The development team had a hard time convincing the Board of Directors to approve the model for production, but it was eventually given the green light as long as it remained cost-effective to produce.
Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. The breadth of its targeting refers to the competitive scope of the business. Porter defined two types of competitive advantage: The focus strategy has two variants, cost focus and differentiation focus.
If a firm is targeting customers in most or all segments of an industry based on offering the lowest price, it is following a cost leadership strategy; If it targets customers in most or all segments based on attributes other than price e.
It is attempting to differentiate itself along these dimensions favorably relative to its competition. It seeks to minimize costs in areas that do not differentiate it, to remain cost competitive; or If it is focusing on one or a few segments, it is following a focus strategy.
A firm may be attempting to offer a lower cost in that scope cost focus or differentiate itself in that scope differentiation focus. The least profitable firms were those with moderate market share. This was sometimes referred to as the hole in the middle problem.
Firms in the middle were less profitable because they did not have a viable generic strategy. Porter suggested combining multiple strategies is successful in only one case. But combinations like cost leadership with product differentiation were seen as hard but not impossible to implement due to the potential for conflict between cost minimization and the additional cost of value-added differentiation.
Since that time, empirical research has indicated companies pursuing both differentiation and low-cost strategies may be more successful than companies pursuing only one strategy. They claim that a low cost strategy is rarely able to provide a sustainable competitive advantage.
In most cases firms end up in price wars.
Instead, they claim a best cost strategy is preferred. This involves providing the best value for a relatively low price.
Cost Leadership Strategy[ edit ] This strategy also involves the firm winning market share by appealing to cost-conscious or price-sensitive customers. This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio price compared to what customers receive.
To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower cost than its rivals. There are three main ways to achieve this.
The first approach is achieving a high asset utilization. In service industries, this may mean for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast.
In manufacturing, it will involve production of high volumes of output. These approaches mean fixed costs are spread over a larger number of units of the product or service, resulting in a lower unit cost, i. For industrial firms, mass production becomes both a strategy and an end in itself.Describe the nature of focused cost leadership and focused differentiation.
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