Porter’s Generic Strategy Model is designed to gain a competitive advantage in the industry. For say, when you come to book a flight, you get so many options to choose from, right? Why is this so? The answer is simple- each airline has adopted a different way of achieving a competitive advantage in the marketplace.
Basically, it helps in evaluating a firm’s relative position within the industry. Further, it helps in determining whether a firm’s profitability is above or below the industry average. A competitive advantage is an advantage over competitors that can be gained by providing consumers greater value. It can be achieved either by providing greater services that justify higher prices or by lowering the prices of the product.
The four strategies are summarized in the figure below:
The Cost Leadership Strategy
In cost leadership, the aim of a firm is to become the low-cost producer in the industry. The ways to implement cost advantage strategy depends and varies according to the structure of the industry. It includes the pursuit of proprietary technology, preferential access to raw materials, economies of scale and other factors. A low-cost producer must look for the sources of cost advantage. In the end, if a firm succeeds in achieving overall cost leadership, then it is counted as above average performer in its industry.
In a differentiation strategy, the aim of a firm is to offer products or services that are unique and more attractive as compared to the competitors’ product. Their focus is to become unique in its industry along with some dimensions that are broadly valued by buyers. To make it possible, companies choose one or more attributes that many buyers in an industry perceive as unique and important. And that is why it is rewarded for creating a brand image that your customers value.
The Focus Strategy
With the generic strategy of Focus, companies concentrate on particular niche markets in the industry. They analyze the market dynamic forces and the unique needs of customers within it, before developing uniquely low-cost or well-specified products for the market. Basically, the focus strategy has two variants.
(a) In cost focus, a firm seeks a cost advantage in its target segment
(b) In differentiation focus, a firm seeks differentiation in its target segment.
In the target segments, either you have customers with unusual needs or you have the production and delivery system that differ from that of your competitors’ segments within the industry. Furthermore, in some segments, differentiation focus exploits the special needs of buyers while cost focus exploits differences in cost behavior.