4.2.1 What is meant by generic strategies?

Two of the essential decisions a firm has to made are related with its position within the industry, through opting by low cost or differentiation, and how broad or narrow a market segment to target. Porter produced a matrix using cost advantage, differentiation advantage and a broad or narrow focus to classify a set of generic strategies that the firm can pursue to generate and maintain a competitive advantage.

By applying those strengths in either a broad or narrow scope, result the three Porter´s generic strategies: cost leadership, differentiation and focus, shown in Figure 4.


Figure 4: Porter´s Generic Strategies (Click on the thumb nail to enlarge figure 4)

These strategies can be applied in most cases at SME level. They are called generic strategies because they are nor firm or industry dependent.

Cost Leadership Strategy

It takes a lot of money to look this cheap, said Dolly Parton. Like others in the Low Cost Leadership category, Dolly Parton is a big business.

The Cost Leadership strategy is frequently the domain of big business. Small firms are not in general resourced to achieve cost leadership (which requires scale). This generic strategy emphasizes efficiency once is considered for being the low cost producer in an industry for a given level of quality. Low costs allow firms to sell relatively standardised products that offer features acceptable to many customers at the lowest competitive price and such low prices will gain competitive advantage thus increasing market share. Whether a cost leadership strategy is sustainable depends on the ability of another competitor to match or develop a cost base than is lower than the cost leader. The lowest cost base must be able to be sustained if leadership is to continue.

Differentiation Strategy

Differentiation strategy is related with the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product.

Focus

Focus is essentially a strategy of segmenting markets and appealing to only one or a few groups of consumers or industrial buyers, to a not many select target markets. It is also called a segmentation strategy or niche strategy. It is hoped that by focusing the marketing efforts on one or two narrow market segments and tailoring the marketing mix to these specialized markets, it is possible to better meet the needs of that target market. At same time it attempts to achieve either a cost advantage or differentiation.