Q 322. What are the two methods suggested by Michael Porter to create a Competitive Advantage over your business rivals? Give examples of each method.

 

 

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Competitive advantage referred by Michael Porter is that for any Industry can have the competitive edge by pursuing in any of two unique ways, either 
→ through Low Cost (Cost Leadership), or 
→ through Differentiation 
and the third generic strategy is through Focus.

He also points, failure to follow this strategy could end up stuck on the middle scenario and subsequently the organization might not be able to retain long-term competitive advantage over rivals.
 

Below is Porter’s generic strategies model:

 

Objective	Cost Leadership	Differentiation	Focus
	Lowering selling/servicing price, by cutting cost of production/purchasing/service	Offer Finest/First Class Quality product that can't be matched by rivals and charge a premium for this "Difference"	Positioning the business in one specific niche in the market
Examples	Redmi, OnePlus	Macbook, iMac	Samsung: Fold (Differentiation), A/M Series (cost-focus)

 

Cost Leadership can be achieved by:

• Setting facilities/resources to obtain economies of scale
• Improving productivity 
• Keeping overhead cost minimal
• Low cost source supply
• Relocate to cheaper location.

To Differentiate:

• Building brand Image
• Special features that stand out
• Providing exceptional service and user experience

Below is an example in car industry: 

 

 

Hyundai’s cost leadership strategy depends on attracting a large customer base and keeping prices low.
Mercedes-Benz builds its differentiation strategy around offering extravagance features and providing exceptional service.
In a focused Cost Leadership, Morris Garage does not offer a full array of car lineup, but those that it does offer (SUV/MUV) are priced to cruise. 
Ferrari follows a focused differentiation strategy by assembling with exclusive materials and with finest craftsmanship for Niche market segments. 

 

Although there is a risk/disadvantages with any of referred strategies, Porter argues that a firm must pursue one of them to have competitive edge. 

Which one to select depends on market conditions and unique set of core competencies of the firm and thus closing this with his quotes.

Quote

"Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different" - Michael Porter 

 

The 2 ways suggested by Michael Porter for creating Competitive advantage are being cost effective and second creating a Niche, differentiation.

 

Example for cost advantage can succeed when an organization wants to penetrate at a great speed goes for mass production like FORD always produced Black color cars in beginning. Organizations shifting production bases closer to raw material sources or lower labour cost like garment industries in Bangladesh. 

Sometimes a skewed focus only on cost backfires when Quality is compromised specifically when affordable and more reliable products at a bit higher cost are available like the case of TATA Nano car failure as its too much focus on cost positioned it at the bottom and a promising product got killed.

 

2nd is Differentiation with Quality and related aspects like serviceability, customer focus and reliability.

Examples are many where organizations have created a niche and customer is ready to pay extra for these features. These products are invested heavily in for research and development, branding and Quality. Examples Rolex watches to say that they not only tell time but to say tell time of the owner to others will not be an over statement.

Many products carry a renowned name which have become synonym for Quality like Ferrari, BMW, Porsche automobiles.

These products create in downstream suppliers who also produce niche products and its whole ecosystem where others don't easily dare enter. The products continue to get premium for the niche.

 

 

Both Mohamed Asif and Manjeet Sachdeva have explained the strategies along with relevant examples and hence both are winners for this question.