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WHAT IS PORTER'S GENERIC STRATEGIES ANALYSIS?

Executive summary
This article focuses on the main aspects of Porter's generic strategies as presented by various
scholars and as they can be applied in various companies. The main three generic strategies of
cost leadership, differentiation, and focus are discussed along with the advantages and risks
inherent with each strategic option. The article includes tips for students and analysts on how
to write good generic strategies analysis for a firm or any organisation. Moreover, sources of
findings information for generic strategies analysis have been discussed. The limitations of
Porter's generic strategies analysis have been discussed, and the relationship between these
strategies and industry forces is also discussed. Cite this Paper as: Otundo Martin Richard or
Otundo M: Year is 2016.

1.1Introduction
According to Freedman (2013), there is no universal definition of a strategy since strategies
differ from one organisation, body or operation to another. For example, a corporate strategy
may differ from a business strategy, a political strategy or an education strategy. However, a
strategy can be defined as a high level plan to achieve one or more goals under conditions of
uncertainty. Henry Mintzberg from McGill University defined strategy as "a pattern in a stream
of decisions" to contrast with a view of strategy as planning (Mintzberg, 1996), while Max
McKeown (2011) argues that "strategy is about shaping the future" and is the human attempt to
get to "desirable ends with available means". Dr. Vladimir Kvint defines strategy as "a system of
finding, formulating, and developing a doctrine that will ensure long-term success if followed
faithfully( Kvint, 2009)."

Porter's generic strategies framework constitutes a major contribution to the development of

the strategy development and strategic management literature in the modern world. 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

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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 (Pearson, 1999). The profit of a company/an organisation 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.

1.2 Main aspects of Porter's Generic Strategies Analysis

Organisations can achieve competitive advantages essentially by differentiating their products

and services from those of competitors and through low costs (Otundo Martin, 2016). Firms can
target their products by a broad target, thereby covering most of the marketplace, or they can
focus on a narrow target in the market (Lynch, 2003). According to Porter, there are three
generic strategies that a company can undertake to attain competitive advantage: cost leadership,
differentiation, and focus.

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Figure 1: Source: Porter (1985)

1.2.1Cost leadership

According to Otundo (2016), organisations that attempt to become the lowest-cost producers in
an industry can be referred to as those following a cost leadership strategy. The
organisation/firm/company with the lowest costs would earn the highest profits in the event
when the competing products are essentially undifferentiated, and selling at a standard market
price. Companies following this strategy place emphasis on cost reduction in every activity in the
value chain (Rumelt, 2011). It is important to note that a company might be a cost leader but that
does not necessarily imply that the company's products would have a low price. In certain
instances, the company can for instance charge an average price while following the low cost
leadership strategy and reinvest the extra profits into the business (Lynch, 2003). Examples of

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companies following a cost leadership strategy include RyanAir, and easyJet, in airlines; Airtel
and Orange in Kenya’s telecommunication, Fly540, Jumbojet and Ethiopian airline in Kenya’s
airline and ASDA and Tesco, in superstores.

However, Wilson (2012) notes that, the risk of following the cost leadership strategy is that the
company's focus on reducing costs, even sometimes at the expense of other vital factors, may
become so dominant that the company loses vision of why it embarked on one such strategy in
the first place.

1.2.2 Differentiation

When a company differentiates its products, it is often able to charge a premium price for its
products or services in the market. Some general examples of differentiation include better
service levels to customers, better product performance etc. in comparison with the existing
competitors (Henderson, 1981). Porter (1980) has argued that for a company employing a
differentiation strategy, there would be extra costs that the company would have to incur. Such
extra costs may include high advertising spending to promote a differentiated brand image for
the product, which in fact can be considered as a cost and an investment. Equity Bank in Kenya,
for example, is differentiated by its very brand name and brand offers like wings to fly, small and
flexible loans along the equity member (Otundo, 2016).

Differentiation has many advantages for the firm which makes use of the strategy. Some
problematic areas include the difficulty on part of the firm to estimate if the extra costs entailed
in differentiation can actually be recovered from the customer through premium pricing.
Moreover, successful differentiation strategy of a firm may attract competitors to enter the
company's market segment and copy the differentiated product (Lynch, 2003).

1.2.3 Focus

Porter initially presented focus as one of the three generic strategies, but later identified focus as
a moderator of the two strategies. Companies employ this strategy by focusing on the areas in a

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market where there is the least amount of competition (Pearson, 1999). Organisations can make
use of the focus strategy by focusing on a specific niche in the market and offering specialised
products for that niche. This is why the focus strategy is also sometimes referred to as the niche
strategy (Lynch, 2003). Therefore, competitive advantage can be achieved only in the company's
target segments by employing the focus strategy. The company can make use of the cost
leadership or differentiation approach with regard to the focus strategy. In that, a company using
the cost focus approach would aim for a cost advantage in its target segment only. If a company
is using the differentiation focus approach, it would aim for differentiation in its target segment
only, and not the overall market.

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 specialised group of
buyers (cost focus). Ferrari and Rolls-Royce are classic examples of niche players in
the automobile industry. Both these companies have a niche of premium products available at a
premium price (Kiechel, 2010). Moreover, they have a small percentage of the worldwide
market, which is a trait characteristic of niche players. The downside of the focus strategy,
however, is that the niche characteristically is small and may not be significant or large enough
to justify a company's attention. The focus on costs can be difficult in industries where
economies of scale play an important role. There is the evident danger that the niche may
disappear over time, as the business environment and customer preferences change over time
(Ghemawat, 2002).

2.1 Stuck in the Middle

According to Porter (1980), a company's failure to make a choice between cost leadership and
differentiation essentially implies that the company is stuck in the middle. There is no
competitive advantage for a company that is stuck in the middle and the result is often poor
financial performance (Porter, 1980). However, there is disagreement between scholars on this
aspect of the analysis. Kay (1993) and Miller (1992) have cited empirical examples of successful
companies like Toyota and Benetton, which have adopted more than one generic strategy. Both

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these companies used the generic strategies of differentiation and low cost simultaneously, which
led to the success of the companies.

2.2 How to write a Good Porter's Generic Strategies Analysis?

Firms can choose from one of the three generic strategies to compete in the marketplace,
regardless of the context of industry (Porter, 1980). Note that companies that are successful at
making use of the cost leadership strategy are often positioned to capitalize on a value
proposition which emerges from their low cost emphasis, like the classic success story of Tesco ,
in the UK. These companies typically focus their efforts on value-oriented customers in the
market. Tesco , Value products are focused on providing value-oriented customers with products
that are indeed value-for-money, relative to competitive offerings. Interestingly, an emphasis on
cost leadership in this sense can act as a form of differentiation. Successful implementation of a
cost leadership strategy would benefit from process engineering skills, products designed for
ease of manufacture, access to inexpensive capital, tight cost control and incentives based largely
on quantitative targets (www.wikipedia.org). McDonalds, restaurants, for example, achieve low
costs through standardized products, and centralized buying of supplies etc. Despite the benefits
that the cost leadership strategy entails, there is limited empirical evidence that supports
successful implementation of cost leadership strategies.

Contrary to the cost leadership strategy, there is empirical evidence to support the differentiation
strategy (Pearson, 1999). Hall (1980) investigated sixty-four American companies and the
findings of the study revealed that companies following a differentiation strategy had superior
performance compared to those companies that were not following the same. It is important for
analysts to note that there is more than one way in which a company can make use of
differentiation. Differentiation can be achieved through a differentiated product, superior quality,
and customer service etc. A key question to ask is whether the customers of the company
perceive the point of difference as one that is worth a price premium.

The focal point for the company pursuing a differentiation strategy should be the customer, and
not per se the competitors. Note that for a differentiation strategy to be successful, the point of

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differentiation perceived by customers as valuable should coincide with the distinctive

competence of the company (Pearson, 1999). For example, Safaricom succeeded by providing
the most basic requirements for mobile phone communication, better than the competition, and
in that the company created a differentiation in the minds of the consumers. Safaricom in
Kenya provides the customers with mobile phone communication requirements like better
network coverage, network reliability, and charging customers for only what they use, instead of
features like free phone calls, which even have a higher cost for provider (Barwise et al, 2004).

Therefore, Henry Mintzberg (May 1978) argues that, a customer-focused differentiation strategy
when implemented with a clear vision benefits the company in many ways including price
premium, brand loyalty and sometimes even reduced costs, like the case of Orange. In order to
effectively maintain a differentiation strategy, the firm should have strong skills in R&D, product
engineering, change management, marketing, advertising, and HRM.
Continuous innovation plays a vital role in case of differentiation, as is exemplified by
companies like IBM, also referred to as the IT bluehood of the corporate world. IBM was
awarded more US patents in 2003 than any other company, for the eleventh year running, which
qualifies IBM as one of the most innovative and successful companies in its industry.

Notably, a number of small and medium sized companies have found that the niche strategy is
the most useful strategic area to explore for them (Lynch, 2003). While most companies employ
cost leadership strategy, differentiation, or a mix of these two strategies, there are relatively
fewer companies that adopt a niche strategy. Perhaps one of the most important elements to
consider in case of a niche strategy is whether the size of the market is appropriate from the
revenue potential aspect, and if the company has the capability to provide the specialised
products that the consumers in the niche market need and want.

According to Parnell (2006), the stuck in the middle phenomenon received considerable support
in the 1980s (Dess et al, 1984; Hawes et al 1984) but was later challenged by numerous scholars
(Buzzell and Gale, 1987; Proff, 2000). It has been noted that a shortcoming of the low-cost-
differentiation dichotomy, is that the two strategies are not opposites in entirety, and are neither
always mutually exclusive (Parnell, 1997). Notably, most successful firms exhibit one or more

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forms of differentiation, along with forms that are directly associated with cost leadership and
even the focus orientation. This is one of the trickiest areas in the analysis of generic strategies
that the reality can be different and more subtle than the stark contrasts that are highlighted by
Porter (1980). It is important to conduct the analysis with an open mind, and to explore the
relative advantages, disadvantages, and risks that the various strategies may offer to a company
vis-à-vis the competition and overall business environment.

Information Technology and the advent of the Internet have caused major changes in the
business environment and have accelerated the speed of change. Kim et al (2004) have argued
that Porter's generic strategies of differentiation and cost leadership will be applicable to e-
business firms in a broad sense, while the focus/niche strategy will not be as viable for e-
business firms, compared to their traditional counterparts. They suggest that an integration of
cost leadership and differentiation strategies would be the most promising in the e-business
context, but individually differentiation will show superior performance compared to cost
leadership. As more and more companies are transforming their bricks-and-mortar existences to
brick-and-click, it is vital for analysts to understand the role that generic strategies are playing in
the digital era.

2.3 Where to find information for Porter's Generic Strategies Analysis

Analysts can explore various sources to find information necessary for conducting the generic
strategies analysis. Possible sources of information include company and competitor websites in
order to view the existing portfolio of products or services that are being offered to customers.
The annual reports of the company can used to analyse the relationships between costs and
profitability, and how a particular strategy is affecting the firm's overall performance.

Marketing communications tools used by the company and competitors may also reflect the
generic strategies. Advertisements can be a useful source of information to analyse the strategy
that is being pursued by the company, and how that differs from that of the competition. Journal
articles, trade publications and reputable magazine articles are useful sources of information to

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analyse industry trends, customer preferences in a given market, and the strategies that are being
pursued by the companies in a particular industry.

3.1 Relationship between Porter's Generic Strategies Analysis & Industry Forces

The three generic strategies suggested by Porter (1980, 1985) can be effectively utilised to
defend against competitive forces in the business environment. The industry forces take the form
of competitive rivalry, barriers to entry, threat of substitutes, buyer power, and supplier power
(Lynch, 2003).

3.1. Competitive rivalry

If the competition in the industry in which the company operates is fierce, the advantage of a cost
leadership strategy would be that the firm would be able to compete on price. However, cost
leadership strategy is not the most desirable strategy in this event, as competitors may put intense
price pressures, such that all companies would end up reducing their prices drastically.
Differentiation would be a viable strategy in this case as there is a likelihood that the loyal
customers would stay with the company. It would also be hard for competitors to cope with the
specialised needs of customers who are part of a niche segment in the market.

3.1.2 Barriers to Entry

A company employing any one of the three strategies would find it easy to create barriers for
new entrants. The learning curve of cost leaders in an industry, along with the economies of scale
through experience curve effects, would often make it impossible for potential entrants to
compete on price, as the more mature firm can further lower prices without comprising its
profitability. High customer loyalty towards a company's brands, which is true for the
differentiation strategy, can play a vital role in discouraging potential entrants. Customers often
choose to be with a niche player because of a certain core competence that only that particular
player is providing in the market. Also companies that make use of the focus strategy over time

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often develop a thorough understanding of their customers' needs, which is a very difficult task
for a potential entrant. In this way, focus can act as an entry barrier also.

3.1.3 Threat of substitutes

It is the differentiation and differentiation-focused strategies that effectively reduce the threat of
substitutes. Threat of substitutes is reduced in case of the differentiation strategy due to customer
loyalty to the unique aspects of a particular product or service, which no substitute product can
offer in the customer's mind. In case of the later strategy, the very nature of the company's
products and core competence of the firm reduce the threat of substitutes.

3.1.4 Buyer Power

The power of buyers changes in accordance with the three generic strategies. Cost leaders have
the unique ability to offer lower price options to large and powerful buyers. However, the
scenario differs for companies making use of the differentiation and focus strategies. Buyers in
case of these two strategies would have less power as there are few alternatives available to
them.

3.1.4 Supplier Power

Suppliers can exercise their power primarily in case of differentiation and focus/niche strategies.
Companies making use of these strategies have the ability to pass the price increases of suppliers
to their final customers, through the premium pricing strategy.

4.1 Limitations of Porter's Generic Strategies Analysis

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During the 1980s, the generic strategies were regarded as fundamental to strategy and the ideas
suggested by Porter were used extensively. It became clear over time that in reality there were
some shades of grey in the distinction between differentiation and cost, compared to the black
and white that is projected in theory. It is very difficult for most companies to completely ignore
cost, no matter how different their product offering is. Similarly, most companies will not admit
that their product is essentially the same as that of others (Macmillan et al, 2000).

It is important for analysts to bear in mind that Porter's generic strategies should be considered as
a part of a broader strategic analysis. The generic strategies only provide a good starting point for
exploring the concepts of cost leadership and differentiation. Perhaps a major limitation of the
generic strategies is that they may not provide relevant strategic routes in the case of fast
growing markets (Lynch, 2003). It is important to conduct other analyses like PESTEL analysis
to analyse how the generic strategy being employed by a company should change in accordance
with external factors. Other useful analyses would include SWOT analysis, analysis of the key
success factors etc.

5.1 Conclusion

Porter's generic strategies framework suggests that a company can maximize performance by
striving to be the cost leader in an industry, by differentiating its products or services from those
of other companies, and by focusing on a narrow target in the market. A company that attempts
to combine cost leadership and differentiation strategies would invariably be stuck in the middle,
which according to Porter is not a desirable notion. It is seen that each of the generic strategies
has advantages and inherent risks that should be analysed carefully with respect to the company
and its competitors. It is noted that in practice, most successful companies make use of a
combination of low cost and differentiation strategies, which is true even in the context of online
business.

It is seen that Porter's generic strategies can be effective in defending against competitive
forces in the industry. Key sources of information for conducting a generic strategies analysis

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include company and competitor websites, annual reports, advertising, and journal articles, trade
publications and reputable magazine articles. Porter's generic strategies have certain limitations
which include shades of grey in the distinction between differentiation and cost, compared to the
black and white approach suggested by Porter. Also, analysts must use the generic strategies
analysis as only a part of a broader strategic analysis. Use of other strategic models and tools
like PESTEL, SWOT etc. is recommended for a more holistic analysis.

If you found this article useful please have a look at the other articles we have written:Ansoff
analysis, McKinsey 7S Framework, SWOT analysis, BCG Growth-Share Matrix,Porter's 5
Forces analysis, Scenario Planning, Value chain analysis, Pest Analysis,Balanced
Scorecard, Competitor Analysis, Critical Success Factors, Industry Lifecycle,Marketing
Mix and Product Life Cycle.

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