Competitive Advantage – Michael Porter
According to the Competitive Advantage model of Porter, a competitive strategy takes offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior return on investment. According to Michael Porter, the basis of above-average performance within an industry is sustainable competitive advantage.
2 basic types of Competitive Advantage
1. Cost Leadership (low cost)
2. Differentiation
Both can be more broadly approached or narrow, which results in the third viable competitive strategy:
3. Focus
Competitive Advantage type 1: Cost Leadership
* Achieving Cost Leadership means that a firm sets out to become the low cost producer in its industry.
* A cost leader must achieve parity or at least proximity in the bases of differentiation, even though it relies on cost leadership for its competitive advantage.
* If more than one company try to achieve Cost Leadership, this is usually disastrous.
* Often achieved by economies of scale.
Competitive Advantage type 2: Differentiation
* Achieving of Differentiation means that a firm seeks to be unique in its industry along some dimensions that are widely appreciated by buyers.
* A differentiator can not ignore its cost position. In all areas that do not affect its differentiation it should try to decrease cost; in the differentiation area the costs should at least be lower than the price premium it receives from the buyers.
* Areas of differentiation can be: product, distribution, sales, marketing, service, image, etc.
Competitive Advantage type 3: Focus
* Achieving Focus means that a firm sets out to be best in a segment or group of segments.
* 2 variants: Cost Focus and Differentiation Focus.
Stuck in the middle
* This is usually a recipe for below-average profitability compared to the industry.
* Still, attractive profits are possible if and as long as the industry as a whole is very attractive.
* Manifestation of lack of choice.
* Especially dangerous for Focusers that have been successful, and then start neglecting their focus. They must seek other Focus niches. Rather then compromise their focus strategy.
Written by: Tony Jacowski
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Tagged as business planning, business strategies, competitive advantage, management, management theories, michael porter, work organization + Categorized as Business, Economy articles, Ladership & Management
And Michael Porter is correct. After 30 years…. his five forces model is still the best.
Thanks for the well-written overview.