Generic Competitive Strategies

Essay by hopia May 2005

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Porter describes a structure for evaluating the behavior of costs, the determinants of relative cost position, and the way firms can gain a sustainable cost advantage or minimize their cost disadvantage. The study also reveals the cost differentiation, and the ways a differentiated competitor can lower costs in the areas that do not undercut its differentiation. Porter also made a concrete proposal over the value chain and its connection to cost analysis. Porter said that "the value chain provides the basic tool for cost analysis". He began describing the pattern of the value chain relative to cost analysis by showing how to define a value chain for cost analysis purposes and how to associate costs and assets with value activities. He then described how to analyze the behavior of cost, using the concept of cost drivers. Cost drivers are the structural determinants of the cost of an activity, and differ in the extent to which a firm controls them.

Cost drivers determine the behavior of costs within an activity, reflecting any linkages or interrelationships that affect it. A firm's cost performance in each of its major discrete activities cumulates to establish its relative cost position. After presenting the framework for analyzing cost behavior, Porter then tells how a firm assesses the relative cost of competitors and achieves a sustainable cost advantage. He then describes some important pitfalls in developing an understanding of cost position. Then porter concluded the chapter with a discussion of the steps in strategic cost analysis. On the next chapter "Differentiation", Porter presented a framework for analyzing differentiation and choosing a differentiation strategy. He describes the sources of differentiation, which can arise anywhere in a firm's value chain. He said that successful differentiation strategies grow out of the coordinated actions of all parts of a firm, not...