Porters generic strategies

INTRODUCTION

This case study report is based on the various competitive strategies employed by Apple, its strategic alliances and its strategic resources and competences.

Question 1:

PORTER'S GENERIC STRATEGIES

A competitive strategy arises from the understanding of the industrial structure and the changes occurring in the field. Michael E. Porter developed a model of generic strategies to analyse how a company competes in the market to create and sustain the competitive advantage. Porter's model of competitive advantage has three generic strategies.

  • Cost Leadership
  • Differentiation
  • Focus strategies

A company can achieve higher profit rates over their competitors in either of the two ways:

  • By supplying a product at a comparatively lower cost which means cost leadership strategy
  • By supplying a product which is differentiated from their rival products in such a way that the customers are ready to pay a premium price for the product. This is known as differentiation strategy (Grant 2005:241-242).
  • Cost Leadership

    "Cost leadership is where the company achieves comparatively lower costs than their competitors and competes across a broad range of segments" (Thompson, Martin 2005:287). A company must be able to offer their products at the lowest possible price without making any compromises in the quality of the product. It does not imply that the company has to offer their product at the lowest market price as those products are often regarded as inferior. A firm which focuses on cost leadership strategy will be able to produce higher profit margins by selling more product units. "Cost leadership can be achieved by superior management, concentrating on cost-saving opportunities, minimising waste, and not adding values which customers regard as unimportant to the product (Thompson, Martin 2005:287).

    Differentiation

    "Differentiation is the ability of the firm to provide unique and superior value to the buyer in terms of product quality, special features, or after-sale services" (Porter 1992:37). Even though the firms focussing on differentiation strategy sell lesser product units, they will be able to achieve higher profits as they have more profit margins on the product.

    Focus Strategies

    In a focus strategy, the firm concentrates only on a particular or a limited range of market segments. Focus strategy can be used by a company to gain either cost leadership or differentiation. Focus strategy can be subdivided into two:

    • Cost Focus
    • Focus differentiation

    STRATEGIES PURSUED BY APPLE AND ITS COMPETITORS

    Based on Porter's generic model, the strategies and market segments pursued by Apple and its competitors can be analysed.

    Apple

    Based on Porter's model, Apple falls under differentiation strategy. Apple offers a wide range of products in personal computers field like the iMac and iBook product lines for basic computer buyers and PowerBook and G series computers for advanced purchasers. Apple concentrates more on innovative product lines and quality rather than releasing products at lower prices. Apple computers work on Macintosh operating system which is unique in the industry where most others rely upon Windows. Apple has diversified its product range off late through iPods, the success of which has further enhanced Apple's brand identity. None of Apple's competitors have been able to replicate its unique product quality, reliability and design. Because of the differentiation strategy, Apple is able to charge premium prices for their products.

    Hewlett-Packard

    Hewlett-Packard follows Cost Leadership strategy. It focuses mainly upon selling computers at a comparatively lower cost by lowering the profit margin without making any compromises in the quality of the product. But HP is able to achieve higher profits by selling more product units. Besides, 30 percent of its total revenue comes from printers and cartridges which also give them a strong position in the market.

    International Business Machines

    IBM follows Differentiation strategy. It focuses on a limited product range with high quality at a premium price. IBM's product range includes mainframe construction and operation, servers and other internet activities. The alliance between IBM and Lenovo computers in 2004 has led to formation of the third largest PC supplier in the world.

    Dell

    Dell is another company which focuses on Cost leadership strategy. Cost reduction techniques employed by Dell in supply chain management have enabled them to become the pioneers in personal computer market. In a bid to diversify their product range, Dell has entered consumer electronics field and has launched its own music download store, digital music jukebox and wireless personal digital assistant.

    Microsoft

    Microsoft follows cost leadership strategy. It has created a niche for itself in the software field with the Windows operating system dominating almost 95 percent of personal computer industry. The ease of using and comparatively lower costs for the products has enabled them to become the leaders in software industry.

    Question 2:

    STRATEGIC ALLIANCES

    The definition of a strategic alliance, according to Griffin and Pustay is as follows:

    "Cooperation between international firms can take many forms, such as cross-licensing of proprietary technology, sharing of production facilities, confounding of research projects, and marketing of each other's products using existing distribution networks. Such forms of cooperation's are known collectively as Strategic Alliances". (Griffin & Pustay 1998:451)

    General Reasons for Strategic Alliances

    Many firms enter into strategic alliances with other companies in as a growth strategy. Some of the potential benefits of joint ventures are listed below.

