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Generic Strategy

Porter's Generic Strategies outlines three main competitive strategies for companies: cost leadership, differentiation, and focus. Cost leadership involves having the lowest production costs in an industry. Differentiation means creating unique products or services that are perceived as better than competitors. Focus involves targeting either cost leadership or differentiation at a specific niche market rather than industry-wide. Porter argued that companies must choose one of these three strategies or risk being "stuck in the middle" with no competitive advantage. Other theorists have since expanded on these ideas or proposed alternatives.

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537 views7 pages

Generic Strategy

Porter's Generic Strategies outlines three main competitive strategies for companies: cost leadership, differentiation, and focus. Cost leadership involves having the lowest production costs in an industry. Differentiation means creating unique products or services that are perceived as better than competitors. Focus involves targeting either cost leadership or differentiation at a specific niche market rather than industry-wide. Porter argued that companies must choose one of these three strategies or risk being "stuck in the middle" with no competitive advantage. Other theorists have since expanded on these ideas or proposed alternatives.

Uploaded by

Amit Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Porter’s Generic Strategies: Differentiation, Cost Leadership

and Focus
Porter’s Generic Strategies is an answer to one of two central questions underlying the choices
companies have with regard to competitive strategy. The first question is about the attractiveness of
industries for long-term profitability and how to choose which industry to enter as a company. We
are all familiar with the framework that Porter came up with to determine this: the Five Forces
Model. The second question is about the determinants of a company’s relative competitive position
in an industry after a certain industry is chosen to enter. Because, in order to be a successful
company, being active in an attractive industry alone is not enough: you will need to acquire a
dominant competitive position by choosing among three generic strategies: Differentiation, Cost
Leadership and Focus. Failing to choose between one of these strategies will result in strategic
mediocrity and below-average performance, or as Porter describes it: ‘being stuck in the middle’.

Figure: Porter’s Generic Strategies: Cost Leadership, Differentiation and Focus


Differentiation
Differentiation is a type of competitive strategy with which a company seeks to distinguish its
products or services from that of competitors: the goal is to be unique. A company may use creative
advertising, distinctive product features, higher quality, better performance, exceptional service or
new technology to achieve a product being perceived as unique. A differentiation strategy can reduce
rivalry with competitors if buyers are loyal to a company’s brand. Companies with a differentiation
strategy therefore rely largely on customer loyalty. Because of the uniqueness, companies with this
type of strategy usually price their products higher than competitors. Examples of companies with
differentiated products and services are: Apple, Harley-Davidson, Nespresso, LEGO, Nike and
Starbucks.

Cost Leadership
Cost Leadership is a type of competitive strategy with which a company aggressively seeks efficient
large-scale production facilities, cuts costs, uses economies of scale, gains production experience
and employs tight cost controls to be more efficient in the production of products or the offering
of services than competitors: the goal is to be the low-cost producer in the industry. A low-cost
position also means that a company can undercut competitors’ prices through for
example penetration pricing and can still offer comparable quality against reasonable profits. Low-
cost producers typically sell standard no-frills products or services. Examples of companies with
cost leadership positions are: Southwest Airlines, Wal-Mart, McDonald’s, EasyJet, Costco and
Amazon.

Focus
Focus is a type of competitive strategy that emphasizes concentration on a specific regional
market or buyer group: a niche. The company will either use a differentiation or cost leadership
strategy, but only for a narrow target market rather than offering it industry-wide. The company first
selects a segment or group of segments in an industry and then tailors its strategy to serve those
segments best to the exclusion of others. Like mentioned, the focus strategy has two variants:
Differentiation Focus and Cost Focus. These two strategies differ only from Differentiation and Cost
Leadership in terms of their competitive scope. Examples of companies with a differentiation focus
strategy are: Rolls Royce, Omega, Prada and Razer. Examples of companies with a cost focus
strategy are: Claire’s, Home Depot and Smart.
Stuck in the Middle
A company that tries to engage in each generic strategy but fails to achieve any of them, is
considered ‘stuck in the middle’. Such a company has no competitive advantage regardless of the
industry it is in. As a matter of fact, such a company will compete at a disadvantage because the ‘cost
leader’, the ‘differentiators’ and the ‘focusers’ in the industry will be better positioned to compete. It
may be the case, however, that a company that is stuck in the middle still earns interesting profits
simply because it is operating in a highly attractive industry or because its competitors are stuck in
the middle as well. If one of the two exceptions are not present it will be very hard for companies to
engage in both differentiation and cost leadership, Porter argues, because differentiation is usually
costly. Each generic strategy is a fundamentally different approach to creating and sustaining
superior performance and requires a different operating model.

