The second chapter of Competitive Strategy looks at three approaches in "coping with the five competitive forces" outlined in the previous chapter, which are industry competitors, potential entrants, substitutes, suppliers, and buyers. The three strategies include overall cost leadership, differentiation, and focus. While they are not mutually exclusive, it is "rarely possible" to pursue multiple approaches.
Overall cost leadership entails "aggressive construction of efficient-scale facilities" to minimize cost, which provides "high margins which can be reinvested." This strategy is usually associated with high volume and market share. Differentiation sacrifices volume for perception of uniqueness industry-wide. Finally, focus strategy is "built around serving a particular target very well." Honed onto a particular segment only, focus can pursue either low cost, high differentiation position, or both.
The chapter notes that a "firm failing to develop its strategy in at least one of these three directions ... is in an extremely poor strategic situation" and "is almost guaranteed low profitability." These firms lose both the high-volume customers looking for low costs, and the high-margin business that depends on differentiation. While each of these strategies has its set of risks, these three generic competitive strategies give an intuitive explanation of the U-shaped relationship between profitability and market share, as observed in some industries.
