Cost leadership a firm pursuing a costleadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors. The advantages and disadvantages of the cost leadership styles show us that this process can be used to create a unique competitive advantage. Both can be more broadly approached or narrow, which results in the third viable competitive strategy. A focused cost leadership strategy requires competing based on price to target a. Pearsons correlation, analysis of variance anova and multiple regression analysis were used to establish the relationships among the study variables.
How is competitive advantage used in focus strategy. Three competitive strategies for your business frogdog. Describe the nature of focused cost leadership and focused differentiation. Once your analysis is complete, it is time to implement a strategy to expand your competitive advantage. These are known as porters three generic strategies and can be applied to any size or form of business. As a generic strategy, differentiation involves developing the online business and its products in. It provides better profits for the team and organization. Pdf carrefours competitive strategy cost leadership and differentiation. Also, the niche could disappear or be taken over by larger competitors. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. Differentiation and its role in competitive advantage culttt. Cost leadership strategy aldi is a typical hard discounted store pursuing cost leadership strategy bonn, 2010. Below are some of the examples of implementation of cost leadership strategy used by aldi stores.
It represents a greater value for the customer, created either by lower prices or by providing greater benefits and services that justify higher prices. The global online retailer operates with a razor thin profit margin and succeeds due to. Cost leadership, differentiation, market focus and strategic alliance were all found to have a positive and significant influence on sme performance. Cost leadership, differentiation and focus strategies are the three main general approaches the model suggests companies can. Cost leadership strategy and boc kenya competitiveness. A critique of porters cost leadership and differentiation strategies 40 strategy can bring about in gaining a low cost position, as porter 1985, p. Dec 14, 2019 competitive advantage is what makes an entity better than opponents. The focus strategy has two variants, cost focus and differentiation focus. Here the main focus centres on automating manufacturing processes and work procedures in order to streamline operations and reduce cost. The study focuses on cost leadership strategy and sustainable competitive advantage of naivas supermarket chain in kenya. By reducing development and production costs, it becomes possible for higher profit margins to appear. In cost leadership, a firm sets out to become the low cost producer in. An institutions relative position within its industry determines whether an industrys profitability is above or below the industry average.
Porters model of generic strategies for business tutor2u. Cost leadership, differentiation and focus strategies are the three main general approaches the model suggests companies can use when attempting to leverage core business strengths to achieve competitive advantages. A focused or market niche strategy based on low costsconcentrating on a. The most revolutionary development in the american automobile market then was the popularity of. To be effective, cost leadership must be carefully managed to generate the profits that are possible. The five generic competitive strategies semantic scholar. Hybrid competitive strategies malta business school. Cost leadership and competitive advantage your business. There are two basic types of competitive advantage. However, the firm is moving toward the broad differentiation generic strategy to compete against firms like gm and toyota. These three broad types of competitive strategies have also been labeled generic strategies. Organizations that achieve cost leadership can benefit either by gaining market share through lowering prices whilst maintaining profitability or by maintaining average prices and therefore increasing profits.
Today, given its current one ford plan, ford motor company has been moving its generic strategy to emphasize differentiation for competitive advantage. Mcdonalds business strategy and competitive advantage. Generic competitive strategies, generic competitive. Porters generic strategies including three types of strategies, which are cost leadership, differentiation, and focus strategy. In cost leadership, a firm sets out to become the low cost producer, a firm must find and exploit all sources of cost advantage. It is in the context of the overall generic strategy which a firm may be pursuing that strategic options may be usefully considered. As with a focused lowcost strategy, narrow markets are defined in different ways in different settings. Creating and sustaining superior performance in 1985. Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources.
Cost leadership involves a company that is able to produce and sell its products and services at a much lower cost than its competitors. A critique of porters cost leadership and differentiation. Cost leadership styles are focused on creating lowcost operations within their market and industry. Cost leadership strategy and sustainable competitive. It is used to reduce the cost of the operation in running the grocery store.
