Three typical competitive strategies (according to the theory of M. Porter)

In 1985, in the work “Competitive Strategy”, M. Porter introduced the concept of universal strategies and identified three main types of strategy: cost leadership, differentiation, focus.

Table 2 Resource requirements by component

Porter Matrix

Competitive advantage

Low costs

Differentiation

Area of competition

Broad Purpose

Cost leadership

Differentiation

Narrow purpose

Focus on costs

Focus on differentiation

Source. Yudanov A.Y. Competition: theory and practice: Uchebno-prakticheskoe posobie. – M., 1998, p.295.

These types are determined on the basis of highlighting the type of competitive advantage (costs or differentiation) and the chosen sphere of competition (narrow or wide scope). Porter presented the results in matrix form (Table 2).

Porter emphasizes that universal strategies do not exist for all industries. The specifics of each industry leave an imprint on the choice of strategy and determine the options for typical strategies highlighted above. At the same time, multiple strategies can be used simultaneously in the same industry. For example, Japanese shipbuilders have chosen a differentiation strategy and offer a wide selection of quality vessels at relatively high prices. Korean firms compete on costs. Scandinavian – produce only a few types of highly specialized vessels, i.e. prefer focused differentiation. And Chinese firms offer simple, standard ships and produce them at a lower cost than Korean firms.

Leadership in costs is typical for companies that are distinguished by large sizes, the production of mass standardized products. The main sources of competitive advantage here are economies of scale, advanced technology, access to raw material sources and reliable distribution channels. At the same time, it is important not to yield to competitors in terms of product quality.

The strategy of differentiation is usually chosen by firms that have the ability to create a unique product for a large number of consumers. Differentiation can be created in many ways. Uniqueness is created by marketing conditions and other methods of non-price competition. It is not necessarily the quality of the product itself. Ways to reduce costs here are limited compared to the first strategy. Non-price methods of competition require higher costs. But the firm should not ignore the possibilities of cost reduction. Consumers are willing to pay for the uniqueness of the product only in the first stages of the product life cycle. In the future, from two products with the same price, the consumer will prefer a higher quality, and from two products of the same quality, he will prefer a cheaper one – this is the law of the modern market.

The focus strategy is based on the choice of a narrow scope (goal) of competition. The company chooses a market segment or market niche and tries to achieve competitive advantages in relation to the characteristics of this segment.

Porter emphasizes that if a firm has failed to steer its operations down one of the three paths outlined above, it is at a strategic disadvantage. Its market share is insufficient, it lacks investment and receives a low rate of return. For such a company, the following are characteristic: inconsistency in management, the system of labor incentives; low level of corporate culture. To get out of this situation, the firm needs to make a fundamental Strategic decision: whether to focus its activities on reducing costs, or choose to change the product as a target; whether to compete across the market or focus on one, several segments. And only in rare cases, firms manage to achieve success in two areas – costs and product. The “Japanese challenge” to Western companies in the 80s was associated with high quality and at the same time low cost of products of Japanese firms. Firms that took this path of rapid transition to new products were able to reduce costs and strengthen differentiation.

With each typical strategy, the firm faces specific problems. The leader in costs should constantly take care of investing in modern equipment, monitor technical innovations, as he is constantly experiencing the pressure of competitors. New competitors can create imitations of a branded product with lower costs and prices. Inflationary cost escalation could negate efforts to reduce them. Fascination with cost problems can lead to a delay in reacting to market changes. Technical innovations that eliminate the advantages provided by previous technologies can also pose a danger. When differentiating a product, competitors who are leading in costs may pose a danger to the firm, so care should be taken to ensure that the utility of the firm’s product can compensate for the difference in prices with other firms. Competitors-imitators are also dangerous here. The danger to a focus strategy may be that the differences between the needs of an industry market and a particular segment of it may diminish over time, and that other competitors may distinguish segments within a given segment.

Later, M. Porter supplemented this theory of strategies, identifying three main sources of the firm’s strategic position. The first source is positioning focused on the breadth of the nomenclature. A firm can gain an advantage through better configuration of the value chain aimed at gaining advantages in the production of industry goods. With this positioning factor, the company does not care about the comprehensive satisfaction of the consumer’s needs of a particular market segment. Any of the strategies can be used. The second source of an advantageous position is the service of most or all of the needs of a certain group of consumers. Porter calls this source a needs-driven positioning. Such positioning should be carried out by firms whose markets are diverse in needs, and the firm has activities that are better able to meet these specialized needs. The third source-
nickname – access-oriented positioning. Access to certain market segments may be related to the geographical location of consumers, the different concentration of consumers, the magnitude of their income, etc. For example, a retail firm can create advantages by serving consumers in small towns [13 pp.59-65].