Porter’s generic strategies, developed my Michael Porter, describes a companies competitive advantage over its chosen market scope. According to Porter’s generic strategies, a company has two competitive advantages it can pursue, focus on reducing its costs or focus on differentiation themselves from their competition. The company will apply this across two scopes, narrow or broad. As a result, these combinations gives us three/four possible generic strategies.
These strategies are:
- Cost Leadership: lower cost and broad market scope.
- Differentiation: differentiation and broad market scope.
- Focus: lower cost and narrow market scope
- Focus: differentiation and narrow market scope.
According to Michael Porter, a company should focus purely on one of these three/four strategies. A company that doesn’t is considered to be stuck in the middle which will generally result in failure of that firm.
This generic strategy works in two parts. A firm focuses on reducing the cost of providing a product or service. The firm them reduces its prices in order to gain a larger market share.
The lower cost production costs allows the company room to under price its competitors and still turn a sizable profit. Competitors may try to follow in a price war which, in the long run, will drastically reduce the Competitors profit margins.
An example of this would be Walmart. The company uses information technology, strategically sells items with high turn over and other various strategies in order to reduce its operating costs. With lower operating costs, Walmart can charge less per item which it does in order to gain more market share.
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