Strategy

Topics: Porter generic strategies, Strategic management, Marketing Pages: 24 (9277 words) Published: January 5, 2015
Table of Contents

A Critique of Porter’s Cost Leadership and Differentiation Strategies4 ABSTRACT4 Key Words4
INTRODUCTION5
COST LEADERSHIP STRATEGY5
Major Reliance on Modern Capital Equipment7
Relying on the Experience Curve to Underprice Competition Risky7 A Cost Leader Cannot Ignore Differentiation8 No Such Thing as a "Commodity": Everything Can Be Differentiated9 High Market Share a Prior Condition for Cost Leadership?10 Porter Identifies High Market Share with Cost Leadership Strategy10 Differentiation--Not Cost Leadership Alone--Behind GM’s and Whirlpool’s Success11 “Low-Cost” or “Low-Price” Strategy?12 Thompson and Strickland’s Low-cost Provider Strategy14

Internal Orientation of Cost Leadership Strategy14
DIFFERENTIATION STRATEGY15
Superiority of Differentiation over Cost Leadership Strategy16 Porter: Differentiation and High Market Share Incompatible17 Differentiation Compatible with High Market Share--and Low Cost18 Even higher quality may lead to lower cost18

High Market Share Contributes to Long-term Competitive Advantage20 Market Share Leadership Enhances Differentiation20 “PURE” COST LEADERSHIP STRATEGY VS. COST LEADERSHIP AS A RESULT OF DIFFERENTIATION STRATEGY20 Porter: “Pure” Cost Leadership Strategy Incompatible with Differentiation Strategy21 The Importance of Organizational Culture21

Need to Redefine Porter’s Narrow View of Differentiation22 A PROPOSED FRAMEWORK OF COMPETITION23 Differentiation the Cornerstone of Competitive Strategy23
Road to Market Share Leadership: Differentiation at Moderate Prices23 Need for Recognizing an Important Distinction: Segmentation vs. Differentiation24 “Premium Price” or “Price Premium”?24 The Importance of Positioning26

The Crucial Role of “Outpacing” Strategies27
DISCUSSION29
Shift in Porter’s Thinking29
CONCLUSION30
Suggestion for Future Research31
REFERENCES32
ENDNOTES38

A Critique of Porter’s Cost Leadership and Differentiation Strategies

ABSTRACT

Here we offer a critique of Porter’s cost leadership and differentiation strategies, and a synthesis of the relevant literature.

Porter suggests a low-cost position often requires high market share. But how does a business get there first? Answer: market share leaders do it via a strategy of differentiation.

Porter lists GM as a successful practitioner of cost leadership strategy. However, the 1976-1982 quality-data shows that higher quality (differentiation) also played a key role in this success.

Mintzburg argues that Porter’s low-cost strategy is actually a differentiation strategy based on low price.

Contrary to Porter’s views, differentiation strategies are more profitable than cost leadership strategies, because market share leaders prefer to compete more on the basis of differentiation than low cost.

Finally, research shows that differentiation and cost leadership can co-exist. However, Porter insists that each generic strategy requires a different culture and a totally different philosophy. He says the “strategic logic of cost leadership usually demands that a firm be the cost leader.”

The flaw is not in Porter’s logic but in his basic premise that associates differentiation with uniqueness and premium prices: a situation generally incompatible with high market share.

So, we need to redefine Porter’s idea of differentiation. A vast majority of the best-selling brands are likely to be in the mid-price segment that offer better quality than the competition, and carry an above-average price tag. Then a business does not need to adopt the rigid culture and philosophy of Porter’s Cost Leadership strategy to achieve market share leadership.

Key Words

Michael Porter
Cost Leadership strategy
Differentiation strategy
Market Segmentation
Positioning

INTRODUCTION

A scholarly work that has received widespread attention and recognition in the Strategic Management area--and beyond--is Porter’s (1980, 1985) typology of generic competitive strategies: Cost...

