Introduction Porter’s generic strategies framework constitutes a major contribution to the development of the strategic management literature.

Generic strategies were first presented in two books by Professor Michael Porter of the Harvard Business School (Porter, 1980, 1985). Porter (1980, 1985) suggested that some of the most basic choices faced by companies are essentially the scope of the markets that the company would serve and how the company would compete in the selected markets. Competitive strategies focus on ways in which a company can achieve the most advantageous position that it possibly can in its industry. The profit of a company is essentially the difference between its revenues and costs. Therefore high profitability can be achieved through achieving the lowest costs or the highest prices vis-à-vis the competition. Porter used the terms ‘cost leadership’ and ‘differentiation’, wherein the latter is the way in which companies can earn a price premium.

Michael Porter has described a category scheme consisting of three general types of strategies that are commonly used by businesses to achieve and maintain competitive advantage. These three generic strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demandside dimension and looks at the size and composition of the market you intend to target. Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm. In particular he identified two competencies that he felt were most important: product differentiation and product cost (efficiency).

He originally ranked each of the three dimensions (level of differentiation, relative product cost, and scope of target market) as either low, medium, or high, and

Empirical research on the profit impact of marketing strategy indicated that firms with a high market share were often quite profitable. Porter suggested combining multiple strategies is successful in only one case. Both these companies have a niche of premium products available at a premium price. but so were many firms with low market share. is that the niche characteristically is small and may not be significant or large enough to justify a company’s . it would aim for differentiation in its target segment only. The company can make use of the cost leadership or differentiation approach with regard to the focus strategy. Organizations’ can make use of the focus strategy by focusing on a specific niche in the market and offering specialized products for that niche. Combining a market segmentation strategy with a product differentiation strategy was seen as an effective way of matching a firm’s product strategy (supply side) to the characteristics of your target market segments (demand side). and not the overall market. Companies employ this strategy by focusing on the areas in a market where there is the least amount of competition (Pearson. 2003). competitive advantage can be achieved only in the company’s target segments by employing the focus strategy. but later identified focus as a moderator of the two strategies. a company using the cost focus approach would aim for a cost advantage in its target segment only. the category scheme was displayed as a 3 by 3 by 3 cube. This was sometimes referred to as the hole in the middle problem. 1999). Ferrari and Rolls-Royce are classic examples of niche players in the automobile industry. But most of the 27 combinations were not viable. This is why the focus strategy is also sometimes referred to as the niche strategy (Lynch. Firms in the middle were less profitable because they did not have a viable generic strategy. This strategy provides the company the possibility to charge a premium price for superior quality (differentiation focus) or by offering a low price product to a small and specialized group of buyers (cost focus). they have a small percentage of the worldwide market. Therefore. which is a trait characteristic of niche players. The least profitable firms were those with moderate market share. however. Moreover. That is.juxtaposed them in a three dimensional matrix. If a company is using the differentiation focus approach. Porter’s explanation of this is that firms with high market share were successful because they pursued a cost leadership strategy and firms with low market share were successful because they used market segmentation to focus on a small but profitable market niche. The downside of the focus strategy. Focus Porter initially presented focus as one of the three generic strategies. In that. But combinations like cost leadership with product differentiation were seen as hard (but not impossible) to implement due to the potential for conflict between cost minimization and the additional cost of value-added differentiation.

