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In 1980, Porter wrote that strategy target differentiation, cost leadership or focus. These are known as Porter’s three generic strategies. This can be applied to any size or form of business. Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. Porter’s generic strategies detail the interaction between product differentiation strategies, cost minimization strategies, and market focus strategies. Porter described an industry as having multiple segments that can be targeted by a firm. The breadth of its targeting refers to the competitive scope of the business. He defined two types of competitive advantage: lower cost or differentiation relative to its rivals. Attaining competitive advantage results from a firm’s ability to cope with the five forces better than its rival. He wrote, achieving competitive advantage requires a firm to make a choice about the type of competitive advantage it seeks to attain and the scope within which it will it will attain it. Porter also wrote: “the two basic types of competitive advantage combined with the scope of activities for which a firm seek to achieve them lead to three generic strategies for achieving above average performance in an industry: differentiation, cost-leadership, and focus. The focus strategy has two variants, differentiation focus and costs focus.
In Cost leadership, a firm sets out to become the low-cost producer in its industry. The sources of cost advantage are different and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw material and other factors. A low-cost producer must find and exploit all sources of cost advantage. If a firm can sustain and achieve overall cost leadership, then it will be an above average performer in its industry.
In a differentiation strategy, a firm seeks to be unique in its industry along with some dimensions that are widely valued by buyers. Here, it selects one or more attributes that many buyers in an industry perceived as important. It is rewarded a premium price for its uniqueness.
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. Here, the focuser selects a segment or a group of segments in the industry and tailors its strategy to serving them to the exclusion of others. It has two variants.
(a) In cost focus, a firm seeks a cost advantage in its target segment while in
(b) differentiation focus a firm seeks differentiation in its target segment. The cost focus exploits differences in cost behavior in some segments, while differentiation focus exploits the special needs of buyers in certain segments.
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