Porter’s Five Forces Theory: Strategies. Part One

On the assumption Porter recommends to use one of three strategies in order to strengthen positions: 1. Leadership at the expense of economy on costs. Companies which have decided to use this strategy direct all their actions towards costs reduction. This may lead to greater market share, availability of competitive advantages (access to cheap raw materials, low costs of product delivery and selling), well-defined expenses control, possibility to economy on research, advertisement, and service.

Advantages of this strategy are: companies stay profitable even in conditions of high level of competition when other competitors suffer losses; high entry barriers create low costs; a leader in costs economy has greater discretion than his competitors when substitute products appear; low costs reduce suppliers’ impact.

Strategy risks: competitors are able to implement the same methods of costs reduction; technological innovations can remove existing competitive advantages and turn the gained experience into useless one; concentration on costs can make it difficult to detect changes and demands of a market; contingencies that increase costs may lead to reduction of cost gaps as compared with competitors.

2. Differentiation strategy. Companies which have decided to use this strategy direct all their actions towards the product creation that has great benefit for consumers as compared with competitors’ product. In this case costs do not refer to priority problems (for example, differentiation strategies of ‘Sony’, ‘Braun’, etc.). Preconditions are: a special company’s image; high potential; exclusive design; production and usage of high-quality materials; a complete record of customers’ requirements.

Advantages of this strategy are: consumers prefer to buy products of this concrete company; consumers’ preference and product uniqueness create high entry barriers; product’s peculiarities reduce consumers’ impact; high profits ease relations with suppliers.

Strategy risks: product’s price can be so high that despite brand stability consumers would prefer to buy products of other companies; a company may imitate other companies’ strategies that will lead to reduction of advantages which are connected with differentiation; a change of consumers’ value system may lead to reduction or even loss of significance of differentiation product peculiarities.

3. One segment concentration strategy. Companies which have decided to use this strategy direct all their actions towards a concrete market segment. In this case a company may strive for leadership at the expense of costs economy, or for product differentiation, or for a combination of both aims.

Precondition which is necessary for this situation is that a company must satisfy consumers’ demands better than competitors. Strategy risks: products’ cost diversity of companies that serve all the market does not correspond to the advantages of specific products of this market segment for a consumer; competitors may differentiate its products even better, having distinguished separate parts within a market segment.