The Appropriate Use of Michael Porter’s Competitive Strategies
As it is known, a company can achieve the competitive advantage by either implementing the cost strategy or the differentiation strategy. The differentiation approach is utilized with the purpose to create and spread the idea that certain products or services are “different, bigger or better than competitors” (Kokemuller 2014a). Meanwhile, the cost strategy is “typically a contrast to a cost-leadership approach where the emphasis on operations and marketing is luring customers with low prices” (Kokemuller 2014a). Michael Porter argues that, in order to become a competitive and profitable firm, while seeking a competitive advantage, it is supposed to choose between the above-stated approaches. The rationale that precedes this claim is the following: the notion of differentiation refers to uniqueness, whereas the cost advantage strategy presumes the beneficial correlation and comparison with other goods and services, which, naturally, implies the diversity (Institute for Manufacturing n.d.). Moreover, an endeavor to differentiate the proposed commodities and services suggests developing a brand. In particular, the companies often apply the notion of luxury and use it as a part of a differentiation advantage, which excludes the approach of cost reduction. Besides, high prices are also used as a positioning strategy since expensive goods are the means of self-positioning and promotion of one’s success and richness. Furthermore, people are known to believe that more expensive commodities are of a better quality; it is the belief that is successfully used by numerous companies with the aim to enhance their profits through increased prices. Naturally, this approach contradicts with an attempt to set the cheapest prices in order to attract customers. Assessing the correlation of the cost advantage and differentiation advantage from this perspective, it becomes clearly visible that a firm must choose that one which correlates better with the company’s goals. Nevertheless, the implied mutual exclusiveness of the cost strategy and the differentiation strategy should not be taken unambiguously since, along with the prevailing strategy, the opposite one can be successfully implemented.
For instance, aiming at setting a higher price, a company is supposed to enhance the value of its products (Kelchner 2014). To succeed with this task, different approaches can be implemented, which are defined by the demand. Specifically, in the more prosperous society, it is relevant to create the image of luxury that would support buyers’ needs to emphasize their social position. Meanwhile, in the community with moderate incomes, it would be more appropriate to emphasize the quality of particular services or goods. The interesting aspect is that the notion of quality often presumes thriftiness. Consider the case, a company builds the brand on the product’s particular characteristics that are known to provide better results, this way, appealing to the clients’ sense of thrift. In this case, the differentiation happens by means of comparison with the other similar goods while pointing to the obvious advantages of the promoted one. For example, “Tide laundry detergent is commonly shown against “alternative” or “other leading” brands to show how Tide performs better at getting dirt out” (Kokemuller 2014a). Assessing these strategies of building a competitive advantage, it is possible to deduce that target buyers’ sense of thrift is typical for both cost and differentiation approaches.
What is more, setting the cheapest price serves to differentiate and position certain goods over the others because there are several ways of pricing. At the first sight, the rule that in each industry there can be the only one firm which proposes the lowest prices seems to be truthful. Furthermore, it is the only possible valid claim in terms of logic. Nevertheless, the implementation of different pricing approaches makes the opposite become possible. Consider the case, apart from lessening the ‘sticker price’ of a commodity; a company may consider decreasing the amount of product or the terms of services (Perner 2008). In this case, the price may be the lowest, but if one compares the cost per one gram of the product with the similar goods, the cost may be the same or even higher. Moreover, the cheapest prices can be set by means of changing the quality of goods and services. Using this strategy, a company is supposed to find the way to reduce the manufacturing costs of its product (s). Exactly, as in the case of the first example, the lowest price does not presume the similar characteristics while being compared with the identical goods of rivals. On the contrary, the correlation between the price and quality may imply a larger price of the cheaper goods. Finally, the third way to set lower prices suggests changing “the terms of a sale” (Perner 2008). For instance, “firms may begin charging for previously free delivery” (Perner 2008). This sample displays that, meanwhile, the fact that certain goods may be sold for the lowest prices does not mean that the cost is actually the smallest. Besides, it points to the creation of diversity, or in other words, leads to the differentiation.
