Companies that use a cost leadership strategy and those that use a differentiation strategy share one important characteristic. In summary, the three strategies your company can choose from to sustain a competitive advantage include. Another focus strategy is to target niche market segments with specialized product lines. It describes how the choice of competitive scope, or the range of a firms activities, can play a powerful role in determining competitive advantage. Michael porter defines three strategy types that can attain competitive advantage. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. Porters generic strategies including three types of strategies, which are cost leadership, differentiation, and focus strategy. In cost leadership, a firm sets out to become the low cost producer in. Once your analysis is complete, it is time to implement a strategy to expand your competitive advantage.
Literally speaking, the term strategy stands for the warart of the military general, compelling the enemy to fight as per. It is a strategy that was first developed by michael porter, business professor at harvard university, in the mid1980s. Besides cost leadership, the other two general strategies include differentiation and focus. As a generic strategy, differentiation involves developing the online business and its products in ways that make them different from the competition. The most revolutionary development in the american automobile market then was the popularity of the closedbody cars sloan, 1972, pp. To obtain competitive advantage, company is following the three generic strategies. Competitive advantage is a set of unique features of a company and its products that are perceived by the target market as significant and superior to the competition.
It is in the context of the overall generic strategy which a firm may be pursuing that strategic options may be usefully considered. The general focus of differentiation led organisations is to make their products different or more attractive than any other within the industry to achieve a competitive advantage. A case study find, read and cite all the research you need on. Organizations that achieve cost leadership can benefit either by gaining market share through lowering prices whilst maintaining profitability or by maintaining average prices and therefore increasing profits. Cost leadership a firm pursuing a cost leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors. The study focuses on cost leadership strategy and sustainable competitive advantage of naivas supermarket chain in kenya. Also, the niche could disappear or be taken over by larger competitors.
The five generic competitive strategies semantic scholar. The 3 strategies are cost leadership, differentiation, and focus. Types of strategies cost leadership,differentiation, focus. Cost leadership strategy aldi is a typical hard discounted store pursuing cost leadership strategy bonn, 2010. As with the difference between cost leadership and a pricecentered focus strategy, a nichemarket focus differs from a differentiation strategy by its specialization on. Competitive advantage is defined in terms of cost and differentiation while linking it to profitability. Here the main focus centres on automating manufacturing processes and work procedures in order to streamline operations and reduce cost. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. A focused cost leadership strategy requires competing based on price to target a. Critical analysis of competitive strategies on performance. The emergence of competitive advantage sustaining c. Michael porter competitive strategies involve taking offensive or defensive actions to create a defendable position in the industry. To be effective, cost leadership must be carefully managed to generate the profits that are possible.
Amazon business strategy can be described as cost leadership taken to the extreme. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them lead to three generic strategies for achieving aboveaverage performance in an industry. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry. Cost focus differentiation focus competitive advantage competitive scope. Strongest advantage comes through leadership in a factor that is important to customers and difficult for competitors to. In the case of cost leadership, one advantage is that cost leaders emphasis on efficiency makes them well positioned to withstand price competition from rivals table 5. There are two basic types of competitive advantage. Mar 23, 2020 amazon business strategy can be described as cost leadership taken to the extreme. Cost leadership, differentiation and focus strategies are the three main general approaches the model suggests companies can. In any business strategy, competitive advantage must play a big role.
A critique of porters cost leadership and differentiation strategies 40 strategy can bring about in gaining a low cost position, as porter 1985, p. Below are some of the examples of implementation of cost leadership. Pdf carrefours competitive strategy cost leadership and. Chapter 4 competitive advantage cost and differentiation in this chapter 4, after analysing the environment and the internal resources and capabilities, we focus on the source of c. These strategies are cost leadership, differentiation, and. There are two basic types of competitive advantage a firm can possess. They are 1 low cost leadership strategies, 2 differentiation strategies, and 3 focus strategies. Focused cost leadership and focused differentiation mastering. Organizations that achieve cost leadership can benefit either by gaining market share through lowering prices whilst maintaining. The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. Cost leadership, differentiation, market focus and strategic alliance were all found to have a positive and significant influence on sme performance.
