4.2.2 Why firms implement the generic strategies?

The Cost Leadership Strategy

Within this strategy the firm sells its standardized products either below the average industry prices to increase market share or at average industry prices to earn a profit higher than that of competitors.

Therefore, having a low cost advantage does not always lead to low price. Some firms that are very good at managing their costs sell their products at competitive parity, thus enjoying greater margins than their competitors. In this environment, the low cost business situates industry-standard pricing and brands its products to compete alongside other comparable brands in the category. Its success is measured by its profit. In the occurrence of a price confrontation, the firm can keep on some effectiveness while the competitors suffer losses. Even without a price confrontation, as the industry matures and prices decline, the firms that can produce more inexpensively will remain profitable for a longer period of time. The costs leadership strategy usually targets a broad market.

Differentiation

Differentiation is a viable strategy for earning above-average returns in an industry, because it creates a defensible position for coping with the five competitive forces.

In fact, by the product differentiation the firm attempt to gain a competitive advantage by increasing the perceived value of their products and services relative to the perceived value of other firm's products and services. Products sold by two different firms may be exactly the same, but if customers believe the first one is more valuable than the second, then the first product has a differentiation advantage. The existence of product differentiation, in the end, is always a matter of customer perception but firms can take a variety of actions to influence these perceptions.

Focus

The firm usually looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency. Notably, a number of small and medium sized companies have found that the niche strategy is the most useful strategic area to explore for them (Lynch, 2003).

While most companies employ cost leadership strategy, differentiation, or a mix of these two strategies, there are relatively fewer companies that adopt a niche strategy. A focus strategy should target market segments that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investment. A firm using a focus strategy frequently benefits from a high degree of customer fidelity, and this well-established loyalty discourages other firms from competing openly. Because of their narrow market focus, firms using a focus strategy market lower volumes and therefore less bargaining power close to their suppliers. Nonetheless, firms pursuing a differentiation-focused strategy may be able to pass on higher costs to customers since close alternative products do not exist.