This is how it works: Sir Clive Sinclair demonstrates his C5 electric vehicle.

Launched in 1985, the C5

had a top speed of just 15 miles per hour

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Porter's Generic Competitive Strategies

(ways of competing)
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.

 Main aspects of Porter's Generic Strategies Analysis

Companies can achieve competitive advantages essentially by differentiating their products
and services from those of competitors and through low costs. Firms can target their products
by a broad target, thereby covering most of the marketplace, or they can focus on a narrow
target in the market (Lynch, 2003) (Figure 1). According to Porter, there are three generic
strategies that a company can undertake to attain competitive advantage: cost leadership,
differentiation, and focus.

Figure 1: Source: Porter (1985)

Cost leadership

The companies that attempt to become the lowest-cost producers in an industry can be
referred to as those following a cost leadership strategy. The company with the lowest costs
would earn the highest profits in the event when the competing products are essentially
undifferentiated, and selling at a standard market price. Companies following this strategy
place emphasis on cost reduction in every activity in the value chain. It is important to note
that a company might be a cost leader but that does not necessarily imply that the company's
products would have a low price. In certain instances, the company can for instance charge an
average price while following the low cost leadership strategy and reinvest the extra profits
into the business (Lynch, 2003). Examples of companies following a cost leadership strategy
include RyanAir, and easyJet, in airlines, and ASDA and Tesco, in superstores.

The risk of following the cost leadership strategy is that the company's focus on reducing
costs, even sometimes at the expense of other vital factors, may become so dominant that the
company loses vision of why it embarked on one such strategy in the first place.

Differentiation

When a company differentiates its products, it is often able to charge a premium price for its
products or services in the market. Some general examples of differentiation include better
service levels to customers, better product performance etc. in comparison with the existing
competitors. Porter (1980) has argued that for a company employing a differentiation
strategy, there would be extra costs that the company would have to incur. Such extra costs
may include high advertising spending to promote a differentiated brand image for the
product, which in fact can be considered as a cost and an investment. McDonalds , for
example, is differentiated by its very brand name and brand images of Big Mac and Ronald
McDonald.
Differentiation has many advantages for the firm which makes use of the strategy. Some
problematic areas include the difficulty on part of the firm to estimate if the extra costs
entailed in differentiation can actually be recovered from the customer through premium
pricing. Moreover, successful differentiation strategy of a firm may attract competitors to
enter the company's market segment and copy the differentiated product (Lynch, 2003).

Focus

Porter initially presented focus as one of the three generic strategies, but later identified focus
as a moderator of the two strategies. Companies employ this strategy by focusing on the areas
in a market where there is the least amount of competition (Pearson, 1999). Organisations can
make use of the focus strategy by focusing on a specific niche in the market and offering
specialised products for that niche. This is why the focus strategy is also sometimes referred
to as the niche strategy (Lynch, 2003). Therefore, competitive advantage can be achieved
only in the company's target segments by employing the focus strategy. The company can
make use of the cost leadership or differentiation approach with regard to the focus strategy.
In that, a company using the cost focus approach would aim for a cost advantage in its target
segment only. If a company is using the differentiation focus approach, it would aim for
differentiation in its target segment only, and not the overall market.