or backward integration. This is achieved by having the lowest prices in the target market segment. and minimizing other costs including distribution. etc. establishing a cost-conscious culture. or at least the lowest price to value ratio (price compared to what customers receive). In service industries. this may mean for example a restaurant that turns tables around very quickly. The associated distribution strategy is to obtain the most extensive distribution possible. this takes a . working with vendors to keep inventories low using methods such as Just-in-Time purchasing or Vendor-Managed Inventory. offering basic no-frills products and limiting customization and personalization of service. Cost Leadership Strategy This strategy involves the firm winning market share by appealing to cost-conscious or pricesensitive customers. Promotional strategy often involves trying to make a virtue out of low cost product features. the firm must be able to operate at a lower cost than its rivals. as the business environment and customer preferences change over time. it will involve production of high volumes of output. locating premises in low rent areas. i. This is achieved by offering high volumes of standardized products. The second dimension is achieving low direct and indirect operating costs. For industrial firms. Some writers posit that cost leadership strategies are only viable for large firms with the opportunity to enjoy economies of scale and large production volumes. To succeed at offering the lowest price while still achieving profitability and a high return on investment. squeezing suppliers on price. and limiting the number of models produced to ensure larger production runs. This could be achieved by bulk buying to enjoy quantity discounts. Higher levels of output both require and result in high market share. This will include outsourcing. controlling production costs. The first approach is achieving a high asset turnover. The third dimension is control over the supply/procurement chain to ensure low costs. Overheads are kept low by paying low wages. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. Wal-Mart is famous for squeezing its suppliers to ensure low prices for its goods. increasing asset capacity utilization.e. Other procurement advantages could come from preferential access to raw materials. instituting competitive bidding for contracts. who may be unable to achieve the scale necessary to match the firms low costs and prices. There are three main ways to achieve this. In manufacturing. Production costs are kept low by using fewer components. or an airline that turns around flights very fast. using standard components.attention. However. resulting in a lower unit cost. and create an entry barrier to potential competitors. the firm hopes to take advantage of economies of scale and experience curve effects. The focus on costs can be difficult in industries where economies of scale play an important role. mass production becomes both a strategy and an end in itself. R&D and advertising. There is the evident danger that the niche may disappear over time. Dell Computer initially achieved market share by keeping inventories low and only building computers to order. These approaches mean fixed costs are spread over a larger number of units of the product or service.

Nike athletic shoes. Asian Paints. High level of expertise in manufacturing process engineering. An example is the success of low-cost budget airlines who despite having fewer planes than the major airlines. Efficient distribution channels. the market is competitive or saturated. Buyers have low switching costs 6. A reputation as a cost leader may also result in a reputation for low quality. Rival’s products are identical and supplies are readily available 3.  Can be especially effective when: 1. which may make it difficult for a firm to rebrand itself or its products if it chooses to shift to a differentiation strategy in future.limited industrial view of strategy. as pricesensitive customers will switch once a lower-priced substitute is available. HLL. Industry newcomers use low prices to attract buyers Firms that succeed in cost leadership often have the following internal strengths:     Access to the capital required to make a significant investment in production assets. A differentiation strategy is appropriate where the target customer segment is not price-sensitive. Small businesses can also be cost leaders if they enjoy any advantages conducive to low costs. Examples of Cost Leadership. and Mercedes-Benz automobiles.Toyota. rapid table turnover and employs staff on minimum wage. Most buyers use the product in the same way 5. this investment represents a barrier to entry that many firms may not overcome. Wal-Mart and Tesco. were able to achieve market share growth by offering cheap. for example. There are few ways to achieve differentiation 4. Buyers are large and have significant power 7. Perstorp BioProducts. A cost leadership strategy may have the disadvantage of lower customer loyalty. Skill in designing products for efficient manufacturing. Differentiation Strategy Differentiate the products in some way in order to compete successfully. Price competition among rivals is vigorous 2. Innovation of products or processes may also enable a startup or small company to offer a cheaper product or service where incumbents' costs and prices have become too high. a local restaurant in a low rent location can attract price-sensitive customers if it offers a limited menu. and the firm has unique resources and capabilities which enable it to satisfy these . having a small component count to shorten the assembly process. For example. Apple Computer. Examples of the successful use of a differentiation strategy are Hero Honda. customers have very specific needs which are possibly under-served. no-frills services at prices much cheaper than those of the larger incumbents.

