The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share.
Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. The breadth of its targeting refers to the competitive scope of the business. Porter defined two types of competitive advantage: The focus strategy has two variants, cost focus and differentiation focus.
If a firm is targeting customers in most or all segments of an industry based on offering the lowest price, it is following a cost leadership strategy; Focused cost leadership it targets customers in most or all segments based on attributes other than price e.
It is attempting to differentiate itself along these dimensions favorably relative to its competition.
It seeks to minimize costs in areas that do not differentiate it, to remain cost competitive; or If it is focusing on one or a few segments, it is following a focus strategy. A firm may be attempting to offer a lower cost in that scope cost focus or differentiate itself in that scope differentiation focus.
The least profitable firms were those with moderate market share. This was sometimes referred to as the hole in the middle problem. Firms in the middle were less profitable because they did not have a viable generic strategy.
Porter suggested combining multiple strategies is successful in only one case. But combinations like cost leadership with product differentiation were seen as hard but not impossible to implement due to the potential for conflict between cost minimization and the additional cost of value-added differentiation.
Since that time, empirical research has indicated companies pursuing both differentiation and low-cost strategies may Focused cost leadership more successful than companies pursuing only one strategy. They claim that a low cost strategy is rarely able to provide a sustainable competitive advantage.
In most cases firms end up in price wars. Instead, they claim a best cost strategy is preferred. This involves providing the best value for a relatively low price. Cost Leadership Strategy[ edit ] This strategy also involves the firm winning market share by appealing to cost-conscious or price-sensitive customers.
This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio price compared to what customers receive. To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower cost than its rivals.
There are three main ways to achieve this. The first approach is achieving a high asset utilization. In service industries, this may mean for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast.
In manufacturing, it will involve production of high volumes of output. These approaches mean fixed costs are spread over a larger number of units of the product or service, resulting in a lower unit cost, i. For industrial firms, mass production becomes both a strategy and an end in itself.
Higher levels of output both require and result in high market share, and create an entry barrier to potential competitors, who may be unable to achieve the scale necessary to match the firms low costs and prices. The second dimension is achieving low direct and indirect operating costs.
This is achieved by offering high volumes of standardized productsoffering basic no-frills products and limiting customization and personalization of service. Production costs are kept low by using fewer components, using standard components, and limiting the number of models produced to ensure larger production runs.
Overheads are kept low by paying low wages, locating premises in low rent areas, establishing a cost-conscious culture, etc. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business.
The associated distribution strategy is to obtain the most extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low cost product features. Wal-Mart is famous for squeezing its suppliers to ensure low prices for its goods. Other procurement advantages could come from preferential access to raw materials, or backward integration.
Keep in mind that if you are in control of all functional groups this is suitable for cost leadership; if you are only in control of one functional group this is differentiation.
This will be clarified in other sections. Cost leadership strategies are only viable for large firms with the opportunity to enjoy economies of scale and large production volumes and big market share.
Small businesses can be "cost focused" not "cost leaders" if they enjoy any advantages conducive to low costs. For example, a local restaurant in a low rent location can attract price-sensitive customers if it offers a limited menu, rapid table turnover and employs staff on minimum wage.
An example is the success of low-cost budget airlines who, despite having fewer planes than the major airlines, were able to achieve market share growth by offering cheap, no-frills services at prices much cheaper than those of the larger incumbents.
At the beginning low-cost budget airlines chose "cost focused" strategies but later when the market grow, big airlines started to offer the same low-cost attributes, and so cost focus became cost leadership!A focused cost leadership strategy requires competing based on price to target a narrow market.
A firm that follows this strategy does not necessarily charge . At the beginning low-cost budget airlines chose "cost focused" strategies but later when the market grow, big airlines started to offer the same low-cost attributes, and so cost focus became cost leadership!
Describe the nature of focused cost leadership and focused differentiation. Know the advantages and disadvantages of focus strategies.
Companies that use a cost leadership strategy and those that use a differentiation strategy share one important characteristic: both groups try . Focused cost leadership strategy • A focused cost leadership strategy requires competing based on price to target a narrow market.
• A firm that follows this strategy does not necessarily charge the lowest prices in . Companies that use a cost leadership strategy and those that use a differentiation strategy share one important characteristic: both groups try to be attractive to customers in general.
Describe the nature of focused cost leadership and focused differentiation. Know the advantages and disadvantages of focus strategies. Focused cost leadershipA generic business strategy that requires competing based on price to target a narrow market.
is the first of two focus strategies. A focused.