Strategic management: Porter’s model of generic competitive strategies - theory and analysis

“Critically evaluate Porter’s model of generic competitive strategies and apply

this model to a hospitality, tourism or leisure organisation of your choice”

Introduction

“Strategy is the direction and scope of an organisation over the long term, which achieves advantage for the organisation through its configuration of resources within a changing environment and to fulfil stakeholder expectations” Johnson and Scholes (2002) p10

Strategy plays an important, if not the most important role in an organisation. Not only concerning competition, but regarding all aspects of the business. Competition has always been the greatest fear of every businessman. Trying to think ahead of the competitors is the only option a successful business owner has. Developing a strategy, adapting and improving it and ensuring that employees are aware of the business’ mission are only a few criteria, which help to gain competitive advantage.

Professor Michael Porter developed the so-called model of “generic competitive strategies”, which will be explained in the first part of this report. Later on the report will outline problems, which occur in Professor Porter’s model.

The second part of the report applies Porter’s concept to a tourism organisation and analyses its relevance for the chosen business.

Alexandra Kossowski - BA (Hons) Tourism Management 4

Strategic Management Assignment

Part 1 – Theoretical concept

1.1. Porter’s Generic Competitive Strategies

During the 1980s Professor Michael Porter from the Harvard Business School developed the model of generic competitive strategies. He called the strategies generic as they can be undertaken by businesses of any size or type, even it they are non-profit organisations (Hunger and Wheelen [2001] p82).

He argued that companies only have three strategies to choose from:

1. Cost leadership

2. Differentiation

3. Focus (Lynch [2000] p564) Porter also believed that before a company decides which strategy to adopt, it must know its competitive scope: “the breadth of its target market, the range of products it wishes to produce, the distribution channels, the type of buyers and geographic areas it wants to serve and the related industries it will be competing in” (Hunger and Wheelen [2001] p82)

The cost leadership strategy is aimed at the broad mass market and requires actions like cost minimisation in Research & Development, service, sales force, advertising and so forth. By doing this the company will sell its product for a smaller price than its competitors, but still achieve reasonable profit. This also creates an entry barrier for new market entrants, as it would be difficult for them to match the low cost of the existing producer. (Hunger and Wheelen [2001] p.83)

The differentiation strategy is aimed at the broad mass market as well, but this time creating a product which must be perceived as unique by its customers, for example through design, image, technology, customer service, dealer network and so on.

The strategy aims to gain customer loyalty and therefore making the buyer insensitive to a high price. This again will also make entry into the market more difficult for new entrants (Hunger and Wheelen [2001] p83)

Hunger and Wheelen (2001, p83) argue, “differentiation strategy generates higher profits as it creates a better entry barrier. Low cost strategy however, creates increases in market share”. Alexandra Kossowski - BA (Hons) Tourism Management 5

Strategic Management Assignment

Focus strategy concentrates on serving only a certain niche market as either a cost leader or with a differentiation strategy. “In cost focus a firm seeks a cost advantage in its target market only, in differentiation focus a firm seeks differentiation in its target segment” (Lynch [2000] p. 568)

The following diagram may illustrate Porter’s model a bit more in detail:

Source of Competitive Advantage

Competitive

Scope

1.2. Problems with Porter’s Generic Competitive Strategies

Like any other model Porter’s strategies show risks and problems. The main issue identified by Professor Porter is the problem of “being stuck in the middle”. He argues that every company must adopt one of his strategies; otherwise it will be left with no competitive advantage. However, Lynch (2000, pp570-571) explains that examples have shown companies that were able to adopt more than one strategy to achieve the desired result.

Alexandra Kossowski - BA (Hons) Tourism Management 6 Strategic Management Assignment