unique technical expertise (e.g. Variants on the Differentiation Strategy The shareholder value model holds that the timing of the use of specialized knowledge can create a differentiation advantage as long as the knowledge remains unique. because the purchase is a onetime event. Buyer needs and uses are diverse 3.g. Highly skilled and creative product development team. or innovative processes. Starbucks could brand coffee. Successful brand management also results in perceived uniqueness even when the physical product is the same as competitors. Technology change is fast paced and competition revolves around evolving product features Firms that succeed in a differentiation strategy often have the following internal strengths:     Access to leading scientific research. rather than dynamic. The advantage is static. Chiquita was able to brand bananas. is differentiated by its very brand name and brand images of Big Mac and Ronald McDonald.[2] This model suggests that customers buy products or services from an organization to have access to its unique knowledge. These could include patents or other Intellectual Property (IP). There are many ways to differentiate and many buyers perceive the value of the differences 2.needs in ways that are difficult to copy. for example. An organization with greater resources can manage risk and sustain profits more easily than one with fewer resources. This way. and Nike could brand sneakers. Few rival firms are following a similar differentiation approach 4. Fashion brands rely heavily on this form of image differentiation. Corporate reputation for quality and innovation. If a firm lacks the capacity for continual innovation. McDonalds .  Can be especially effective when: 1. Strong sales team with the ability to successfully communicate the perceived strengths of the product. a sports team's star players or a brokerage firm's star traders). it will not sustain its competitive position over time. talented personnel (e. Apple's design skills or Pixar's animation prowess). This deep-pocket strategy provides a short-term advantage only. The unlimited resources model utilizes a large base of resources that allows an organization to outlast competitors by practicing a differentiation strategy. Focus or Strategic Scope .

you can better meet the needs of that target market. or in a defined. and growing 2. brand and customization) depending on its resources and capabilities. Industry leaders do not consider the niche crucial 3. Examples of firm using a focus strategy include Southwest Airlines. Pixar also targets the mass market with its movies. which provides short-haul point-to-point flights in contrast to the hub-and-spoke model of mainstream carriers. Industry leaders consider the niche too costly or difficult to meet 4.This dimension is not a separate strategy per se. The firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency. other rivals are attempting to specialize in the same target segment Generic Strategies and Industry Forces These generic strategies each have attributes that can serve to defend against competitive forces. These should be distinct groups with specialized needs. and for which customers are willing to pay to see and own. but adopts a differentiation strategy.  Can be especially effective when: 1. focused market segment with a narrow scope. The target market niche is large. the principle is the same: the firm must ascertain the needs and wants of the mass market. and compete either on price (low cost) or differentiation (quality. In adopting a broad focus scope. if any. branding and user experience that enables it to charge a price premium due to the perceived unavailability of close substitutes. The firm can choose to compete in the mass market (like Wal-Mart) with a broad scope. but combines this broad scope with a differentiation strategy based on design. The choice of offering low prices or differentiated products/services should depend on the needs of the selected segment and the resources and capabilities of the firm. but describes the scope over which the company should compete based on cost leadership or differentiation. The following table compares some characteristics of the generic . profitable. A focused strategy should target market segments that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investment. and Family Dollar. the company ideally focuses on a few target markets (also called a segmentation strategy or niche strategy). Few. using its unique capabilities in story-telling and animation to produce signature animated movies that are hard to copy. Apple also targets the mass market with its iPhone and iPod products. In adopting a narrow focus. It is hoped that by focusing your marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets. the basis of competition will still be either cost leadership or differentiation. In either case. The industry has many different niches and segments 5. Wal Mart has a broad scope and adopts a cost leadership strategy in the mass market. It is most suitable for relatively small firms but can be used by any company.