Other interpretations of Porter’s Generic Strategies


Like many business frameworks, Porter’s Generic Strategies Model has both proponents and
opponents. Among others, Miller (1992) has questioned Porter’s notion of having to pursue one
single strategy or else being caught ‘stuck in the middle’. He claims that there is a viable middle-
ground between strategies and uses the example of Caterpillar Inc, which differentiated itself by
producing the highest quality earth-moving equipment in the world while paying attention to cost-
efficiency. Miller argues that strategic specialization, as Porter suggests, has the danger of becoming
inflexible and blind to customer needs. Also, Chan Kim and Mauborgne (2005) abandon the ‘value-
cost’ trade-off that a company needs to choose between certain strategies. With their Blue Ocean
Strategy, they advise companies to pursue differentiation and low cost simultaneously: it is about
driving costs down while simultaneously driving value up for buyers. However, there are also
popular authors who do believe in Porter’s idea of competitive choice. Treacy and Wiersema (1995)
for example build further on Porter’s idea and modified Porter’s Generic Strategies into the Value
Disciplines. They advise companies to choose between Operational Excellence, Product Leadership
and Customer Intimacy.
What are generic competitive strategies?

Michael Porter, a Harvard professor, developed the phrase “generic


competitive strategies (GCS)” in his business planning and
strategizing book, “Competitive Advantage: Creating and Sustaining
Superior Performance.” Porter’s generic competitive strategy is a
framework for planning the strategic direction of your business that
assists with gaining an advantage in the marketplace over your
competitors. He also claimed that a company must only choose one of
the three strategies or risk wasting precious resources.

Overview of generic competitive strategy

GCS is composed of three generic strategies: cost leadership,


differentiation and focus. Cost leadership and focus are then broken
down into two types. A company may select a strategy for a
competitive advantage. For instance, it may lower costs, yet retain
prices, on popular products. Or it choose between offering products to
a select target segment or offer products industry-wide across many
segments.

Each strategy uses different methods, and businesses within the same
industry may choose different strategies based on their strengths and
desired outcome.

To find the best strategy for your business, you should run a
competitive analysis in your particular industry. If you don’t know what
is out there and who your competitors are, it can be difficult to drive
marketing efforts for the optimum return on investment.

3 types of generic strategies

Porter divides strategies into three approaches, including:

1. Cost leadership

A business that wants to gain a market advantage by controlling


costs. There are two types of cost leadership: low-cost strategy and
best-value strategy. One aims to increase profits by reducing costs
while maintaining industry-average prices. The other aims to increase
market share by charging lower prices and reducing costs.
Keep in mind consumers' perception of your product. If your only
strategy is to be “cheaper” than the competition, your consumers may
devalue what you offer. Seek out a medium between pricing your
product or service as valuable and still attainable.

Also, consider using promotions and discounts to improve consumer


perception. You may price the product higher but offer incentives for
purchase via a short-long term discount code, coupon or sale. The
consumer still sees the product as valuable but may get excited about
the cost savings.

2. Differentiation

Adapting to a differentiation strategy means that your company must


find something about its products that is special or different from your
competitor’s. You could do this by rebranding or developing new
specialized products to offer under your existing brand and marketing
strategy. By being attentive and responsive to customers’ needs and
wants, you encourage them to pay prices that may be higher than your
competitors.

To determine your differentiation, you may need to create—or revisit—


your mission and values statements. What is your value proposition to
the market? How is your product different from the competition? They
may be similar, but it is up to you to distinguish how yours is different
and better.

To differentiate your product to your target audience, you must


understand how they perceive your brand. You can gain insight by
analyzing user-generated content on your social media channels. What
are people really saying about you—positively and negatively? All
feedback is helpful and can help you modify strategies moving
forward. You may also want to implement a social media listening tool
to alert you to mentions of your company name, brand or specific
products.

3. Focus

The focus strategy provides the option to use either cost leadership or
differentiation within a niche market. This doesn’t mean that the
market will be smaller because your company might be small, but
rather that your company wants to build product value and generate a
loyal, yet specific client base for future profits and sales.

There are two types of focus: low-cost and best-value. The best-value
focus is also known as differentiation focus. The two differ by focusing
on either lowest cost possible or best value for the price.

How to use Porter’s generic strategies

There are many ways to use Porter’s generic strategies in your


business. Here are some ways your business may begin using GCS:

1. Choose a strategy

The most important step to consider when you use Porter’s generic
competitive strategies is to select the appropriate strategy for your
business. Consider your business’s strengths and goals—beyond just
additional revenue. The best way to choose the right strategy for your
business is to:

SWOT analysis

 Create a Strengths, Weakness, Opportunities, Threats


(SWOT) analysis for each of the three strategies. This
may make it clear which strategy would be most
beneficial to your organization.
 Analyze businesses within your industry to determine how
to position your own strategy. Consider creating a
“Competitive Analysis” document regularly—monthly,
quarterly or annually depending on your business’s unique
production schedule. If you are in a highly volatile
industry, it’s important to stay on top of trends even
weekly. If your production phase is much longer, you may
only need to review the competition quarterly or annually.
 Compare your SWOT to the results from your analysis of
the industry. SWOT analysis can be extremely insightful
as you create your marketing, sales and even production
plans (as applicable).

