will have low profits, a blurred corporate culture, conflicting organizational structures, weak system of motivation, etc. Instead of taking the risks of such desperate circumstances, Porter argues, managers should take the good advice of choosing one of three strategies.

By general strategies, Porter means strategies that have universal applicability or are derived from certain basic postulates. In his

Rice. 3. Porter's four-cell matrix illustrates the choice of strategy. Quadrant 1, for example, is occupied by smaller European car manufacturers that have achieved cost leadership by expanding production and lowering unit costs. Volvo could be placed in quadrant 2, and BMW, which makes luxury cars for a narrow range of price-insensitive consumers, in quadrant 3B.

In the book “Competition Strategy” M. Porter presents three types common strategies aimed at increasing competitiveness. A company that wants to create competitive advantages must make a strategic choice in order not to “lose face”. There are three basic strategies for this:

leadership in cost reduction;
differentiation;
focusing (special attention). To satisfy the first condition, a company must keep costs lower than those of its competitors.

To ensure differentiation, it must be able to offer something unique in its own way.

The third strategy proposed by Porter suggests that the company focuses on a certain group of customers, a certain part of the product, or in a certain geographic market.

Low cost production is more than just moving down the experience curve. The product manufacturer must find and use every opportunity to obtain cost advantages. Typically, these benefits are obtained through the sale of standard products with no added value, when consumer goods are produced and sold, and when the company has strong distribution chains.

Porter goes on to point out that a company that has won leadership in cost reduction cannot afford to ignore the principles of differentiation. If consumers do not find the product to be comparable or acceptable, the leader will have to make price cuts to weaken his competitors and lose his lead in the process.

Porter concludes that a leader in cost reduction in product differentiation must be on par with, or at least close to, its competitors.

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

From the foregoing, it follows that the parameters of differentiation are specific to each industry. Differentiation may be in the product itself, in the methods of delivery, in terms of marketing, or in any other factors. A company relying on differentiation must find ways to improve production efficiency and reduce costs.

There are two types of focus strategy. A company within a selected segment is either trying to achieve cost advantages or is increasing product differentiation in an attempt to stand out from other companies in the industry. Thus, it can gain competitive advantage by focusing on specific market segments. The size of the target group depends on the degree, and not on the type of focus, while the essence of the strategy under consideration 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 an effective means of achieving and maintaining competitive advantage.

Firms that get stuck halfway.

The following excerpt is taken from M. Porter's Strategy for Competition.

“The three main strategies represent alternatives to robust approaches to competition. One of the negative implications that can be drawn from the foregoing discussion is that a firm that fails to steer its strategy along one of the three paths, a firm stuck in the middle, is in extremely bad shape. strategic position. Its market share is insufficient, it is underinvested, it has to go either to reduce costs or product differentiation on an industry-wide scale to avoid cost competition, or to reduce costs and product differentiation, but within a more limited area.

A firm stuck halfway through is almost guaranteed a low rate of return. Either it loses numerous low-price customers, or it must sacrifice profits to outmaneuver low-price firms. It also loses the opportunity to run a highly profitable business, that is, it loses the cream, leaving it to firms that have been able to focus their efforts on generating high profits or have achieved differentiation. A firm that is stuck “halfway through” is likely to have a low level of corporate culture and the inconsistency of the organizational structure and incentive system.

A firm stuck halfway through must make a fundamental strategic decision. It must: either take steps towards achieving cost leadership, or at least reach the middle level, which usually entails active investment in modernization and, possibly, the need to spend on gaining more market share, or choose a specific goal, i.e. focus on some aspect, or achieve some uniqueness (differentiation). The last two alternatives are likely to cause a reduction in the company's market share and even sales."

Cost leadership risk

A cost-leading firm is under constant pressure to maintain its position. This means that the leader must invest in modern equipment, ruthlessly replace obsolete products, resist the temptation to expand the range and keep a close eye on technical innovations. Cost reductions by no means automatically follow output expansion, without constant vigilance, it is also impossible to enjoy the benefits of economies of scale.

The following hazards must be kept in mind:

1) technological advances that reduce to: no value of the investments and know-how made;

2) new competitors and your followers who. achieve the same cost advantage by imitation or by investing in modern equipment;

3) inability to grasp the need to change the < induction or market as a result of immersion in problems of cost reduction;

4) inflationary cost growth that undermines a company's ability to maintain a price differential high enough to negate competitive efforts or other advantages of differentiation.

The risk associated with differentiation

Differentiation comes with some dangers. Among them:

1) the cost gap between a company that differentiates its products and those competitors that have chosen a cost leadership strategy may be too large to compensate for it with the special range, services or prestige that this company can offer its customers;

2) the need of buyers for product differentiation may decrease, which is possible with the growth of their awareness;

3) imitation can hide a tangible difference, which is generally characteristic of industries reaching the stage of maturity.

