A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus.
1. Cost Leadership
In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average.
2. Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.
3. Focus
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.
The focus strategy has two variants.
(a)In cost focus a firm seeks a cost advantage in its target segment, while in(b)differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.
References
- Porter, Michael E., "Competitive Advantage". 1985, Ch. 1, pp 11-15. The Free Press. New York.
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FAQs
These are: Cost Leadership, Differentiation and Focus.
What are Porter's generic competitive strategies ways of competing? ›
The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus.
What is an example of Porter's differentiation strategy? ›
Because of the uniqueness, companies with this type of strategy usually price their products higher than competitors. Examples of companies with differentiated products and services are: Apple, Harley-Davidson, Nespresso, LEGO, Nike and Starbucks.
What is Porter's competitive strategy theory? ›
Porter's competitive strategies outline three core paths to competitive advantage: cost leadership, differentiation, and focus, each offering a distinct route to market supremacy. Cost Leadership: Cost leadership aims to make a firm the most cost-efficient producer, not at the expense of quality.
What is Porter's generic strategies pdf? ›
By combining price and market type, Porter suggests these competitive strategies: cost leadership, differentiation, and market segmentation (or focus) to enable a competitive environment to prosper. This chapter concentrates on establishing and understanding the Five Forces model and the generic strategies.
What are the four competitive strategies based on Porter's five forces model? ›
Understanding Porter's Five Forces
Rather than viewing competition narrowly as rivalry among existing competitors, which is his first force, Porter expanded the concept to include four others: the bargaining power of suppliers and buyers, the threat of new entrants, and the threat of substitute products or services.
What is a good example of Porter's five forces? ›
The automotive industry is a good example of Porter's five forces model because the first force is the threat of substitutes, which is high for automobiles because there are many vehicles on the market that are cheaper and which serve similar purposes.
What is an example of competitive differentiation? ›
What is competitive differentiation? A food market selling exclusively organic produce in a market that sells primarily non-organic products is just one example of competitive differentiation.
What is a real life example of differentiation strategy? ›
Coca-Cola is a perfect example of this differentiation strategy. For instance, they offer diet cola, canned, and bottled drinks. Thus, serving three different markets at the same time.
What is Porter's model of competitive advantage? ›
The Porter Diamond Model explains the factors that provide a competitive advantage for one national economy or business over another. The points of the theory resembling a diamond include the firm strategy, structure and rivalry, related industries, demand conditions, and factor conditions.
Porter's Five Forces include: Competitive Rivalry, Supplier Power, Buyer Power, Threat of Substitution, and Threat of New Entry. The model encourages organizations to look beyond direct competitors when assessing strategy and, instead, consider broader environmental forces.
What does Porter's generic strategies focus on? ›
Porter's generic strategies detail the interaction between cost minimization strategies, product differentiation strategies, and market focus strategies of firms. Michael Porter described an industry as having multiple segments that can be targeted by a firm.
What is a generic competitive strategy? ›
In this strategy, the firm focuses on a few target markets. It is also known as a niche strategy. It is anticipated that by focusing marketing efforts on one or two narrow market segments and altering marketing mix to these specialized markets, company can successfully meet the needs of that target market.
What is a focus strategy example? ›
Focus Strategy Examples
The focus strategy example is Pepsi Black. Pepsi focuses on broad markets to serve many customers. However, it focuses on a specific market to serve a target group. It produced a healthier product with lower levels of aspartame.
What are the generic types of competitive strategies? ›
The generic types of competitive strategies include: low-cost provider, broad differentiation, best-cost provider, focused low-cost and focused differentiation strategies.
What are the four competitive strategies? ›
Porter's four competitive strategies are cost leadership, differentiation, cost focus, and differentiation focus strategies.
What are the four generic strategies of social responsiveness? ›
Answer: There are four generic strategies of social responsiveness: reaction, defence, accommodation and proaction.
What is an example of a differentiation focus strategy? ›
Focused Differentiation Strategy
Focused differentiation allows you to target one or all market segments and provide custom products for each. Coca-Cola, with its Diet, canned, and bottled colas, is a focused differentiation strategy example that serves three distinct market segments.