Cost Leadership requires a very detailed internal focus on processes.strategies in the context of the Porter's five forces. Brand loyalty to keep customers from rivals. demands an outward-facing. Supplier Better insulated from Better able to pass on supplier low volumes. it may be clear that your organization is unlikely to be able to make a success of some of the generic strategies. if you adopted that strategy. it's vital that you take your organization's competencies and strengths into account. Buyer Power Ability to offer lower Large buyers have less power price to powerful to negotiate because of few buyers. So. Use the following steps to help you choose. focused firm is better able to pass on supplier price increases. Rivals cannot meet differentiationfocused customer needs. 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. Rivalry Better able to compete on price. so it's worth spending time to get it right. close alternatives. on the other hand. But you do need to make a decision: Porter specifically warns against trying to "hedge your bets" by following more than one strategy. substitutes. highly creative approach. when you come to choose which of the three generic strategies is for you. but a differentiationPower powerful suppliers. Choosing the Right Generic Strategy Your choice of which generic strategy to pursue underpins every other strategic decision you make. competency protect against reducing threat of substitutes. and the opportunities and threats you would face. . price increases to customers. Step 1: For each generic strategy. carry out a SWOT Analysis of your strengths and weaknesses. Generic Strategies and Industry Forces Industry Force Generic Strategies Cost Leadership Differentiation Focus Focusing develops core competencies that can act as an entry barrier. Differentiation. Suppliers have power because of Entry Ability to cut price in Customer loyalty can retaliation deters discourage potential entrants. Barriers potential entrants. Having done this. Customer's become attached to Specialized products & core differentiating attributes. Large buyers have less power to negotiate because of few alternatives. low price Threat of Can useagainst to defend Substitutes substitutes.

However. recruiting policy. Organisations normally operate with a higher cost base when they produce and sell a premium product that customers highly value. Come out on top of the competitive rivalry. ask yourself how you could use that strategy to:      Reduce or manage supplier power. Select the generic strategy that gives you the strongest set of options. Organisations require different sets of structural traits to accommodate either a low cost or a differentiation strategy. Although the ideas behind the model still hold for smaller organisations. In the late 70's. Implementation must be consistent once a position has been selected. Reduce or eliminate the threat of new entry. No best strategy exists. current opinion among strategy theorists holds that the generic strategies . pros: Porter's generic strategies captured the tension between cost and differentiation. etc. cons: The model applies best to large and established companies. the tools are too heavy and all encompassing to provide valuable insight for them. Reduce or manage buyer/customer power. reward system. Porter directed his analysis primarily on large multinationals with multiple strategic business units. Porter based his model on Chandler's assumption that 'structure follows strategy'. Porter stressed the importance of choosing one generic strategy and following it through. His model showed that differentiation is as effective a strategy as cost leadership. Reduce or eliminate the threat of substitution.Step 2: Use Five Forces Analysis to understand the nature of the industry you are in. Choosing a strategic position depends on time and circumstance. For each strategic option. The selection of a generic strategy provides direction to management and staff that helps them acquire internal consistency between management style. Step 3: Compare the SWOT Analyses of the viable strategic options with the results of your Five Forces analysis. Porter saw too many US companies 'stuck in the middle' and unable to compete on a global scale.

should not be treated as absolutes. This excludes other assumptions such as customer bonding in Alexander Hax's delta model. Many companies. The Value Chain is used to analyse a firm's position in relation to its direct competitors with the assumption that rivalry drives profitability. Criticisms of generic strategies Several commentators have questioned the use of generic strategies claiming they lack specificity. Their approach fundamentally goes against Porter's concept that a firm must focus either on cost leadership or on differentiation. lack flexibility. . He claims that there is a viable middle ground between strategies. have entered a market as a niche player and gradually expanded. A popular post-Porter model was presented by W. According to Baden-Fuller and Stopford (1992) the most successful companies are the ones that can resolve what they call "the dilemma of opposites". Most change occurs bottom-up. but as a continuum. The objective of a strategy process is to find strategic positions where the widest gap exists between relative cost and the level of differentiation. Chan Kim and Renée Mauborgne in their 1999 Harvard Business Review article "Creating New Market Space". In particular. intuitively and creatively. Porter stated that competitive strategic analysis needs to happen on an ongoing basis. In this article they described a "value innovation" model in which companies must look outside their present paradigms to find new value propositions. Mintzberg argued that real strategy is fuzzy at best. An organisation then provides customers the most features at lower cost than its competitors. and are limiting. Miller (1992) questions the notion of being "caught in the middle". They later went on to publish their ideas in the book Blue Ocean Strategy. and can be detected early using soft data rather than hard data. the reaction is frequently too late to realign the company. for example. Even when a quantative/economic change in the industry's conditions is detected.

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