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Leadership, Differentiation, and Focus. These Strategies Are Applied at The

This document summarizes Porter's three generic business strategies: cost leadership, differentiation, and focus. It explains that cost leadership involves being the low-cost producer in an industry. Differentiation calls for developing unique product attributes that customers value and are willing to pay a premium for. Focus strategy concentrates on a narrow market segment and aims for low costs or differentiation within that segment.

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71 views4 pages

Leadership, Differentiation, and Focus. These Strategies Are Applied at The

This document summarizes Porter's three generic business strategies: cost leadership, differentiation, and focus. It explains that cost leadership involves being the low-cost producer in an industry. Differentiation calls for developing unique product attributes that customers value and are willing to pay a premium for. Focus strategy concentrates on a narrow market segment and aims for low costs or differentiation within that segment.

Uploaded by

romirathi
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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If the primary determinant of a firm's profitability is the attractiveness of the

industry in which it operates, an important secondary determinant is its


position within that industry. Even though an industry may have below-
average profitability, a firm that is optimally positioned can generate superior
returns.

A firm positions itself by leveraging its strengths. Michael Porter has argued
that a firm's strengths ultimately fall into one of two headings: cost
advantage and differentiation. By applying these strengths in either a broad
or narrow scope, three generic strategies result: cost
leadership, differentiation, and focus. These strategies are applied at the
business unit level. They are called generic strategies because they are not
firm or industry dependent. The following table illustrates Porter's generic
strategies: 

Porter's Generic Strategies

Advantage

Target Scope

Low Cost Product Uniqueness

Broad Cost Leadership Differentiation


(Industry Wide) Strategy Strategy

Focus Focus
Narrow
(Market Segment) Strategy Strategy
(low cost) (differentiation)

Cost Leadership Strategy


This generic strategy calls for being the low cost producer in an industry for
a given level of quality. The firm sells its products either at average industry
prices to earn a profit higher than that of rivals, or below the average
industry prices to gain market share. In the event of a price war, the firm can
maintain some profitability while the competition suffers losses. Even without
a price war, as the industry matures and prices decline, the firms that can
produce more cheaply will remain profitable for a longer period of time. The
cost leadership strategy usually targets a broad market.

Some of the ways that firms acquire cost advantages are by improving
process efficiencies, gaining unique access to a large source of lower cost
materials, making optimal outsourcing and vertical integration decisions, or
avoiding some costs altogether. If competing firms are unable to lower their
costs by a similar amount, the firm may be able to sustain a competitive
advantage based on cost leadership.

Firms that succeed in cost leadership often have the following internal
strengths:

 Access to the capital required to make a significant investment in


production assets; this investment represents a barrier to entry that
many firms may not overcome.
 Skill in designing products for efficient manufacturing, for example,
having a small component count to shorten the assembly process.
 High level of expertise in manufacturing process engineering.
 Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For
example, other firms may be able to lower their costs as well. As technology
improves, the competition may be able to leapfrog the production
capabilities, thus eliminating the competitive advantage. Additionally, several
firms following a focus strategy and targeting various narrow markets may
be able to achieve an even lower cost within their segments and as a group
gain significant market share. 

Differentiation Strategy
A differentiation strategy calls for the development of a product or service
that offers unique attributes that are valued by customers and that
customers perceive to be better than or different from the products of the
competition. The value added by the uniqueness of the product may allow
the firm to charge a premium price for it. The firm hopes that the higher price
will more than cover the extra costs incurred in offering the unique product.
Because of the product's unique attributes, if suppliers increase their prices
the firm may be able to pass along the costs to its customers who cannot
find substitute products easily.

Firms that succeed in a differentiation strategy often have the following


internal strengths:

 Access to leading scientific research.


 Highly skilled and creative product development team.
 Strong sales team with the ability to successfully communicate the
perceived strengths of the product.
 Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by


competitors and changes in customer tastes. Additionally, various firms
pursuing focus strategies may be able to achieve even greater differentiation
in their market segments. 

Focus Strategy

The focus strategy concentrates on a narrow segment and within that


segment attempts to achieve either a cost advantage or differentiation. The
premise is that the needs of the group can be better serviced by focusing
entirely on it. A firm using a focus strategy often enjoys a high degree of
customer loyalty, and this entrenched loyalty discourages other firms from
competing directly.

Because of their narrow market focus, firms pursuing a focus strategy have
lower volumes and therefore less bargaining power with their suppliers.
However, firms pursuing a differentiation-focused strategy may be able to
pass higher costs on to customers since close substitute products do not
exist.

Firms that succeed in a focus strategy are able to tailor a broad range of
product development strengths to a relatively narrow market segment that
they know very well.

Some risks of focus strategies include imitation and changes in the target
segments. Furthermore, it may be fairly easy for a broad-market cost leader
to adapt its product in order to compete directly. Finally, other focusers may
be able to carve out sub-segments that they can serve even better. 

Examples of companies pursuing a differentiation strategy include: Dr.


Pepper with a different taste; Federal Express with superior service;
Caterpillar with high spare parts availability; Wal-Mart with value and more
for your money; Rolex as a prestige brand; and 3M Corporation with its
emphasis on technology leadership and innovation.
Actions to obtain a significant value difference that customers will appreciate
and be willing to pay for and which may increase their product/service
loyalty.

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