The first circumstance is so important that it deserves special comment.

A company can differentiate its products, but differentiation can only outweigh the difference in price. So, if a differentiated company falls too far behind in cost reduction due to changes in technology or simple inattention, a low-cost company can move into a strong attacking position. Thus, Kawasaki and other Japanese motorcycle manufacturers were able to attack differentiated manufacturers such as Harley Davidson and Triumph by cutting prices substantially.

Focus Risk

There are also various dangers associated with the focusing strategy:

1) Widening cost differentials between companies that have chosen a focus strategy and other manufacturers may negate the benefits associated with serving a narrow target group, or outweigh the effect of differentiation achieved through focusing;

2) differences between the types of products and services required by the strategic target group and the market as a whole can be reduced;

3) Competitors can find target groups within the target group served by the company that has chosen the focus strategy and succeed in their new venture.

Many business practitioners find Porter's theories too general to be used to explain real life situations. However, there is no doubt that the relationship between consumer assessment of product quality and price is a central issue. This was reflected in the concept of general strategies put forward by Porter.

The problem of choosing the most expedient competitive strategy is a rather complex task that requires taking into account a number of circumstances. Thus, the choice of the most appropriate competitive strategy depends on the capabilities of the enterprise operating in the target market. If it has outdated equipment, insufficiently qualified managers, workers, does not have promising technical innovations, but it does not have too high wages and other production costs are high, then the most appropriate strategy in this case is “cost orientation”.

If raw materials and 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 goods that are unique or with such a high level of quality that it will justify in the eyes of buyers high price.

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

low order benefits;
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.

The low order of competitive advantages is usually due to the fact that they are very unstable and can be easily lost either due to price increases and wages, or due to the fact that cheap production resources in the same way can be used (or repurchased) by the main competitors. In other words, low-order advantages are advantages with little persistence, unable to provide advantages over competitors for a long time.

It is customary to refer to the advantages of a high order: the availability of unique products; use of the most advanced technologies; high level of management; excellent reputation of the company.

If achieved, for example, by bringing to the market unique products based on their own design developments, then in order to overcome this advantage, competitors must either develop similar products, or offer something better, or get the secrets at the lowest cost. All these ways require a lot of money and time from a competitor. This means that for some time an enterprise that entered the market with a fundamentally new product finds itself in a leading position and is inaccessible to competitors. This is also true for unique technologies, know-how, and highly qualified specialists. They are difficult to reproduce fast 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 sufficiently long period and requires large expenditures 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 highlights the main competitive strategies:

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

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

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

Classification of competitive strategies according to L.G. Ramensky

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

Violet strategy It also implies the supply to the market of products of acceptable quality for consumers at low production costs, which allows manufacturers to set low prices based on a significant amount of demand. The violet strategy is typical for large companies that dominate the market and outperform 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 targeted at the average buyer. A violent strategy can be pursued by large organizations with a stable reputation, which have gradually mastered significant market segments.

Characteristics of types of competition according to L.G. Ramensky

Characteristics of the strategy	Strategies
Characteristics of the strategy	violet	patient	commutative	explerent
Needs Oriented	mass standard	relatively limited, specific	local limited	innovative
Type of production	mass, large-scale	specialized, serial	universal, small-scale	experimental
Company size		large, medium, small		medium, small
Level of competition
Company stability in the market environment
Relative share of R&D spending			absent or small	high, dominant
Competitive Advantage Factors	high productivity, low unit costs	benefits from product differentiation	flexibility	advance in innovation
Development dynamics	high, medium
Type of innovation	improving	adaptive	missing	breakthrough, cardinal
Range				missing

Patent strategy is to serve narrow market segments with specific needs based on the organization of specialized production of products with unique characteristics, designed to conquer and retain relatively narrow market niches within which exclusive special-purpose goods of very high quality are sold. Manufacturers and sellers of such goods sell them on the market at high prices for wealthy buyers, which makes it possible to receive significant profits with small sales volumes. Competitiveness is achieved by the sophistication of the product that satisfies delicate tastes and requests, quality indicators that surpass the quality of similar products of competitors.

Commutative strategy It is designed to satisfy not rare, but rapidly changing, short-term needs of consumers in goods and services. The switching strategy is aimed at adapting to the conditions of limited demand of the local market, meeting rapidly changing needs, and imitating new products. Therefore, the commutation strategy is primarily characterized by high flexibility, which imposes special requirements on the restructuring of production for the production of periodically updated products. Typically, such a strategy is followed by non-specialized organizations with fairly versatile technologies and limited production volumes, when the implementation of this strategy does not aim to achieve high quality and sell at high prices.

