Question

Identify the competitive advantage strategies and explain why most firms pursue only one of these strategies.

Answer 1

Michael E Porter defined three generic strategies for competitive advantage. They are-
1. Cost Leadership
2. Differentiation
3. Focus- Focus strategy has two components. They are cost focus and differentiation focus

Most firms pursue only Cost leadership. Firms' objective is to produce at lowest cost so that it becomes lowest cost producer. This strategy is important to firms because objective of the firms is cost minimisation. Firm which can sell its product at lowest price will gain most of the market share. They can achieve this through producing at lowest cost so they can enjoy cost advantage thereby selling products at lower cost and enjoying higher profits. So, firms try to maximise their sales by achieving cost minimisation which means cost leadership over other firms to gain maximum profits. If a firm is able to achieve cost leadership then it will become an above average performer.
Under differentiation strategy, firms try to become unique by catering to the special customer needs. They do get a premium price for their unique products from limited customers. However, here they do can not get a major market share. This is why most firms only pursue 'Cost Leadership' because through minimum cost, firms gain maximum market share and thus maximum profits.