Generic Strategies - Michael Porter (1980)

Generic Str= ategies - Michael Porter (1980)

Generic strategies were used initially in the early 1980s, and seem to be even more popular today. They outline the three main strategic options open to organization that wish to achieve a sustainable competitive advantage. Each of the three options are considered within the context of two aspects of the competitive environment= :

Sources of competitive advan= tage - are the products differentiated in any way, or are they the lowest cost producer in an industry? Competitive scope of the market - does the company target a wide market, or does it focus on a very narrow, niche market?=

The generic strategies are: 1. Cost leadership, 2. Differentiation, and 3. Focu= s.

1. Cost Leadership.

The low cost leader in any m= arket gains competitive advantage from being able to produce at the lowest cost. Factories are built and maintained; labor is recruited and trained to deliv= er the lowest possible costs of production. 'cost advantage' is the focus. Cos= ts are shaved off every element of the value chain. Products tend to be 'no frills.' However, low cost does not always lead to low price. Producers cou= ld price at competitive parity, exploiting the benefits of a bigger margin than competitors. Some organizations, such as Toyota, are very good not only at producing high quality autos at a low price, but = have the brand and marketing skills to use a premium pricing policy.<= /span>

2. Differentiation.

Differentiated goods and ser= vices satisfy the needs of customers through a sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generat= es a comparatively higher price and a better margin. The benefits of differentia= tion require producers to segment markets in order to target goods and services = at specific segments, generating a higher than average price. For example, British Airw= ays differentiates its service.

The differentiating organiza= tion will incur additional costs in creating their competitive advantage. These costs must be offset by the increase in revenue generated by sales. Costs m= ust be recovered. There is also the chance that any differentiation could be co= pied by competitors. Therefore there is always an incentive to innovate and continuously improve.

3. Focus or Niche strategy.

The focus strategy is also k= nown as a 'niche' strategy. Where an organization can afford neither a wide scope c= ost leadership nor a wide scope differentiation strategy, a niche strategy coul= d be more suitable. Here an organization focuses effort and resources on a narro= w, defined segment of a market. Competitive advantage is generated specifically for the niche. A niche strategy is often used by smaller firms. A company c= ould use either a cost focus or a differentiation focus. With a cost focus a firm aims at being the lowest cost producer in that niche or segment. With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment. There are potentially problems with the niche approach. Small, specialist niches could disappear in the lo= ng term. Cost focus is unachievable with an industry depending upon economies = of scale e.g. telecommunications.

The danger of being 'stuck in the middle'.

Make sure that you select one generic strategy. It is argued that if you select one or more approaches, a= nd then fail to achieve them, that your organization gets stuck in the middle without a competitive advantage.

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