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Porters Generic Strategies,Choosing your Route to success.
Porters Generic Strategies.
Porter’s generic strategies describe how a company pursues competitive advantage across its chosen market scope. There are three/four generic strategies, either lower cost, differentiated, or focus. A company chooses to pursue one of two types of competitive advantage, either via lower costs than its competition or by differentiating itself along dimensions valued by customers to command a higher price. A company also chooses one of two types of scope, either focus (offering its products to selected segments of the market) or industry-wide, offering its product across many market segments. The generic strategy reflects the choices made regarding both the type of competitive advantage and the scope. The concept was described by Michael Porter in 1980.
Definition of ‘Generic Strategies’
Definition: Michael Porter developed three generic strategies, that a company could use to gain competitive advantage, back in 1980. These three are: cost leadership, differentiation and focus.
Description: The cost leadership strategy advocates gaining competitive advantage due to the lowest cost of production of a product or service. Lowest cost need not mean lowest price. Costs are removed from every link of the value chain- including production, marketing, and wastages and so on. The product could still be priced at competitive parity (same prices as others), but because of the lower cost of production, the company would be able to sustain itself even through lean times and invest more into the business all throughout.
Examples are the TPS system developed by the Toyota Motor Company. The TPS system aims to cut costs throughout the company, but Toyota cars are still priced at almost the same levels as American or other Japanese cars.
The ‘differentiation’ strategy involves creation of differentiated products for different segments. A variety of products, each branded and promoted differently with levels of function, allows a company to ‘desensitize’ prices, and on the basis of being different, charge premium or higher prices. This strategy also provides a hedge against different markets and product life cycles, allowing cash flow to come in even if a few products decline, while others grow or mature.
A prime example of this strategy is Hindustan Lever, which, while focused on FMCG, has a range of products even within the soaps category for different segments. Such a strategy needs strong segmentation, marketing and branding skills.
The ‘focus’ strategy involves focusing on a narrow, defined segment of the market, also called a ‘niche’ segment. For example, Porche markets to the particular segment that likes fast and expensive cars and can afford it. A company in a niche market has customers who understand, appreciate and can pay a premium for their indulgence. Competitive advantage – either by cost or differentiation- is created specially for the niche. But the risks are that the niche may not grow, or it may disappear with time and change.
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