Generic Competitive Strategies
A giant cheap furniture store and a pricey design boutique — both thrive in the same market. How? Because there isn't one way to win. Porter showed there's a small set of 'generic strategies' that differ on two axes: what the advantage rests on (low cost or uniqueness) and which audience it targets
Two sources of advantage: be cheaper, or be more unique. Times two audiences: the whole market, or a focused niche. Crossing them gives the generic strategies. Economies of scale (spreading fixed cost over more units) are what make cost leadership possible.
- generic competitive strategies
- A small set of strategies along two axes: the type of advantage (low cost / differentiation) and the target audience (broad / focused).
- cost leadership
- A strategy aiming for costs significantly below rivals', to offer a low price while staying profitable.
- differentiation
- A strategy aiming for a different product of unique value, for which the customer will pay a premium.
- focus strategy
- Focusing on a narrow market niche (a specific audience or need) instead of the whole market — on low cost or on differentiation.
- economies of scale
- When increasing the quantity produced lowers the average cost per unit, mainly by spreading the fixed cost.
- average cost (AC)
- Total cost divided by quantity: AC = (FC + VC×Q) / Q. It falls as you produce more, until diseconomies of scale set in.
- integrated (best-cost) strategy
- A blend of low cost and differentiation: giving the customer a bit more value for a bit more money.
- diseconomies of scale
- Past a point, further growth raises average cost (bureaucracy, coordination) — the AC curve is U-shaped.
- marginal cost (MC)
- The cost of producing one more unit. MC = wage divided by marginal product (W ÷ MPL); as marginal product falls, MC rises.
- diminishing marginal returns
- Adding more of one input onto a fixed resource, each extra unit contributes less — which raises marginal cost and explains the rise in AC on the right side of the U-curve.
