five generic strategies
Five generic strategies
The relative position of an organization is a major factor that determines whether the profits of the firm are either below or above the average in that particular industry. An organization is only able to post profits that are above average in an industry in the long run if it has a sustainable competitive advantage. A firm can have either of two types of competitive advantage: low cost or differentiation. The combination of the two fundamental types of competitive advantage and the scope of operations for which a company seeks to attain them, results to five generic strategies that will enable the company’s profits to exceed the average in the industry. The five generic strategies are cost leadership strategy, differentiation strategy, focused differentiation, and focused low-cost and focus strategy.
Components of the Generic Strategy
The generic competitive strategy is founded on five generic strategies: cost leadership, differentiation, focus, focused differentiation, and focused low-cost. All the strategies have different mechanisms for attaining their objectives. Companies in the same sector do not necessarily follow the same strategy, it is a decision that is made by the management, on the basis of the desired results of achievement as well as the strengths of the company. All the strategies have distinct components that model the operations of the company (Kossowski, 2007).
Cost Leadership Strategy
A company that desires to attain a competitive advantage over its competitors through cost leadership will have extensive knowledge on reducing costs while keeping the prices constant. The aim always needs to be to lower the costs that accrue in the course of running a business, while ensuring the price of its products is comparable to that of its rivals (Kossowski, 2007). The strategy increases the profits of the company without accruing any additional expenses. The strategy of cost leadership can similarly be maximised by reducing its price. Since the cost of producing its products is already low, it will still be earning higher profits. This will enable the company to underbid its rivals while still making healthy profits.
The company that are different in what they pursue and have an appealing and wide range of products and services to offer to their customer are considered to have a competitive edge. Research points out that companies can stand out from their competitors by implementing a differentiation strategy. The businesses that follow a differentiation strategy develop products and services with features that are distinct from those offered by competitors and are therefore able to appeal to consumers in such areas as functionality, superior customer support and product quality (Gekonge, 2014). The strategy is also referred to as broad scope strategy because it is the hope of the company that a wide segment of the market will find their business differentiation strategy appealing. The company is additionally able to patent and apply for intellectual property rights to its new concepts that create differentiation although other companies can copy their idea in one way or the other.
A company that opts to use the Focus strategy is choosing a niche market, and then makes a decision on the scope of focus. The company has the freedom of either using cost leadership or differentiation within the focus strategy. The company selects a section, or several sections of the market in the industry tailors its strategies with the aim of meeting their demand while excluding all the other segments. There are two variations within the focus strategy. The first is cost focus in which the company endeavours to find a cost advantage in its target section while the second is differentiation, where a firm pursues differentiation in the segment it is targeting. The two variants of the focus strategy are founded on the variations between the company’s target section and the other segments in the market (Chevalier-Roignant & Trigeorgis, 2011). The segments being targeted need to have either consumers with unique demands or the production and delivery structure that best fulfils the needs of the segment need to be different from that of the remaining segments of the industry. Cost focus takes advantage of the differences in cost behaviour in a few of the segment while differentiation focus takes advantage of the unique demands of particular segments.
A Focused Differentiation Strategy
A focused strategy aimed differentiation purposes at getting a competitive gain with a product judiciously engineered to appeal to the exceptional inclinations and requirements of a small, distinct group of consumers. Effective application of a focused differentiation strategy is determined by the presence of a buyer section in search of distinct product qualities or supplier competences and on a company’s capability of standing apart from competitors in the same industry.
A Focused Low-Cost Strategy
A focused strategy grounded on low-cost purposes to secure a competitive advantage by attending to consumers in the target segment at a lesser cost and reduced price compared to competing players. The only actual variation between a low-cost supplier strategy and a focused low-cost strategy is the dimension of the consumer group that a corporation is attempting to appeal to-the previous encompasses a product manufacturing that appeals largely to the majority of all buyer segments and market sections during the latter at only fulfilling the requirements of purchasers in a small market segment (Miltenburg, 2005).
Wal-Mart is conceivably one of the most renowned corporations that apply Cost Leadership as their corporate strategy. With well-organized distribution systems, massive volume price cuts from suppliers, and their management of production and catalogue, they are in a position to charge lower prices compared to their competitors in the industry. They have reduced costs and are capable of passing to their customers huge savings, occasioning in increased number of consumers in their stores who devote slightly above average amount of money in those stores. By concentrating on reducing their costs, they can appeal to a broader section of the population who regularly a visit to their store in pursuit of a discount.
Formerly an inexperienced computer corporation, Apple has established itself from its competitors via their Differentiation strategy. They were able to design an operating system and then came up with products that use that operating platform. The hardware used in their products are designed by engineers and designers from Apple in addition to the fact that their products are not only superior but also of high quality (Bosch & Man, 2007). The company did not just manage to stand out among its competitors but also managed to create a subgroup of loyal clienteles who line-up to be the first to purchase new devices and products. By engineering every module that is used in their devices, they can set themselves totally apart from their competitors.
A perfect example of focused low-cost strategy is Motel 6, which accommodates price-conscious itinerants who desire a hygienic, basic place to pass the night. To be a low-cost provider of accommodation, the motel chooses comparatively cheap sites on which to build its houses. These tactics reduce both expenditures on investment and costs of operation.
Bosch, F. A. J., & Man, A. P. (2007). Perspectives on strategy: Contributions of Michael E. Porter.
Chevalier-Roignant, B., & Trigeorgis, L. (2011). Competitive strategy: Options and games. Cambridge, Mass: MIT Press.
Gekonge, C. O. (2014). Emerging business opportunities in Africa: Market entry, competitive strategy, and the promotion of foreign direct investments. Hershey, PA: Business Science Reference.
Kossowski, A. (2007). Strategic management: Porter’s model of generic competitive strategies – theory and analysis. München: GRIN Verlag GmbH.
Miltenburg, J. (2005). Manufacturing strategy: How to formulate and implement a winning plan. New York: Productivity Press.
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