Question

Illustrate generic Strategies of Cost Leadership and Focus with appropriate examples

Answer 1

Porter’s generic strategies helps the company to adopt competitive advantages across its chosen market. These generic strategy targets either cost leadership, differentiation or focus.

Cost Leadership Strategy

Firm win the market share by appealing to cost conscious or price sensitive customers. This is achieved by offering the lowest prices in the target market or at least lowest price to value ratio.

Firm has to operate in lower cost than its competitors. They achieve a high asset utilization. In service industry, this means for example a restaurant that turns tables around very quickly or an airline that turn around their flight very quickly. In manufacturing, it involves production of high volumes of output resulting in a lower unit cost by achieving economies of scale and experience curve effects.

Firm achieve low direct and indirect operating costs by offering high volumes of standardized products, limiting customization and personalization of services.

Firm has a control over the value chain encompassing all functional groups or departments to achieve low cost. Wal – Mart for example is famous for squeezing its suppliers to get low prices for its goods.

Disadvantage of this strategy is lower customer loyalty as price sensitive customers may shift to whoever offering the lower priced substitute. Cost leader reputation in the longer term may result in a reputation for low quality making difficulty if the firm chooses to rebrand itself to differentiation strategy in future.

Focus Strategy

Firm focuses on a few target markets. Firm choose to offer the low price or differentiated products as per the need of the target market and the resources and capabilities of the firm. Firm focuses marketing effort and tailor their marketing mix to meet the need of the said market. Firm attains competitive advantage though product innovation and or brand marketing. Market that are less vulnerable to substitute or where competition are weakest to earn above – average return on investment are the focused target market.

Small firm wants to follow this strategy to avoid competition with the bigger ones.

For example, Southwest Airlines provides short haul point to point flights in contrast to hub and spoke model of mainstream carriers like United and American Airlines.

Some risk of focus strategies are imitation and changes in the target market. It may be easier for a cost leader to adapt its product to compete directly.