Common questions

Powered by AI

A company can implement a differentiation strategy by creating a unique value proposition through innovative products, branding, or superior quality and customer service . This may involve creative advertising, introducing distinctive product features, and being responsive to customer needs . It is crucial to understand how the brand is perceived by customers, possibly using social media analysis and customer feedback to refine offerings . Successful differentiation results in stronger brand loyalty and the ability to charge premium prices .

A focus strategy targets a specific segment or niche of the market, allowing a company to specialize its offerings either through differentiation or cost leadership, but within a limited scope . Whereas differentiation or cost leadership strategies are applied industry-wide, focus strategies concentrate on serving the needs of a particular regional market or buyer group exclusively, tailoring offerings to this group's specific preferences . This narrow approach allows for specialized service and can result in strong customer loyalty within the chosen niche .

Opportunities associated with cost leadership include achieving the lowest production costs, which enables competitive pricing to increase market share . This can be accomplished through large-scale production efficiencies, cost control, and exploiting economies of scale. However, challenges include maintaining quality while reducing costs and preventing products from being perceived as low value by consumers . Constant technological advancements and process optimizations are necessary to sustain a low-cost position in a competitive market .

Porter's Generic Strategies comprise three main approaches: Differentiation, Cost Leadership, and Focus. Each strategy provides a different path to gaining a competitive advantage within an industry. Differentiation involves making a product unique, thus fostering customer loyalty and allowing higher pricing . Cost Leadership focuses on becoming the lowest-cost producer in the industry, enabling firms to undercut competitors while maintaining profits through economies of scale . The Focus strategy targets a specific, narrow market segment, applying either differentiation or cost leadership but on a smaller scale . Choosing one of these strategies helps companies build a competitive edge, as failing to do so could result in being 'stuck in the middle' with no clear advantage .

Customer perception is critical in a differentiation strategy, as it determines whether customers see the product as unique and valuable compared to competitors . Positive perceptions enhance brand loyalty and justify premium pricing, while negative perceptions can devalue the marketing and quality efforts . Companies must monitor and engage with consumer feedback through mechanisms like social media analysis to ensure their product's uniqueness is acknowledged and appreciated in the market .

Modifications to Porter's original strategies include the Value Disciplines model by Treacy and Wiersema, which refines options into Operational Excellence, Product Leadership, and Customer Intimacy . Chan Kim and Mauborgne's Blue Ocean Strategy suggests bypassing traditional competitive boundaries through simultaneous differentiation and cost leadership, instead of singular pursuits . These adaptations aim to offer firms more nuanced frameworks that integrate flexibility with strategic clarity, countering the limitations of solely pursuing one strategy .

A company 'stuck in the middle' fails to achieve a competitive advantage as it does not fully commit to one of the three strategies: differentiation, cost leadership, or focus . This lack of clear strategic direction results in strategic mediocrity, where the company may be outperformed by focused competitors who are better positioned for differentiation, cost efficiency, or niche targeting. This competitive disadvantage is exacerbated unless the company operates in a highly attractive industry or all competitors are similarly unfocused .

Critics of Porter's Strategies, like Miller, suggest that a blend of strategies can offer flexibility and responsiveness to changing customer needs . For instance, Miller highlights Caterpillar Inc as a company that successfully combined differentiation by producing high-quality equipment and maintaining cost efficiency . Chan Kim and Mauborgne's Blue Ocean Strategy proposes simultaneous pursuit of differentiation and low cost to create untapped market space, thereby dispelling Porter's value-cost trade-off . These views propose that strategic hybrids can capture diverse market opportunities while avoiding strategy inflexibility .

A company might remain profitable while 'stuck in the middle' if it operates in a highly attractive industry where general market demand and margins compensate for its lack of strategic focus . Additionally, if all competing firms are similarly unfocused, relative competitive disadvantages might be minimized, allowing the company to remain competitive and sustain profits without adhering stringently to one of Porter's strategies . These scenarios highlight their ability to survive through industry conditions rather than strategic alignment .

A SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) provides a comprehensive overview of a company's capabilities and external market factors, aiding in strategic choice . By evaluating strengths, a company can determine whether it can excel in cost efficiency, innovation, or customer service, guiding it towards cost leadership, differentiation, or focus . Weaknesses help identify barriers that might undermine certain strategies, while opportunities reveal market trends aligning with potential strategic advantages. Threats from competitors might necessitate strategies to outperform others by focusing decisively on strengths .

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