There are three popular strategies that businesses can use to gain an advantage against their competitors: cost leadership, differentiation and focus. Professor Michael Porter of Harvard Business School pioneered these generic strategies and they continue to be popular in both business theory and practice.
Cost leadership happens when a business is the cheapest competitor in its industry. Cheap prices are attractive to customers, so being a low cost leader is an obvious advantage. Businesses can become cost leaders through economies of scale, switching to cheaper materials or suppliers and creating more efficient technologies. However, cost leadership strategies have a few pitfalls. Often, competitors copy the strategy and match the low prices. Too much focus on price can also cause a business to lose sight of other important factors.
Differentiation is a strategy that involves offering something different than competitors. Businesses can pursue this strategy by determining what their customers value and creating products tailored to their needs. Businesses that pursue differentiation strategies can often command higher prices, as they offer things that competitors do not.
Focus strategies involve concentrating on a specific niche of an industry rather than the industry as a whole. This strategy involves narrowing down a small and underserved target group of customers within the industry and serving the needs of those customers alone. Businesses can combine this strategy with low cost leadership or differentiation to become industry leaders.
Several aspects of business management affect a company's strategies. Customer relations go a long way in determining the strategy a business will use and how far that strategy will take it. Business owners and managers must look at things like short-term and long-term growth goals, production and marketing capabilities, distribution methods and profit goals.
A business also needs to look at how far it is willing to compete with its competitors and the technology it will use to achieve its goals. A business's courses of action, competitors and choices will all help to determine the types of strategies it employs.