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

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

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

Implementing an exploratory strategy, as a rule, they have highly qualified personnel, a project management structure, a venture business organization based on early stages innovation process.

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

Benefits of an exploratory strategy:

blocking entry into the industry during the validity of the rights to innovation;
the possibility of large volumes of sales and obtaining excess profits. Exploratory strategy risks:
great uncertainty in the commercialization of the innovation;
danger of imitation, rapid development of similar products by competitors;
unwillingness of the market to accept innovation;
lack of distribution channels for new products;
design, technological and other flaws in the innovation.

There are three types of strategies:

- price leadership,

- differentiation,

- focusing.

strategies are called basic, since all types of business or industry follow them, whether they are manufacturing, servicing or non-profit enterprises.

Benefits of a Low Cost Leadership Strategy is the opportunity for the leader to offer a lower price than competitors at the same level of profit, and in a price war, the ability to better withstand competition due to better starting conditions.

The goal of a differentiation strategy is to achieve competitive advantage by creating products or services that are perceived by consumers as unique. At the same time, companies can use an increased (premium) price. The advantage of a differentiation strategy is the security of a company from competitors as long as consumers maintain a stable loyalty to its products. This gives it a competitive advantage.

With a focus strategy a limited group of segments is selected. A marketing niche can be distinguished geographically, by type of consumer, or by a segment from a range of products. Having chosen a segment, the company uses either differentiation or a low-price approach in it.

Rice. M.Porter's competition matrix

M. Porter identified three main strategies that are universal in nature and applicable to any competitive force.

Leadership in the area of costs creates a large body of action both in pricing policy and in determining the level of profitability. The main idea: all actions and decisions of the enterprise should be aimed at reducing costs

. Differentiation means the creation by the company of a product and service with unique properties, which are most often secured by a trademark. The strategy has become widespread due to the saturation and individualization of consumer demand. Uniqueness allows you to set a high price

Segment Focus is focusing on one of the market segments and achieving either cost leadership, or a special position, or both together.

Add. material (1):

Competition strategies

Most clearly, the main (reference) competitive strategies are presented by Porter in the form of an appropriate matrix.

Porter's Competition Matrix (1975)

Cost reduction strategy (cost leadership)

The incentive to use this strategy is the significant economies of scale and the attraction of a large number of consumers, for whom the price is a determining factor in the purchase.

Advantages of the strategy:

Additional growth in sales and profit margins by reducing the market share of competitors with a higher price for similar products;

Destruction of the strategy of competitors in the field of product differentiation and localization of the market due to the affordability of their products;

Tightening the price barrier at cost for enterprises seeking to enter this industry;

The presence of large reserves in case of an increase in prices for raw materials, materials and components;

Guaranteed profit even with price cuts from closest competitors;

Displacement of goods - substitutes due to mass production and low production costs.

a large share of the enterprise in the market, the enterprise has access to cheap raw materials;

the demand for manufactured products is elastic in price and fairly homogeneous in structure;

competition occurs mainly in the price area;

consumers lose a significant portion of their income when prices rise;

the enterprise and the industry produce standardized products, and in the current conditions there are no effective ways to differentiate them.

large-scale or mass production;

advanced resources, saving technologies;

strict control of production costs;

predominantly wholesale sales of products;

marketing orientation to the entire market.

Destabilizing factors:

technological innovations;

changing consumer preferences;

reducing consumer sensitivity to prices;

copying methods of work by competitors.

Differentiation strategy (strategy of difference)

This strategy is based on specialization in the manufacture of special (original) products that have clear distinctive advantages from the point of view of consumers. It involves the isolation of goods in the market due to its qualitative characteristics.

Advantages of the strategy:

incremental sales growth and profit margins by capturing the preferences of different consumer groups based on superior quality and greater choice;

tightening the entry barrier to the industry due to the formed preferences of consumers;

guaranteed profit from the sale of products by an enterprise using the services of this company only;

displacement of goods - substitutes by strengthening ties with consumers.

Required market conditions:

distinctive characteristics of products are perceived and appreciated by consumers;

the demand for manufactured products is quite diverse in structure;

competition occurs mainly in the non-price area;

Few businesses use a differentiation strategy.

Requirements for the organization of production and management:

availability of easily reconfigured production;

high level of design preparation of production;

retail or small wholesale sales of products.

Destabilizing factors:

high costs of creating the image of the product, causing a significant increase in prices;

excessive product differentiation, in which the consumer ceases to feel that the product belongs to this group.

This strategy often uses personal selling with the involvement of sales agents.

Segment concentration strategy (concentration strategy)

This strategy is aimed at providing advantages over competitors in a separate specific market segment. At the same time, stable sales are guaranteed, however, as a rule, there is no significant growth in this segment (strategy of avoiding competition).

