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This involves production of goods of a given quality level at a lower cost. The firm then sells the good either at a higher or lower price than that of its rivals. By selling products at a higher price, the firm is able to make profits. However, the aim of selling goods at a reduced cost is to gain market share. Thus, in case there are price wars in the market, the firm can still make profit while its rivals suffer losses. Moreover, the firm can produce cheaply and still make significant amount of profit. The firm is able to mature even when the price of goods declines. Cost leadership strategy is mainly convenient for broad markets (Porter, 2003). For example, Dell used this strategy to ensure that it was able to compete effectively in the market. Through cost leadership, Dell produced high quality electronic products that were sold at low price.
For a firm to effectively use the cost leadership strategy, it has to acquire cost advantages through the following: improve its processes making them effective, have access to low cost raw materials, make better decisions that mainly deal with outsourcing and vertical integration of its production as well as limit some unnecessary costs. Rival firms may find it impossible to lower the price of their products by the same amount and therefore, this firm gains some competitive advantage. Cost leadership required a firm: to have access to enough capital for investment and production, have up to date skills in designing products in a unique way, have the require expertise and skills as well as develop effective channels for communication and distribution.
This involves production of unique products. This is in terms of its features, taste, and price among other attributes. Customers have to develop preference to this products in comparison to that of competitors. Thus, the product is deemed to be better and of higher quality. Differentiation strategy also involves adding value to other existing products hence making them unique. However, the firm may decide to raise the price a bit for such products (Kevin, 2009). The additional of premium price is justified as it is meant to cover the extra price incurred in making the products unique. Increase in supplier price means an increase in price of products. However, this works well where customers cannot get substitutes easily.
Blockbuster is an example of an American company that has used differentiation strategy to dominate entertainment industry. This is through provision of highly branded video and game videos. For a firm to successfully utilize differentiation strategy, it has to have the following attributes: have access and use scientific research that is reflected in production, have a highly skilled, trained and creative team specialized in product development, a sales team that is able to communicate effectively and understand the strength of the products as well as ensure that the reputation of the firm’s products is high in terms of quality and level of innovation. This has been the case with Blockbuster.
This involves focusing on a narrow segment in the market. This is achieved through product differentiation or cost advantage. Different people tend to have diverse needs, tastes and preferences. Thus, by providing services targeting a given group it is easy to get their trust. This leads to development of loyalty leading to regular and increased sales. Other firms will find it hard to venture into the same market directly due to the high strength of loyalt. “Target” is a company in United States that mainly focuses on retailing household essentials as well as pharmacy services. Based on its name “Target”, the company has flourished due to its ability to focus on a given segment of the society. It has been able to meet their needs hence gaining their loyalty. Narrowing the market enables firms to have lower volumes as well as experience less bargaining power while dealing with suppliers.
Therefore, Dell, Target and Blockbuster have employed porters’ generic strategies that have led to their success. Evidently, these strategies are vital for any firm that seeks to have increased market share and gain higher profits.