Question

According to Michael Porter, organizations cannot simultaneously pursue both a low-cost business level strategy and a differentiation business level strategy. Illustrate why.

Answer 1

Buisness level Strategy : An organization's core competencies should be focused on satisfying customer needs or preferences in order to achieve above average returns. This is done through Business-level strategies. Business level strategies detail actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product or service markets. Business-level strategy is concerned with a firm's position in an industry, relative to competitors and to the five forces of competition.
According to Michael Porter , a firm's strengths ultimately fall into one of two catagory:

. cost advantage & Differentiation

By applying these strengths in either broad or narrow scope three generic strategy results:

1.LOW COST

2.DIFFERENTIATION &

3. FOCUS.

Here we will discuss about only two.

1.Low -cost level strategy/Cost leadership strategy: Organizations compete for a wide customer based on price. Price is based on internal efficiency in order to have a margin that will sustain above average returns and cost to the customer so that customers will purchase your product/service. Works well when product/service is standardized, can have generic goods that are acceptable to many customers, and can offer the lowest price. Continuous efforts to lower costs relative to competitors is necessary in order to successfully be a cost leader. This can include:

• Building state of art efficient facilities (may make it costly for competition to imitate)
• Maintain tight control over production and overhead costs
• Minimize cost of sales, R&D, and service

Firms that succeed in cost leadership Often have the following strenghts:

Access to the capital required to make a significant investment in the production assets; this investment represents a barrier to entry that many firms may not overcome.

High level of expertise in manufacturing process.

Efficient distribution channels.

Each generic strategy has a RISK,example

• Technology
• Imitation
• Tunnel Vision

2.Differentiation:Value is provided to customers through unique features and characteristics of an organization's products rather than by the lowest price. This is done through high quality, features, high customer service, rapid product innovation, advanced technological features, image management, etc. (Some companies that follow this strategy: Rolex, Intel, Ralph Lauren)
Strengths

• Lowering Buyers' Costs – Higher quality means less breakdowns, quicker response to problems.
• Raising Buyers' Performance – Buyer may improve performance, have higher level of enjoyment.
• Sustainability – Creating barriers by perceptions of uniqueness and reputation, creating high switching costs through differentiation and uniqueness.

Risk:

• Uniqueness
• Imitation
• Loss of Value

If we combine these two generic strategy

These generic strategy are not necessariliy compatible with one another .If a firm attempts to achieve advantage of all fronts ,in this attempts it may achieve no advantage at all.

For example:

If a firm differentiate itself by supplying very high quality products, it risk undermining that quality if its seeks to become a cost leader.Even if a quality did not suffer ,the firm would risk projecting a confusing image.

For this reason Michael Porter argued that to be successful over the long term ,a firm must select only one single generic strategies. Otherwise,more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage.

Porter argued that firms that are able to succeed in multiple strategy often to do by creating separate business unit for each strategy. By separating the strategies into different units having different policies and even different cultures,a business is less likely to stuck in the middle.

Porter's Five forces model for these two strategies:

Industry forces	Cost leadership	Differentiation
Entry barrier	Ability to cut price in retaliation deters potential entrants.	Customer loyalty can discourage potential entrants.
Buyer Power	Ability to offer lower price to powerful buyers.	Large buyers have less power to negotiate because a few close alternative.
Supplier power	Better insulated from powerful suppliers.	Better able to pass on supplier price increases to customers.
Threat of substitutes	Can use low price to defend against substitutes.	Customer's become attached to differentiating attributes,reducing threat of substitute.
Rivalry	Better able to compete the price.	Brand loyalty to keep customers from rivals.