Selection of an effective strategy for a company in its environment is very important. The first successful taxonomy of strategies was done by Porter in 1980. He identified three generic strategies that a business can employ: overall cost leadership, differentiation, and segmentation (or focus).
Overall Cost Leadership
This strategy is based on the effective cost control and marketing products and services based on price. There are obvious benefits of this strategy:
1) Business can make higher returns by charging equal to or lower than market average by means of its lower costs.
2) It allows business to increase its market share by keeping its prices lower than its competitors.
3) It allows the business to enter a new market by charging lower prices than hosting competitors.
4) It gives valuable advantage in the market where consumers are price sensitive.
5) It helps a business to create a barrier for other companies who are willing to enter the market.
Tesco, as the biggest retailer company in the UK, has managed to utilize this strategy aggressively in recent years and gained the biggest market share over among its competitors, in spite of its late entry to the market.
Differentiation
A differentiation strategy is based on achieving a competitive advantage by creating products and services that are perceived by customers to be unique and superior. A differentiated company can charge premium price which is above the market average and makes higher returns, rather than reducing costs. World known companies like Mercedes and Rolex exemplifies this strategy. The products of both companies are perceived as prestigious enough to pay by its consumers. The benefits of this strategy are as follows:
1) They have the privilege to charge above average prices.
2) The demands for their products are less dependent on their prices
3) They can make higher returns by charging higher than their competitors
4) They create a barrier for other companies who are willing to enter the market.
Segmentation
In this type of strategy, companies focuses on particular market segment or consumer base rather than whole market. Consumer base may be identified on their age, income, lifestyle, sex, geography etc. Within this particular segment, company may employ either cost leadership or differentiation strategy. Major benefits are:
1) Companies don’t have to allocate big resources to meet demands for whole market.
2) It gives the opportunity of specialization and greater knowledge for segment
3) It makes simpler for a company to enter a new market, which doesn’t have big resources.
A car manufacturer, Ferrari, employs this strategy by focusing on sports car market. It only produces high performance cars and charge well above prices than its competitors.
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