Furthermore, the relationship between the cost competitive advantage and the differentiation competitive advantage gains a new meaning with the development of the e-businesses. The Internet sale is a modern variation of ‘changing the terms of a sale’ since, in most cases, the e-retailing allows saving money on certain manufacturing aspects, such as delivery, distribution, rental costs and others. Consider the case, “direct sellers like Dell Computer do not rely on wholesalers and retailers to deliver their products to consumers” (Shin 2001). Moreover, conducting business through the Internet allows locating the main office in the area that demands minimal business expenses. Under these terms, the price can be the lowest comparing with the similar products sold in the shops and markets, but, simultaneously, bigger while being compared with the other Internet shops. This peculiarity presumes that striving to accomplish and maintain the competitive advantage, a firm implements two approaches simultaneously. On the one hand, it attracts the clients, who otherwise would shop in their local markets, proposing them the cheapest goods comparing with the prices in their local shops. On the other hand, it has to compete with the other companies that also specialize in the e-retailing and sell similar goods for similar prices; in this case, it is appropriate to refer to the differentiation. For instance, choosing a differentiation competitive strategy, the Internet business may propose certain services for free, this approach helps to promote company's own product(s) and enhance their value (the process of differentiation).
Another example that reveals the complimentary usage of both competitive strategies is the implementation of the price discrimination. Consider the case, there are “two strategies for price discrimination: price lining and smart pricing” (Shin 2001). The smart pricing suggests charging diverse prices depending on the product value, market conditions and peculiarities. For instance, “Staples.com charges different prices for different markets by asking customers to enter their zip codes before they can obtain prices” (Shin 2001). It goes without saying that this approach is a strong argument that points to the relativism and ambiguity of the cost competitive strategy. In this case, people from different countries are attracted by the minimal costs, whereas, the same commodities proposed by the same firm at the same time may significantly differ in price. As for the price lining, it is the practice of price differentiation that is utilized to fulfill various clients’ needs. For instance, American Online sets five diverse rates for each category of subscribers (Shin 2001). The above-described approaches of the price lining and smart pricing display that it may be appropriate to integrate the elements of the cost and differentiation competitive strategies. Assessing these examples, it is possible to deduce that certain Internet businesses may elaborate and successfully implement the combination of both smart pricing and price lining. It would help to create a sophisticated multilevel pricing system, which would ensure greater profitability to its owners. Consider the case, the clients may be categorized basing on their buying activity. Simultaneously, this very classification may be elaborated to reflect the bargaining power of different customers. In this case, the most active clients can purchase the desired goods for the cheapest price, whereas, this approach does not exclude the relevance of differentiation (for instance, the site may propose free consulting). As a result, the supposition that “differentiated products give the customer what she wants” can be easily combined with the pricing strategies (Markgraf 2014). Naturally, such integration is more relevant in e-retailing, though the similar division of prices can be traced in the actual retailing within the borders of one state or between different countries. In one word, the rapid growth of the social media and an ever-increasing amount of the Internet users sharpen not only the companies’ choice of competitive strategies, but also require the competitive approaches to be integrated and modified.
Besides, the contemporary businesses strive to move from the red ocean zone, which is characterized by a vast competition, to the blue ocean areas by creating the so-called blue ocean strategies. As a rule, blue ocean strategies presume the integration of conjunctive (less frequently, totally different) spheres of the similar or diverse industries. The implementation of blue ocean strategies dismisses the notion of rivalry; consequently, a firm does not need to seek for a competitive advantage at all. Consider the case, it is known that “in blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid” (Kim & Mauborgne 2004). It means that, even though the Porter’s model remains topical nowadays, the contemporary society requires changes, which presumes the search, elaboration, and implementation of qualitatively new approaches. Therefore, today, a firm is not obligated to choose between the cost competitive approach and the differentiation competitive approach. Moreover, a company may decide to avoid obtaining any competitive advantage at all; instead, it may create the sphere without rivalry.
