Business Strategy: The Three Generic Strategies

Updated on March 31, 2017
Dr Jerry Allison profile image

Dr Jerry is an associate professor at the Tillman School of Business at University of Mount Olive teaching management and analytics courses.

A strategy of a business can be reduced to one of three generic strategies. These strategies are cost leadership, differentiation, and focus.1,2,3 The three types were discovered by the Harvard professor Michael Porter and many works that discuss strategy refer back to his two books. This article examines each of the three generic strategies.

Cost Leadership Strategy

Cost Leadership is a strategy where "a firm sets out to become the low-cost producer in its industry."2 A firm with this strategy sets as a goal to produce or provide a service for a lower operating cost than the competitors. This enables the firm to sell goods or services at the same selling price as the competitors and make a larger profit. Also, the firm could lower the selling price to underbid the competitors and still make a profit. The emphasis is on lower costs, not on low selling prices. "Cost leadership requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D..."1

Porter further states that this strategy "requires that a firm the the cost leader, not one of several firms vying for this position."2 The only way this strategy works is if the firm is the best. This is because the firm that is number one at cost reduction, can at any time reduce its selling price down below the other firms' operating cost. The number one firm can still make a profit (although slight) while forcing the other firms to match selling price and take a loss or keep the selling price higher. This is a huge advantage to the lowest operating cost firm.

Differentiation Strategy

The second generic business strategy is differentiation: being different than every other firm. Grant states this is an "emphasis on branding advertising, design, service, quality, and new product development."3 The firm adopting this strategy seeks to be unique in the industry. This uniqueness must be a feature for which customers will pay a premium price. This differentiation does not have to be anything outlandish. It can be as simple as the best customer service in the industry. Differentiation can also be speed in filling orders. The point of differentiation only has to be something that customers will be willing to pay a larger selling price than that of the cost leader.

Differentiation can lead to profitability. However, it does not lead to market share. As Porter states, differentiation creates a perception of exclusivity which is incompatible with a high market share.1 Thus, a firm with a differentiation strategy can focus on customer loyalty instead of attempting to create a large market share.

Focus Strategy

The focus strategy ignores most of a product or service market and focuses upon a particular niche. The niche could be "a particular buyer group, segment of the product line, or geographic market."1 For example in the automobile industry there are companies that specialize in selling vehicles for disabled people. These firms do not compete with the dealerships because these firms have a special vehicle the dealerships do not carry in inventory. The focus is to serve a very special group of customers.

As with the differentiation strategy, this also implies market share will be limited. Porter states, "Focus necessarily involves a trade-off between profitability and sales volume."1 However, if a firm adopts the focus strategy, the firm must ensure the market segment that is being served is absolutely different than the main market. If the segment is not different, then the focus strategy will not succeed.2

Summary and Caution

This article has discussed the three generic strategies that firms can have for a product or service. A firm picking one of these has a good chance of being profitable. However, many firms are what Porter describes as "stuck in the middle."1 A firm stuck in the middle is "almost guaranteed low profitability"1, "possesses no competitive advantage"2, and are susceptible to having market share destroyed by those firms with a competitive advantage.2 Thus, it is extremely important for a firm to wisely choose a business strategy and implement that strategy well.

Footnotes

1Porter, Michael (1998). Competitive Strategy. The Free Press: New York.

2Porter, Michael (1998). Competitive Advantage The Free Press: New York.

3Grant, Robert (2008). Contemporary Strategy Analysis. Blackwell Publishing: Malden, MA.

Comments

    0 of 8192 characters used
    Post Comment

    • Dr Jerry Allison profile imageAUTHOR

      Jerry Allison 

      5 years ago from Mount Olive, NC

      Your comment is appreciated, jessyk.

    • jessyk profile image

      Jessy Katz 

      5 years ago from Boston

      I agree, differentiation is my favorite strategy.

      Thanks for this information.

    • Dr Jerry Allison profile imageAUTHOR

      Jerry Allison 

      5 years ago from Mount Olive, NC

      Thank you. I appreciate the comment.

    • iguidenetwork profile image

      iguidenetwork 

      5 years ago from Austin, TX

      What a good article you've written. They're always the classic and still the most effective marketing strategies to get ahead of the business. Up and useful.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, toughnickel.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://toughnickel.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)