Porter's Generic Strategies

Introduction:
Porter wrote in 1980 that strategy target either cost leadership, differentiation, or focus. These are known as Porter's three
generic strategies and can be applied to any size or form of business. Porter claimed that a company must only choose one of
the three or risk that the business would waste precious resources. Porter's generic strategies detail the interaction between
cost minimization strategies, product differentiation strategies, and market focus strategies.
Porter described an industry as having multiple segments that can be targeted by a firm. The breadth of its targeting refers to
the competitive scope of the business. Porter defined two types of competitive advantage: lower cost or differentiation
relative to its rivals. Achieving competitive advantage results from a firm's ability to cope with the five forces better than its
rivals. Porter wrote: "[A]achieving competitive advantage requires a firm to make a choice...about the type of competitive
advantage it seeks to attain and the scope within which it will attain it." He also wrote: "The two basic types of competitive
advantage [differentiation and lower cost] combined with the scope of activities for which a firm seeks to achieve them lead
to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation and focus.
The focus strategy has two variants, cost focus and differentiation focus. In general:

If a firm is targeting customers in most or all segments of an industry based on offering the lowest price, it is
following a cost leadership strategy.

If it targets customers in most or all segments based on attributes other than price (e.g., via higher product quality or
service) to command a higher price, it is pursuing a differentiation strategy. It is attempting to differentiate itself
along these dimensions favorably relative to its competition. It seeks to minimize costs in areas that do not
differentiate it, to remain cost competitive. Or

If it is focusing on one or a few segments, it is following a focus strategy. A firm may be attempting to offer a lower
cost in that scope (cost focus) or differentiate itself in that scope (differentiation focus).

The concept of choice was a different perspective on strategy, as the 1970s paradigm was the pursuit of market share (size
and scale) influenced by the experience curve. Companies that pursued the highest market share position to achieve cost
advantages fit under Porter's cost leadership generic strategy, but the concept of choice regarding differentiation and focus
represented a new perspective..

There are three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the
business unit level. They are called generic strategies because they are not firm or industry dependent. The following table
illustrates Porter's generic strategies:

Porter's Generic Strategies

Target Scope

Broad

Advantage

Low Cost

Product Uniqueness

Cost Leadership
Strategy

Differentiation
Strategy

Focus
Strategy
(low cost)

Focus
Strategy
(differentiation)

(Industry Wide)

Narrow
(Market Segment)

Cost Leadership Strategy :

This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its
products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to
gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses.
Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain
profitable for a longer period of time. The cost leadership strategy usually targets a broad market.
Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large
source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs
altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a
competitive advantage based on cost leadership.
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; this investment represents a
barrier to entry that many firms may not overcome.

Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the
assembly process.

High level of expertise in manufacturing process engineering.

Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For example, other firms may be able to lower their costs
as well. As technology improves, the competition may be able to leapfrog the production capabilities,
thus eliminating the competitive advantage. Additionally, several firms following a focus strategy and targeting various
narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market
share.

Differentiation Strategy :
A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by
customers and that customers perceive to be better than or different from the products of the competition. The value added
by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price
will more than cover the extra costs incurred in offering the unique product. Because of the product's unique attributes, if
suppliers increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute
products easily.
Firms that succeed in a differentiation strategy often have the following internal strengths:

Access to leading scientific research.

Highly skilled and creative product development team.

Strong sales team with the ability to successfully communicate the perceived strengths of the product.

Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes.
Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market
segments.

Focus Strategy:
The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or
differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it. A firm using a
focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from
competing directly.
Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining
power with their suppliers. However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to
customers since close substitute products do not exist.
Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow
market segment that they know very well.
Some risks of focus strategies include imitation and changes in the target segments. Furthermore, it may be fairly easy for a
broad-market cost leader to adapt its product in order to compete directly. Finally, other focusers may be able to carve out
sub-segments that they can serve even better.

A Combination of Generic Strategies - Stuck in the Middle? :

These generic strategies are not necessarily compatible with one another. If a firm attempts to achieve an advantage on all
fronts, in this attempt it may achieve no advantage at all. For example, if a firm differentiates itself by supplying very high
quality products, it risks undermining that quality if it seeks to become a cost leader. Even if the quality did not suffer, the
firm would risk projecting a confusing image. For this reason, Michael Porter argued that to be successful over the longterm, a firm must select only one of these three generic strategies. Otherwise, with more than one single generic strategy the
firm will be "stuck in the middle" and will not achieve a competitive advantage.
Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate business units for each
strategy. By separating the strategies into different units having different policies and even different cultures, a corporation is
less likely to become "stuck in the middle."
However, there exists a viewpoint that a single generic strategy is not always best because within the same product
customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience, and price. There
have been cases in which high quality producers faithfully followed a single strategy and then suffered greatly when another
firm entered the market with a lower-quality product that better met the overall needs of the customers.

Generic Strategies and Industry Forces:

These generic strategies each have attributes that can serve to defend against competitive forces. The following table
compares some characteristics of the generic strategies in the context of the Porter's five forces.

Generic Strategies and Industry Forces

Industry
Force

Entry
Barriers

Generic Strategies

Cost Leadership

Differentiation

Ability to cut price in

Customer loyalty can discourage Focusing develops core

retaliation deters potential

potential entrants.

entrants.

Buyer
Power
Supplier
Power

Focus
competencies that can act as an
entry barrier.

Ability to offer lower price Large buyers have less power to Large buyers have less power to
to powerful buyers.

negotiate because of few close

negotiate because of few

alternatives.

alternatives.

Better insulated from

Better able to pass on supplier

Suppliers have power because of

powerful suppliers.

price increases to customers.

low volumes, but a differentiationfocused firm is better able to pass

on supplier price increases.

Threat of

Can use low price to defend Customer's become attached to

Specialized products & core

Substitutes against substitutes.

Rivalry

differentiating attributes,

competency protect against

reducing threat of substitutes.

substitutes.

Better able to compete on

Brand loyalty to keep customers Rivals cannot meet differentiation-

price.

from rivals.

focused customer needs.

Reference :

Michael E Porter, Competitive Strategy, Free Press, 1980

Philip Kotler, Marketing Management, Analysis, Planning, and Control, Prentice Hall, 1975(3rd edition) - This was
a textbook that went through 6 editions and was used in MBA courses for 20 years. It talks about all three of these
strategies.

Treacy, M. and Wiesema, F. (1993) "Customer intimacy and other Value Disciplines", Harvard Business Review
Jan/Feb 1993.

Wendell R Smith, Product Differentiation and Market Segmentation as Alternative Marketing Strategies. Journal of
Marketing, July 1966 - This is probably the first in depth description of these two strategies.

Millar, D. (1992) "The Generic Strategy Trap", Journal of Business Strategy vol 13, no 1, Jan-Feb, 1992.

Baden-Fullen, C. and Stopford, J. (1992) Rejuvenating the Mature Business, Harvard Business School Press,
Boston, 1992.