Risk of Generic Strategies

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Category: Business and Industry

Date Submitted: 09/14/2011 02:08 AM

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Generic Strategies

The number of potential business strategies are probably as great as the number of different businesses. Each distinct organization must develop a strategy that best matches its internal capabilities and its situation with regard to the external environment.

Still, many of the numerous strategies pursued by businesses can be loosely grouped under three main categories—cost leadership, differentiation, and focus. Porter termed these categories "generic strategies," and claimed that most companies use variations of them, either singly or in combination, to create a defensible position in their industry.

On the other hand, companies that fail to target their efforts toward any of the generic strategies risk becoming "stuck in the middle," which leads to low profitability and a lack of competitiveness.

COST LEADERSHIP. The first generic strategy, overall cost leadership, can enable a company to earn above average profits despite the presence of strong competitive pressures. But it can also be difficult to implement. In a company pursuing a low-cost strategy, every activity of the organization must be examined with respect to cost. For example, favorable access to raw materials must be arranged, products must be designed for ease of manufacturing, manufacturing facilities and equipment must continually be upgraded, and production must take advantage of economies of scale. In addition, a low-cost strategy requires a company to implement tight controls across its operations, avoid marginal customer accounts, and minimize spending on advertising and customer service. Implemented successfully in a price-sensitive market, however, a low-cost strategy can lead to strong market share and profit margins.

Of course, a low-cost strategy—like any other strategy—also involves risks. For example, technological changes may make the company's investments in facilities and equipment obsolete. There is also the possibility that other competitors will learn to...