On the other hand, identifying the strong points of the Porter’s claim, it is appropriate to state that, indeed, in many cases, the above-mentioned approaches may be mutually exclusive. To comprehend this claim, one should observe the performance of the famous and competitive Harley Davidson Motor Company. This firm is known to adhere to the differentiation competitive strategy. This approach presumes that a business leaders “try to differentiate themselves using a wide array of attributes, including overall quality, durability, reliability, style, visual appeal, taste, materials and environmental friendliness” (Kokemuller 2014a). Specifically, Harley Davidson applies to “positioning strategy based on cultural symbols” (Bhasin 2010). Consider the case, one of the company’s crucial strategic decisions is to save the initial design of the Harley motorcycles. This company has a long history and used to supply the participants of the Second World War with its branded motorcycles. Consequently, the decision to save the original design is highly beneficial and creates a strong competitive advantage because the vehicle’s image refers to the American history, emphasizing the strength, masculinity, and devotion to traditions. In addition, to strengthen this feeling, the company decides to produce the motorcycles exclusively on the territory of the United States.
As it is known, the given differentiation strategies help the Harley Davidson Motor Company to create and maintain the reputation of a classy and luxurious brand that remains highly desirable even after a hundred of years. Probably, because of the company’s decision not to change the design of its motorcycles, Harley Davidson vehicles became easily recognizable not only in a country of production, but also abroad. It is appropriate to refer to the success of this company while pointing to the value of differentiation strategy and its incompatibility with the low-cost approach. In addition, this case educates that “when you succeed in providing products and services with a strong reputation to a niche market, you can usually charge premium prices, resulting in high profit margins for your business” (Kokemuller 2014b). Consider the case, the Harley Davidson’s choice to follow the differentiation strategy allows this firm to obtain a significant profit by setting high prices. The loyal customers are ready and willing to pay considerable money because the company succeeded to create the high value of its products. Under such circumstances, it would be suicidal to implement the low-cost strategy. The client base of Harley Davidson does not seek for reduced prices; quite the opposite: their needs are dictated by the desire to stress their classic taste, devotion to luxury, masculinity, strength, respect for traditions and history.
To other adherents of the differentiation approach belongs a famous company Apple, which is reported to implement its leadership position aiming to promote product advantages (Kokemuller 2014a).Consider the case, “Apple has largely relied on superior technological benefits and innovation in marketing its early 21st century music and mobile devices” (Kokemuller 2014a). Simultaneously, it is known that this company uses inflated prices as one of the central positioning strategies. Considering that Apple is a leader in its field, this choice is justified. Therefore, the company’s attempt to expand its client’s base by means of reduced costs for the Apple products would be unproductive.
Another example of product differentiation is Linux. This firm accentuated the benefits of its products proposing “more tech-savvy computer users who want more control over their computer interface and operations” (Kokemuller 2014c). This approach is known to assure better communication with the Linux’s audience, which is reflected in customers’ loyalty. Taking into account this strategy of product differentiation, it is appropriate to deduce that lowing the costs would have a negative rather than positive impact on this corporation. In particular, being accepted as an equal rival of the Microsoft Word, the Linux’s attempt to lessen the costs would be self-discredit, since the leaders are not expected to utilize the low-cost competitive advantage.
Making a conclusion, one should apprehend that competitive advantage plays a decisive role in a firm’s prosperity. Therefore, it is natural that all companies implement different techniques in order to remain competitive. Nevertheless, it is also necessary to acknowledge the rapid and permanent changeability of the today’s world. Under such conditions, the relevance of the competitive model that was elaborated by Michael Porter more than 30 years ago should be reviewed. Undoubtedly, it remains topical and useful in the contemporary world. The Porter’s statement that attempting to gain the competitive advantage, a business must choose between the cost competitive approach and the differentiation competitive approach, is still greatly implemented in numerous business practices. What is more, the firms that apprehend and accept this peculiarity display significant results, taking the leading positions. Simultaneously, given the modern economic and social processes (globalization, urbanization, the Internet penetration and others) that tend to create numerous red zone oceans and change the global order, it is appropriate to integrate both types of competitive advantage. In particular, striving to achieve success and profitability, a firm is supposed to consider applying the low-cost and differentiation competitive strategies. Nowadays, it may be relevant to use the elements of both approaches with one prevailing, integrate them into a new system, or utilize both low-cost and differentiation strategies in accordance with the market’s demand.