    • Ease of market entry
    • Shared risks
    • Shared knowledge and expertise
    • Synergy and competitive advantage (Griffin & Pustay 1998:453-457)
    Ease of market entry

    Even if all the conditions are favourable for entering a new market, a firm may still face many obstacles like the host-government regulations and the lack of proper understanding about the market. In such cases, a firm may opt for strategic alliances in order to enter into that market. The costs involved in entering an unfamiliar territory aggressively and quickly may be avoided through strategic alliances. Besides these, it can also lead to faster introduction of new products (Harrison, Lee & Neale 2004:86).

    Joint ventures may become a necessity in certain countries. For example, nationalistic attitudes in certain European countries which prefer local firms over international brands may affect the formation of alliances. In some other cases, governments may encourage foreign firms to enter into alliances with local companies to improve the quality of local products, for example, China (Griffin, Pustay 1998:454).

    Shared Risks

    Due to the availability of a huge variety of products in the market, no company has a guarantee of success while introducing a new product into an unfamiliar market. Strategic alliances can be used in such cases to share the responsibilities and risks regarding the product. The shared returns through the alliance can be used by the company for research and development purposes. "Resource pooling is considered one of the major factors leading to strategic alliances. This situation refers to the partner's contribution to a collaborative project of resources such as capital, know-how and personnel" (Culpan 2002:25).

    Shared knowledge and expertise

    Not all firms possess the technology and expertise which they must need in order to compete in an unknown territory. In the rapidly changing world, a single company may not possess all the resources to ensure technological edge. Joint ventures enable them to gain knowledge that it is lacking and can use the expertise for their further growth.

    Synergy and competitive advantage

    Strategic alliances may help a firm to achieve synergistic outcomes. Two companies can achieve more benefits by working together rather than by operating as individual entities in the same market. Thus, the cost involved in the R & D of the product as well as the time required for developing the product can be reduced considerably.

    RISKS IN STRATEGIC ALLIANCES

    Managing a strategic alliance is more easier said than done. There are many probable risks associated with an alliance. They include:

    • Loss of autonomy and control
    • Risk of leakage of information
    • Differences in strategic goals of alliance formation
    • Local partners becoming global competitors in future
    • More susceptible to governmental regulations
    • Changing circumstances
    • Profit distribution

    (Schuler, Jackson & Yuo 2004: 28-29)

    Strategic alliances may result in the leakage of critical information as alliances involve mutual sharing of information and technologies. The differences in opinion between the partners while making decisions may also hinder the success of a joint venture. After achieving the desired results through an alliance, a partner may choose to leave the alliance and become a competitor.

    The changes in economic conditions in the target market may also affect the viability of a strategic alliance as the circumstances which led to the formation of the alliance may cease to exist (Griffin and Pustay 1998:470). Another drawback of alliances is the emergence of a disagreement over the sharing of profits which may hinder the success of the alliance. And finally, the host country may place restrictions on foreign firms forming alliances with local companies.

    PROBABLE RISKS TO APPLE

    Apple may encounter many risks because of the strategic alliances they have made. Apple entered into a joint venture with IBM computer to develop the Power PC line of central processing chips to counter the Pentium central processors from Intel. However, the venture was not successful due to the production delays and Apple was not able to meet the demand for Power Macintosh and Powerbook line of computers. Hence Apple decided to use Intel's Pentium processors in their products from 2005.

    Apple forged the alliance with IBM to counter the Pentium processors and after the alliance ended, IBM formed an alliance with Lenovo, the largest information technology company in China and has become a strong competitor to Apple. This can be a potential threat to Apple as Lenovo can use the information from IBM's past alliance with Apple to gain a competitive advantage over Apple.

    Apple's decision not to license the Macintosh operating system to Microsoft is considered to be one of the greatest miscalculations in business. Microsoft went on to introduce the Windows operating system which dominates the global personal computer industry. Due to the popularity of Microsoft products, Apple was forced to forge a relationship with Microsoft and release a Macintosh version of Microsoft's office software. And also, due to the failure of its Power PC central processing chips, Apple is using Intel Pentium processors in their products. Due to these ventures with Microsoft and Intel, Apple's research and development in these fields are limited which may reduce their edge over their competitors.

    Question 3:

    APPLE'S STRATEGIC RESOURCES AND COMPETENCES

    "Strategic resources may be defined as the productive assets of firms which have direct impact on the sustainability and growth of the company" (Mathews 2006:80).

