Porter's Generic Strategy

In his 1985 book "Competitive Strategy: Techniques for Analyzing Industries and Competitors," management expert Michael Porter outlined his generic strategies of business. These are the basic options your company has in entering and successfully competing in a given industry. The choices include cost leadership, differentiation, cost focus and differentiation focus.

A cost leadership strategy means your emphasis is on maintaining low operation costs. By doing so, you can either charge average prices and maintain a high profit margin or charge lower prices than competitors to keep a high market share. High profit margins mean the difference between your prices and cost of goods sold is high. Achieving high margins means you are operationally efficient, which bodes well for long-term success. Wal-mart and other discount providers thrive on beating out competitors with a low-cost, low-price approach to attract customers.

In Porter's generic strategies, the cost or differentiation of your approach combined with emphasis on a narrow or broad market create your strategy. A cost focus means you also maintain a low-cost approach, but unlike cost leadership, you specialize in serving a smaller, niche market. Thus, you compete against larger chains and other smaller companies by offering good prices to a specific type of customer. This is a challenging strategy to put into practice, because niche businesses often have less bargaining power than larger chains with broad markets.

Each of the differentiation strategies centers on doing things that are distinct or better than competitors outside of price competition. A straight differentiation approach means you target a broad market. To succeed, you need to thoroughly understand the needs of your broad target market and offer superior product or service benefits, elite services or other unique attributes, and use sales and marketing to convey these benefits. This strategy is common in highly competitive industries with large players who often invest heavily in TV ads and other marketing efforts to attract customer attention.

A differentiation focus follows the same concept as differentiation, but the target is a smaller, more niche customer group. The point of this strategy is to offer superior value and extra benefits to a specific market. Smaller companies often use this strategy to compete against larger chains that can offer lower prices but not provide the same quality of products and services. A provider of handcrafted furnishings and decor would likely use this strategy because the costs are probably higher than mass-produced items, and the market for such products are smaller.