Porter's Generic Strategies

Choosing Your Route to Competitive Advantage

Which do you prefer when you fly: a cheap, no-frills airline, or a more expensive
operator with fantastic service levels and maximum comfort? And would you ever
consider going with a small company which focuses on just a few routes?

The choice is up to you, of course. But the point we're making here is that when you
come to book a flight, there are some very different options available.

Why is this so? The answer is that each of these airlines has chosen a different way
of achieving competitive advantage in a crowded marketplace.

The no-frills operators have opted to cut costs to a minimum and pass their savings
on to customers in lower prices. This helps them grab market share and ensure their
planes are as full as possible, further driving down cost. The luxury airlines, on the
other hand, focus their efforts on making their service as wonderful as possible, and
the higher prices they can command as a result make up for their higher costs.

Meanwhile, smaller airlines try to make the most of their detailed knowledge of just a
few routes to provide better or cheaper services than their larger, international rivals.

These three approaches are examples of "generic strategies", because they can be
applied to products or services in all industries, and to organizations of all sizes.
They were first set out by Michael Porter in 1985 in his book Competitive Advantage:
Creating and Sustaining Superior Performance. Porter called the generic strategies
"Cost Leadership" (no frills), "Differentiation" (creating uniquely desirable products
and services) and "Focus" (offering a specialized service in a niche market). He then
subdivided the Focus strategy into two parts: "Cost Focus" and "Differentiation
Focus". These are shown in Figure 1 below.
The terms "Cost Focus" and "Differentiation Focus" can be a little confusing, as they
could be interpreted as meaning "A focus on cost" or "A focus on differentiation".
Remember that Cost Focus means emphasizing cost-minimization within a focused
market, and Differentiation Focus means pursuing strategic differentiation within a
focused market.

The Cost Leadership Strategy

Porter's generic strategies are ways of gaining competitive advantage – in other

words, developing the "edge" that gets you the sale and takes it away from your
competitors. There are two main ways of achieving this within a Cost Leadership
strategy:

 Increasing profits by reducing costs, while charging industry-average prices.

 Increasing market share through charging lower prices, while still making a
reasonable profit on each sale because you've reduced costs.

Remember that Cost Leadership is about minimizing the cost to the organization of
delivering products and services. The cost or price paid by the customer is a
separate issue!

The Cost Leadership strategy is exactly that – it involves being the leader in terms of
cost in your industry or market. Simply being amongst the lowest-cost producers is
not good enough, as you leave yourself wide open to attack by other low cost
producers who may undercut your prices and therefore block your attempts to
increase market share.
You therefore need to be confident that you can achieve and maintain the number
one position before choosing the Cost Leadership route. Companies that are
successful in achieving Cost Leadership usually have:

 Access to the capital needed to invest in technology that will bring costs down.
 Very efficient logistics.
 A low cost base (labor, materials, facilities), and a way of sustainably cutting
costs below those of other competitors.

The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost
reduction are not unique to you, and that other competitors copy your cost reduction
strategies. This is why it's important to continuously find ways of reducing every cost.
One successful way of doing this is by adopting the Japanese Kaizen philosophy of
"continuous improvement".

The Differentiation Strategy

Differentiation involves making your products or services different from and more
attractive those of your competitors. How you do this depends on the exact nature of
your industry and of the products and services themselves, but will typically involve
features, functionality, durability, support and also brand image that your customers
value.

To make a success of a Differentiation strategy, organizations need:

 Good research, development and innovation.

 The ability to deliver high-quality products or services.
 Effective sales and marketing, so that the market understands the benefits
offered by the differentiated offerings.

Large organizations pursuing a differentiation strategy need to stay agile with their
new product development processes. Otherwise, they risk attack on several fronts by
competitors pursuing Focus Differentiation strategies in different market segments.

The Focus Strategy

Companies that use Focus strategies concentrate on particular niche markets and,
by understanding the dynamics of that market and the unique needs of customers
within it, develop uniquely low cost or well-specified products for the market.
Because they serve customers in their market uniquely well, they tend to build strong
brand loyalty amongst their customers. This makes their particular market segment
less attractive to competitors.

