PORTER’S GENERIC STRATEGY Porter has identified three types of generic strategies that help a firm to cope with competitive forces and outperform other firms in the industry.
These strategies are:-
1. Overall Cost leadership strategy
2. Differentiation strategy, and
3. Focus strategy
1. OVERALL COST LEADERSHIP STRATEGY:--
The Overall Cost leadership strategy is aimed at gaining a competitive advantage through lower costs.
The low cost leader in any market gains competitive advantage from being able to many to produce at the lowest cost. Factories are built and maintained; labor is recruited and trained to deliver the lowest possible costs of production. 'cost advantage' is the focus.
Financial considerations and budgetary constrains play a critical role here in shaping competitive price of the products.
Besides the production effiency, brand and marketing skills plays a important role in this kind of competition.
For example:--Some organizations, such as Toyota, are very good not only at producing high quality autos at a low price, but have the brand and marketing skills to use a premium pricing policy.
2. DIFFERENTIATION STRATEGY:--
A firm with a differentiation strategy attempts to achieve a competitive advantage by creating a product or service that is perceived as unique.
Differentiated goods and services satisfy the needs of customers through a
sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin.
The benefits of differentiation require producers to segment markets in order to target goods and services at specific segments, generating a higher than average price.
For example, British Airways differentiates its service by providing focus on exceptional good quality of service rather than focusing on low price.
The differentiating organization will incur additional costs in creating their competitive advantage. These costs must be offset by the increase in revenue generated by sales.
There is also the chance that any differentiation could be copied by competitors. Therefore there is always an incentive to innovated and continuously improve.
3. FOCUS OR NICHE STRATEGY:-
The focus strategy is also known as a 'niche' strategy. Where an organization can afford neither a wide scope cost neither leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable.
Here an organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche.
A niche strategy is often used by smaller firms. A company could use either a cost focus or a differentiation focus.--
With a cost focus a firm aims at being the lowest cost producer in that niche or segment.
With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment.
There are potentially problems with the niche approach. Small, specialist niches could disappear in the long term. Cost focus is unachievable with an industry depending upon economies of scale e.g. telecommunications.
These strategies are:-
1. Overall Cost leadership strategy
2. Differentiation strategy, and
3. Focus strategy
1. OVERALL COST LEADERSHIP STRATEGY:--
The Overall Cost leadership strategy is aimed at gaining a competitive advantage through lower costs.
The low cost leader in any market gains competitive advantage from being able to many to produce at the lowest cost. Factories are built and maintained; labor is recruited and trained to deliver the lowest possible costs of production. 'cost advantage' is the focus.
Financial considerations and budgetary constrains play a critical role here in shaping competitive price of the products.
Besides the production effiency, brand and marketing skills plays a important role in this kind of competition.
For example:--Some organizations, such as Toyota, are very good not only at producing high quality autos at a low price, but have the brand and marketing skills to use a premium pricing policy.
2. DIFFERENTIATION STRATEGY:--
A firm with a differentiation strategy attempts to achieve a competitive advantage by creating a product or service that is perceived as unique.
Differentiated goods and services satisfy the needs of customers through a
sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin.
The benefits of differentiation require producers to segment markets in order to target goods and services at specific segments, generating a higher than average price.
For example, British Airways differentiates its service by providing focus on exceptional good quality of service rather than focusing on low price.
The differentiating organization will incur additional costs in creating their competitive advantage. These costs must be offset by the increase in revenue generated by sales.
There is also the chance that any differentiation could be copied by competitors. Therefore there is always an incentive to innovated and continuously improve.
3. FOCUS OR NICHE STRATEGY:-
The focus strategy is also known as a 'niche' strategy. Where an organization can afford neither a wide scope cost neither leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable.
Here an organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche.
A niche strategy is often used by smaller firms. A company could use either a cost focus or a differentiation focus.--
With a cost focus a firm aims at being the lowest cost producer in that niche or segment.
With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment.
There are potentially problems with the niche approach. Small, specialist niches could disappear in the long term. Cost focus is unachievable with an industry depending upon economies of scale e.g. telecommunications.