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Porter's Five Forces. Essay

2326 words - 9 pages

Introduction.'Competitive strategy is the bases on which a business unit might achieve competitive advantage in its market '.There are two factors for a firm to be profitable: the fetching appearance of the industry in which it operates and its position in this industry.The best known and most used set of competitive strategies are Michael Porter's Generic Strategies; he calls these generic strategies because they can be applied to a firm in any industry.A firm creates a defendable position in an industry by its strengths thus Michael Porter argued that in the end all the firms choose between two strengths: cost advantage and differentiation. Porter said that to be at the top of an industry you must improve in terms of cost (cost advantage) or carry out task or products better than competitors (differentiation).If we apply these strengths in a broad or narrow scope we will obtain the three generic strategies: cost leadership, differentiation and focus.The following table illustrates Porter's generic strategies :Target ScopeAdvantageLow CostProduct UniquenessBroad(Industry Wide)Cost LeadershipStrategyDifferentiationStrategyNarrow(Market Segment)FocusStrategy(low cost)FocusStrategy(differentiation)Cost leadership.This generic strategy is based in following a cost strategy; that is to say, it tries to produce the lowest cost but always with a certain quality level. This can be obtained if they achieve to gain the exclusive features of certain row materials at low price or reducing cost in the producing process.If the company manages to produce at low cost it will be able to follow a strategy of low price, which always aims to have lower price than its competitors, earning profit and maintaining a similar or superior quality level the one of the competition. This strategy is normally used in broad markets. This strategy has two fundamental advantages; first, this can be obtained by reducing cost and hereby protecting itself from new companies who can not compete with its cheap product. Second, if there is a price war, the company can reduce the price of the product without lowering the quality because of its high benefit margin and this way protecting of its competence.In addition it has its risks, because the competition can copy the same technology to achieve this advantage with which they abolish all the reductions of costs that the company had made.Differentiation.A company uses a differentiation strategy, when it offers the consumer a product or service with unique qualities, which is perceived and valued by the consumers, who find it better than the competitors product. Due to that quality, the product has an added value and in the long run achieving a premium price. The company must increase the price of the product to cover costs due to that unique attribute. If the suppliers increase the price of the raw materials, the company will be able to pass the cost to its consumers and these will continue buying the product, because it is not easy to...

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