As with broad market strategies, it is still essential to decide whether you will pursue
Cost Leadership or Differentiation once you have selected a Focus strategy as your
main approach: Focus is not normally enough on its own.

But whether you use Cost Focus or Differentiation Focus, the key to making a
success of a generic Focus strategy is to ensure that you are adding something
extra as a result of serving only that market niche. It's simply not enough to focus on
only one market segment because your organization is too small to serve a broader
market (if you do, you risk competing against better-resourced broad market
companies' offerings.)

The "something extra" that you add can contribute to reducing costs (perhaps
through your knowledge of specialist suppliers) or to increasing differentiation
(though your deep understanding of customers' needs).

Generic strategies apply to not-for-profit organizations too. A not-for-profit can use a

Cost Leadership strategy to minimize the cost of getting donations and achieving
more for their income, while one with pursing a Differentiation strategy will be
committed to the very best outcomes, even if the volume of work they do as a result
is lower. Local charities are great examples of organizations using Focus strategies
to get donations and contribute to their communities.

Choosing the Right Generic Strategy

Your choice of which generic strategy to pursue underpins every other strategic
decision you make, so it's worth spending time to get it right.

But you do need to make a decision: Porter specifically warns against trying to
"hedge your bets" by following more than one strategy. One of the most important
reasons why this is wise advice is that the things you need to do to make each type
of strategy work appeal to different types of people. Cost Leadership requires a very
detailed internal focus on processes. Differentiation, on the other hand, demands an
outward-facing, highly creative approach.

So, when you come to choose which of the three generic strategies is for you, it's
vital that you take your organization's competencies and strengths into account.

Use the following steps to help you choose.

Step 1: For each generic strategy, carry out a SWOT Analysis of your strengths and
weaknesses, and the opportunities and threats you would face, if you adopted that
strategy.

Having done this, it may be clear that your organization is unlikely to be able to make
a success of some of the generic strategies.

Step 2: Use Five Forces Analysis to understand the nature of the industry you are
in.

Step 3: Compare the SWOT Analyses of the viable strategic options with the results
of your Five Forces analysis. For each strategic option, ask yourself how you could
use that strategy to:
 Reduce or manage supplier power.
 Reduce or manage buyer/customer power.
 Come out on top of the competitive rivalry.
 Reduce or eliminate the threat of substitution.
 Reduce or eliminate the threat of new entry.

Select the generic strategy that gives you the strongest set of options.

Tip:

Porter's Generic Strategies offer a great starting point for strategic decision making.

Once you've made your basic choice, though, there are still many strategic options
available. Bowman's Strategy Clock helps you think at the next level of details, in
that it splits Porter's options into eight sub-strategies. You can also use USP
Analysis and Core Competence Analysis to identify the areas you should focus on
to stand out in your marketplace.

Key Points:

According to Porter's Generic Strategies model, there are three basic strategic
options available to organizations for gaining competitive advantage. These are:
Cost Leadership, Differentiation and Focus.

Organizations that achieve Cost Leadership can benefit either by gaining market
share through lowering prices (whilst maintaining profitability) or by maintaining
average prices and therefore increasing profits. All of this is achieved by reducing
costs to a level below those of the organization's competitors.

Companies that pursue a Differentiation strategy win market share by offering unique
features that are valued by their customers. Focus strategies involve achieving Cost
Leadership or Differentiation within niche markets in ways that are not available to
more broadly-focused players.

Apply This to Your Life

 Ask yourself what your organization's generic strategy is. How does this affect
the choices your make in your job?
 If you're in an organization committed to achieving Cost Leadership, can you
reduce costs by hiring less expensive staff and training them up, or by reducing
staff turnover? Can you reduce training costs by devising in-house schemes for
sharing skills and knowledge amongst team members? Can you reduce
expenses by using technology such as video conferencing over the Internet?
 If your organization is pursuing a Differentiation strategy, can you improve
customer service? Customer Experience Mapping may help here. Can you
help to foster a culture of continuous improvement and innovation in your
team?
 And if you're working for a company that has a chosen a Focus strategy, what
knowledge or expertise can you use or develop to add value for your customers
that isn't available to broad market competitors?