Michael Porter’s 3 Generic Strategies Model brings forward three basic strategic options or approaches available for any business organization to gain competitive advantage. They are; Cost Leadership, Differentiation, Focus.
In this model, the two basic strategic options being Cost and Differentiation are combined with the scope of the activity or “Focus”. Thereafter “Focus” is further divided into two options combined with the first two strategies.
As depicted in the illustration below, the strategies are developed in combination with the two basic sources of competition (Cost & Differentiation) and two levels or scope of activity (Broad and narrow)
Accordingly, organizations can choose among these options to obtain different competitive advantages in the given market. As Porter suggests, it is appropriate for an organization to clearly adopt one chosen strategy to reach the intended competitive advantage. Thus, these strategies can define the direction of your business organization.
Offering customers a greater value than competitors is Competitive Advantage. Competitive Marketing Strategies should be in place in order to create a competitive advantage. There are strategies that give the company the strongest possible strategic advantage and help the company to strongly position in the market against the competitors. Porter’s 3 Generic Strategies Model is one such marketing strategy introduced by him in his book namely; “Competitive Advantage: Creating and Sustaining Superior Performance” in 1985.
Porter has called these strategies “Generic” since any organization may apply these strategies and discover its competitive edge, whether it is big or small in size, whether it deals with products or services and despite the industry it is in.
The Companies who intend to implement the Cost Leadership Strategy target to become the Cost-Leader in the industry, where the company has the advantage of many ways and means of reducing costs involved in the production process and or other functions of the business.
Cost Leadership is achieved through many sources of cost advantages such as advantageous access to raw materials or labour, access to low cost capital and availability of advanced technology etc. Cost Leadership is often achieved through mass production which is known as Economies of Scale.
In the process, one can opt to offer the lowest possible price in the market, securing a huge demand by being price competitive. One can also secure a huge market share with average prices or increase profits by reducing the costs as low as possible. Accordingly, three main achievements can be viewed under this strategy;
Companies that have achieved and sustained Cost-Leadership, showcase distinctive characteristics. Such companies have access to capital or technology. They also have access to effective distribution channels leading to less cost. They show a high level of productivity with higher effectiveness in capacity utilization. They also have low-cost based bargaining power.
The companies who choose this strategy have different or unique products than the other players in the industry. They seek differentiation in many aspects. They are different with the product features, the product functionality, the durability and how the product is branded and marketed etc.
The main concern in this strategy is that the level of differentiation should be on par or excel the customer expectations regarding the product. This means , the features or functionalities through which differentiation is achieved should be appropriate and important. Along with the uniqueness or differentiation, the Company can go for higher price tags or premium pricing and thereby increase profits or escalate to the high end markets. However, it should be ensured that the price attached is fair by the amount the customers are willing to pay.
Successful differentiation is backed by valuable research and development work and innovation. Successful differentiation is characterized by superior product quality and effective branding. It is also supported by proper distribution and marketing helping the product to be uniquely positioned in the market. Such products usually gain a higher level of customer loyalty; one good example is “Apple” products.
Cost Focus Strategy is a further development to the Cost-Leadership Strategy. This strategy has two aspects to consider which are “Cost” and “Focus”. Here, the company pursues to achieve reduced costs in a focussed market. What is important here is the scope, which is narrow and the area of competition also is therefore narrowed. The firm seeks to develop cost advantage while limiting its presence to a niche market segment.
Often such companies produce basic products which are often similar to the market-leading products. One good example is budget food items in local supermarkets. These supermarkets are concentrated into regional or specific markets.
Differentiation Focus Strategy is a further development to the Differentiation Strategy. This strategy also has two aspects to consider which are “Differentiation” and “Focus”. Here, the company pursues to achieve uniqueness or differentiation in a focussed market. What is important here is the scope, which is narrow and the area of competition also is therefore narrowed. The firm seeks to develop product or service uniqueness while limiting its presence to a niche market segment.
Often such companies produce unique products which make them different from other competitors in the market and therefore could tag a premium price. One good example is Rolls Royce.
The 4 Ps; Product, Price, Place, and Promotion is known as the Marketing Mix. It is an all inclusive Marketing Strategy; a long-term forward looking approach. One can simply say that it is an overall game plan.