Businesses compete with each other based on price, quality and the needs of their customers, each attempting to achieve above-average profits for their industry. Harvard economist Michael E. Porter identified low cost and differentiation as the two basic strategic advantages a business can achieve. The five basic strategies for achieving these advantages are known as the low-cost provider, broad differentiation, focused low-cost, focused differentiation and best-cost provider business strategies.
A business pursuing the low-cost provider or cost leadership strategy tries to provide its products to a broad customer base for the lowest possible cost. The quality of the product must be acceptable to the customer, but the intended customer is more focused on affordability than quality. To become a cost leader in its industry, the company must look for ways to save money in many different areas. For instance, it might try to arrange a deal with a supplier for a below-average price, relying on high order volume to keep the supplier interested. In some situations, the supplier's bargaining position may be too strong for this to be a viable strategy, as Porter pointed out in 2008 in an interview with the Harvard Business Review. For instance, if the supplier doesn't depend on any one revenue source to remain profitable, it may be in a position to resist pressure to lower costs.
A company pursuing a broad differentiation strategy tries to set itself apart from any rivals by providing something customers want and charging more for it. For instance, the company might offer a stereo system with superb sound quality, a feature most customers are willing to pay extra for if they can afford it. It could concentrate on providing superior customer service that's unavailable from other companies, a more durable product that the customer can rely on for years, a broad range of products to choose from or extra features that make the product more appealing.
Sometimes it's enough to just be different. A soft drink that doesn't quite taste like any other will stand out from the rest even if not everyone would say it was a higher quality beverage.
The focused low-cost strategy is much like the cost leader strategy except that it targets a niche market rather than a broad range of customers. For instance, not everyone is interested in traditional archery, but some people who are interested in traditional archery are looking for the most affordable bow they can find. A company pursuing this strategy must find ways to lower its costs while providing a product that meets the needs of its targeted market.
The focused differentiation strategy is a niche market version of the differentiation strategy. A business using this strategy seeks to stand out within a narrowly targeted market. For example, an importer of Belgian ales could stand out by supplying a few beers that are not widely available yet are highly coveted by connoisseurs.
The best-cost provider strategy combines aspects of the other strategies. A business pursuing this strategy tries to provide better than average features or overall quality at a price that compares favorably to other products with similar features. For instance, the company may not make the least expensive television or the television with the highest sound and picture quality. But the sound and picture quality of its television may be very good for the price. A customer who wants high-quality sound and picture on a budget would find this an attractive option.