Read this article, which describes Michael Porter's three competitive strategies: cost leadership, differentiation, and market segmentation.
Michael Porter classifies competitive strategies as cost leadership, differentiation, or market segmentation.
Discuss the value of using Porter’s competitive strategies of cost leadership, differentiation, and market segmentation
Michael Porter described a category scheme consisting of three general types of strategies commonly used by businesses to achieve and maintain competitive advantage. These three strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side dimension and considers the size and composition of the market the business intends to target. Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm.
Porter identifies two competencies as most important: product differentiation and product cost (efficiency). He originally ranked each of the three dimensions (level of differentiation, relative product cost, and scope of target market) as either low, medium, or high and juxtaposed them in a three-dimensional matrix. That is, the category scheme was displayed as a 3x3x3 cube; however, most of the twenty-seven combinations were not viable.
Porter simplified the scheme by reducing it to the three most effective strategies: cost leadership, differentiation, and market segmentation (or focus). He characterizes each as the following:
Empirical research on the profit impact of marketing strategy indicates that firms with a high market share are often quite profitable, but so are many firms with low market share. The least profitable firms are those with moderate market share. This is sometimes referred to as the “hole-in-the-middle” problem. Porter explains that firms with high market share are successful because they pursue a cost-leadership strategy, and firms with low market share are successful because they employ market segmentation or differentiation to focus on a small but profitable market niche. Firms in the middle are less profitable because of the lack of a viable generic strategy.
Source: Boundless Management, https://courses.lumenlearning.com/boundless-management/chapter/internal-analysis-inputs-to-strategy/
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