Concept[ edit ] Michael Porter's Three Generic Strategies Porter wrote in that strategy targets either cost leadershipdifferentiationor focus. Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. Porter's generic strategies detail the interaction between cost minimization strategies, product differentiation strategies, and market focus strategies of porters.
To strive in this competitive environment the firms should have an edge over the competitors. To develop competitive advantage, the firms should produce good quality products at minimum costs etc.
Cost conscious business planning, it becomes necessary for the firms to have a strategic edge towards its competitors. One such competitive strategy is overall cost leadership, which aims at producing and delivering the product or service at a low cost relative to its competitors at the same time maintaining the quality.
According to Porter, following are the prerequisites of cost leadership Cherunilam, To sustain the cost leadership throughout, the firm must be clear about its accomplishment through different elements of the value chain. Figure-1 shows a matrix of the three generic competitive strategies and their interrelationship given by Porter.
Three Generic Competitive Strategy This strategy involves the firm winning market share by appealing to cost-conscious or price-sensitive customers. This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio price compared to what customers receive.
To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower cost than its rivals.
There are three main ways to achieve this. The first approach is achieving a high asset turnover. In service industries, this may mean for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast.
In manufacturing, it will involve production of high volumes of output. These approaches mean fixed costs are spread over a larger number of units of the product or service, resulting in a lower unit cost, i.
For industrial firms, mass production becomes both a strategy and an end in itself. Higher levels of output both require and result in high market share, and create an entry barrier to potential competitors, who may be unable to achieve the scale necessary to match the firms low costs and prices.
The second dimension is achieving low direct and indirect operating costs. This is achieved by offering high volumes of standardized products, offering basic no-frills products and limiting customization and personalization of service.
Production costs are kept low by using fewer components, using standard components, and limiting the number of models produced to ensure larger production runs. Overheads are kept low by paying low wages, locating premises in low rent areas, establishing a cost-conscious culture, etc.
Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. The associated distribution strategy is to obtain the most extensive distribution possible.
Promotional strategy often involves trying to make a virtue out of low cost product features. This could be achieved by bulk buying to enjoy quantity discounts, squeezing suppliers on price, instituting competitive bidding for contracts, working with vendors to keep inventories low using methods such as Just-in-Time purchasing or Vendor-Managed Inventory.
Wal-Mart is famous for squeezing its suppliers to ensure low prices for its goods. Dell Computer initially achieved market share by keeping inventories low and only building computers to order. Other procurement advantages could come from preferential access to raw materials, or backward integration.
Some writers assume that cost leadership strategies are only viable for large firms with the opportunity to enjoy economies of scale and large production volumes. However, this takes a limited industrial view of strategy. Small businesses can also be cost leaders if they enjoy any advantages conducive to low costs.
For example, a local restaurant in a low rent location can attract price-sensitive customers if it offers a limited menu, rapid table turnover and employs staff on minimum wage. Innovation of products or processes may also enable a startup or small company to offer a cheaper product or service where incumbents' costs and prices have become too high.
An example is the success of low-cost budget airlines who despite having fewer planes than the major airlines, were able to achieve market share growth by offering cheap, no-frills services at prices much cheaper than those of the larger incumbents.
A cost leadership strategy may have the disadvantage of lower customer loyalty, as price-sensitive customers will switch once a lower-priced substitute is available. A reputation as a cost leader may also result in a reputation for low quality, which may make it difficult for a firm to rebrand itself or its products if it chooses to shift to a differentiation strategy in future.Part four of my planning a trip to Scotland series looks how much a trip to Scotland might cost.
Scotland is among the costlier places to travel so keeping an eye on your Scotland budget is of paramount importance. Watch video · As the cost of higher education continues to rise, more families are socking away money into college savings plans. As of , these accounts held $ billion in assets, according to the College Savings Plans Network.
Martin Moos / Getty Images Mobile business promotion isn't just for white delivery vans.
Many vehicles have the name and phone number of a business decorating one of the windows or doors. SECTION 1 COST CONTROL. CHAPTER 1 INTRODUCTION LEARNING OUTCOMES After reading this chapter, you should have an understanding of what this book is about. You should be able to: Application of cost planning.
Adults in a consumer-driven health plan (CDHP) were more likely than those in a traditional plan to exhibit a number of cost-conscious behaviors, according to new research findings. The Dominican Republic has a fairly informal business culture, in which networking and personal contacts are very important, as is the giving and receiving of favours.
Business relationships are largely based on trust, so you will need to make regular tri.