At the same time, the firm can serve its narrow target segment more efficiently than competitors who disperse their efforts throughout the market.

Advantages of the strategy:

additional growth in sales and profit by reducing the market share and specialization of the enterprise in a particular segment (a group of buyers with special specific needs);

the possibility of using strategies to reduce costs or differentiate products for a limited range of consumers in the target market segment;

comprehensive service for a specific market segment based on the combined use of cost reduction and product differentiation strategies for a relatively narrow group of customers;

creating the image of an enterprise that cares about the needs of specific customers.

Required market conditions:

the existence of a well-defined isolated group of consumers with specific needs;

competitors do not try to specialize in this segment;

the resources and marketing capabilities of the enterprise do not allow serving the entire market.

Requirements for the organization of production and management:

as a rule, divisional organization of the management structure (by goods);

a high degree of diversification of production and marketing activities;

proximity of production units to consumers;

predominantly small-scale type of production;

own retail network.

Destabilizing factors:

the difference in product characteristics for the target segment and the entire market becomes insignificant;

reduction in prices for similar goods produced by enterprises using a cost reduction strategy.

Later, two more strategies were added to Porter's three basic competition strategies.

Innovation strategy.

Enterprises adhering to this strategy are concentrating their efforts on the search for fundamentally new, hitherto unknown types of products, methods of organizing production, and methods of sales promotion.

This strategy is a source of high sales volumes and super profits, but is associated with increased risk. This is, as a rule, an enterprise - esplerent. It uses matrix organizational structures, project-based or new-oriented. The risk is determined by the high degree of uncertainty of the result.

Advantages of the strategy:

obtaining excess profits due to monopolistically set prices (the strategy of "skimming the cream");

blocking entry into the industry due to monopoly ownership of exclusive rights to products, technologies, services (patents, licenses);

lack of goods - substitutes;

creation of the image of the enterprise - an innovator.

Required market conditions:

lack of analogues of products;

the presence of potential demand for the proposed innovations;

presence of investors.

Requirements for the organization of production and management:

high qualification of personnel;

venture business organization, especially at the initial stages.

Destabilizing factors:

high costs at the initial stages of development;

the need for large investments;

market opposition;

illegal imitation of innovations by other firms;

high risk of bankruptcy.

Strategy for immediate response to market needs.

Enterprises implementing this strategy are aimed at meeting the emerging market needs as quickly as possible. The main principle of activity is the selection and implementation of the most profitable projects in the current market conditions, the possibility of rapid reorientation of production, technology changes in order to obtain maximum profit in a short period of time.

Advantages of the strategy:

obtaining excess profits due to the high price of scarce products;

high interest of consumers in the purchase of goods;

a small number of goods - substitutes;

creating the image of an enterprise that is ready to sacrifice everything to immediately meet the emerging needs of customers.

Required market conditions:

demand for products is not elastic;

entry into and exit from the industry is not difficult;

a small number of competitors;

market instability.

Requirements for the organization of production and management:

a small, flexible non-specialized enterprise with a high degree of diversification;

design structure;

high degree of staff mobility;

developed marketing service;

research focused only on highly profitable non-long-term projects.

Destabilizing factors:

high unit costs;

lack of long-term prospects in a particular business;

a large number of destabilizing environmental factors;

lack of guarantees in making a profit;

high risk of bankruptcy.

Add. material (2):

Industry Profitability- only one of the factors determining the choice of competitive strategy. The second central problem in choosing a competitive strategy is the positioning of the company within a particular industry. Depending on its positioning in relation to other market participants, its earnings will be above or below the industry average. A company in a favorable position will earn high profits even if the industry structure turns out to be unfavorable, and the average profitability due to this circumstance will be low.

The basis of the company's effective operation in the long term is a sustainable competitive advantage. And although each company has a large number of strengths and weaknesses compared to competitors, they can, as a rule, have only two types of competitive advantages: low cost and product differentiation. The significance of a company's strengths and weaknesses is ultimately determined by its ability to maximize (compared to competitors) reduce costs or achieve greater differentiation of its product compared to competitors' products. The ability to minimize costs or differentiate products depends, in turn, on the structure of the industry.

The two main types of competitive advantage, combined with the area in which the company is trying to achieve these advantages, allow it to develop three of the most common competitive strategies that can be used to achieve a level of efficiency above the industry average: leadership in cost minimization, differentiation and focus. The focus strategy has two varieties: focus on costs And focus on differentiation. These three strategies are shown in Fig. 1.3.

Each of the general strategies involves fundamentally different paths to obtaining competitive advantages, which are made up of a combination of the very choice of a particular type of advantage sought, as well as the scale of strategic goals within which these advantages are planned to be obtained.

