Generic strategies

Cost leadership, differentiation and focus: their levers, their risks, working out an experience effect and the trap of being stuck in the middle.

The outline, topic by topic

Each topic is weighted the way the exam weighs it.

Cost leadership: what is it?
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A strategy aimed at producing at a lower cost than every competitor, to sell cheaper or earn more at the same price.
It requires volume, a constant hunt for cost and a fairly standard offer. Its risk is a rival finding an even lower cost.
A maker opens a factory twice as big and runs it at full capacity: its unit cost falls from the very first month, before the teams have gained any new experience. What is this phenomenon?
- Economies of scale
- An experience effect
- Differentiation
- A focus strategy
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Economies of scale
The fall comes from the size of the plant and spreading fixed costs. An experience effect would come from learning over cumulative output, even without changing size.
Porter distinguishes three generic strategies: … leadership, … and focus.
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Porter distinguishes three generic strategies: cost leadership, differentiation and focus.
Focus comes in two kinds: through cost or through differentiation, but on a narrow segment only.
Differentiation: what is it?
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A strategy that offers a product seen as unique on a criterion customers value, so that it can be sold at a higher price.
It rests on brand, innovation or service. Its risk is that the price gap with the cheapest becomes larger than customers think is justified.