The generic strategies of Porter describe how a company can achieve a competitive advantage over its competitors, obtaining a higher performance than theirs. For this, it differentiates two competitive advantages (low costs and differentiation), which can be divided into three or four by market segmentation.
The fundamental basis for obtaining this superior profitability is to achieve a sustained competitive advantage , and for this a business strategy must be followed.
In 1980, Michael Porter seeks to improve the theory of comparative advantage , which by advising countries to specialize in the product or service where they had a comparative or absolute advantage , could relegate some countries to specialize in primary sector production, entering in a spiral of low wages and low wealth generation.
Porter defined three types of competitive advantages to which a company can aspire. These competitive advantages can be achieved in the entire industry:
- Leadership in costs.
- Product differentiation .
- Market segmentation .
Market segmentation, although not considered another competitive advantage, is mentioned, since it simply uses one of the other two competitive advantages but in a narrower scope of the market, industry or country.
1. Cost leadership
A company achieves cost leadership when it has lower costs than its competitors for a similar or comparable product or service in quality. Thanks to the cost advantage, the company manages to lower its prices until the margin of its competitor is canceled.
The cost leadership strategy is recommended when:
- The product is standardized(many products are offered equal in quality and price), and is offered by multiple suppliers or companies.
- There are few ways to achieve product differentiation(try to make your product perceived and provide different characteristics to the buyer), which are significant.
Sources of competitive cost advantage
It has been considered that the main source of the competitive cost advantage is derived from the experience effect which has its origin in the learning effect.
- The learning effectis that the manufacturing time of a product unit decreases as more units of that product are produced. This decrease in the realization time implies a decrease in the unit costs of direct labor and the product.
- The experience effectcauses the experience accumulated by the company to reduce the real cost of the company’s total added value in unit terms. The experience effect constitutes a strong entry barrier for new competitors and a solid competitive advantage for the company that accumulates more experience effect. Also, the effect of economies of scale and economies of scope constitutes a greater competitive advantage and therefore greater barriers to entry.
It is said that a company has a competitive advantage in product differentiation when it offers a product or service that, being comparable to that of another company, has certain attributes or characteristics that make it perceived as unique by customers. Therefore, customers are willing to pay more to get a product from one company than from another.
In general, it can be said that for a product that is simple and that is produced with a specific standardized technique, the opportunities for differentiation are reduced.
On the contrary, the greater the complexity and variety of product characteristics, the greater the chances of obtaining a competitive advantage of differentiation.
The product differentiation strategy is more appropriate when any of the following circumstances occur:
- Customers attach special importance to aspects such as quality, or use the product to differentiate themselves socially.
- Distinctive features are difficult to imitate, at least quickly and economically.
The company that wants to succeed with a product differentiation strategy must take significant efforts to improve the supply of competitors.
Sources of product differentiation
A company can differentiate its offer to customers in a large number of ways. The variables on which the advantage in differentiation can be built are related to the technical characteristics of a product, with the characteristics of its markets, with the characteristics of the company itself or with other variables that are difficult to classify such as time or attention to The criteria of responsibility.
The variables for product differentiation are:
- Product features, such as size, shape, technology, reliability, safety, consistency, durability, pre-sale and after-sales service.
- Market characteristics:They are the variety of needs and tastes by consumers that can allow differentiation.
- Characteristics of the company:They are the way in which the company conceives or conducts its business, the way in which it relates to its customers, identity, style, values or reputation and prestige towards customers.
- Other variables for differentiation:Two other additional variables are time and attention to social responsibility criteria.
The market segmentation strategy seeks that companies know people’s behaviors when it comes to consuming a product or service and thus offer them what they really need. Try to get companies to focus on a few target markets instead of trying to target everyone.
It is a strategy often used for small businesses, since they do not usually have the necessary resources to attract the public, but it compensates them to focus their efforts on a market segment. Companies that use this method often focus on customer needs and how products or services could improve their daily lives. In addition, some companies may allow consumers to participate in your product or service.
This being so, the next step will be to classify individuals into segments of the public that have the closest possible response to the product offered.