What is Porter’s Generic Strategies
Porter’s generic strategies are used to determine the competitive advantage of each business unit to compete with other rivals in a market. There are four types of generic strategies include cost leadership, differentiation, cost focus, and focus differentiation.
- Cost leadership strategy (low-cost, broad target) is a competitive advantage from producing products with low cost.
- Differentiation strategy (different, broad target) is a competitive advantage achieved by developing a unique product that stands out from the competitor.
- Cost focus (low-cost, niche target) is a competitive advantage from selling low-cost products to a specific niche market.
- Focus differentiation (different, niche target) is similar to differentiation strategy but focused on the niche market instead of the mass market.
Each type of four Porter’s generic strategies in each quadrant represents a combination of competitive advantage that the company needs to achieve and the scope of the target.
The first dimension is the source of competitive advantage that the company needs to achieve: by keeping a product low cost or offering a unique product. The second dimension is the scope of the business’ target: broad or specific niche market.
Generic strategies are based on the work of Michael E. Porter of the Havard Business School in 1980. Normally, the Porter’s generic strategies are used as a tool to help the company to determine the business level strategy in strategic management.
- Porter’s generic strategies are used to determine the competitive advantage of each business unit to compete with other competitors in a market.
- There are four types of generic strategies include cost leadership, differentiation, cost focus, and focus differentiation.
Cost Leadership Strategy
Cost leadership strategy is a generic strategy that focused on achieving a competitive advantage with a low-cost efficiency. The business that uses a cost leadership strategy as its competitive advantage will produce an acceptable or standard product with a large amount to achieve the economies of scale in production, or produce with low-cost labor.
As you can see in the generic strategy matrix, cost leadership strategy exist in the top right quadrant of the Porter’s generic strategy matrix. They are competing with a low-cost product in a broad market, a business that succeeds with a cost leadership strategy normally is a large company to take advantage of economies of scale in production.
Some Chinese companies that produce products in huge amounts or with low-cost labor can compete with an advantage against the company with higher labor costs and smaller production.
However, a company that competes with a cost leadership strategy is likely to find that it does not last forever. Since price is the key point of customer choice, the company earns less loyalty from their customers.
Differentiation strategy is a generic strategy that the company focused on seeking advantage from uniqueness by developing brands that stand out from the competitor in the market. The business can offer a differentiation product in several ways such as higher product quality, superior service, or outstanding marketing.
In contrast to the cost leadership strategy, the company competing with a differentiation strategy results in strong brand identity, higher loyalty, and easy to defend the business from a low-cost competitor.
Cost focus and focus differentiation strategy are the Porter’s generic strategies that focused on specialization. They are the same strategy but focused on the narrow target customers (also known as a niche market) rather than focused on the mass market.
The niche company tends to be smaller than the big competitors who work on a cost advantage but they nevertheless can be profitable and develop a loyal customer base.