Porter's Generic Strategies

PORTER'S GENERIC STRATEGIES

According to porter (1985), generic strategies allow organizations to gain competitive advantage from three different bases which are Cost leadership, differentiation and focus. Cost leadership is the ability of a company or a business unit to design,produce and market a comparable product more efficiently than its competitors. Cost leadership emphasise producing standardized products at very low per unit cost for consumers and clients who are price sensitive. Differentiation strategy is the ability of the company to provide unique and superior value to the buyer in terms of product quality,special features or after-sale service. Differentiation is strategy aimed at producing products and services considered unique,industry wide and directed at consumers who are relatively price sensitive.

Focus on the other hand means producing products and services that fulfill the needs of a small group of consumers. This three generic strategies can be combined in the sense that a company could either choose the broad marker for the first two strategies or combine the first two strategies and focus on a particular market. For example when the lower-cost and differentiation strategies have a broad mass market target, they are simply called cost leadership and differentiation. When they are focused on a market niche (narrow target), however they are called cost focus and differentiation focus.

Research indicates that a well established firm is better off following a broad scope strategy because of higher return on assets,meanwhile start ups are advised to follow a narrow scope for better chances of survival.

The primary reason for pursuing forward,backward and horizontal integration strategies is to gain cost leadership benefits, but cost leadership must be pursued in conjuction with differentiation. Different generic strategies offer different degrees of differentiation. Differentiation may not guarantee competitive advantage if the products being differentiated are easily substituted by other products or if it can be easily imitated by competitors. Differentiation should allow product flexibility, compatibility, convenience or more features. Product development is an example of of generic strategy that offers the advantage of differentiation.

A successful focus strategy is dependent on factors such as a market with sufficient size, good growth potential and not crucial to the success of other major competitors. Strategies such as market penetration and market development offer substantial focusing advantages. In combination with the earlier two strategies,we can get a cost focus and differentiation focus strategy.

Cost focus is a low cost strategy that focuses on a particular market and seeks to be efficient and reduce costs to make it unattractive to others. In using cost focus, the company or business unit seeks a cost advantage in its target segment.

Differentiation focus also concentrates on a particular buyer group or market like the cost focus. In using differentiation focus,a company or business unit seeks differentiation in a target market segment.