THREE GENERAL STRATEGIES

Professor Michael Porter of Harvard Business School

1. Low Cost Strategy

A firm producing goods whose cost of goods sold is low is said to have attained low cost
strategy. A low cost producer occupies a significant position in an industry become more
competitive and there are several benefits alluding to remaining below the low cost strategy.

(1) Low cost strategy help shield a firm from incumbent price competition
(2) Attain economy of scale and barrier to entry by companies whose market capitalization
is low.
(3) Explore business opportunities and firm grows

Disadvantages are: (1) trade off or compromise product features or quantity to achieve low
cost status. Low cost can reduce product quality and quantity
(2) Firms that are low cost are targeted for takeovers by larger multinationals (e.g. low cost
gold producer Placer Dome was taken over by Barrick Gold).

The low cost strategy is not an everyday afford to of trying to control cost. Low cost business
strategy is about acquiring low cost projects, production facilities and producing projects.
Melbourne based Western Mining Corporation (WMC) is example of low cost business
strategy where it has acquired low cost nickel laterite projects all around Australia. There is
only one winner in remaining competitively below a particular commodity industry cost curve.

Price Marginal cost Production costs

Low cost position

A firm is said to attain low cost strategy when it moves towards position A and attains cost
competitiveness in that industry.

2. Differentiation Strategy

A firm is said to have achieved differentiation strategy when its product appearance, style of
business operation and added value to suit customer demand is more than other firms. Production
differentiation is simply the change of product features or appearance of a product that is being
produced by other firms in the same industry. Product differentiation means different to different
sectors; example, service and commodity.
 E.g. Service: - room service or pick up/drop off at airport by hotels is a product
differentiation

- you buy one and get one free (e.g. Ditigel, buy one for K99 & get one mobile phone
free)
- discount airline Virgin Blue with children under 3 years free travel with parents
- sell smoke and supply free lighter or sell buai and supply lime free
E.g. Commodity: - in copper industry, cathode copper is the standard one and corrugated copper is a
differentiated product and premium is charge on differentiated copper
- Ok Tedi copper concentrate has high fluorine content and thus it has marketing problem
(customers dislike fluorine in copper concentrate). It has to reduce fluorine content as
much as possible is form of product differentiation
- gold mineral can not be easily depreciated but gold hedging programs, spotting right
deposit, near surface and close to major transport infrastructure or low sulfur content gold
deposit is a differentiated product

A differentiated product sells faster than same product being sold be competitors in the same industry.
To win the women of your dreams you have to differentiate your product faster, while others are still
sharpening theirs.

Some of the greatest successes in business have come from a commitment to do things differently in
an industry. Thus searching for excellence is all about looking for ways to succeed in your industry by
innovation to differentiate your service or product.

3. Focus Strategy

Porters third strategy is that of Focus Strategy which encompasses geographic or niche,
market/customers a firm targets to occupy. With a focus strategy a firm places management efforts
solely in that segment of business, region, market or customers. It involves focus on high portion of
market segment of that product, whereby firm tries to increase production and establish consumer
network. Focus also means concentrating on a particular commodity; if your firm in involve in gold, do
not skip to any other commodity that could temperately look attractive. Vanilla price for instance was
K800/kg at one stage and Niuigini Islands people and those in the Sepik region neglected cocoa
plantations. Now vanilla price has fall to low of K40/kg and cocoa bean price has risen dramatically in
recent times. This illustrates that if you are in a commodity business, focus on only one key product; if
cocoa producers had focus on cocoa even if it looked unattractive, they could gain in the long run.

The three generic strategies form a good starting point in evaluation company strategy and business
direction. Professor Porters advice is that stick with either low cost strategy, product differentiation or
focus on particular region/market, product or business segment. Do not try to do all these at the same
time, because if you do, your firm will get stuck in the middle, not competitive on any front.
Concentrate on one strategy and master it.
Porters Fives Forces of Competition
Professor Michael Porter of Harvard School of Business

Five forces of competition affect every company engaged in business in a particular industry, mining
for this matter. The three generic strategies we discussed earlier give some starting point to this
discussion. The five forces govern competition in an industry or commodity market. Note that
competition in economic terms eliminate possible profits, thus a firm has to defend it by creating
barriers to competition by other firms. The Fig. 1.0 shows the forces affecting a firm in an industry.

