Generic Business Strategies05/03/2020
Every business must find a strategy that enables it to achieve a competitive advantage in the marketplace. That choice of strategy is based on the strengths and weaknesses of the company’s products and the position it wants to have in the minds of its customers. The best strategy is the one that leverages the company’s strengths for the greatest profits and the highest return on investment.
Porter’s generic strategies are as follows:
- Cost Leadership Strategy.
- Differentiation Strategy.
- Cost Focus.
- Differentiation Focus.
A cost leadership strategy works if the company can produce its products at the lowest cost in the industry. This strategy is commonly used in markets with products that are not distinctly different from each other. They are “standard” products in a broad market, frequently purchased and universally accepted by most consumers.
To become a cost leader, a company strives to reach the lowest cost of production with the least distribution cost so that it can offer the cheapest price in the market. With the lowest price, the company hopes to attract the most buyers and dominate the market by driving competitors out.
A successful cost leadership strategy requires the optimization of all aspects of a company’s operations. To becomes the lowest-cost producer, a business might pursue the following:
- Productivity: Study any process that uses labor and find ways to improve productivity and increase efficiency.
- Bargaining power: One way to lower the cost of production is to exploit the economies of scale. Higher volumes enable the business to negotiate lower prices from material suppliers and reduced costs for transportation.
- Technology: Improvements in technology happen rapidly, and a company must invest in the latest innovations to remain competitive.
- Distribution: As with technology, the methods of distribution are constantly evolving. Businesses must continuously analyze changes in distribution costs to find the lowest cost to transport their goods.
- Production methods: Lowering the cost of production is a continuous process. For example, implementing just-in-time inventory controls for raw materials is a way to reduce financing costs of assets.
Firms that are successful with a cost leadership strategy usually have the following advantages:
- They have access to the capital needed to large investments in manufacturing facilities that lower the cost of production. Weaker competitors may not have the financial strength to borrow large sums of money.
- More efficient producers will have highly-skilled engineering and production staff that work constantly to improve the manufacturing processes.
- Aggressive companies are always looking for ways to vertically integrate their processes by acquiring raw material suppliers, component manufacturers and distribution companies. Of course, this also requires having the financial strength to finance the purchases of these companies.
Walmart is one of the most well-known companies that has an effective cost leadership strategy. Their approach is to market to the largest number of customers with the lowest prices on all of its products.
The company has been able to dominate the low-cost market by negotiating price-volume discounts with suppliers and building an incredibly cost-efficient distribution system. Walmart works with all of its internal processes to operate at the lowest cost.
A differentiation strategy requires the company to offer products with unique characteristics that consumers believe have value and are willing to pay more for them. If consumers perceive that these unique properties are worthwhile, the company can charge premium prices for its products.
Ideally, the premium prices will be more than enough to offset the higher costs of production and allow the company to make a reasonable profit.
Companies that succeed with a differentiation generic marketing strategy need to have a talented and creative product development staff. These people must have the ability to survey the market and get into the minds of the potential buyers to identify the features that will attract consumers and make them willing to pay more for the products.
Having a unique product is not the end of the story. The implementation of a differentiation strategy requires a sales team that has the skills to effectively communicate the unique properties of the products and convince consumers that they are receiving more value for their money. At the same time, marketing campaigns should promote and establish the company as a reputable firm known for high-quality and innovative products.
A differentiation strategy has several risks. Competitors will not remain idle when losing market share; they will find ways to imitate products and begin their own differentiation campaigns.
Another risk is changing consumer tastes. Unique product characteristics that capture the minds of consumers at one time can fade away as competitors introduce other features that catch the eyes of buyers.
A cost focus strategy centers on a limited market segment or a particular niche. It requires the company to understand the idiosyncrasies of that market and the unique needs of those specific customers.
Companies that pursue a cost focus strategy are taking a risk by abandoning the mass market. While concentrating on a specific demographic may develop a loyal pool of customers, the company is basing its fortunes on a small group of buyers. The features that are attractive to this niche market may not appeal to the broader market.
Like a cost focus strategy, the differentiation focus approach aims for a narrow niche market. In this case, the company finds unique features of its products that appeal to a particular group of customers.
However, the company is depending on the spending habits of a small group of consumers for its profits. If this group changes its tastes, the company will have difficulty switching direction to start selling to the mass market.
A successful differentiation focus strategy depends on developing a strong brand loyalty from its customers and constantly finding unique features to stay ahead of the competition.
Choosing a Strategy
The first step in selecting a strategy for your company is to conduct a SWOT analysis of the business. This analysis will identify the strengths and weaknesses of the company in addition to highlighting market opportunities and threats.
To thoroughly understand the market, Porter developed another model known as the Five Forces Analysis. This analysis looks at the competitive position of the business and the factors that will adversely affect its profitability. Those factors are the
- Power of suppliers.
- Power of customers.
- Availability of similar products.
- Threat of new competitors.
- Internal competition.
The SWOT and Five Forces analyses will help to identify which one of these generic business strategies will work best for your company.