Cost leadership and differentiation strategies typically focus on gaining competitive advantage across a broad range of industry segments, while focus strategies focus on gaining cost advantage or differentiation in narrow industry segments. The specific actions required to implement each strategy will vary depending on the type of industry, and the possibilities of implementing a particular general strategy in a particular industry will also be different. It is not easy to choose a general strategy, and even more difficult to implement it in practice, but there are logically "built" ways to gain competitive advantage, and these ways can be tried in any industry.

Rice. 1.3. General Competition Strategies

The main thing to understand about the most common strategies is that each of these strategies is inherently focused on obtaining certain competitive advantages and in order to achieve these advantages, the company must make a choice, that is, decide what type of competitive advantages it needs. and to what extent the company will achieve these benefits. It is impossible to be “everything for everyone” - this is a strategic recipe for mediocre and ineffective activity; often this means that the company lacks any competitive advantage.

MINIMIZATION OF COSTS

Perhaps of the three most common strategies cost minimization is the most obvious and understandable. As part of this strategy, the company aims to establish low-cost production of goods in the industry. Typically, such a company has a wide scope of activity: the company serves several segments of the industry, while capturing, if possible, related industries - often it is such a wide scope of activity that allows the company to achieve leadership in minimizing costs. The sources of cost advantages can be very diverse and vary by type of industry. This can be increased efficiency through economies of scale, proprietary technologies, special access rights to raw material sources, and many other factors. For example, in the television industry, cost leadership includes optimally sized picture tubes, low-cost design, automated assembly, and global production scale that fund research and development. If a company provides security services, the cost advantage comes from low overheads, an abundance of low-cost labor, and effective training programs required by the high employee turnover in the industry. Being a low-cost producer is not just about taking advantage of the learning curve. Such manufacturers must constantly look for new sources of cost advantage and make the most of them.

If a company manages to achieve an undisputed lead in terms of cost reduction and maintain this advantage for a long time, the efficiency of such a company will far exceed the average market level - but provided that the company can keep the prices of its products at the average level for this industry or at the level slightly higher than it. A company that is a leader in cost reduction will, through this advantage, earn high profits even at prices comparable to competitors' prices, or at lower prices than competitors. However, such a company should not forget about the basics of differentiation. The company's product must be evaluated by buyers as comparable to competitors' products, or at least quite acceptable, otherwise the company, even being a leader in minimizing costs, will be forced to significantly reduce product prices in order for sales to reach the required indicators. And this can negate any benefits accruing from a cost-cutting position. For example, Texas Instruments (watch manufacturing) and Northwest Airlines (air travel) fell into this trap: both companies managed to significantly minimize their costs. But then Texas Instruments couldn't solve the problem of product differentiation and had to leave the market.

Northwest Airlines discovered the problem in time, and management made efforts to improve marketing, passenger service, and ticketing services so that the company's products were in no way inferior to competitors' products.

Thus, no matter how much a company relies on competitive advantages in the form of cost reduction, it must still achieve equality, or at least approximate equality, in the basis of differentiation of its products in relation to competitors' products - only in this case the company will be able to reach efficiency indicators that exceed average level. Equality in the bases of differentiation allows a company that is a leader in minimizing costs to directly translate its low cost advantage into high profits—higher than those of its competitors. But even if the bases of differentiation are approximately equal, the low prices necessary to gain control over the desired market share in no way affect the leader's cost-minimizing advantage, as a result of which the leader receives higher incomes than the market average.

The logic of a cost-minimizing leadership strategy usually requires the company to become the sole leader, not just be part of a group of those who aspire to this position. Many companies that refused to acknowledge this fact made a serious strategic mistake. When there are several candidates for the position of the leader in minimizing costs, the rivalry between them becomes especially fierce - after all, each, even the smallest, market segment begins to be of decisive importance. And until one of the companies takes the lead, "convincing" the rest of the competitors to change strategy, the consequences of this struggle for profitability (and also for the structure of the industry in the long term) can be very detrimental, and this has been the case with several petrochemical enterprises. industry.

Thus, the strategy of cost leadership is basically based on the priority right to have a certain advantage - and the company is forced to give up this right, unless at some point it has the opportunity to radically change its position in relation to costs thanks to major technological advances.

DIFFERENTIATION

The second of the most common competitive strategies is differentiation strategy, which consists in the fact that the company is trying to occupy a unique position in an industry, giving the product features that will be appreciated by a large number of buyers. There can be one or more such characteristics or attributes - the main thing is that they are really important for buyers.

In this case, a company whose products satisfy certain customer needs through these attributes positions itself in some unique way, and the reward for this uniqueness is the willingness of customers to pay high prices for the company's products.

