Michael Porter Theory

Michael Porter presented three generic strategies (above) that a firm can use to overcome the five forces and achieve competitive advantage. Firms that identify with one or more of the forms of competitive advantage that Porter identified outperform those that do not and firms that combing multiple forms outperform those that only use one.

Overall Cost Leadership

The first generic strategy is overall cost leadership. Cost leadership requires a tight set of interrelated efforts that include:

- Aggressive construction of efficient-scale facilities

- Vigorous pursuit of cost reductions from experience

- Tight cost and overhead control

- Avoidance of marginal customer accounts

- Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising

The value-chain concept can be used as an analytical tool to identify specific activities and the costs and assets associated with them. Two important concepts related to the overall cost leadership strategy are economies of scale (the decline in unit costs that usually come with larger production runs, larger facilities, and allocating fixed costs across more units produced) and the experience curve (how the business “learns” to lower costs as it gains experience with production processes; with experience, unit costs of production decline in most industries as output increases).

Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces

- Enables a firm to achieve above-average returns despite strong competition

- Protects a firm against rivalry from competitors because lower costs allow a firm to earn returns even if its competitors eroded their profits through intense rivalry

- Protects a firm against powerful buyers (buyers can drive down prices only to the next most efficient producer)

- Provides more flexibility to cope with demands from powerful suppliers for input cost increases

- Provide substantial entry barriers from economies of scale and cost advantages

- Puts the firm