Michael Porter presents three generic strategies that firms can use to overcome the five forces and attain competitive advantage. The first, overall cost leadership, is based on creating a low cost position relative to one’s peers. The second, differentiation, requires that the firm (or business unit) create products and/or services that are unique and valued. Finally, firms following a focus strategy must direct their attention (or “focus”) toward narrow product lines, buyer groups or geographical markets. Firms emphasizing a focus strategy must attain advantages either through differentiation or a cost leadership approach. Cost leadership requires a tight set of interrelated tactics such as: aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of managerial customer accounts, and cost minimization in all activities in a firm’s value chain. Differentiation consists of creating differences in the firm’s products or service offerings by creating something that is perceived industry-wide as being unique and valued by customers. Differentiation can take many forms such as: prestige or brand image, technology, innovation, features, customer service, or dealer networks. The third generic strategy (focus) is based on the choice of a narrow competitive scope within an industry. Competitive advantages are attained by focusing on a segment or group of segments that tailors its strategy.
The key benefit to be enjoyed by firms that successfully integrate low cost and differentiation strategies is that it is generally harder for competitors to duplicate or imitate them. An integrated strategy enables a firm to provide two types of value to customers: differentiated attributes and lower prices. Furthermore, the benefits of combining advantages can be additive, instead of merely involving tradeoffs. To stay competitive, firms must update their strategies to reflect the new possibilities and constraints that the Internet and Web-based technologies represent. An overall low cost leadership strategy involves managing costs in every activity of a firm’s value chain and offering no-frills products that are an exceptional value at the best possible price. Internet technologies now provide more opportunities to manage costs and achieve greater efficiencies. But these capabilities are available to many firms and may provide only short-lived advantage. Most analysts agree that the Internet’s ability to lower transaction costs will transform business. Transaction costs refer to various expenses associated with conducting business. It applies not just to buy-sell transactions but to the costs of interacting with every part of a firm’s value chain, both within and outside the firm. The process of disintermediation lowers costs. Each time intermediaries are used in a transaction, additional costs are added. Removing those intermediaries lowers transaction costs. The Internet may also reduce the costs of traveling, and the cost of maintaining a physical address. Many experts agree that the net effect of the Internet is fewer rather than more opportunities for sustainable advantages. Therefore, new strategic combinations that make the best use of the competitive strategies may hold the greatest promise for future success. The Internet has provided all companies with greater tools for managing costs. This may be good in general for the efficiency of the economy. But for individual companies, it may shave profit margins and make creating a sustainable advantage more difficult. Many differentiation advantages are diminished by the Internet. The ability to comparatively shop, for example, is depriving some companies of unique advantages. In the Internet age, the best approach may be to combine differentiation with other competitive strategies. The greatest benefit may be in using the Internet to focus on a niche. However, an incumbent firm that previously thought a given niche market was not worth the effort may use Internet technologies to enter the segment for a lower cost than it could in the past.