Ways to differentiate differ from industry to industry. Differentiation can be based on the unique properties of the product itself, implementation features, special marketing approaches, as well as a wide variety of other factors. For example, in the construction equipment industry, Caterpillar's product differentiation is based on long machine life, maintenance, parts availability, and an excellent dealer network. In the perfumery and cosmetics industry, the basis for differentiation is most often the image of the product and its placement on the shelves of department stores.

A company that can differentiate products in some way and maintain a chosen direction for a long period will perform more efficiently than the average company in the industry - but only if the markups on the company's goods exceed the additional costs of differentiation, that is, to to make the product unique. A company choosing a differentiation strategy must therefore constantly look for new ways to differentiate—ones that can generate profits that outweigh the costs of differentiation itself. But a company following the path of differentiation should not forget about costs: any, even the highest mark-ups, will not lead to anything if the company takes a disadvantageous position in terms of costs. Thus, if a company chooses differentiation as a strategy, it should strive for cost parity or near parity with its competitors by cutting costs in all areas not directly related to the chosen direction of differentiation.

The logic of the differentiation strategy requires that the company bases differentiation on such attributes of the product that would distinguish it from the product of competing companies. If a company wants to pay a high price for its products, it must be truly unique or perceived as unique by customers. But unlike the cost leadership strategy, the implementation of a differentiation strategy does not require the presence of only one leader in the industry - in this case, there may be several companies that successfully implement the differentiation strategy, but provided that the products in this industry have several parameters that are especially valued buyers.

FOCUSING

The third general strategy of competition is focus strategy. This strategy differs from the others: it is based on the choice of a narrow area of competition within a particular industry. A company that has chosen a focus strategy selects a specific segment or group of industry segments and directs its activities to serve exclusively this segment or segments. By optimizing its strategy in accordance with target segments, the company tries to gain certain competitive advantages in these segments, although it may not have overall competitive advantages within the entire industry.

The focusing strategy comes in two varieties. Focus on costs is a strategy in which a company, working in its target segment, tries to gain an advantage at the expense of low costs. At focus on differentiation The company differentiates itself in its target segment. Both strategy options are based on the features that distinguish the selected target segment from other segments of the industry. The target segment is likely to include both customers with special needs and production and distribution systems that best suit them and differ on this basis from industry standards. When focusing on costs, the company takes advantage of differences in their structure in various sectors of the industry, while when focusing on differentiation, the company benefits from the fact that in certain market segments there are special groups of buyers with special needs. The existence of such differences in cost structure and consumer demand suggests that these segments are poorly served by broad-based competitors - such companies serve these special segments on an equal footing with everyone else. In this case, the company that has chosen the focus strategy gains competitive advantages by fully focusing its work on this segment. It doesn't matter if it's a narrow segment or a broad segment: the essence of the focus strategy is that the company receives income from those features of this segment that distinguish it from other sectors of the industry. A narrow specialization in itself is not enough for a company to achieve performance indicators that will be above the market average.

Consider the example of Hammermill Paper. The work of this company is an excellent example of the implementation of a focus strategy: the company chose a strategy based on differences in the production process, and then optimized its production in accordance with the chosen target segment. Hammermill is moving more and more towards the production of relatively small batches of high quality paper for specific applications, whereas large companies whose equipment is set up to produce large batches would suffer significant losses by producing such a product. Hammermill equipment is more suitable for the production of small batches of goods and frequent reconfiguration for certain product parameters.

A company that has chosen focusing as a competitive strategy has a significant advantage over competitors with a broad specialization, namely: such a company can choose the direction of optimization - differentiation or cost reduction. For example, it is possible that competitors are not serving a particular market segment well enough to satisfy the needs of buyers in this sector, and then the company has excellent opportunities to focus on differentiation. On the other hand, broad-based competitors are likely to spend too much money and effort on serving this segment, which means that their costs of satisfying the needs of buyers in this segment are too high. In this case, the company has the option of focusing on costs - after all, you can reduce costs by spending money solely on meeting the needs of customers in this segment, and nothing more.

If the target segment chosen by the company is no different from other segments, the focus strategy will not bring the desired results. For example, in the soft drink industry, Coca-Cola and Pepsi produce a wide range of products with different compositions and tastes, while Royal Crown decided to specialize in the production of only cola. The segment chosen by the company is already well served by Coke and Pepsi, even though these companies also serve other segments. Therefore, Coke and Pepsi have a distinct advantage over Royal Crown in the cola segment of the market, thanks to the fact that they produce a wider range of products.

The performance of a company that has chosen a focus strategy will be above the industry average if:

a) the company will be able to achieve sustainable leadership in its segment in minimizing costs (focusing on costs) or to differentiate its product in this segment as much as possible (focusing on differentiation);

b) in this case, the segment will be attractive in terms of its structure. The structural attractiveness of a segment is a prerequisite, as some segments in an industry will be inherently less profitable than others. Often, the industry provides opportunities for the successful implementation of several long-term focus strategies, but only if the companies choosing this strategy pursue it in different segments. In most industries, several different segments can be identified, with specific customer needs or specific production and delivery systems, making these segments excellent testing grounds for a focus strategy.

