A company chooses to pursue one of two types of competitive advantage, either what is strategy michael porter pdf free lower costs than its competition or by differentiating itself along dimensions valued by customers to command a higher price. The generic strategy reflects the choices made regarding both the type of competitive advantage and the scope.
These are known as Porter’s three generic strategies and can be applied to any size or form of business. Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. Porter’s generic strategies detail the interaction between cost minimization strategies, product differentiation strategies, and market focus strategies of porters. Achieving competitive advantage results from a firm’s ability to cope with the five forces better than its rivals. Porter wrote: “Achieving competitive advantage requires a firm to make a choiceabout the type of competitive advantage it seeks to attain and the scope within which it will attain it.
The focus strategy has two variants, cost focus and differentiation focus. It is attempting to differentiate itself along these dimensions favorably relative to its competition. If it is focusing on one or a few segments, it is following a focus strategy. Companies that pursued the highest market share position to achieve cost advantages fit under Porter’s cost leadership generic strategy, but the concept of choice regarding differentiation and focus represented a new perspective. The least profitable firms were those with moderate market share.
This was sometimes referred to as the hole in the middle problem. Porter’s explanation of this is that firms with high market share were successful because they pursued a cost leadership strategy and firms with low market share were successful because they used market segmentation to focus on a small but profitable market niche. Firms in the middle were less profitable because they did not have a viable generic strategy. Porter suggested combining multiple strategies is successful in only one case. Since that time, empirical research has indicated companies pursuing both differentiation and low-cost strategies may be more successful than companies pursuing only one strategy.
Some commentators have made a distinction between cost leadership, that is, low cost strategies, and best cost strategies. Instead, they claim a best cost strategy is preferred. This involves providing the best value for a relatively low price. This strategy also involves the firm winning market share by appealing to cost-conscious or price-sensitive customers. To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower cost than its rivals. There are three main ways to achieve this. The first approach is achieving a high asset utilization.
In service industries, this may mean for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast. In manufacturing, it will involve production of high volumes of output. These approaches mean fixed costs are spread over a larger number of units of the product or service, resulting in a lower unit cost, i. For industrial firms, mass production becomes both a strategy and an end in itself. Higher levels of output both require and result in high market share, and create an entry barrier to potential competitors, who may be unable to achieve the scale necessary to match the firms low costs and prices. The second dimension is achieving low direct and indirect operating costs. Production costs are kept low by using fewer components, using standard components, and limiting the number of models produced to ensure larger production runs.
Overheads are kept low by paying low wages, locating premises in low rent areas, establishing a cost-conscious culture, etc. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. The associated distribution strategy is to obtain the most extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low cost product features.