PORTER'S GENERIC STRATEGIESIf the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns. A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or a narrower scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies will be 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:  |
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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. 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:
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:
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
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 long-term, a firm must select only one
of these three generic strategies. Otherwise, with more than one generic strategy, the firm will be "stuck in
the middle". Thus, it 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
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. 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
- Skill in designing products for efficient manufacturing, for example, having a small component count to
- 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
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 long-term, a firm must select only one
of these three generic strategies. Otherwise, with more than one generic strategy, the firm will be "stuck in
the middle". Thus, it 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
