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The Competitive Strategy Model of Porter learns that competitive strategy is about taking offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior return on investment.
According to
Michael Porter, the basis of above-average performance within an industry is sustainable competitive advantage.
There are 2 basics types of competitive advantage:
- Cost leadership (low cost), and
- Differentiation. Both can be more broadly approached or narrow, which results in the third viable competitive strategy: focus.
Cost leadership- A firm sets out to become the low cost producer in its industry.
- A cost leader must achieve parity or at least proximity in the bases of differentiation, even though it relies on cost leadership for it’s competitive advantage.
- If more than one company aim for cost leadership, usually this is disastrous.
- Often achieved by economies of scale
Differentiation- A firm seeks to be unique in it’s industry along some dimensions that are widely valued by buyers.
- A differentiator cannot ignore it’s cost position. In all areas that do not affect it’s differentiation it should try to decrease cost; in the differentiation area the costs should at least be lower than the price premium it receives from the buyers.
- Area’s of differentiation can be: product, distribution, sales, marketing, service, image, etc.
FocusA firm sets out to be best in a segment or group of segments. - Focus refers to Cost focus and Differentiation focus.
Usually a recipe for below-average profitability compared to the industry
- Still attractive profits are possible if and as long as the industry as a whole is very attractive
Manifestation of lack of choice
- Especially risky for focusers that have been successful and then to loose their focus. They must seek for other niches rather then compromise their focus strategy.
From a Value Based Management point of view, the Competitive Strategy model helps to build a relative competitive advantage, together with Porter's Value Chain framework. Taken together, they can be seen as one of two dimensions in maximizing corporate value creation. The other value creation dimension is the Market/Industry Attractiveness for which another model from Porter is often used: the Competitive Forces model.
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