Generic strategies developed by Porter explains how a company pursues competitive advantage across its chosen market scope. Competitive strategy relates to all the different numerous strategies that company implement in order to gain a competitive advantage, Retain existing market share, Capture new market share, Identify and access new market opportunities, Satisfy wants and needs, Provide superior value in a product or service, Position and differentiate the product, Optimize manipulation of the marketing mix and achieve its goals in the competitive market place. It is well established that Generic strategies can support the organization to cope with the competitive forces in the industry and perform better than other organization in the industry. Michael Porter categorized competitive strategies as cost leadership, differentiation, or market segmentation (Lynch, 2000).
This could mean having lowest cost among some competitors where each firm enjoys pricing power and high profits.
Cost leadership is defined autonomously of market structure.
Cost leadership is a defensible strategy because it protects the firm against powerful buyers. Buyers can drive price down only to the level of the next most efficient producer.
It defends against powerful suppliers. Cost leadership provides flexibility to absorb an increase in input costs, while opponents may not have this flexibility.
The factors that lead to cost leadership also provide entry barriers in many instances. Economies of scale require potential rivals to enter the industry with substantial capacity to produce, and this means the cost of entry may be prohibitive to many potential rivals.
There are several approaches to differentiation:
A differentiation strategy may mean differentiating along two or more of these dimensions. Differentiation is an invulnerable strategy for earning above average returns because:
Market segmentation strategy has less scope. Both cost leadership and differentiation are comparatively broad in market scope and can embrace both strategic advantages on a smaller scale.
Porter cautions that companies who try to accomplish both cost leadership and differentiation may not succeed in competitive environment. He notes that specializing is the perfect strategic approach.
Any company try to gain a competitive advantage through effectiveness rather than efficiency. Focus strategy can be used by a company to gain either cost leadership or differentiation. Focus strategy can be segmented into two:
Generic Competitive Strategies
Characteristics of Generic Strategies: These strategies can be pursued by all companies regardless of whether they are manufacturing, service, or non-profit. Generic strategies can be pursued in different kinds of industry environments. It results from a company’s consistent choices on product, market, and distinctive competencies.
Drawbacks of generic strategies:
The difficulties of each generic strategy are as under:
Risk of cost leadership: Positioning a firm as a low cost manufacturer or service provider places a severe problem on the firm. Cost leadership is susceptible to risks such as: Technological change that expunges past investments and outdates past learning. Risk of imitation by late entrants who have advantage of low cost learning. Lack of attention to the needs and preferences of customer due to unnecessary concerns for cost minimization. Unforeseen inflation in costs that decreases the firm’s ability to counterbalance product differentiation through cost leadership.
Risk of differentiation: A differentiation strategy is defenceless to the following risks:
Increased cost differential between low cost producers and the differentiating firm will stimulate brand loyalty customers to switch brands. Thus, buyers would sacrifice some additional features and image for huge savings in cost.
Imitation might narrow down the perceived difference.
If a differentiating firm drops back excessively, a low cost firm may conquest the market of the differentiating firm.
Risk of focus: A focus strategy is susceptible to the following risks:
Increasing cost differentiated between huge competitors and the focus firm might offset the differentiation achieved through focus and the customers may switch towards firms that offer a broad range of products.
Perceived or actual differences between products and services might vanish.
Other firms might find submarkets within the target market of the focus firm and out focus the focuser.
It can be established in management literature that The Generic competitive strategies is beneficial when a company wants to gain an advantage over a competitor. If a company wants to ‘win’ the advantage over other businesses, it does so by winning sales and taking customers away from rivals. The main advantage using a Generic competitive strategies is to establish a method of doing business that will drive the company in a certain direction. Rather than simply upholding the status quo, a Generic competitive strategies gives a company a proposal to follow that will generate the structure of the company.
Creating a Generic competitive strategies, firms must follow some steps:
To summarize, generic strategy matrix proposed by Porter highlights cost leadership, differentiation and focus as choices for firms, has dominated corporate competitive strategy. A cost leadership strategy is based upon a business organizing and managing its value adding activities so as to be the lowest cost producer of a product within an industry. A differentiation strategy is based upon attracting customers that a product is high quality in some way as compared to its competitors. Lastly, a focus strategy is aimed at a segment of the market for a product instead of the whole market.