I summarized cost leadership in an earlier post, the first of three generic strategies Michael Porter discusses in his landmark volume Competitive Strategy. As mentioned there, most firms intuitively know which of the three they use, even if they are not familiar with Porter’s language. More important is the breakdown Porter provides of the skills, resources, and organizational requirements a company needs and should seek to leverage in its strategic execution. A firm also does well to be aware of the risks associated with each strategy.
The second strategy is differentiation, defined as “differentiating the product or service offering of the firm, creating something that is perceived industrywide as being unique.” Advantages to achieving differentiation include the potential for higher margins, increased customer loyalty, and the ability to avoid the ‘race to the bottom’ (i.e., price wars).
Commonly required skills and resources to achieve and maintain differentiation are strong marketing abilities, product engineering, research capability, a reputation for quality, a long tradition in the industry, and strong cooperation from supply channels. Organizational requirements include strong coordination between R&D, product development, and marketing; subjective rather than quantitative measurement incentives; and amenities to attract highly skilled employees.
The third strategy Porter discusses is the focus strategy. This takes either cost leadership or differentiation and focuses it on a certain segment of the market (as opposed to industrywide). For example, perhaps there is a geographic region that is underserved in your industry. A focus strategy would apply either the cost leadership or differentiation strategy to that particular geographic region.