The classical porters typology of competitive strategies covers the three generic competitive strategies of cost leadership, differentiation and focus. In this post im going to be focusing on differentiation, but it is important to understand why differentiation is a strategy and how it relates to competitive advantage. A cost leadership strategy is based upon a business organizing and managing its value adding activities so as to be the lowest cost producer of a product within an. Organizations that achieve cost leadership can benefit either by gaining market share through lowering prices whilst maintaining. It will also reduce the speed to which an organization is able to adapt to changing circumstances. Companies that use a cost leadership strategy and those that use a differentiation strategy share one important characteristic.
According to porter, there are three generic strategies that a company can undertake to attain competitive advantage. This enables a low cost leader to earn above average profits. A differentiation strategy involves the firm creating a. Competitive strategies adopted by safaricom kenya limited. Achieving cost leadership means that a firm sets out to become the low cost producer in its industry. Amazon business strategy can be described as cost leadership taken to the extreme. Below are some of the examples of implementation of cost leadership. These organisations generally target larger markets and focus on differentiation on a much wider scale within the industry than would a cost led company. They are 1 low cost leadership strategies, 2 differentiation strategies, and 3 focus strategies.
By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry. Porter called the generic strategies cost leadership across an industry or within a particular industry segment differentiation creating uniquely desirable products and services across an industry or within a particular industry segment, cost focus offering a specialized products or service at low cost. Cost leadership is a strategy that having lowest operational cost and lowest prices in the target market segment. Competitive advantage is a set of unique features of a company and its products that are perceived by the target market as significant and superior to the competition. How is competitive advantage used in focus strategy a focus strategy is one business approach outlined by management expert and author michael porter in his generic strategies model. Generic strategies can help the organization to cope with the five competitive forces in the industry.
Competitive advantage is what makes an entity better than opponents. Mcdonalds business strategy utilizes a combination of cost leadership and international market expansion strategies. To gain competitive advantage, small businesses can focus on different strategies, including leadership in cost, quality, innovation or customer service. Chapter 4 competitive advantage cost and differentiation. Competitive advantage is a theory that seeks to address some of the criticisms of comparative advantage. There are three marketing ways you can sustain a competitive advantage with a focus strategy. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them lead to three generic strategies for achieving aboveaverage performance in an industry. There are two basic types of competitive advantage a firm can possess. An operational excellence strategy aims to accomplish cost leadership. This study analyses tourist preferences for hutted accommodation in a staterun game reserve in kwazulunatal and concludes that even where superior accommodation facilities were available, customers expressed a preference for more. The most revolutionary development in the american automobile market then was the popularity of the closedbody cars sloan, 1972, pp. As a generic strategy, differentiation involves developing the online business and its products in ways that make them different from the competition. To obtain competitive advantage, company is following the three generic strategies.
This book describes how a firm can gain a cost advantage or how it can differentiate itself. Cost leadership, differentiation, market focus and strategic alliance were all found to have a positive. Let us examine the implications of each of the three generic strategies. When you focus on a narrow target market, you have the best chance to become the leader of that niche. The low cost leader in any market gains competitive advantage from being able to.
In the case of cost leadership, one advantage is that cost leaders emphasis on efficiency makes them well positioned to withstand price competition from rivals table 5. Focus is the easiest and least costly of the three strategies for most companies. Franchising and licensing forms of new market entry is utilized within mcdonalds business strategy to a great extent. One of the general strategies is the strategy of cost leadership.
Competitive advantage is defined in terms of cost and differentiation while linking it to profitability. Literally speaking, the term strategy stands for the warart of the military general, compelling the enemy to fight as per. Porters generic strategies are ways of gaining competitive advantage in other words, developing the edge that gets you the. Another focus strategy is to target niche market segments with specialized product lines. To that end, porter identified three generic strategies that can be implemented in any industry, and in companies of any size. Ford still maintains its cost leadership generic strategy. It is a strategy that was first developed by michael porter, business professor at harvard university, in the mid1980s.
