Porter’s three basic strategies are
a framework
for building competitive advantage proposed by
Michael Porter
, an American management scholar and professor at Harvard Business School.
In an industry crowded with competitors, how can you
position yourself
and overcome the competition? Michael Porter categorizes competitive strategies into three categories: “cost leadership strategy,” “differentiation strategy,” and “concentration strategy,” and proposes strategies for companies to survive.
In this article, we will introduce the definition of Porter’s three basic strategies and how to utilize each strategy.
What is Porter’s basic strategy?
Porter’s Basic Strategy is a management strategy theory advocated by American management scholar Michael Porter to overcome competitors and build a competitive advantage in the industry. It proposes how companies should position and fight for survival, and is used around the world as a framework for competitive strategy.
Porter’s basic strategies fall into three categories:
Basically, companies choose one of the basic strategies listed above that suits them and execute it independently. However, depending on the situation, you can combine several basic strategies and use them simultaneously.
Porter’s three basic strategies: ①Cost leadership strategy
Here is an overview of Porter’s three basic strategies.
Cost leadership strategy is a strategy that establishes a competitive advantage by providing products and services that are cheaper than competitors. In order to provide inexpensive products and services, it is necessary to produce products and services at the lowest possible cost.
Ways to achieve lower costs include increasing the efficiency of work content and work processes to increase employee productivity, and increasing production volume to reduce fixed costs per unit. In addition, if low costs are realized, in addition to lowering the selling price of products and services, it is also possible to obtain high profit margins by offering products and services at the same price as other companies without lowering prices.
Benefits of a cost leadership strategy
The main benefit of a cost leadership strategy is that it provides a competitive advantage in price competition with competitors. If you can provide your own products and services at low prices while keeping costs down, you will have a better chance of gaining an advantage in price competition with your competitors.
Disadvantages of cost leadership strategy
A disadvantage of a cost leadership strategy is that your company may become overwhelmed by price competition with competitors. Even if you are able to lower the price of your own products or services to the limit, if a competitor offers a lower price than that, there is a high risk of failure, and you may even have to consider withdrawal. Sometimes.
Porter’s three basic strategies: ② Differentiation strategy
A differentiation strategy is a strategy that emphasizes the uniqueness of a company’s products and services to differentiate it from other companies and build a unique position within the industry.
Items that differentiate your company’s products and services include product functionality, quality, technical capabilities, brand image, and customer service. A differentiation strategy requires not only increasing the value of products and services, but also increasing customer value.
A differentiation strategy is not just about creating something unique that is different from other companies; it is also important to have customers recognize that your products and services have value.
Benefits of differentiation strategy
One of the benefits of a differentiation strategy is that it allows you to avoid price competition with your competitors.
This is a state in which a company’s products and services become so-called “one-of-a-kind” for customers. If you can provide a product or service that makes repeat customers say, “I have to buy this product from this company,” regardless of price, then you can say that your differentiation strategy has been successful.
Disadvantages of differentiation strategy
Although a company succeeds in retaining existing customers through a differentiation strategy, it suffers a major blow when those customers no longer feel the need or appeal of the company’s products or services and leave.
It is difficult to regain good customers once they have left, and it is not easy to acquire new customers one after another. The risk of losing customers and the difficulty of acquiring new customers can be said to be the disadvantages of a differentiation strategy.
Porter’s three basic strategies: ③ Concentration strategy
Concentration strategies include “cost concentration strategies,” which aim to reduce costs, and “differentiation concentration strategies,” which aim to differentiate ourselves from other companies. This is a strategy that narrows down the target to a specific narrow range and concentrates the company’s management resources.
Cost leadership strategies and differentiation strategies aim to build a competitive advantage within an industry, but focused strategies are limited to a specific market rather than the entire industry.
However, if the narrowed-down target market no longer exceeds a certain size, the business may no longer be viable. We must be especially careful in fields that are easily influenced by trends.
Benefits of a focused strategy
The concentration strategy can be said to be a strategy that has great benefits for small and medium-sized enterprises and micro enterprises (small enterprises) that lack management resources.
Because we develop our business strategy by specializing in niche markets with few competitors, we are less likely to get caught up in price competition with competitors, and it is possible to minimize the investment of management resources. . One of its characteristics is that it is difficult for major companies to enter the market, and this strategy has a high possibility of generating stable profits over the long term.
Disadvantages of a focused strategy
A concentrated strategy involves developing your own business strategy in a market that is difficult for major companies to enter, but if a major company conducts research and determines that profits can be secured in the market, it may enter the market.
In such cases, companies with poor management resources will lose out to competition. In addition, the disadvantage of a concentrated strategy is that it is difficult to respond to such rapid changes in the environment.
How to take advantage of Porter’s three basic strategies
How can Porter’s three basic strategies be used?
How to use cost leadership strategies
One way to utilize cost leadership strategies is to carry out the entire process in-house, from the planning stage to sales.
For example, UNIQLO Co., Ltd., which manufactures and sells clothing, handles everything from planning to production, distribution, and sales in-house. By eliminating intermediaries, distribution costs are reduced and reflected in the selling price. We have succeeded in manufacturing low-priced, high-quality products and have achieved dramatic growth.
