According to Porter, a company can create a competitive advantage over its competitors in its chosen market through the use of generic competitive strategies. Focus, differentiation, and cost leadership are three generic strategies.
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Overview
There are two ways for a company to gain a competitive advantage: either by lowering costs or differentiating itself on dimensions valued by customers. Furthermore, companies can choose either a focused (segment-based) or industry-wide scope to offer their products across a wide range of market segments. Choices concerning both the type and scope of competitive advantage are reflected in the generic strategy. Originally described in 1980 by Michael Porter, it has been widely adopted ever since.
Cost leadership
By reducing costs, the company can offer competitive prices and profit margins while also campaigning for discounts or launching an aggressive pricing war to eliminate the competition. Cost reductions can also open up new markets that were previously unable to sustain higher prices. In addition to providing flexibility, lowering costs also reduces the likelihood that you will be forced to raise prices if suppliers raise prices unexpectedly and suddenly. It is possible for other companies to copy your methods, eroding any advantage you may have, and if you fail to invest in research and development, your products will appear dated and inefficient compared with those of competitors with the newest technology.
Differentiation
Differentiating your products for different segments sets you apart from the competition. By enhancing product desirability, strengthening your brand, promoting customer loyalty, creating a competitive advantage, and enabling higher prices, you can achieve higher returns. It is possible to differentiate your products from those of your competitors, but you can also differentiate your own products from one another in order to target different markets and customer groups. There are risks involved, such as increased costs and waste, as well as the potential for more complex operations.
Focus
Focus involves both cost leadership and differentiation, but focuses on gaining a greater share of a certain market segment. By focusing on too few factors, on a less lucrative or unstable market, and overly focusing on the short term, there is a risk of obtaining a narrow view.
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