Porter’s Generic Strategies

Porter’s Generic Strategies is a model used to define which overall strategy a company should pursue, based on the current market, the competitive situation and the company’s strengths (Leinsdorff, 2003).

Figure 13: Porter’s Generic Strategies

Source: Own creation based on Leinsdorff (2013)

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The model consists of four strategies that a company can choose between, depending on its situation. The competitive scope constitutes the choice between a broad and a narrow competitive scope, which means that a company can choose between targeting a broad segment of the market and targeting a small niche market. The source of competitive

advantage constitutes the choice between a cost minimization strategy and a differentiation strategy for achieving competitive advantage.

An important factor of this model, according to Collins & Winrow (2010), is that a company should focus its resources on one of the strategies and not attempt to implement two or more of the strategies. A consequence of getting ‘stuck in the middle’ of these strategic choices is an overextension of resources, loss of competitive advantage and loss of the ability to

differentiate products from the offerings of the competition. This is all due to the fact that the strategies are inherently contradictory and therefore cannot easily be combined.

8.1.1 Cost Leadership

The cost leadership strategy is a combination of a broad competitive scope and the use of cost minimization to establish a competitive advantage (Collins & Winrow, 2010). This means the possibility to market a product or service to a large market and using price as a competitive factor. The main requirement or prerequisite for using this strategy is the use of economies of scale (Leinsdorff, 2003). If a company has the advantage of economies of scale, it is possible for them to minimize costs and thereby lower product prices more than the competitors that do not have this advantage are able to.

8.1.2 Differentiation

The differentiation strategy is also based on a broad market scope, but the source of

competitive advantage is reached through the development products or services with unique features and attributes, which differentiates them from the offerings of the competitors (Collins & Winrow, 2010). In this strategy, the competitive factor can be based on product, place or promotion. The differentiation strategy is aimed at creating customer satisfaction and loyalty, which, in turn, will make the customers less price sensitive, which is why price is not a competitive factor when using this strategy.

118 8.1.3 Cost Focus

The cost focus strategy is aimed at a narrow segment, or a niche market, where cost

minimization can lead to price as a competitive factor (Collins & Winrow, 2010). In focusing on a narrow market, a company can focus all its resources on a small segment and thereby attempt to increase brand loyalty and customer satisfaction by competing on price.

8.1.4 Differentiation Focus

The differentiation focus strategy is similar to the cost focus strategy in that it is also aimed at a narrow market, focusing all its resources on increasing brand loyalty and customer

satisfaction within this small segment (Collins & Winrow, 2010). However, the competitive factors in this case are based on product, place or promotion rather than price.

8.1.5 Discussion Broad market

As discussed in chapter 6.1, Dunkin’ Donuts will not focus on a small niche segment, but rather, they will split their focus between several different market segments. This means that in this model, they will target what is labelled as the broad market. This leaves the decision of whether they should use the cost leadership strategy or the differentiation strategy towards the targeted broad market.

Differentiation

The U.S. is a country with a large coffeehouse industry, with many large coffeehouse chains competing. In the U.S., Dunkin’ Donuts, like many of its competitors, has the advantage of economies of scale and therefore uses a cost leadership strategy (Spinelli et al. 2004).

Furthermore, instead of spending time and money on innovation for differentiation purposes, they imitate the successful initiatives of their competitors and make slight adjustments to these to make them their own. This leaves Dunkin’ Donuts with the ability to spend most of their energy and resources on minimizing costs, so that they can be able to compete on the price factor.

As discussed in chapter 3.1.1, the Danish coffeehouse market is one with a high level of competition from companies like Starbucks, Baresso, and many other smaller coffeehouses.

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High levels of competition on the market usually work to drive prices down, but since none of the current actors on the market has the obvious price-related advantage of economies of scale, price levels are not the competing factor in this industry. Instead, differentiation on place, promotion or product is what drives the competition in the Danish coffeehouse industry.

When Dunkin’ Donuts enters the Danish market, they will no longer be able to take advantage of the economies of scale, and at the same time, as mentioned in chapter 5, they will have to pay higher taxes and wages than what they have been used to in the United States. Together, this means that they will not be able to compete on price in Denmark. Instead, they will have to focus on differentiation of their product, place and/or promotion aspects. Based on the TOWS matrix analysis, TOWS’ specific recommendations as to how Dunkin’ Donuts can achieve this differentiation strategy will be explored.

As evident in both the ‘weaknesses’ and ‘opportunities’ parts of the TOWS matrix, online sales is an area in which Dunkin’ Donuts has room for improvement. They have not yet opened up for the option of buying either baked goods or coffee and merchandise online in any of their European franchises. Doing so in Denmark would provide both the option of creating loyalty programs to retain customers and encourage customer loyalty but would also provide Dunkin’ Donuts with a strong way of differentiating themselves from the competition (e.g.

Starbucks & the Donut Shop) in Denmark.

Recommendation: Add online purchasing option

As mentioned in chapter 5, donuts have not yet captured the Danish market, which gives Dunkin’ Donuts a point of difference from the competition. However, as coffee has now been moved to the forefront of the Dunkin’ image, the donut selling point has been diminished.

Therefore, a split promotional focus on both coffee and donuts would provide Dunkin’ Donuts with a way to differentiate their offerings from the offerings of the competitors.