    Apple's main strategic resources are given below:

    • Human Resources
    • Innovative vision
    • Strong research and development team
    • Retail Outlets
    • Diversification
    • Brand image
    • Customer loyalty

    Apple's most valuable resource is Steve Jobs, its founder and the current CEO. After being forced to resign in 1985 from the company which he helped found, Steve Jobs returned to the post of interim CEO in 1998 after the sales of several Apple products fell. Steve Jobs used his unique vision and business approach to good effect by entering into a relationship with Microsoft. The failure to do so in the past is considered to be one of the greatest miscalculations in business world. Under Steve Jobs, Apple implemented several cost cutting measures and decided to focus only on two markets: consumer and professional.

    Apple has a strong research and development team which consists of carefully selected and talented personnel. This is a valuable strategic resource for Apple as its competitors have tried hard over the years to imitate their style without any success.

    One of the major strengths of Apple was diversification. Apple started off with Macintosh computers which became an iconic product in the market. Instead of focussing only on enhancing their computer range, they entered into new market segments by introducing the iPhone and the iPod and iTunes music store website, which revolutionised the world of digital music. These products further cemented Apple's position as a true global leader and helped them to enhance their brand image. As a result of this, Apple's customers tend to be loyal to the brand.

    Apple has always given importance to innovation to make their products superior than those of their rivals. For example, the iMac range of personal computers has an innovative all-in-one design and has a choice of five colors. Apple focuses more on quality, design elegance and superior customer service and is creating a revolution in the world of technology by integrating music, images and animation.

    Another strategy being pursued by Apple is the opening of retail outlets. Apple operates primarily on a geographic basis, with around 86 outlets, the majority of them being in the United States. This enables them to act as both a sales outlet and an advertisement for their brand.

    ELEMENTS OF SUSTAINABILITY

    Competitive advantage of a firm depends upon the ability of the firm to sustain the superiority of its products. The various factors contributing to the prolonged sustainability are briefed below. (Grant 2005:)

    • Durability
    • Transferability
    • Marketing
    • Diversification
    • Innovation and constant improvement
    • Human resources
    • Brand name
    • Customer loyalty

    Various factors have contributed to the prolonged sustainability of Apple in the market. If a company has a diversified product range, then even if the sales of the products in one field is affected, it will not affect the company significantly as the company may have roots in different fields. Apple concentrates in the manufacture of computers, cell phones and portable music players. Hence, even if the sales of one product fail, Apple can make up for the loss through the sales of other two products.

    Customer's choice of a product mainly depends upon the physical presence of retail outlets and after sales service. Apple has opened 86 retail stores and these act as a source of marketing and advertisement as well. Apple has always given importance to innovation and constant improvement of their products which has given them a competitive advantage over its counterparts.

    One of Apple's greatest resources has been their dedicated design teams, programmers and engineers and their current CEO Steve Jobs whose unique vision has enabled them to become the pioneers in the industry. Further, the quality and reliability of their product ranges has enabled Apple to create a niche for themselves in the market. As the Windows-based computers are becoming more prone to virus attacks, the Apple computers which work on Macintosh operating system are becoming increasingly popular among the information technology professionals. This has given Apple a distinct brand identity and as a result, Apple's customers tend to remain loyal to the brand.

    CONCLUSION

    Apple has been able to reap the benefits of differentiation strategy which is evident from their market positioning. The case study examined the strategies pursued by Apple and explains about the various risks associated with strategic alliances. We have also successfully understood the resources and competences of apple which has aided in its sustainability.

    LIST OF REFERENCES

    • Michael E Porter (1992). The Competitive Advantage of Nations. HongKong: The MACMILLAN PRESS LTD. P37-39.
    • Robert M.Grant (2005). Contemporary Strategy Analysis. 5th ed. Cornwall: Blackwell Publishing. 241-242.
    • John Thompson, Frank Martin (2005).Strategic Management: Awareness and Change. 5th ed. London: Thomson learning. 287.
    • Ricky W Griffin & Michael W Putsay (1998). International Business:A Managerial Perspective. 2nd ed. Harlow, England: Addison-Wesley. 451, 453-457, 470.
    • Terry P. Harrison, Hau Leung Lee, John J. Neale (2005).The practice of supply chain management: where theory and application converge. New York: Springer Science and Business Media, Inc. 86.
    • Refik Culpan (2002).Global business alliances: theory and practice. Westport: Greenwood Publication Group. 25.
    • Randall S. Schuler, Susan E. Jackson, Yadong Luo (2004).Managing Human Resources in Cross-Border Alliances. London: Routledge. 28-29.
    • John Alwyn Mathews (2006).Strategizing, disequilibrium, and profit. Stanford: Stanford University Press. 80.

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