1. Threat of New Entrants

When there is no barrier to entry, new companies try to enter an industry or market that
obviously increases competition for the firm already in that business. Porters first advice to
competitive force is to design barriers to entry to shield your firm from vigorous
competition from new entrants. The major barriers to entry a firm could contemplate to
protect profit being eliminated by profit are:

Capital expenditure
Economies of scale
Brand identification
Access to distribution channels
Government policies

To be successful, your firm must be first to get into the market segment and built barriers to
entry. If you are left behind and no barriers are built, new entrants/competitors will crowd-
out profit making opportunities. It is better to focus on the three strategies and build
barriers to entry in order for your firm to be more competitive, than just competitive on cost
advantage.

2. Bargaining Powers of Suppliers

Bargaining powers of suppliers can influence project performance, negatively of suppliers become
too powerful. Input suppliers of a production process become powerful in terms of charging high
prices for input items if there are few companies producing particular highly demanded products.
First, input suppliers are more powerful if they are few of them supplying a particular industry (e.g.
mining). Orica and other West Farmers supply explosive to the mining industry and are powerful
because mining wont occur without them.

Second, input suppliers are powerful if product supplied is unique and more depend on the
production processes. Cart or Caterpillar earthmoving equipment suppliers are highly powerful
because they dominate the market. A mining project will not do business without them because
their input to mineral production is significant, unique and there is substitute or switch opportunity.
Third, if no alternative suppliers are around for an input product, there is incredible threat of
supplier forward integrating into the business segment. Example, West Farmers explosive firm
dominates the mining company by not only supplying explosives to the mining site, but it also
establishes its office at site and offers explosive preparation services.
When an input supplier is very important to mining for example, companies lock-in the supplier
by giving long term contract (e.g. Orica Explosives & Cart earthmoving equipment company).
These companies are forward integrated.

3. Bargaining Powers of Customers

Customers are those who buy your finished product and how they bargain can have economic
impacts on the business. First, customers are powerful if they bulk purchase products from you (as
supplier) and if there are few customers for your product. In this scenario, supplier might sell at low
price, supplier looses and customers gains because they have the bargaining powers. Also long term
contracts for sale of commodities to customers can be profitable if there is high competition and
you are a marginal supplier. On the other hand, a major supplier will loose in terms of price and
exchange rate benefits if it forward sells the commodity at a fixed price.

4. Threat of Substitute Products and Services

Due to consumer/customer preferences, substitute products or services can erode profit.

Substitution occurs when consumers response to alternative service or product whose price has
risen or quality has fallen. When fuel prices increase, the alternative to cheap means of transport to
work in most countries is bicycle. When there is a switch, vehicle sales slows drop and also fuel
sales. Another clear example is PNG Power monopoly has risen electricity costs and consumers are
switching away from using electrical items in homes and are using gas, traditional firewood and
lantern lamb/gas as alternatively cheap energy sources. Concurrently, electrical item suppliers such
as ESSCO and Brian Bell experience low sales of electrical items because average income earner is
unable to afford them.

Copper prices have risen in recent times as well as other mineral commodity prices. As a result,
demand for scrap metal has risen as an alternative to mined minerals. The switching to scrap copper
from ore copper is a clear reaction by consumers due to surging copper prices. These examples
depict the threat of substitute products and services.

5. Internal Rivalry

Internal rivalry amongst firms in an industry can push each other and there could be few winners.
Competition erode profit resulting from loss of customers, market overcrowded, increased costs
from over advertising, discretionary pricing tactics and introduction of new products. A firm can
loose business by inside fighting amongst firms, slow growth of the industry, high fix cost and large
scale capacity additions. If it not easy to exit an industry because of such competitions, a firm will
compete harder at all cost, which in turn turns out to be high exit costs.

Example of internal rivalry is the current competition for market and customer access between B
Mobile and Digicel. The reality is that Digicel has fix cost and advertising cost to enter the
communication market, which is already occupied by B Mobile or PNG Telikom. Internal rivalry
amongst firms can occur in any market structure like the B Mobile & Digicel competing in a
monopoly structure.
Barriers to entry, rivalry amongst firms, buying power, selling power and threat of substitutes are
five forces in the Porters world of business strategy. This is all applied economics.