"Strapped in the Middle"

A company that unsuccessfully tries to implement all three strategies will inevitably find itself stuck in the middle between leaders and laggards. This strategic position is a sure sign of a company's underperforming performance, as well as a path to gaining none of its competitive advantage. A stalled company will always be in an extremely competitive position - in any market segment, all advantageous positions will be occupied either by leaders in minimizing costs, or by companies that have chosen differentiation or focus. Even if a stuck company successfully discovers a profitable product or a promising group of customers, competitors who have an edge and know how to keep those advantages will quickly take over all profitable finds. In most industries, there are always a few stalled companies.

If suddenly a company becomes stuck, it will make significant profits only if this is highly favored by the structure of the industry, or if the company is lucky enough that its competitors are also stuck firms. However, such companies usually make much less profit than those who consistently implement one of the general competitive strategies. When an industry reaches a stage of maturity in the process of development, this makes the difference in performance between the "sluggish" companies and companies implementing one of the general strategies more noticeable, more obvious. After all, in this way it becomes clear that the company's strategy was wrong from the very beginning, but the rapid growth of the industry did not allow to notice the shortcomings of the strategy at first.

When a company begins to “slip”, it often means that its management did not make a conscious choice of strategy at the time. Such a company is trying hard to gain competitive advantages, but, as a rule, to no avail - when you try to achieve different types of competitive advantages at the same time, it makes your actions inconsistent. Even quite successful companies can get stuck: those that, for the sake of growth or the prestige of the company, decided to compromise in the course of implementing one of the general strategies of competition. A classic example of this is Laker Airways, which started in the North Atlantic market with a well-defined cost-focused strategy: the company was focused on the segment of the air travel market where ticket prices were most important to customers, so the company offered only the most basic services. However, over time, the company began to offer new services and new routes, thus adding an element of luxury to its service. This negatively affected the company's image and undermined its service and supply chain. The consequences were tragic: the company eventually went bankrupt.

The temptation to move away from the systematic implementation of one of the general strategies (which inevitably leads to "getting stuck") is especially strong for those companies that, having chosen a focus strategy, dominate their market segment. Specialization requires a company to intentionally limit potential sales volumes. Success is often blinding, and a company implementing a focus strategy forgets what made it successful and compromises in order to grow further, moving away from the chosen strategy. But instead of sacrificing the original strategy, the company should rather find new, growth-oriented industries where the company can also implement one of the general competitive strategies or take advantage of the existing interconnections in this industry.

CAN MORE THAN ONE STRATEGY BE IMPLEMENTED AT THE SAME TIME?

Any of the most common competitive strategies is a fundamentally different approach to gaining competitive advantage and how to maintain it over a long period of time. Each such strategy combines a certain type of competitive advantage that the firm is trying to achieve, as well as the scope of the strategic goal.

Usually a company must choose for itself a specific type of both - otherwise it will find itself stuck between leaders and laggards. If a company tries to simultaneously serve a large number of diverse market segments, choosing to focus on costs or differentiation, it loses the benefits that it could gain by optimizing its strategy for a specific target segment (focusing). Sometimes a company manages to create two completely independent business units within the same corporation, and each of these units implements its own strategy. A good example of this is the British hotel firm Trusthouse Forte, which has created five separate hotel chains, each targeting a specific market segment. However, such a company must strictly separate from each other the units focused on the implementation of various strategies - otherwise, none of these units will achieve the competitive advantages that are expected to be obtained as a result of the implementation of the strategy chosen by the management. An approach to competition in which management allows the transfer of corporate culture from one business unit to another, and also does not have a clearly defined policy for each business unit, undermines the competitive strategy of both each business unit and the entire corporation, and leads to the fact that the company falls into the number of "stalled".

Usually cost leadership and differentiation are incompatible with each other - differentiation tends to be quite expensive. In order to make a company unique and thereby force customers to pay the highest prices for its products, management is forced to increase costs - this is the price of differentiation. In particular, in the construction equipment industry, this is exactly what Caterpillar management did. Conversely, cost reduction often requires trade-offs in differentiation—cutting overheads and other costs inevitably leads to product standardization.

However, cost reduction does not always require concessions in product differentiation. Many companies have found a way to cut costs while making their products even more differentiated through the use of effective organizational techniques or fundamentally different technologies. Sometimes drastic cuts can be achieved this way without compromising differentiation—unless, of course, the company has previously been heavily cost-cutting. But simple cost reduction should be distinguished from the conscious achievement of cost minimization as a certain competitive advantage. When a company competes with strong competitors who are also vying for leadership in cost minimization, there will invariably be a point at the end where further reductions cannot be achieved without compromising product differentiation. It is at this point that a company's strategy can become inconsistent and the company is forced to make choices.

