Lecture Notes: The Generic Competitive Strategies
Introduction
Competitive strategy refers to how a company positions itself in the
marketplace to gain a competitive advantage. Michael E. Porter, a renowned
economist, identified five generic competitive strategies that businesses use
to compete effectively. These strategies are applicable across industries and
help firms achieve their goals depending on their market position, resources,
and customer needs.
1. Low-Cost Provider Strategies
This strategy focuses on achieving the lowest operational costs compared to
competitors while delivering products or services of acceptable quality. The
goal is to appeal to price-sensitive customers by offering lower prices than
rivals.
Key Features
Efficiency Focus: Minimizing costs through economies of scale, efficient
supply chain management, and lean production processes.
Price Leadership: Selling at lower prices to attract high volumes of
customers.
Risk: The risk of being undercut by competitors with even lower costs
or compromising quality in pursuit of cost reduction.
Example
Walmart: Known for its "Everyday Low Prices" strategy driven by
efficient logistics and bulk purchasing.
References
Porter, M.E. (1980). Competitive Strategy: Techniques for Analyzing
Industries and Competitors. New York: Free Press.
2. Broad Differentiation Strategies
This strategy aims to set a company's product or service apart from
competitors by offering unique attributes that customers perceive as
valuable, allowing the firm to charge a premium price.
Key Features
Unique Value Proposition: Differentiation can be based on quality,
design, brand image, technology, or customer service.
Customer Loyalty: Building a strong brand and creating customer
loyalty through superior value.
Risk: The risk of imitation by competitors or failing to justify a higher
price with the perceived value.
Example
Apple Inc.: Differentiates its products through innovative design,
cutting-edge technology, and a strong brand identity.
References
Kotler, P., & Keller, K.L. (2012). Marketing Management. Pearson
Education.
3. Best-Cost Provider Strategies
This strategy combines elements of both low-cost and differentiation
strategies by offering customers more value for their money through mid-
range pricing coupled with superior features or services.
Key Features
Balanced Approach: Delivering high-quality goods at competitive
prices.
Target Market: Appeals to value-conscious consumers who seek both
quality and affordability.
Risk: The challenge of maintaining high quality while keeping costs
low, and the possibility of being "stuck in the middle" between cost
leaders and differentiators.
Example
Toyota's Lexus brand: Offers luxury vehicles at prices lower than those
of premium brands like BMW or Mercedes-Benz.
References
Porter, M.E. (1996). What is Strategy? Harvard Business Review, 74(6),
61-78.
4. Focused (or Market Niche) Strategies
This strategy targets a specific segment of the market (a niche) by tailoring
products or services to meet the unique needs of the niche market better
than competitors.
Subtypes
Focused Low-Cost Strategy: Offering low-cost products or services
within a niche market.
Focused Differentiation Strategy: Offering uniquely differentiated
products or services within a niche market.
Key Features
Specialization: Developing an in-depth understanding of the niche
market's needs and preferences.
Limited Market Reach: Concentrated efforts on serving a narrow
segment rather than the broader market.
Risk: The danger of niche markets becoming unattractive or too
competitive over time.
Example
Rolls-Royce: Focuses on ultra-luxury automobiles for a very specific
high-net-worth customer base.
References
Barney, J.B., & Hesterly, W.S. (2015). Strategic Management and
Competitive Advantage. Pearson Education.
5. The Contrasting Features of the Five Generic Competitive Strategies
Target
Strategy Key Objective Market Risks Example
Low-Cost Achieve cost Price wars,
Provider leadership Broad quality trade-offs Walmart
Broad Imitation, cost
Differentiation Create unique value Broad escalation Apple Inc.
Best-Cost Offer superior value Broad/Value- Quality-cost Toyota’s
Provider at mid-range pricing conscious balance Lexus
Focused Low- Lowest costs within
Cost Strategy a niche Narrow Niche saturation Ryanair
Changing
Focused Unique value within customer Rolls-
Differentiation a niche Narrow preferences Royce
Conclusion
The choice of competitive strategy depends on the company’s resources,
capabilities, and competitive environment. Each strategy has its advantages
and risks; therefore, businesses must align their strategy with their long-
term goals and market dynamics.
Additional References for Further Reading
1. Grant, R.M. (2010). Contemporary Strategy Analysis. Wiley.
2. Hill, C.W.L., Jones, G.R., & Schilling, M.A. (2014). Strategic
Management Theory. Cengage Learning.
3. Porter, M.E. (1985). Competitive Advantage: Creating and Sustaining
Superior Performance. Free Press.
