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Generic Competitive Strategies

M.E. Porter, Competitive Advantage, New York, 1985. This diagram has been recreated by LMC.

LMC explains Generic Competitive Strategies

The generic competitive strategies form a business tool which helps strategists understand how the position of a company within its industry can be directly related to the strategy it employs. The strategy employed can then be analysed to understand where a company's competitive advantage lies, with a view to maintaining it. Porter (1985) identified the two main types of competitive advantage as cost advantage and differentiation. In developing and maintaining their competitive advantage, companies have the option to adopt one of the three generic strategies: cost leadership, differentiation or focus. The horizontal axis across the top of the graph shows the type of competitive advantage the company has, whilst the vertical axis relates to the scope of the competition, either broad and company-wide or narrow and limited to a market segment.

Cost Leadership

This is a strategy where a company aims to out-price its competitors by reducing overheads or the fixed costs associated with manufacture and distribution. It requires a focus on the efficiency of production lines and economies of scale. This strategy is employed where customers have the ability to change supplier easily and the products or services are standardised and well understood by the consumer. A good example of cost leadership strategy is employed by supermarket chains on everyday necessity goods. By using this strategy, marketing the product becomes less important. Benefits include raising barriers for competitors to enter the market and easing the effect of fixed-cost rises across the industry.

Differentiation

This strategy is employed where a unique attribute of a product or service is highlighted relative to similar alternatives presented by the competition. It allows a higher price to be charged or a greater ability to command customer loyalty. Differentiation strategy is used where the company sees its key product competencies as a more profitable advantage than simple cost leadership. Examples include Coca-Cola, which differentiates by building a solid brand, or Sony, which differentiates on quality or reliability of products. Customers react to this strategy by paying more for a perceived greater reliability or quality or by returning to a trusted brand. It relies heavily on marketing or advertising to maintain the brand identity and raises the barrier to competitors entering the market.

Focus

This strategy is aimed at a specific target consumer group, for example cultural, economic, political, geographical or age-related groups. The strategy employs either cost focus (3A) or differentiation focus (3B) within its target audience, and in this sense it is a narrower application of one of the aforementioned strategies. Saga holidays, for example, focus on a specific group of consumers - the over 50's. Benefits include the increase in brand loyalty developed as customers perceive the company to be a specialist.

Porter identified that one combination of the strategies is possible: combining market segmentation with differentiation. However, in general, other combinations are not possible due to a conflict between cost reduction and value-added differentiation. Therefore, a company should retain one overall main strategy to maintain its long term competitive advantage.


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