Focus is the easiest and least costly of the three strategies for most companies. Product differentiation being the most commonly used one of these two strategic typologies spencer, joiner, and salmon, 2009. May 22, 20 there are essentially two strategies for creating competitive advantage. Types of strategies cost leadership,differentiation, focus strategies the term strategy has been adapted from war and is being increasingly used in business to reflect broad overall objectives and policies of an enterprise. These three broad types of competitive strategies have also been labeled generic strategies. These organisations generally target larger markets and focus on differentiation on a much wider scale within the industry than would a cost led company. An operational excellence strategy aims to accomplish cost leadership.
As a generic strategy, differentiation involves developing the online business and its products in. A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost cost advantage, or deliver benefits that exceed those of competing products differentiation advantage. Achieving cost leadership means that a firm sets out to become the low cost producer in its industry. Range, price and convenience are placed at the core of amazon competitive advantage. A firm differentiates itself from its competitors if it is unique in something that is widely valued by buyers. To that end, porter identified three generic strategies that can be implemented in any industry, and in companies of any size. Kmarts illfated attempt to engage walmart in a price war ended in disaster, in part because walmart was so efficient in its. The study concludes that while cost leadership, differentiation and focus strategies does influence an organizations competitiveness, a combination of all three brings forth a higher competitive edge. Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. Mcdonalds business strategy utilizes a combination of cost leadership and international market expansion strategies. A focused or market niche strategy based on low costsconcentrating on a. Business professor and strategist, michael porter, wrote the book competitive advantage. Cost leadership strategy and boc kenya competitiveness. Types of strategies cost leadership, differentiation, focus strategies the term strategy has been adapted from war and is being increasingly used in business to reflect broad overall objectives and policies of an enterprise.
Focused differentiation is the second of two focus strategies. As with a focused lowcost strategy, narrow markets are defined in different ways in different settings. It represents a greater value for the customer, created either by lower prices or by providing greater benefits and services that justify higher prices. A focused differentiation strategy requires offering unique features that fulfill the demands of a narrow market table 5. By reducing development and production costs, it becomes possible for higher profit margins to appear. Competitive advantage is what makes an entity better than opponents. Any attempt to combine or reconcile strategies would result in firms becoming stuck in the middle, a poor strategic choice due to the existence of an inevitable tradeoff.
Cost leadership, differentiation, market focus and strategic alliance were all found to have a positive. Hybrid competitive strategies malta business school. Pearsons correlation, analysis of variance anova and multiple regression analysis were used to establish the relationships among the study variables. A critique of porters cost leadership and differentiation strategies. Differentiation and its role in competitive advantage culttt. This book describes how a firm can gain a cost advantage or how it can differentiate itself.
Porter called the generic strategies cost leadership across an industry or within a particular industry segment differentiation creating uniquely desirable products and services across an industry or within a particular industry segment, cost focus offering a specialized products or service at low cost. The global online retailer operates with a razor thin profit margin and succeeds due to a combination of economies of scale. Cost leadership a firm pursuing a costleadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors. Porters generic strategies are ways of gaining competitive advantage in other words, developing the edge that gets you the. Know the advantages and disadvantages of focus strategies. How is competitive advantage used in focus strategy a focus strategy is one business approach outlined by management expert and author michael porter in his generic strategies model.
A critique of porters cost leadership and differentiation. Dec 14, 2019 competitive advantage is what makes an entity better than opponents. How is competitive advantage used in focus strategy. Let us examine the implications of each of the three generic strategies. The companys managers believed that competitors held a cost advantage.
Mcdonalds business strategy and competitive advantage. It provides better profits for the team and organization. These are known as porters three generic strategies and can be applied to any size or form of business. Moreover, product and service standardization lies. Ford still maintains its cost leadership generic strategy.