If a firm manages to achieve cost leadership while remaining a producer of a differentiated product, it will be generously rewarded for its efforts: differentiation implies a high price for the product, and cost leadership - low costs.

So the benefits add up. An example of a company that has achieved both cost leadership and differentiation strategies is Crown Cork & Seal, a metal container manufacturer. The company specializes in the production of containers for liquid products - beer, soft drinks, aerosols. The company's products are made of steel - unlike other companies that produce both steel and aluminum containers. In its target segments, the company differentiates its product through special service and technological support, as well as offering a full range of steel sealed cans, metal lids and can sealing equipment. This type of differentiation would be more difficult to achieve in other sectors of the industry where customers have different needs. At the same time, Crown is focusing its production on only the types of containers required by customers in its target sectors and is actively investing in state-of-the-art two-piece sealed can packaging technology. As a result, Crown, most likely, has also received the status of a low-cost manufacturer in its market segments.

A firm can simultaneously implement a differentiation strategy and achieve cost leadership if the following three conditions are met: The company's competitors are stuck. When a company's competitors get stuck, nothing they can do can put the company in a position where cost leadership and differentiation are incompatible. This is exactly what happened with Crown Cork. The company's most serious competitors did not invest in low-cost steel container technology, so the company was able to achieve cost savings without sacrificing product differentiation. But if the company's competitors had adopted a cost leadership strategy, Crown's attempt to become a low-cost producer of a differentiated product would have been doomed: the company would have been stuck. Indeed, in this case, all opportunities to reduce costs without sacrificing differentiation would already be used by Crown's competitors.

However, the situation when competitors “slip”, and the company itself, due to this, achieves advantages in both cost and differentiation, is often temporary. In the end, one of the competitors will start implementing one of the general strategies of competition and will also succeed perfectly in finding a balance between costs and differentiation. That is, the company still has to choose a certain type of competitive advantage, which it is focused on and which it will try to maintain for a long period of time. Weak competitors are also dangerous: under these conditions, the company is trying to achieve both differentiation and cost minimization, trying to combine these two strands of strategy, but as a result, such a company will be exposed if a new powerful competitor enters the market.

Cost levels are influenced by market share and industry relationships. It is possible to achieve both leadership in cost minimization and differentiation if the level of costs is determined by the size of the market, and to a greater extent than by product design, manufacturability, service level and other factors. If a company gains advantages by having a significant market share, cost advantages allow the company not to lose its leading position in cost even if the company incurs additional costs in other areas. In another case, with a certain market share of the company, it is possible to reduce the cost of differentiation costs to a level lower than that of competitors. In the same way, cost reduction and differentiation can be achieved simultaneously in areas where there are such interconnections between industries that can be advantageously used only by certain companies, but not by their competitors. Such unique interconnections can help reduce the cost of differentiation, or at least offset the high costs. on her. And yet, the attempt to achieve both leadership in minimizing cost costs and a high degree of product differentiation always leaves the company vulnerable and unprotected in the face of such competitors who will actively invest in the implementation of one of the general strategies, correlating their strategy either with a certain market share or with relationships existing in the industry.

The firm becomes a pioneer in major innovations. The introduction of a major technological innovation in the industry allows the company to simultaneously reduce costs and make significant progress in terms of product differentiation, thus achieving success in implementing both strategies. The introduction of new automated production technologies can have such an effect, as well as the use of new information technologies in logistics or computer-aided product design. The same effect can be achieved through the use of innovative organizational techniques that are not related to technology.

However, the ability to achieve the status of a manufacturer of a differentiated low-cost product directly depends on how the company can become the sole owner of the rights to the innovation. As soon as the innovation begins to be used by any of the competitors, the company is forced to choose again between cost reduction and differentiation, finding itself, for example, in the following type of dilemma: is the company's information system compared to the competitor's similar system better suited to minimize costs or to differentiation? A pioneering company may even be at a disadvantage if, in its pursuit of cost minimization and differentiation, its management fails to foresee opportunities for competitors to replicate the innovation. Once an innovation becomes available to competitors who have adopted one of the common strategies, the pioneering company will not be able to achieve any of the advantages.

A company should always actively pursue cost-minimization opportunities that do not require differentiation compromises. At the same time, the company must use all the opportunities for differentiation that do not require high costs. However, if a company fails to find an intersection of opportunities of both kinds, the company's management must be prepared to select a certain type of competitive advantage in order to adjust the balance of costs and differentiation accordingly.

Porter calls the following basic competitive strategies. M. Porter's strategies. Cost minimization strategy. Benefits of this strategy

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