Michael Porter's three generic strategies are: cost leadership, niche or focus strategy and differentiation. They are basic concepts to help define your target market. With regard to cost leadership, a company can decide to be a low cost leader, meaning that they offer the best prices in the industry, for example, Wal-Mart is a low cost leader, and as such, they try to keep their prices as low as possible, this is their general strategy, how they identify themselves in the retail industry.
When a company wants to shift its focus off price competition and engage in non-price competition, they use a differentiation strategy where they focus on product quality or features that differentiates them in the market from their competition. Customers who are drawn to these products usually buy them not based on cost but another aspect of the product, such as a service agreement that provides special service to a car. Let's say you are a high-end car buyer and are trying to choose between Lexus and Mercedes you may choose to buy the Mercedes because they provide a service where they come and get your vehicle when it needs to be serviced, in place of your vehicle, they give you a loaner car.
Differentiation in a market that has achieved price equality or price compatibility that no longer serves to separate one product from another, could make all the difference in making your product stand out in the consumer's mind and draw customers to purchase your product over your competitors.
Focus or niche strategy is simply deciding to focus on a small segment of the buying population who would want to buy your product. Niche strategies work for small companies who provide specialized services or products provided that the market remains viable. The danger of a niche strategy is that your market will be lost to a larger competitor who has the resources to draw your speciality customers into their successful use of a differentiation strategy.
Niche or focus strategy puts a business's resources into marketing and selling one type of service or product, but sometimes the market for these products are the first to go especially during economic downturns.
For example, the demise of the Concord, the supersonic jet that brought people to Europe in a short ride, 3 hours, much shorter than the conventional time of 8-10. But the market for this service disappeared because the company was unsustainable because there were not enough customers to keep a revenue stream flowing.