After reading it, you understand the core of this strategy theory.
Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. The breadth of its targeting refers to the competitive scope of the business.
Porter defined two types of competitive advantage: The focus strategy has two variants, cost focus and differentiation focus. If a firm is targeting customers in most or all segments of an industry based on offering the lowest price, it is following a cost leadership strategy; If it targets customers in most or all segments based on attributes other than price e.
It is attempting to differentiate itself along these dimensions favorably relative to its competition. It seeks to minimize costs in areas that do not differentiate it, to remain cost competitive; or If it is focusing on one or a few segments, it is following a focus strategy.
A firm may be attempting to offer a lower cost in that scope cost focus or differentiate itself in that scope differentiation focus. The least profitable firms were those with moderate market share. This was sometimes referred to as the hole in the middle problem.
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. But combinations like cost leadership with product differentiation were seen as hard but not impossible to implement due to the potential for conflict between cost minimization and the additional cost of value-added differentiation.
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.
They claim that a low cost strategy is rarely able to provide a sustainable competitive advantage. In most cases firms end up in price wars.
Instead, they claim a best cost strategy is preferred. This involves providing the best value for a relatively low price. Cost Leadership Strategy[ edit ] This strategy also involves the firm winning market share by appealing to cost-conscious or price-sensitive customers.
This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio price compared to what customers receive.
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.
This is achieved by offering high volumes of standardized productsoffering basic no-frills products and limiting customization and personalization of service.
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.Through this work he created Porter’s Generic Strategies, three interconnected concepts that most organizations use to develop key operating procedures and outmaneuver competitors.
Understanding the ins and outs of Porter’s techniques will offer burgeoning entrepreneurs insight into the mechanisms that create and dictate most business models.
1. Porter’s Generic Strategy Advantage Advantage Target Scope (Low Cost) (Product Uniqueness) Broad Cost Leadership Differentiation (Industry wide) Narrow Focus Strategy Focus Strategy (Market wide) (low cost) (differentiation) 5.
Porter's Generic Strategies Explained The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.
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. May 10, · This article explains the Porter’s Generic Strategies by Michael Porter in a practical way.
After reading it, you understand the core of this strategy theory. What are Porter’s Generic Strategies? The Generic Strategies can be used to determine the direction (strategy) of your srmvision.coms: 1.
Porter's Generic Strategies with examples 1.
PORTER’S GENERIC STRATEGIES 2. Introduction Michael Porter is a professor at Harward Business School. A firm’s success in strategy rests upon how it positions itself in respect to its environment.
Michael Porter has argued that a firms strengths ultimately fall into one of two headings: cost .