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.
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.
Focus (Niche) Strategy
Under a focus strategy a business focuses its effort on one particular segment of the market and
aims to become well known for providing products/services for that segment.
They form a competitive advantage by catering for the specific needs and wants of their niche market. Examples include Roll Royce, Bentley and Saga a UK company catering for the needs of people over the age of 50. Once a firm has decided which market segment they will aim their products at, Porter said they have the option to pursue a cost leadership strategy or a differentiation strategy to suit that segment. A focus strategy is known as a narrow scope strategy because the business is focusing on a narrow (specific) segment of the market.
Are You "Stuck In The Middle"
Some businesses will attempt to adopt all three strategies; cost leadership, differentiation and niche (focus). A business adopting all three strategies is known as "stuck in the middle". They have no clear business strategy and are attempting to be everything to everyone. This is likely to increase running costs and cause confusion, as it is difficult to please all sectors of the market. Middle of the road businesses usually do the worst in their industry because they are not concentrating on one business strength.
To create a competitive advantage businesses should review their strengths and pick the most appropriate strategy cost leadership, differentiation or focus. Although each of these strategies are known as generic strategies (because they can be applied to every industry) they will not suit every business. For example small businesses may find it difficult to generate the economies of scale needed for broad scope cost leadership but a smaller customer base may enable them to offer a personalised service through a narrow scope focus strategy. Conversely a larger business may not be able to generate sufficient revenue through a focus strategy but be able to pursue aggressive broad scope cost leadership because of the size of the business. Whatever strategy a business decides to adopt they should make sure that it isn't middle of the road because one business can not do everything well.