University of California
Type of paper: Thesis/Dissertation Chapter
3 generic strategy
Michael porter developed 3 generic strategies: cost leadership, differentiation and focus. They are developed to create a defendable position in the long-run, outperforming competition and establish a competitive advantage. However does the generic strategy lead to sustainable competitive strategy? This analysis will explain in detail. Cost leadership means setting out to become the low-cost producer of its industry. Each industry is different and provides with diverse problems. Cost leadership can come from many different forms such as: pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. The emphasis is on lower costs, not on low selling prices. For a cost leader to be effective it is imperative that it needs to exploit all sources of cost to its advantage. If a firm can execute this it will automatically sustain overall cost leadership and therefore outperform in its industry and dominate prices. In a differentiation strategy a firm intention and desire is to be unique in its industry. “It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs” (Michael E Porter). This distinctive uniqueness is rewarded by a premium price that the firm can set. Been differentiation doesn’t have to be substantial. It can be as simple as having the best customer service. Differentiation may lead to profitability but doesn’t always guarantee the lead in the market share. Focus strategy emphases on a selected segment or group of segments within the industry and adapts its strategy to serving them to the exclusion of others. This focus strategy has two variants; cost focus and differentiation focus. Cost focus deals when a firm wants a cost advantage in its market. Differentiation focus deals with seeking differentiation within its target segment.
A generic strategy does not lead to sustainable competitive advantage. This is because the “sustainability of the 3 generic strategies demands that a firm competitive advantage resists erosion by competition behaviour or industry evolution” (Michael E Porter). Each of the 3 generic portrays different risk. Competitor can imitate each of the moves or even ameliorate them and gain considerable advantage. They can also exploit a gap that may potentially arise when a company tries to differentiate itself. For a company to gain full competitive advantage it will need to possess some barriers that make this imitation almost impossible. The three generic strategies can create competitive advantage can or destroy a business if not implemented correctly. If a firm concentrate its effort on picking one only it will have more chance of surviving than one that picks many. Firms who pick more than one of the generic strategy can be described as “stuck in the middle” (Michael E Porter). A firm stuck in the middle is guaranteed to possess no competitive advantage, low profitability, and can have its market share taking by firms who are competitive advantaged. It is particularly important for any firm to choose a correct strategy and implement it well.
Business Strategy: The Three Generic Strategies: http://drjerryallison.hubpages.com/hub/Business-Strategy-The-Three-Generic-Strategies Accessed the 25th of March 2014.
Definition of ‘Generic Strategies: http://economictimes.indiatimes.com/definition/generic-strategies Accessed the 25th of March 2014.
Porter’s Generic Competitive Strategies (ways of competing): http://www.ifm.eng.cam.ac.uk/research/dstools/porters-generic-competitive-strategies/ Accessed the 25th of March 2014.
Michael E porter, Competitive advantage, Creating and Sustaining Superior Performance, published: New York: free Press; London: Collier Macmillan. Pages: 11-26
Michael Porter’s “Generic Strategies”:
http://faculty.bcitbusiness.ca/kevinw/4800/Bobs_porter_notes.pdf Accessed the 25th of March 2014.