Generic (Competitive) Strategies
Michael Porter suggested that businesses can secure a sustainable competitive advantage by adopting one of three generic strategies. He also identified a fourth strategy "middle of the road" strategy, which although adopted by some businesses, is unlikely to create a competitive advantage. Each of the four strategies are discussed below.
Porter's Generic Strategies are illustrated in the diagram below.
Cost Leadership Strategy
This strategy involves the organisation aiming to be the lowest cost producer and/or distributor within their industry. The organisation aims to drive cost down for all production elements from the sourcing of materials, to labour costs. To achieve cost leadership a business will usually need large scale production so that they can benefit from "economies of scale". Large scale production means that the business will need to appeal to a broad part of the market. For this reason a cost leadership strategy is a broad scope strategy. A cost leadership business can create a competitive advantage:
- - by reducing production costs and therefore increasing the amount of profit made on each sale as the business believes that its brand can command a premium price or
- - by reducing production costs and passing on the cost saving to customers in the hope that it will increase sales and market share
Low cost producers include Easy Group, Ryan Air, and Walmart.
To be different, is what organisations strive for; companies and product ranges that appeal to customers and "stand out from the crowd" have a competitive advantage. Porter asserts that businesses can stand out from their competitors by developing a differentiation strategy. With a differentiation strategy the business develops product or service features which are different from competitors and appeal to customers including functionality, customer support and product quality. For example Brompton folding bicycles when folded are more compact than other folding bikes. Folding bikes are usually purchased by people with limited storage space at home or on the move; a compact bike is therefore a valued product feature and differentiates Brompton bicycles from other folding bicycles. A differentiation strategy is known as a broad scope strategy because the business is hoping that their business differentiation strategy, will appeal to a broad section of the market. New concepts which allow for differentiation can be protected through patents and other intellectual property rights, however patents have a certain life span and organisation always face the danger that their idea which gives them a competitive advantage will be copied in one form or another.