Michael E. Porter developed three generic competitive strategies to take optimize competitive advantages across a competitive scope of activities where a firm hopes to gain above average profitability. In other words, while above average profitability depends upon competitive advantage, in offering low cost or offering differentiation, when competitive advantage is combined with scope of activities, three possible optimization strategies emerge.
Porter illustrates this with a four-square grid. In the two left-hand grid boxes are listed the two areas of competitive scope, or cost/leadership target: narrow target and broad target. In the two top horizontal grid boxes are listed the two areas of competitive advantage: low cost advantage and product differentiation advantage. When the elements of the grid are combined as dualities, Porter gets three generic competitive strategies, with a subdivision for the third (1, 2, 3a, 3b).
These three strategies are as follows:
- For a broad scope with a lower cost advantage, the strategy is "Cost Leadership."
- For a broad scope with a differentiation advantage, the strategy is "Differentiation."
- For a narrow scope with a lower cost advantage, the strategy is a focused one: "Cost Focus."
- For a narrow scope with a differentiation advantage, the strategy is a focused one: "Differentiation Focus."
Cost Leadership: This is strategic leadership to attain the goal of lowest producer in the industry. It requires utilizing all possible "sources of cost advantage," like advantageous access to raw materials and "proprietary technology" that has been newly innovated for industry needs.
Differentiation: A firm seeks to be differentiated from others in the industry by unique qualities that command advantageous prices from a broad base of buyers who value the unique qualities.
Focusing Strategies: A firm focuses through either lower cost or differentiation by pinpointing a "segment or group of segments" within an industry to focus on at the exclusion of all other segments or groups of segments. This might be called "niche" focusing. (a) Focus on lowest cost within the selected segment/segments. (b) Focus on differentiation of services or goods within the selected segment/segments.
[Answer taken from University of Cambridge Institute of Manufacturing, "Porter's Generic Competitive Strategies (ways of competing)."]