1. Cost leadership 2. Differentiation

3. Focus.

•Generic strategies were used initially in the early 1980s, and seem to be even more popular today.

•They outline the three main strategic options open to organization that wish to achieve a sustainable competitive advantage.

Strategic Orientation—Porter’s Three Generic Strategies

UniquenessUniquenessLow Cost Low Cost PositionPosition

BroadBroad

Narrow

Narrow

Bu

sin

ess

Sco

pe

Bu

sin

ess

Sco

pe

Strategic AdvantagesStrategic Advantages

DifferentiatioDifferentiationn

Overall Overall Cost Cost

LeadershipLeadership

FocusFocusFocus Focus DifferentiationDifferentiation Focus Low CostFocus Low Cost

Cost Leadership. The low cost leader in any market gains

competitive advantage from being able to produce at the lowest cost. Products tend to be 'no frills.'

Cost is driven down through all the elements of the value chain.

Cost Leadership. However, low cost does not always lead to low price.

Producers could price at competitive parity, exploiting the benefits of a bigger margin than competitors.

Toyota, is very good not only at producing high quality autos at a low price, but have the brand and marketing skills to use a premium pricing policy. Wal-Mart is another example of low-cost strategy.

The Sources of Cost Advantages

Economies of Scale Experience or learning-curve Capacity Utilization Product Design Location Vertical Integration/Outsourcing Value chain configuration

Differentiation

“Differentiation means providing something unique that is valuable to the buyer beyond simply offering a low price.” (M. Porter)

Differentiated goods and services satisfy the needs of customers through a sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin.

Differentiation

Incurs additional costs in creating their competitive advantage. These costs must be offset by the increase in revenue generated by sales. Costs must be recovered.

There is also the chance that any differentiation could be copied by competitors. Therefore there is always an incentive to innovate and continuously improve.

• Understanding customer needs andpreferences

• Commitment to customers

• Knowledge of company's capabilities

• Innovation

Keys to Successful DifferentiationKeys to Successful Differentiation

TANGIBLE Observable characteristics: size, color, materials, etc.performancepackagingcomplementary services

INTANGIBLEUnobservable and subjective characteristics relating to image status, exclusively, identity.

TOTAL CUSTOMER RESPONSIVENESS: Differentiation not just about the product, it embraces the whole relationship between the supplier and the customer.

The Nature of DifferentiationThe Nature of Differentiation

THE KEY IS CREATING VALUE FOR THE CUSTOMER

Pitfalls of Differentiation Strategies

Uniqueness that is not valuableToo much differentiationToo high a price premiumDifferentiation that is easily imitatedDilution of brand identification through

product-line extensionsPerceptions of differentiation may vary

between buyers and sellers

Niche/ Focus strategies Here the organisation focuses its effort on

one particular segment and becomes well known for providing products/services within the segment.

They form a competitive advantage for this niche market and either succeed by being a low cost producer or differentiator within that particular segment. Examples include Roll Royce, Bentley or Organic food.

NicheFocus is based on the choice of a narrow

competitive scope within an industryFirm selects a segment or group of segments

(niche) and tailors its strategy to serve themFirm achieves competitive advantages by

dedicating itself to these segments exclusivelyTwo variants

Cost focusDifferentiation focus

Where competitors are weakest

Pitfalls of Focus Strategies

Erosion of cost advantages within the narrow segment

Focused products and services still subject to competition from new entrants and from imitation

Focusers can become too focused to satisfy buyer needs. E.g.,Restaurant menu.

Stuck In The MiddleThe danger some organisation face is that

they try to do all three and become what is known as stuck in the middle.

They have no clear business strategy, be all to all consumers, which adds to their running costs causing a fall in sales and market share.

It is argued that if you select one or more approaches, and then fail to achieve them, your organization gets stuck in the middle without a competitive advantage. Good take-over targets.

Market Share (Quantity)

Low High

Pro

fita

bil

ity

Low

High

Differentiation-based Strategies

Low Cost Leadership Strategies

Stuck-in-the-Middle

Market Share-Profitability Relationship:“Porter’s Bucket”

Market Share-Profitability Relationship:“Porter’s Bucket”

Ikea's success in the retail industry can be attributed to its vast experience in the retail market, product differentiation, and cost leadership.

One of the World's most successful multinational retailing firms operating as a global organization based on its unique concept that the furniture is sold in kits that are assembled by the customer at home.

Ikea's mission is to offer a wide range of home furnishing items of good design and function, excellent quality and durability, at prices so low that the majority of people can afford to buy them.

The company targets the customer who is looking for value and is willing to do a little bit of work serving themselves, transporting the items home and assembling the furniture for a better price.

The typical Ikea customer is young low to middle income family.