How to apply the Porter’s Generic Strategies?

According to Michael Porter there are four Generic strategies:

1. Cost Leadership
Company targets a broad market (large demand) and offers the lowest possible price.
There are 2 options within this course. 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.
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
company targets a broad market (high demand), but the 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. Such an organisation is focused on the outside world and
has a creative approach.

3. Cost Focus
Company targets a niche market (little competition, ‘focused market’, specialized market
for a particular product or services) and offers the lowest possible price. In this strategy,
you choose to target a clear niche market and through understanding the dynamics of
the market and the wishes of the consumers, you can ensure that the costs remain low.
4. Differentiation Focus
Company targets a niche market (little competition, ‘focused market’) and the product or
service has unique features. This strategy often involves strong brand loyalty among
consumers. 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.

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 the highlight opportunities and threats.
Step 2: Try to truly grasp the market. This can be done, for example, through the Five
Forces Analysis – a model also developed by 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’s Generic Strategies model in which you opt for 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 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
4. Differentiation Focus
An understanding of the market, your industry and your own organisation are
paramount in choosing the right strategy.