Cost leadership, differentiation and focus strategies are the three main general approaches the model suggests companies can use when attempting to leverage core business strengths to achieve competitive advantages. One of the general strategies is the strategy of cost leadership. Porters model of generic strategies for business tutor2u. To gain competitive advantage, small businesses can focus on different strategies, including leadership in cost, quality, innovation or customer service. All strategies are intended to give the company a competitive advantage.
Three competitive strategies for your business frogdog. When you focus on a narrow target market, you have the best chance to become the leader of that niche. Today, given its current one ford plan, ford motor company has been moving its generic strategy to emphasize differentiation for competitive advantage. To summarize, generic strategy matrix proposed by porter highlights cost leadership, differentiation and focus as choices for firms, has dominated corporate competitive strategy. Since the advancement of the technology more focus of the company lies on gaining competitive advantage. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.
The advantages and disadvantages of the cost leadership styles show us that this process can be used to create a unique competitive advantage. Chapter 4 competitive advantage cost and differentiation. It will also reduce the speed to which an organization is able to adapt to changing circumstances. A differentiation strategy involves the firm creating a. There are three marketing ways you can sustain a competitive advantage with a focus strategy. Creating and sustaining superior performance in 1985. The low cost leader in any market gains competitive advantage from being able to.
This enables a low cost leader to earn above average profits. Competitive strategies adopted by safaricom kenya limited. Below are some of the examples of implementation of cost leadership strategy used by aldi stores. 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. Nevertheless, a differentiation strategy based on superior quality compared to competition is more profitable than cost leadership strategy. Both can be more broadly approached or narrow, which results in the third viable competitive strategy. In cost leadership, a firm sets out to become the low cost producer, a firm must find and exploit all sources of cost advantage.
Even though netflix mainly applies cost leadership as its generic strategy for competitive advantage, the business also uses differentiation in its operations. Porter wrote in 1980 that strategy targets either cost leadership, differentiation, or focus. Pdf carrefours competitive strategy cost leadership and differentiation. This study analyses tourist preferences for hutted accommodation in a staterun game reserve in kwazulunatal and concludes that even where superior accommodation facilities were available, customers expressed a preference for more. Generic strategies can help the organization to cope with the five competitive forces in the industry. However, the firm is moving toward the broad differentiation generic strategy to compete against firms like gm and toyota. Cost leadership involves a company that is able to produce and sell its products and services at a much lower cost than its competitors.
Porters generic competitive strategies ways of competing. Cost leadership strategy and sustainable competitive. An institutions relative position within its industry determines whether an industrys profitability is above or below the industry average. Cost leadership styles are focused on creating lowcost operations within their market and industry. In this post im going to be focusing on differentiation, but it is important to understand why differentiation is a strategy and how it relates to competitive advantage. Describe the nature of focused cost leadership and focused differentiation.
The strategy lends itself to highvolume, transactionoriented and standardized production that has little need for much differentiation. The most revolutionary development in the american automobile market then was the popularity of. The classical porters typology of competitive strategies covers the three generic competitive strategies of cost leadership, differentiation and focus. The focus strategy is one of three generic strategies that professor porter created at the time. The global online retailer operates with a razor thin profit margin and succeeds due to. Competitive advantage is a theory that seeks to address some of the criticisms of comparative advantage.
Cost leadership is a strategy that having lowest operational cost and lowest prices in the target market segment. According to porters generic strategies model, there are three basic strategic options available to organizations for gaining competitive advantage. The focus strategy has two variants, cost focus and differentiation focus. Cost leadership is a concept developed by michael porter, used in business strategy which describes a way to establish a competitive advantage.
Franchising and licensing forms of new market entry is utilized within mcdonalds business strategy to a great extent. It is used to reduce the cost of the operation in running the grocery store. According to porter, there are three generic strategies that a company can undertake to attain competitive advantage. With this strategy, the objective is to become the lowest cost producer in the industry. Generic competitive strategies, generic competitive.
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