How to use differentiation strategies
One way to utilize a differentiation strategy is to first decide on a market target, research market
needs
and competitor information, and consider your company’s position.
An effective differentiation strategy is to brand your products and services and highlight the differences between them and other companies. Branding isn’t just for large companies. If
branding
is done well, even small and medium-sized businesses can run a stable business.
How to use focus strategies
To utilize a concentration strategy, there is a way to narrow down the market where your company’s existing technological capabilities and brand power can be optimized, and concentrate on one point without expanding your methods.
Sharp, a comprehensive consumer electronics manufacturer, is a typical company that utilizes a concentration strategy. Sharp has implemented a focused strategy using liquid crystal technology as its weapon, and has succeeded in differentiating itself from other companies with its excellent technological development capabilities.
Examples of using Porter’s three basic strategies
Introducing examples that utilize Porter’s three basic strategies.
Examples of using cost leadership strategies
Finally, we will explain examples of companies that have successfully implemented cost leadership strategies.
Uniqlo
UNIQLO provides a one-stop service from product planning and development to manufacturing and sales, and has built a system that allows these processes to be completed in-house. We have succeeded in implementing this cost leadership strategy using a business model known as ASP (manufacturing and retailing).
Saizeria
Saizeria is known as a chain restaurant that offers high quality Italian food at low prices. We have our own factory in Australia and a tomato farm in Sendai, and are trying to cut costs as much as possible.
As a result of this cost leadership strategy, we are now able to offer high-quality Italian food while keeping prices low.
mcdonalds
McDonald’s Japan, which once launched a 100 yen burger strategy, has successfully implemented numerous cost leadership strategies.
For example, McDonald’s has built its own logistics system and has a thorough quality and cost control system in place. In addition, efficiency is improved by ensuring that employees perform manual tasks, which also leads to cost reductions.
Example of using differentiation strategy
We will explain the use cases of companies that have succeeded with differentiation strategies.
starbucks
Starbucks succeeded by developing a differentiation strategy that focused on third places.
“First place = home”, “Second place = work/school”, “Third place = third place”, and by focusing on how users can comfortably spend their time in this third place, we aim to differentiate ourselves from our competitors. It was. This differentiation strategy won the hearts of users and became a popular cafe chain store worldwide.
moss burger
Mos Burger has adopted a high-priced strategy, which is the complete opposite of McDonald’s, which has pursued a low-priced strategy. This is the differentiation strategy of “providing high quality and delicious products to users even if it costs more.”
By using a lot of expensive domestic vegetables and rice, and establishing a high-end taste, we succeeded in capturing the hearts of consumers who are willing to eat small luxury items even if they are a little more expensive. Through this strategy, Mos Burger gained attention for achieving a higher growth rate than McDonald’s at one point.
Muji
MUJI’s thorough differentiation strategy has enabled it to stand out from its competitors. When you see the MUJI logo, you can tell at a glance that it is a MUJI product, and it even creates the illusion that it is a one-of-a-kind product that your competitors don’t have.
The reason behind our branding success to this point is our corporate philosophy of “Simple is Best.” MUJI’s brand power lies in the simplicity of its products, which focus on ingredients, the food as raw as possible, and the minimum necessary packaging, and is also the reason for its successful differentiation strategy.
Examples of using concentration strategies
We will explain examples of companies that have succeeded with a focused strategy.
kentucky fried chicken
Kentucky Fried Chicken is classified as a fast food restaurant, but its main product is not hamburgers like McDonald’s and Mos Burger. It can be said that it is a globally successful company that is one of the few fast food chain stores that mainly sells fried chicken.
The company developed a strategy of concentrating on a specific market, fried chicken, and now has stores all over the world.
suzuki automobiles
Suzuki Motors is a company that has achieved success in the “light car” market, which is limited to Japan. We have been able to make the most of our management resources by focusing on the niche market of light vehicles among the numerous vehicle types and developing a focused strategy.
While Toyota, Nissan, and Honda are increasing sales of sedans, wagons, and sports cars not only in Japan but also around the world, Suzuki Motors has achieved success with the highest sales of light cars in Japan.
Shimamura
Shimamura, a well-known apparel manufacturer, is another company that achieved success through a focused strategy.
In a limited market where the main target is housewives in their 20s to 50s, by providing low-priced products that meet the needs of users who don’t want to spend money on clothes but want to enjoy fashion. It was a success.
summary
◆Porter’s three basic strategies are management strategies for overcoming competitors and building a competitive advantage, and are classified into three categories: “cost leadership strategy,” “differentiation strategy,” and “concentration strategy.” Ru.
◆Cost leadership strategy is a strategy to maintain competitive advantage within the industry by achieving low costs.
◆Differentiation strategy is a strategy that emphasizes the uniqueness of your product and differentiates it from other companies.
◆Concentration strategy is a strategy that narrows down the target market and intensively invests management resources, and includes “cost concentration strategy” and “differentiation concentration strategy.”