Porter's Generic (Competitive) Strategies
Michael Porter's Generic Strategies are a useful framework for organisations to identify a potential niche in which they can gain a competitive advantage in any industry.
Markets and Competition
Michael Porter's 1985 book Competitive Advantage has served as the foundation for much of modern business strategy. In it, Porter explained the different methods by which organisations managed to develop a niche within any industry.
For example, let's take the UK supermarket industry. Some supermarkets, such as Waitrose and Marks & Spencer advertise themselves as the luxury option, providing premium products and services. Contrast this with budget supermarkets such as the German-based companies Lidl and Aldi, whose main selling point is the low prices of their products. Alongside these and the other major chains are small supermarkets and shops who serve products to a local neighbourhood.
Each of these can survive within different niches of the UK supermarket industry as they all have different selling points. Premium products often appeal to a certain demographic of individuals who are willing to pay more for better services, whereas cheap supermarkets keep costs at a minimum and use this to pass savings onto their customers. Local supermarkets pride themselves on their convenience, and their ability to appeal specifically to a specific group of people.
The Generic Strategies
Each of these is an example of a Generic Strategy, as coined by Porter. They are referred to as generic as they can be applied to products, services across all industries, and in organisations of a variety of sizes.
These initial strategies as described by Porter were: Cost Leadership (cheap, no expenses), Differentiation (unique or premium products) and Focus (a specialised service or market). He later sub-divided Focus into two different strategies: Differentiation Focus (unique strategy differentiation in a focused market) and Cost Focus (lower costs in a focused market).
This strategy generally consists of an organisation attempting to gain a market share by appealing to cost-conscious or cost-restricted customers or consumers. Therefore, it is the aim of the organisation to become the lowest-cost producer in their chosen industry. Although any organisation will aim to remove any unnecessary costs, those employing this strategy prioritise lowering all overheads.
Often, this can be achieved through mass-production of products, allowing the organisation to exploit the economies of scale; however, costs can be cut during many stages of the production process. This will allow the organisation to sell products or services for around or below the average price for the industry, and as a result of cost-limitation will achieve the greatest profits. These mass-produced products will often be very standard, and will exhibit little-to-no differentiation.
Some organisations with cost leadership may also sell products for below the market average, allowing them to gain a greater share of consumers than their competitors - particularly if their profit margins can still remain high due to low production costs.
These organisations cannot afford to be merely among the lowest-cost producers - this leaves them open to undercutting from rivals - instead, they need to be the lowest-cost producer.
Organisations exhibiting cost-leadership often exhibit a number of traits and attributes which make them suited for this approach:
Access to capital or technology required to drive costs down
High levels of productivity
- High efficiency and capacity utilisation
A low-cost base (e.g. labour, materials, facilities) and a method of maintaining this
Use of bargaining power to negotiate low production costs
- Access to effective distribution channels
The general focus of differentiation-led organisations is to make their products different or more attractive than any other within the industry to achieve a competitive advantage. These organisations generally target larger markets and focus on differentiation on a much wider scale within the industry than would a cost-led company.
The methods of achieving differentiation can vary broadly across industries, products and services; however, it can involve various features, functionality, durability, and also how the brand and the product are marketed to achieve an image which customers value. When designing products, the organisation will focus on various criteria considered by consumers within the industry, and will then orient themselves uniquely to meet those criteria.
Though not universally, this strategy is often associated with charging premium prices for the products or services in question. This reflects the potentially higher production costs associated with developing unique items, and also the extra features and uniqueness exhibited by said product. As higher prices are often a forced measure to cover production costs, it is crucial that the differentiation of the product is appealing enough to justify these prices to consumers.
Here are the most important traits associated with differentiation-led organisations:
Strong research, development and innovation
Superior product quality
Recognisable branding, effective branding and marketing
- Industry-wide distribution within all major channels (stocked by most retailers)
Cost-focus refers to organisations who seek to develop a lower-cost advantage, but only within a small market segment. These products will generally be basic, vaguely similar to the average market-leading products (though more popular products can be charged at a higher price) and will be acceptable to a sufficient number of customers in order to make a profit.
An example would be budget food items or other household tools stocked only by small, local supermarkets. Another would be a low-cost regional airline which focuses only on specific routes. These products are often referred to as "me too's".
In a differentiation-focus strategy, the organisation will look to develop product differentiation, but only within one or a smaller number of market segments. As these organisations have identified a smaller consumer group to focus on, they can more specifically appeal to the needs and wants of this group than could an organisation which is attempting to differentiate for a wider population.
For this strategy to succeed, the organisation will have to first identify that a consumer group has a different set of needs than does the wider market population. If there is no variation in need, then there is no valid basis for differentiation. Alongside this, the organisation also must ensure that another competitor is not already appealing to the specific and unique needs that they have identified.
This approach is the most common niche marketing strategy. Small businesses can use this method to force themselves into a niche, developing unique products which can be sold for higher prices than similar undifferentiated products, often due to specialist knowledge or innovation compared with other businesses.
A good example would be craft beer companies, who can charge a higher price compared with large breweries due to the uniqueness of their products.
Choosing the Correct Strategy
The generic strategy effectively underpins the majority of business and competitive decisions made by an organisation. Therefore, it is crucial that it is chosen correctly.
In his work, Porter emphasised the importance of not trying to utilise more than one strategy, as each appeals to a different consumer base, and to different organisational strengths and attributes.
For example: a small business may sometimes struggle to compete on cost within an industry dominated by large multinational organisations.
To develop and maintain a competitive advantage, businesses should look within and identify where their strengths lie. One way of doing so would be to perform a SWOT Analysis of the organisation. This allows a business to identify both strengths and weaknesses, but also any specific opportunities and threats that they may face along the way. Consider your SWOT analysis in the context of the generic strategies. For example: can your organisation possibly reduce costs? Does it have the resources or individuals to create differentiated products?
On top of this, different analyses can be used to help with the process. Value Chain Analysis can be utilised to identify tools and processes which are valuable to the organisation and its products, and which can be used to gain a competitive advantage.
On top of this, Porter's Five Forces can be used to develop a greater understanding of the industry in which the organisation lies, and the level of competitiveness within it. By applying these two analyses alongside an organisational SWOT analysis, a business can cross-reference its strengths and attributes to the nature of the industry, and identify whether a cost-based or a differentiation-based strategy would be most suited to them, and whether they should be focused on a small or large segment of the market.