References: Abernathy, W.J., & Wayne, K. (1974). Limits of the learning curve. Harvard Business Review, 52 (5), 109-119.
Ansoff, I. H. (1965). Corporate strategy. New York: McGraw Hill.
Barney, J. B. (1997). Gaining and sustaining competitive advantage. Reading, MA: Addison-Wesley.
Beatty, G. (1999). Familiarity breeds contentment. HFN, 73 (37), September 20.
Bennett, R. C., & Cooper, R. G. (1979). Beyond the marketing concept. Business Horizons, June, pp.76-83.
Burck, C. G. (1980). The Japanese deserve credit: The comeback decade for the American car. Fortune, June 2, p. 63.
Buzzell, R. D., & Gale, B. T. (1987). The PIMS principles. New York: Free Press.
Caves, R. E. (1987). American industry: Structure, conduct, performance, 6th Edn. Englewood, NJ: Prentice Hall.
Chrisman, J. J., Boulton, W. R., & Hofer, C. W. (1988). Toward a system for classifying business strategies. Academy of Management Review, 13, 413-28.
Coleman Co., Inc. (1999). Form 10-K. Washington, D. C.: Securities & Exchange Commission.
Datta, Y. (1979). Competitive strategy and performance of firms in the TV set industry: 1950-60. Proceedings of the Academy of Management, pp. 106-110.
_______ (1996). Market segmentation: An integrated framework. Long Range Planning, 29 (6), 797-811.
________(1997). Customer: Big gap in management theory. In M. A. Rahim, R. T. Golembiewski, & L. E. Pate (Eds.), Current topics in management (Vol. 2, chap. 11: 189-220). Greenwich, CT: JAI Press.
________(1998). The mechanistic foundations of strategic management: Time for a radical change. In R. A. Rahim, R. T. Golembiewski, & C. Lundberg (Eds.), Current topics in management (Vol. 3, pp. 125-150). Greenwich, CT: JAI Press.
D 'Aveni, R. A. (1994). Hypercompetition: Managing the dynamics of strategic maneuvering. New York: Free Press.
Dean, J. W., Jr., & Bowen, D. E. (1994). Management theory and total quality: Improving research and practice through theory development. Academy of Management Review, 19, 392-418.
Deming, W. E. (1986). Out of the crisis. Cambridge, MA: MIT Press.
Dertouzos, M. L., R. K. Lester, R. M. Solow & others (1989). Made in America: Regaining the productive edge. New York: Harper Perennial.
Dess, G. G., & Rasheed, M. A. (1992). Commentary: Generic strategies... (D. Miller). In P. Shrivastava, A. Huff, & J. Dutton (Eds.), Advances in strategic management (Vol. 8, pp. 409-416). Greenwich, CT: JAI Press.
Dess, G. G., Gupta, A., Hennart, J., & Hill, C. W. L. (1995). Conducting and integrating strategy research at the international, corporate, and business levels. Journal of Management, 21 (3), 357-393.
Dess, G. G., & Picken, J. C. (1999). Creating competitive (dis)advantage: Learning from Food Lion’s freefall. Academy of Management Executive, 13 (3), 97-111.
Dickson, P. R., & Ginter, J. L. (1987). Market segmentation, product differentiation, and marketing strategy. Journal of Marketing, April, pp. 1-10.
Drucker, P. F. (1974). Management: Tasks, responsibilities, practices. New York: Harper & Row.
Flynn, E. J., & Flynn, B. R. (1996). Achieving simultaneous cost and differentiation competitive advantage through continuous improvement: World class manufacturing as a competitive strategy. Journal of Management Issues, 8 (3), pp. 360-379.
Friedman, J. W. (1983). Oligopoly theory. Cambridge University Press.
Gale, B. T., & Buzzell, R. D. (1989). Market perceived quality. Planning Review, March-April, 6-15, 48.
Gale, B. T. (1992). Quality comes first when hatching power brands. Planning Review, July-August, pp. 4-9.
Ghoshal, S., & Bartlett, C. A. (1997). The individualized corporation: A fundamentally new approach to management. New York: HarperBusiness.
Giddens-Emig, K. (1983). Portfolio planning: A concept in controversy. Managerial Planning, November-December, pp. 4-15.
Gilbert, X., & Strebel, P. (1987). Strategies to outpace the competition. Journal of Business Strategy, 8 (1), 28-36.
_____________________ (1989). From innovation to outpacing. Business Quarterly, Summer, pp. 19-22.
Goldman, K. (1993). Volvo seeks to soft-pedal safety image. Wall St. Journal, March 16, p. B 4.
Hall, W. K. (1980). Survival strategies in a hostile environment. Harvard Business Review, 58 (5), 75-85.
Hambrick, D.C. (1983). High profit strategies in mature capital goods industries: A contingency approach. Academy of Management Journal, December, 26, 687-707.
Hamel, G., & Prahalad, C. K. (1994). Competing for the future: Breakthrough strategies for seizing control of your industry and creating the markets of tomorrow. Boston: Harvard Business School Press.
Hill, C. W. (1988). Differentiation versus low cost or differentiation and low cost: A contingency approach. Academy of Management Review, 13, 401-412.
Jacobson, R., & Aaker, D. A. (1987). The strategic role of product quality. Journal of Marketing, October, 31-44.
Jones, G. R., & Butler, J. E. (1988). Generic competitive strategies: An analytical approach. Academy of Management Review, 13, 202-13.
Karnani, A. (1984). Generic competitive strategies-An analytical approach. Strategic Management Journal, 5, 367-80.
Kiechel, W., III. (1981a). The decline of the experience curve. Fortune, October 5, pp. 139-146.
_____________ (1981b). Three (or four, or more) ways to win. Fortune, October 19, pp. 181-183.
Kotter, J. P. (1995). The new rules: How to succeed in today’s post-corporate world. New York: Free Press.
Krebs, M. (1996). 1997 Toyota Camry: Indeed, less is more. New York Times, October 27.
Lawless, M. W. (1991). Commodity bundling for competitive advantage: Strategic implications. Journal of Management Studies, May, 267-80.
Levitt, T. (1980). Marketing success through differentiation of anything. Harvard Business Review, 58 (1), 83-91.
_________ (1986). The marketing imagination, rev. edn. New York: Free Press.
Luchs, R. (1986). Successful businesses compete on quality--Not costs. Long Range Planning, Feb., 12-17.
Magaziner, I. C., & Reich, R. B. (1982). Minding America’s business. New York: Vintage Books.
Mathur, S. S. (1986). Strategy: Framing business intentions. Journal of General Management, 12 (1), pp. 77-97.
Miller, D. (1992a). The generic strategy trap. Journal of Business Strategy, 13, 37-41.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Grand Strategy Essay
  • Literature Review on What Is Strategy Essay
  • strategy analysis of case 2 Essay
  • Hierarchical Levels of Strategy Essay
  • Strategy Essay
  • Strategy Formulation Essay
  • STRATEGY Essay
  • strategy Essay

Become a StudyMode Member

Sign Up - It's Free