Porter - Generic Strategies

Porter’s Generic Strategies
What are Porter’s Generic Strategies?
The Generic Strategies can be used to determine the direction (strategy) of your organisation.
Michael Porter uses 4 strategies that an organisation can choose from. He believes that a
company must choose a clear course in order to be able to beat the competition.
The four strategies to choose from are:
1. Cost Leadership strategy

2. Differentiation
3. Cost Focus
4. Differentiation Focus
Michael Porter described the theory in his 1985 book ‘Competitive Advantage: Creating and
Sustaining Superior Performance’. The basis was formed by three strategies, namely cost
leadership, differentiation and focus. He divided the latter into cost focus and differentiation
focus.
1. Cost Leadership strategy
Choosing the cost leadership strategy, you target a broad market (large demand) and offer the
lowest possible price. There are 2 options within this cost leaders strategy. You can opt to
keep costs as low as possible; or ensure that you have a larger market share with average
prices.
In both cases, the point is to keep the company costs as low as possible. The consumer price
is a different story.
Organisations that apply this strategy successfully usually have substantial investment capital
at their disposal, efficient logistics and low costs when it comes to materials and labour.
The organisation is generally focused on internal processes.
2. Differentiation
You target a broad market (high demand), but your product or service has unique features.
With this strategy, you make your product as exclusive as possible, making it more attractive
than comparable products offered by the competition.
Succeeding using this strategy requires good research & development, innovation and the
ability to deliver high quality. Effective marketing is important, so that the market
understands the benefits of your unique product.
It’s important to be flexible and to be able to adapt quickly in a changing market, or you risk
the competition beating you at it. Such an organisation is focused on the outside world and
has a creative approach.
3. Cost Focus
You target a niche market (little competition, ‘focused market’) and offer the lowest possible
price. In this strategy, you choose to target a clear niche market and through understanding
the dynamics of these market segments and the wishes of the consumers, you can ensure that
the costs remain low (cost advantages).
An example of low-cost producers like this are the low-cost budget airlines that achieve
market share growth by choosing cost focused strategies like offering cheap, basic services at
lower prices than the big airlines that charge much higher prices.
Choosing the differentiation focus strategy, you target a niche market (little competition,
‘focused market’) and your product or service has unique features. This strategy often
involves strong brand loyalty among consumers.
During the focus on differentiation, it’s very important to ensure that your product remains
unique, in order to stay ahead of possible competition.
In order to choose the right strategy for your organisation, it’s important be aware of the
competencies and strengths of your company.
Porter’s Generic Strategies: choose the right strategy
You can follow these steps to choose the right strategy:

Step 1
Do a SWOT analysis for your business. This will clarify your strengths and weaknesses as
well as highlight opportunities and threats.
Step 2
Try to truly grasp the market of your industry. This can be done, for example, through
the Five Forces Analysis, a model also developed by Michael Porter, designed to determine
profit potential. The 5 forces that influence this are:
• the (power of) suppliers;
• the (power of) the customers;
• the availability of comparable products;
• the threat of new entrants;
• and internal competition.
Step 3
Compare your SWOT analysis with the outcomes of step 2. For each of Porter’s strategies,
ask yourself how you might use that strategy to influence the previously mentioned five
forces. On that basis, determine which strategy offers you the best starting point (and profit
potential).
Critical comments
Porter stressed the idea that only one strategy should be applied by an organisation in order to
prevent a “stuck in the middle” scenario. However, a model in which you opt for just one
single strategy certainly also raises criticism. For example, the model isn’t particularly
flexible.
There are plenty of companies that opt for a more ‘hybrid’ strategy, i.e. making use of
different (components) of Porter’s 4 general strategies. In a rapidly changing market, this
flexibility, the ability to switch quickly and respond to the market and the demand, seems to
be an important element to running a successful and long-term business.
To summarise Porter’s Generic Strategies
Porter’s Generic strategies can be used to determine the direction (strategy) of your
organisation. There are four strategies an organisation can choose from.
The four strategies to choose from are:

1. Cost Leadership
2. Differentiation
3. Cost Focus
An understanding of the market, your industry and your own organisation are paramount in
choosing the right strategy.
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Porter’s Generic Strategies

What are Porter’s Generic Strategies?

The four strategies to choose from are:

1. Cost Leadership strategy

1. Cost Leadership strategy

The organisation is generally focused on internal processes.

Porter’s Generic Strategies: choose the right strategy

You can follow these steps to choose the right strategy:

To summarise Porter’s Generic Strategies

The four strategies to choose from are:

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