Cost Strategies
GENERIC STRATEGIES:
A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm’s strength usually falls into one of two headings:
• Cost advantage
• Differentiation
By applying these strengths in either a broad or narrow or narrow scope, three generic strategies result:
• Cost leadership
• Differentiation
• Focus
These strategies are applied at business unit level. They are called generic strategies because they are not firm or industry dependant.
Cost Leadership:
This generic strategy calls for being the low cost producer in an industry for a given level of quantity. The firm sells its products at either average industry prices to earn a profit higher than its rivals or below the average industry prices to gain market share. In the event of price war, the firm can maintain some profitability while the competition suffers loses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time. The cost leadership strategy usually targets a broad market.
Differentiation Strategy:
A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customer perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product.
Focus Strategy:
The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing
A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm’s strength usually falls into one of two headings:
• Cost advantage
• Differentiation
By applying these strengths in either a broad or narrow or narrow scope, three generic strategies result:
• Cost leadership
• Differentiation
• Focus
These strategies are applied at business unit level. They are called generic strategies because they are not firm or industry dependant.
Cost Leadership:
This generic strategy calls for being the low cost producer in an industry for a given level of quantity. The firm sells its products at either average industry prices to earn a profit higher than its rivals or below the average industry prices to gain market share. In the event of price war, the firm can maintain some profitability while the competition suffers loses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time. The cost leadership strategy usually targets a broad market.
Differentiation Strategy:
A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customer perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product.
Focus Strategy:
The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing