In This Article
Introduction
Michael Porter's Generic Strategies framework (1980) describes three fundamental ways a company can achieve sustainable competitive advantage. The choice depends on two dimensions: competitive scope (broad vs. narrow) and source of advantage (low cost vs. differentiation).
| Low Cost | Differentiation | |
|---|---|---|
| Broad Target | Cost Leadership | Differentiation |
| Narrow Target | Cost Focus | Differentiation Focus |
Strategy 1: Cost Leadership
Become the lowest-cost producer in the industry while maintaining acceptable quality.
How to Achieve
- Economies of scale: Large production volumes
- Learning curve: Efficiency from experience
- Process innovation: More efficient methods
- Tight cost control: Rigorous overhead management
- Supply chain efficiency: Low-cost sourcing
Risks
- Technological change may leapfrog cost advantages
- Competitors may imitate
- Focus on cost may cause neglect of product changes
Example: Walmart, Dmart
Relentless focus on cost reduction through efficient logistics, bulk purchasing, minimal frills, enabling "Everyday Low Prices."
Strategy 2: Differentiation
Offer unique attributes that are valued by customers and command a price premium.
Sources of Differentiation
- Product features: Unique functionality
- Quality: Superior reliability, durability
- Brand image: Prestige, reputation
- Customer service: Superior support
- Technology: Innovation leadership
- Distribution: Convenience, availability
Requirements
- Strong R&D and marketing capabilities
- Creative talent
- Corporate reputation for quality
- Strong cooperation with channels
Example: Apple
Differentiation through design, user experience, ecosystem integration, and brand prestige—commanding premium prices.
Strategy 3: Focus (Niche) Strategies
Target a narrow market segment and serve it better than broad-scope competitors.
Two Variants
- Cost Focus: Be the lowest-cost provider in a niche
- Differentiation Focus: Offer unique value to a niche
Focus Works When
- Segment has distinct needs
- Segment is large enough to be profitable
- Segment is poorly served by broad competitors
- Firm has capabilities to serve segment well
Example: Rolls-Royce
Differentiation focus on ultra-luxury segment—doesn't try to compete with mass-market cars.
Stuck in the Middle
Porter warned that firms trying to pursue all strategies simultaneously end up "stuck in the middle"—neither the lowest cost nor meaningfully differentiated.
• Competing on price but not lowest cost
• No clear value proposition
• Average profitability below industry
• No sustainable competitive advantage
Choosing a Strategy
Consider
- Industry structure: What works in your industry?
- Resources and capabilities: What can you do well?
- Competitor positions: Where are gaps?
- Customer needs: What do they value?
Conclusion
Key Takeaways
- Three generic strategies: Cost leadership, differentiation, focus
- Cost leadership: Lowest cost in industry through efficiency
- Differentiation: Unique value that commands premium
- Focus: Serve narrow segment better than broad competitors
- Avoid being "stuck in the middle"—make a clear choice
- Strategy must align with capabilities and market
- Each strategy has different requirements and risks