Discussion: Performance by Minimizing Costs

Discussion: Performance by Minimizing Costs

Discussion: Performance by Minimizing Costs

A classic, widely used model developed by Michael Porter still frames most discussions of business strategy. In the next section, we review Porter ’ s generic strategies framework as well as dynamic environment strategies. 5 We then share questions that a general manager must answer to understand the business ’ strategy.

The Generic Strategies Framework Companies sell their products and services in a marketplace populated with competitors. Michael Porter ’ s frame- work helps managers understand the strategies they may choose to build a competitive advantage. In his book Competitive Advantage , Porter claims that the “fundamental basis of above‐average performance in the long run is sustainable competitive advantage.” 6 Porter identifi ed three primary strategies for achieving competitive advantage: (1) cost leadership, (2) differentiation, and (3) focus. These advantages derive from the company ’ s relative position

5 Another popular model by Michael Porter, the value chain, provides a useful model for discussing internal operations of an organization. Some find it a useful model for understanding how to link two firms. This framework is used in Chapter 5 to examine business process design. For further information, see M. Porter , Competitive Advantage , 1st ed. ( New York : The Free Press , 1985 ) . 6 M. Porter , Competitive Advantage: Creating and Sustaining Superior Performance , 2nd ed. ( New York : The Free Press , 1998 ) .

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22 The Information Systems Strategy Triangle

in the marketplace, and they depend on the strategies and tactics used by competitors. See Figure 1.3 for a summary of these three strategies for achieving competitive advantage.

Cost leadership results when the organization aims to be the lowest‐cost producer in the marketplace. The organization enjoys above‐average performance by minimizing costs. The product or service offered must be comparable in quality to those offered by others in the industry so that customers perceive its relative value. Typ- ically, only one cost leader exists within an industry. If more than one organization seeks an advantage with this strategy, a price war ensues, which eventually may drive the organization with the higher cost structure out of the marketplace. Through mass distribution, economies of scale, and IS to generate operating efficiencies, Walmart epitomizes the cost‐leadership strategy.

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