Porter’s generic strategies are one of the most popular tools used when undertaking a competitive analysis in any industry. According to Porter (1985) companies can generally choose from two broad strategies, product differentiation or cost efficiency in broad market scope, or they may pursue product differentiation or cost efficiency strategies within a particular customer segment.
To put it simply, companies usually choose to maximise their profit through offering products or services in lower prices, or offering superior quality products or services for higher price. And this can be done for the whole business or for a particular customer segment.
A focus strategy “is defined by its emphasis on a single industry segment within which the orientation may be toward either low cost or differentiation” (Czinkota and Ronkainen, 2007, p.196).
When pursuing a cost leadership strategy the company prices its products or services at a lower level than competition. Cost leadership strategy is associated with engagement in economies of scale and maintaining strict control of costs. Differentiation strategy, on the other hand, focuses marketing efforts on quality and uniqueness in relation to specific aspects of products or services.
There are many advantages product differentiation strategy provides to the business. Product differentiation strategy increases the level of customer loyalty dramatically by mentioning the statistical data according to which US consumer loyalty to a single brand varies from 30 percent in batteries up to 70 percent in cigarettes.
When conducting competitive analysis companies should seek following information: current strategy and future objectives of competitors, assumptions about the industry in which competitors believe, and strengths and weaknesses of competitors.
Grant, RM, 2005, Contemporary Strategy Analysis, Wiley Publications
Hitt, MA, Ireland, RD & Hoskinson, RE, 2009, Strategic Management: Competitiveness and Globalisation: Concepts and Cases, Cengage Learning
Porter, ME, 1985, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press