Focused cost leadership and focused differentiation. Focused differentiation is the second of two focus strategies. The study concludes that while cost leadership, differentiation and focus strategies does influence an organizations competitiveness, a combination of all three brings forth a higher competitive edge. Besides cost leadership, the other two general strategies include differentiation and focus.
With this strategy, the objective is to become the lowest cost producer in the industry. Since the advancement of the technology more focus of the company lies on gaining competitive advantage. A critique of porters cost leadership and differentiation strategies. A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost cost advantage, or deliver benefits that exceed those of competing products differentiation advantage. May 22, 20 there are essentially two strategies for creating competitive advantage.
The emergence of competitive advantage sustaining c. All strategies are intended to give the company a competitive advantage. Focused cost leadership and focused differentiation mastering. A case study find, read and cite all the research you need on. Cost leadership is a concept developed by michael porter, used in business strategy which describes a way to establish a competitive advantage. These strategies are cost leadership, differentiation, and. The 3 strategies are cost leadership, differentiation, and focus. To summarize, generic strategy matrix proposed by porter highlights cost leadership, differentiation and focus as choices for firms, has dominated corporate competitive strategy. Types of strategies cost leadership,differentiation, focus. Michael porter competitive strategies involve taking offensive or defensive actions to create a defendable position in the industry. A firm differentiates itself from its competitors if it is unique in something that is widely valued by buyers. Even though netflix mainly applies cost leadership as its generic strategy for competitive advantage, the business also uses differentiation in its operations.
Types of strategies cost leadership, differentiation, focus strategies the term strategy has been adapted from war and is being increasingly used in business to reflect broad overall objectives and policies of an enterprise. In any business strategy, competitive advantage must play a big role. Types of strategies cost leadership,differentiation, focus strategies the term strategy has been adapted from war and is being increasingly used in business to reflect broad overall objectives and policies of an enterprise. The general focus of differentiation led organisations is to make their products different or more attractive than any other within the industry to achieve a competitive advantage. According to porters generic strategies model, there are three basic strategic options available to organizations for gaining competitive advantage. Cost leadership a firm pursuing a cost leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors. Product differentiation being the most commonly used one of these two strategic typologies spencer, joiner, and salmon, 2009. Moreover, product and service standardization lies. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry. Mar 23, 2020 amazon business strategy can be described as cost leadership taken to the extreme. The companys managers believed that competitors held a cost advantage. Porters generic competitive strategies ways of competing. The strategy lends itself to highvolume, transactionoriented and standardized production that has little need for much differentiation. Strongest advantage comes through leadership in a factor that is important to customers and difficult for competitors to.
Pdf carrefours competitive strategy cost leadership and. Critical analysis of competitive strategies on performance. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. In summary, the three strategies your company can choose from to sustain a competitive advantage include. The focus strategy is one of three generic strategies that professor porter created at the time. As with the difference between cost leadership and a pricecentered focus strategy, a nichemarket focus differs from a differentiation strategy by its specialization on. The global online retailer operates with a razor thin profit margin and succeeds due to a combination of economies of scale. Range, price and convenience are placed at the core of amazon competitive advantage. Kmarts illfated attempt to engage walmart in a price war ended in disaster, in part because walmart was so efficient in its. Cost focus differentiation focus competitive advantage competitive scope.
Business professor and strategist, michael porter, wrote the book competitive advantage. Michael porter defines three strategy types that can attain competitive advantage. It describes how the choice of competitive scope, or the range of a firms activities, can play a powerful role in determining competitive advantage. Porter wrote in 1980 that strategy targets either cost leadership, differentiation, or focus. Chapter 4 competitive advantage cost and differentiation in this chapter 4, after analysing the environment and the internal resources and capabilities, we focus on the source of c. Nevertheless, a differentiation strategy based on superior quality compared to competition is more profitable than cost leadership strategy.
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