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Firms operating in a competitive market can only succeed if they create competitive advantages in their industries. Firms can create competitive advantages if they are optimally positioned in their industries. In order to achieve optimal positioning, a firm must leverage its strengths.
This involves adopting one of Porter’s generic strategies namely, cost leadership strategy, differentiation strategy and focus strategy. These strategies are considered to be generic since they do not depend on either the firm or the industry. This paper aims at evaluating these strategies as well as giving examples of business sectors that can adopt them.
Cost Leadership Strategy
For a firm to pursue this strategy, it must aim at attaining the lowest cost of production in the industry. This will enable it to maintain competitive prices in the market. Due to the low production cost, the firm can sell its goods at the prevailing price and realize higher returns than other firms.
Alternatively, it can set its prices below the equilibrium price in order to increase its sales and market share. This strategy enables firms operating in markets characterized by price wars to remain profitable as their competitors incur losses. The strategy is suitable for businesses targeting the broad market.
Was of Implementing the Cost Leadership Strategy
The cost leadership strategy can be realized as follows. First, the firm can focus on improving process efficiency. This will help in lowering the overall cost of production and turnaround time.
Second, the firm can obtain its supplies from a large source associated with low cost materials in order to reduce the price of the final product.
Third, it can focus on vertical integration or outsourcing some of its operations in order to minimize operating cost. Examples of operations that can be outsourced include logistics and transportation. Finally, the firm can avoid costs that are not necessary.
Preconditions for Cost Leadership Strategy
In order to pursue the cost leadership strategy, the firm must have the following strengths. First, it must have the capital to acquire production assets. This acts as an entry barrier if the firm’s competitors lack capital to invest in the production assets.
Second, the firm’s workers should be skilled in product design in order to facilitate efficient production. Besides, they must be experts in engineering manufacturing process in order to promote high efficiency. Finally, the firm must have an efficient distribution channel. This helps in lowering distribution costs.
Despite its advantages, the cost leadership strategy is associated with the following weaknesses. Other firms in the industry are also likely to achieve low cost in production thus lowering their prices as well. The competitive advantage attributed to efficient production can be eliminated as other firms adopt better production technologies.
Cost leadership strategy is mainly used in the retail industry. This is because, firms in the industry serve a broad market and their customers are price sensitive, hence necessitating low prices.
Firms pursuing this strategy aim at developing products associated with superior attributes that are valued by customers. Due to the superior attributes, customers perceive the products to be better than those of competitors.
The firm can charge a high price for the product due to its superior attributes. If the price of supplies increases, the firm can transfer the additional costs to the customers especially if substitutes are not readily available. Thus this strategy enables the firm to be associated with high product quality.
Preconditions for Differentiation Strategy
First, the firm must be able to make significant investment in research and development in order to produce high quality products. Second, the firm should hire highly skilled and creative employees in order to develop products that meet specific needs of the customers.
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This can be achieved through strategic talent acquisition. Third, the firm’s sales team must be able to convey the perceived superior attributes of the product in the market. Finally, the firm should have a reputation of high quality in order to distinguish itself in the market.
The differentiation strategy is associated with the following demerits. The unique attributes of the product can be imitated by competitors especially if the intellectual property rights are not protected through appropriate legislation. The product might become less attractive as customers’ tastes change. Besides, other firms might be able to achieve greater differentiation.
Differentiation strategy is mainly pursued in manufacturing industry. For example, manufacturers of electronics such as Sony depend on high product quality to maintain their market shares.
In this case, the company focuses on a particular market segment. Some firms pursuing this strategy serve their segments through cost leadership strategy while others normally adopt a differentiation strategy. The rationale behind this strategy is that the needs of the segment can be served better by focusing on it.
Firms pursing this strategy are associated with high customer loyalty and this prevents potential competitors from joining the market. Firms pursuing this strategy have low barraging power since they focus on a small market segment which leads to low sales volume. However, they can transfer high production costs to customers through a differentiation-focused strategy.
Preconditions for Focus Strategy
The firm should have excellent knowledge of the market in order to serve it well. It should also be able to produce a wide range of products that best meet the needs of the customers.
The focus strategy is associated with the following limitations. The products of the firm can be imitated by competitors especially if they have superior attributes. Changes in tastes in the market can also limit the firm’s sales. Besides, other firms might be able to identify sub-segments which they can best serve.
Focus strategy can be used in the service industry. For example, a consultancy firm can target a specific group of clients and offer tailor made services for such clients.
The above strategies enable firms to create competitive advantages in the market. Consequently, they are able to compete effectively and remain profitable. The generic strategies include focus strategy, differentiation strategy and cost leadership strategy. The selection of these strategies depends on the firm’s ability to meet the preconditions associated with them. Despite their benefits, each of these strategies has its demerits as discussed above.