Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage. The strategies relate to the extent to which. He also wrote: "The two basic types of competitive advantage [differentiation and lower cost] 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 leadership, differentiation and focus.Concept · Cost Leadership Strategy · Differentiation Strategy · Focus strategies. The generic strategies of cost leadership, differentiation, and focus strategies. If competing firms are unable to lower their costs by a similar amount, the firm.
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If we assume our firm and the other competitors are producing the product for a cost of C and selling it at SP, we are all receiving a profit of P.
Porter's Generic Strategies
As cost leader, we generic competitive strategies able to lower our cost to C while the competitors remain at C. We now have two choices as to how to take advantage of our reduced costs. Department stores and other high-margin firms often leave their selling price as SP, the original selling price.
This allows the low-cost leader to obtain a higher profit margin than they received before the reduction in costs. Since the competition was unable to lower their costs, they are receiving the original, smaller profit margin.
The cost leader gains competitive advantage over the competition by generic competitive strategies more profit for each unit sold.
Discount stores such as Wal-Mart are more likely to pass the savings from generic competitive strategies lower costs on to customers in the form of lower prices. These discounters retain the original profit margin, which is the same margin as their competitors.
However, they are able to lower their selling price due to their lower costs C. They gain competitive advantage by being able to under-price the competition while maintaining the same profit margin.
Porter's generic strategies - Wikipedia
Overall cost leadership is not without potential problems. Two generic competitive strategies more firms competing for cost leadership may engage in price wars that drive profits to very low levels.
Ideally, a firm using a cost leader strategy will develop an advantage that is not easily copied by others. Cost generic competitive strategies also must maintain their investment in state-of-the-art equipment or face the possible entry of more cost-effective competitors.
Major changes in technology may drastically change production processes so that previous investments in production technology are no longer advantageous.
Generic competitive strategies, firms may become so concerned with maintaining low costs that needed changes in production or marketing generic competitive strategies overlooked.
The strategy may be more difficult in a dynamic environment because some of the expenses that firms may seek to minimize are research and development costs or marketing research costs, yet these are expenses the firm may need to incur in order to remain competitive.
Whether the features are real or just in the mind of the customer, customers must perceive the product as having desirable features not commonly found in competing products.
The customers also must be relatively price-insensitive.
GENERIC COMPETITIVE STRATEGIES
Adding product features means that the production or distribution costs of a differentiated product may be somewhat higher than the price of a generic, generic competitive strategies product. Customers must be willing to pay more than the marginal cost of adding the differentiating feature if a differentiation strategy is to generic competitive strategies.
Differentiation may be attained through many features that make the product or service appear unique. Possible strategies for achieving differentiation may include: Differentiation can be achieved through real product features or through advertising that causes the customer to perceive that the product is unique.
Differentiation may lead to customer brand loyalty and result in reduced price elasticity. Differentiation may also lead to higher profit margins and reduce the need to be a low-cost producer.
Porter’s Generic Competitive Strategies
Since customers see the product as different from competing products and they like the product features, customers are willing to pay a premium for these features. As long as the firm can increase the selling price by more than the marginal cost of adding the features, generic competitive strategies profit margin generic competitive strategies increased.
The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to you, and that other competitors generic competitive strategies your cost reduction strategies. This is why it's important to continuously find ways of reducing every cost.
One successful way of doing this is by adopting the Japanese Kaizen philosophy of "continuous improvement. How you do this depends on the exact nature of your industry and of the products and services themselves, but will typically involve features, functionality, durability, support, and also brand image that your customers value.
To make a success of a Differentiation strategy, organizations need: