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Porter's Generic Strategies: Low Cost, Differentiated & Focus

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  • 0:03 Low Cost,…
  • 0:41 Strategic Advantage
  • 2:09 Strategic Focus
  • 3:11 Avoid Being Stuck in…
  • 3:53 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

Michael Porter, author of 'Competitive Advantage,' suggested in 1985 that all companies pursue one of three general strategies. In this lesson, we'll learn what those strategies are and when each is appropriate to use.

Low Cost, Differentiation, and Focus

Business professor and strategist, Michael Porter, wrote the book Competitive Advantage: Creating and Sustaining Superior Performance in 1985. In this book, Porter presented his readers with the idea that companies pursue one of four generic strategies based on their strategic target and their strategic advantage. These strategies include:

  • Cost leadership strategy
  • Differentiation strategy
  • Focus strategy
  • Combined cost leadership and differentiation strategy

You can take a look at this matrix to make sense of what Porter was suggesting:

Porter

Strategic Advantage

According to Porter, companies could find a strategic advantage by pursuing either a low-cost strategy or a differentiation strategy. A low-cost strategy is when a company attempts to offer goods or services that are comparable to their competitors, but at a lower cost. You don't have to look further than your local Walmart to see an example of a low-cost strategy. Walmart's strategy is based on offering the lowest cost.

The low-cost strategy isn't always the best strategy, and not all companies use it. One company that does so successfully is Apple. If you've ever bought one of its products, you may have noticed it was significantly more expensive than a similar phone, tablet, or computer. For many customers, the Apple brand is unique and offers important, unique benefits over the competition, so they're willing to pay those prices. As such, the company is employing a product differentiation strategy, or how unique customers view goods and services.

On Porter's model of generic strategies, the horizontal axis is the degree to which a company pursues a low-cost or a differentiation strategy. It's important to note this isn't an either/or decision. Companies can have strategies that are a combination of low-cost and differentiation strategies. Consider some of the tablets made by Samsung. They aren't as low-cost as some of the competitors, but they aren't as unique as Apple's iPads, which places them in the middle of the strategic advantage scale.

Strategic Focus

In addition to choosing a strategic advantage, companies select a target market. A target market is a group of consumers a company views as potential customers and can either be industry-wide or focused on a particular segment.

Companies pursuing an industry-wide focus offer goods and services that are useful to an entire market. For instance, the iPad appeals to a broad market in that it meets the needs of students, professionals, gamers, readers, and even young children. By contrast, the Microsoft Surface aims to be more of a laptop replacement and is targeted more towards working professionals. While Apple's iPad may have more of an industry-wide focus, the Microsoft Surface has a particular segment focus.

An industry-wide versus segment focus is not an either/or decision. Like strategic advantage, each option is on opposite sides of the same scale. A company can still meet the needs of a specific consumer group while providing goods and services to other segments of the market.

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