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 Porters Three Generic Strategies

Low Cost Position Overall Cost Leadership Focus Focus Low Cost

Uniqueness Differentiation

Focus Differentiation

Strategic Advantages

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 lowcost 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.

Keys to Successful

Differentiation

Understanding customer needs and preferences

Commitment to customers Knowledge of company's capabilities Innovation

The Nature of Differentiation

THE KEY IS CREATING VALUE FOR THE CUSTOMER
TANGIBLE Observable characteristics: size, color, materials, etc. performance packaging complementary services

INTANGIBLE Unobservable 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.

Pitfalls of Differentiation Strategies

Uniqueness that is not valuable

Too much differentiation

Too high a price premium Differentiation that is easily imitated

Dilution of brand identification through product-line

extensions Perceptions 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.

Niche
Focus is based on the choice of a narrow competitive

scope within an industry

Firm selects a segment or group of segments (niche) and

tailors its strategy to serve them Firm achieves competitive advantages by dedicating itself to these segments exclusively

Two variants
Cost focus Differentiation 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 Middle

The 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-Profitability Relationship: Porters Bucket

High

Differentiationbased Strategies

Profitability

Low Cost Leadership Strategies

Stuck-in-the-Middle

Low Low High

Market Share (Quantity)

 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.