strategies that a company can use to achieve a competitive advantage. Competitive advantage is a situation whereby a company makes relatively higher profits than its competitors.
Generic Strategies Details
In an ideal situation, companies that are in the same market have an equal chance of success. If a company wants to achieve a competitive advantage, it can either reduce its costs or increase its revenue. Michael Porter, an American academic, came up with strategies that companies could use to make this possible. These strategies are known as generic strategies.
Michael Porter developed the generic strategies in 1985 and aimed them at helping companies achieve a competitive advantage in any market. Porter developed the generic strategies from two main bases:
- the scope of the strategy
- the source of the competitive advantage
The scope of the strategy is the target market's size—it can either be large or small. The source of the competitive advantage could either be a low-cost leader or a differentiator.
There are four main types of generic strategies known as Porter's generic strategies. Companies tend to only pick one strategy, the one it can put into effect easily. When a company uses two or more generic strategies, the complexity of navigating the strategies can potentially cause the business to lose important resources. The companies that manage to implement both strategies successfully are usually larger, more experienced, and wealthier.
Real-World Example of Generic Strategies
Apple, Inc. uses a generic strategy called differentiation strategy. Apple products are unique and highly differentiated from the products offered in the same product market. The iPhone, for instance, is differentiated from other phones through its regular phone updates and advanced features. This explains why there are so many iPhone users, despite higher prices.
Walmart uses the cost leadership strategy as a way to achieve a competitive advantage. The company's prices are relatively lower compared to other stores. This, in turn, increases customers since they are attracted to affordable commodities. An increase in customers increases demand which leads to increased profits.
Ferrari uses a differentiation focus strategy. Ferrari cars are high-quality, luxurious cars. The company targets a narrow market of those who want to buy their cars and can afford them.
Types of Generic Strategies
Here are Michael Porter's four generic strategies.
Cost Leadership Strategy
Companies decide to reasonably lower their prices to increase their competitive advantage. The relatively lower prices compared to other companies making the same product will attract more customers. Due to the increase in demand, there will be an increase in the company's profit. Examples of companies that use this strategy are Walmart, Dell, and Amazon.
Differentiation means doing something different from what other companies in the same product market are doing. Companies do this so that their products or services stand out and offer them at a higher price due to the differentiation. Due to the differentiation of the commodity, consumers will not mind paying a higher amount for it. Higher prices lead to higher profits and, therefore, a competitive advantage. Apple, Starbucks, and Harley Davidson are examples of companies that use this strategy.
Cost Focus Strategy
This strategy is used by companies that have a narrow-focused market. They target narrow and price-sensitive customers and offer their products at a huge discount. Aldi is an example of a supermarket that uses a cost focus strategy.
Differentiation Focus Strategy
This strategy is used in a narrow market whereby consumers are willing to pay high amounts for high-quality products that are not affordable to the average person. Companies that use this strategy attract fewer customers but see higher revenue. Therefore they have a competitive advantage. Ferrari uses this strategy.