Understanding Generic Strategy Types

Generic Business Strategies

According to Michael Porter, superior value is created in three generic ways:

(1) by having a cost leadership advantage over competitors

(2) by using some differentiating technique to provide a “better” value offering.

(3) by focusing on what one does better than the competition

Cost leadership

A Cost Leadership advantage is achieved when an organisation’s costs are lower than competitors’ costs.’ A cost leadership advantage generates superior profitability when buyers consider the firm s value offering to be comparable to the value offerings of competitors (so under-pricing competitors is not necessary to win sales).

There are two ways to pursue a cost advantage: (1) do a better job of controlling the cost driver’s vis-à-vis competitors; and (2) revamp the makeup of the activity-cost chain by doing things differently and saving enough in the process that customers can be supplied more cheaply.

Differentiation strategy

Successful differentiation requires being unique at something buyers consider valuable.’ When differentiation offers value to the customer, it yields competitive advantage.

Successful differentiation allows an organisation to:

(1)     Command a premium price; and/or

(2)     Sell more units of its value offering at a given price; and/or

(3)     Realise greater degrees of buyer loyalty.

Differentiation and the value of brand names

The value of the brand image also becomes an important element of the augmented offer.  Brands are a major determining element in the repeat purchase of consumer value offerings, industrial value offerings, and an important way of adding differentiation at the augmented level.  Value is added through the creation of brand image.  The owners of strong brand names can command higher prices for their offerings.

Focus strategy

A focuser excels in serving the target segment.  A focuser can gain a segment-based competitive advantage whenever differences across segments make it more costly for broadly targeted competitors to meet the specific needs of buyers in the focuser’s target segments at the same time they are trying to serve other specific needs of buyers in other segments.  This is the condition that makes focusing really attractive.  A good focus strategy generally assumes that each organisation has a different focus, that no two organisations will focus in the same way in the same market.

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