.

Competitive advantage grows out of value a firm is able to create for its buyers that
exceeds the firms cost of creating it. Value is what buyers are willing to pay, and
superior value stems from offering lower prices than competitors for equivalent
benefits or providing unique benefits that more than offset a higher price. There are
two basic types of competitive advantage: cost leadership and differentiation.
Michael Porter, Competitive Advantage 1985, p3

Despite the ongoing recession two of the largest supermarket retailers Tesco and
Sainsburies announced in 2009 that they both had strong first quarter sales growth.
The key factor of this growth was due to the expansion of their ‘value’ product
ranges, both supermarkets were eager to attach cash strapped consumers away from
budget retailers such as Lidl and Aldi.

This demonstrates the point in which Porter is making in the above paragraph. ‘Value
is what buyers are willing to pay, and superior value stems from offering lower prices
than competitors for equivalent benefits’. Because of the economic climate Lidl and
Aldi increased their customer base both are no-frills operators who have reduced there
on costs to a minimum and therefore pass on their savings to their customers in lower
prices. To compensate for this Tesco and Sainsburies increased there value ranges to
compete with Lidl and Aldi. This they successfully did with increased sales especially
within their value product ranges.

This is one example of generic strategies (cost Leadership) which were first brought
about by Michael Porter in 1985 in his book Competitive Advantage: Creating and
Sustaining Superior Performance.

Generic strategies are broken down into three areas “Cost leadership” the firms
strategy is to minimise costs giving greater flexibility on pricing decisions,
“Differentiation” the firm offers a product or service which is different some way but
has value to the customer, this could be high quality service or product features,
“Focus” is where the firm targets a particular marker sector or market segment.

Therefore organisations that achieve Cost leadership will benefit from either increased
market share through lowering prices whilst still maintaining profitability, or by
maintaining average prices and therefore increased profits. All of this is achieved
through reducing costs below that of the organisations competitors. Organisations that
pursue a differentiation strategy win market share by offering unique features that are
valued by the customer. Focus strategies involve achieving cost leadership or
differentiation within certain niche markets in ways that are not available to more
broadly focused organisations.

According to Porter (1980) an organisation that fails to follow either Cost Leadership
or Differentiation will result in the organisation being stuck in the middle. Therefore
having no competitive advantage would equates to poor financial performance.

Analysis
Porter’s generic strategies demonstrate the need to separate cost from differentiation.
The model showed that having a highly valued product which customers valued is as
profitable as a budget value product. Therefore his model showed that differentiation
is as effective as cost leadership. Focus within the market sector/segment applies to
both the any generic strategies

Porter's generic strategies captured the tension between cost and

differentiation. Organisations normally operate with a higher cost
base when they produce and sell a premium product that customers
highly value. His model showed that differentiation is as effective a
strategy as cost leadership.

No best strategy exists. Choosing a strategic position depends on

time and circumstance. Implementation must be consistent once a
position has been selected.

Porter based his model on Chandler's assumption that 'structure

follows strategy'. Organisations require different sets of structural
traits to accommodate either a low cost or a differentiation strategy.
The selection of a generic strategy provides direction to
management and staff that helps them acquire internal consistency
between management style, reward system, recruiting policy, etc.

cons:

The model applies best to large and established companies. Porter

directed his analysis primarily on large multinationals with multiple
strategic business units. Although the ideas behind the model still
hold for smaller organisations, the tools are too heavy and all
encompassing to provide valuable insight for them.

Porter stressed the importance of choosing one generic strategy and

following it through. In the late 70's, Porter saw too many US
companies 'stuck in the middle' and unable to compete on a global
scale. However, current opinion among strategy theorists holds that
the generic strategies should not be treated as absolutes, but as a
continuum. The objective of a strategy process is to find strategic
positions where the widest gap exists between relative cost and the
level of differentiation. An organisation then provides customers the
most features at lower cost than its competitors.

The Value Chain is used to analyse a firm's position in relation to its

direct competitors with the assumption that rivalry drives
profitability. This excludes other assumptions such as customer
bonding in Alexander Hax's delta model.
Porter stated that competitive strategic analysis needs to happen on
an ongoing basis. Mintzberg argued that real strategy is fuzzy at
best. Even when a quantative/economic change in the industry's
conditions is detected, the reaction is frequently too late to realign
the company. Most change occurs bottom-up, intuitively and
creatively, and can be detected early using soft data rather than
hard data.