Porter's Generic Strategies

There are a number of frameworks on this website that help a business develop its strategy. Ansoff offers a model that looks at opportunities within existing markets, new markets and with existing products and new products. This is useful when thinking of future areas for expansion. So too the Boston Matrix looks at opportunities arising from markets with strong growth prospects and those where a business has a significant market share. Mintzberg gives us an understanding of how strategies vary from those which follow a plan through to those which develop a ploy to beat the competition or simply adjust to the ebbs and flow of the market. Michael Porter with his generic strategies starts at the beginning. He argues that a brand or a business must stand for something if it is to be successful. His thesis is that there are three important positions that a brand can take:

Low-cost (Cost leadership): Companies that have a cost advantage can use this to compete effectively within a market. Low-cost airlines that strip bare their services and hone their processes to perfection, can offer airfares at a fraction of the cost of the legacy airlines. Chinese companies that produce products in immense volumes and with low-cost labour can compete against those who are shackled with higher labour costs and smaller production runs. Porter recognises that in any market there is a significant minority of people that simply want the lowest possible price.  Because price is the key driver of choice, companies that seek this position have less loyal customers. People driven by low prices are likely to flit to wherever they see a marginal price advantage.

A company competing on a low-cost strategy is likely to find that it doesn’t last for ever. The low labour cost advantage of China may be overtaken by cheaper labour in Vietnam or Cambodia. Once the cost advantage has gone, it may be necessary to find a new strategy. A company taking a low-cost position has to ensure that it covers the basic needs of its customers. In order to achieve the low-cost position it is permissible to eliminate the exciting factors and those that differentiate a brand but it would be dangerous to compromise on the fundamental quality of the offer.

Niche (Focus): Specialisation is always a good strategy for competing. People like to deal with specialist brands and companies that they believe are attuned to their own narrow needs. Most markets have a number of companies that carve out a niche for themselves. Porter saw these companies as highly focused targeting only a small proportion of the total market with their specialist products. They tend to be smaller than the big competitors who work on a cost advantage but they nevertheless can be profitable and develop a loyal customer base. In the motorbike market Harley-Davidson sits in a niche position offering large luxury bikes to people who want a customised product. Admittedly this segment of the overall motorbike market is sizeable and big enough for Harley-Davidson to have achieved revenues of $6 billion per annum.

Differentiation:  Companies can develop brands that stand out from the competition because they are seen to have a very distinct value proposition. The big automotive brands such as Mercedes-Benz, BMW, Ford and General Motors all seek a differentiated position. In the industrial market, companies such as Dow, Grundfos, and Shell have built brands that people specify because of their strength.  A differentiation strategy which builds a strong brand is usually easier to defend than a low-cost strategy. The position that the differentiated brand has in the shelf space of people’s minds sticks for a long time.

This said, a brand can be knocked off its pedestal if it faces a disaster. In 1990 Perrier was a brand synonymous with mineral water. It had a 15% share of the US market. It had a differentiated position being seen as a pure brand which was healthy to drink. In 1992, it nearly came unstuck when American regulators in North Carolina found contamination with benzene. Although the contamination was miniscule, it required Perrier to recall 160 million bottles across 120 different countries at a cost of more than $250 million. It was a high price but it had to be paid to defend its differentiated position.

Companies competing on a low-cost can have a strong brand but it is the low-cost part of the offer that prompts people to choose it. Companies in a niche can have a strong brand but in their case it is their specialisation that draws customers to them, not just the brand itself. These companies address a broad range of customers within the market, except perhaps those who are simply interested in buying at the lowest price.

A good strategy is one that is solidly located in one of the three positions. The worst place to be is stuck in the middle where a brand tries to stand for everything and, in doing so, achieves nothing. Porter believes that it is difficult but not impossible to address a broad audience with more than one position. This has to be achieved by segmentation. Airlines for example offer a strongly differentiated value proposition to business class customers and a stripped down offer to those in coach or economy class. Whilst this is possible in some markets, it is more difficult in others. It would be difficult for a car manufacturer to position itself with a single brand that in some cases offered a differentiated product and in other cases a low-cost one.  Many business to business companies find it difficult to deal with customers that want a low price alongside those who are prepared to pay a premium. They find themselves falling into the trap of giving everyone the same product and service but at different prices and with different levels of profitability.

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Porter explains his generic strategies with the following diagram that plots strategic advantage against the market segment that is being targeted. 

A good strategy is one that is solidly located in one of the three positions. The worst place to be is stuck in the middle where a brand tries to stand for everything and, in doing so, achieves nothing. Porter believes that it is difficult but not impossible to address a broad audience with more than one position. This has to be achieved by segmentation. Airlines for example offer a strongly differentiated value proposition to business class customers and a stripped down offer to those in coach or economy class.

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Determining which strategy is the right one should begin with a SWOT analysis. This will show the company’s strengths and weaknesses and the opportunities and threats that it faces. It would also be helpful to carry out an analysis using Porter's Five Forces to see how these are shaping the company. Against this background, a generic strategy can be chosen that is right for the company and which plays to its strengths.

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Clarity is really important when developing a strategy. It is why Michael Porter argues in favour of building a strategy based on differentiation, cost leadership or focus. Don’t get confused about the strength of your brand. You can have a strong brand in cost leadership and also in a niche.

Some things to think about:

• Clarity is really important when developing a strategy. It is why Michael Porter argues in favour of building a strategy based on differentiation, cost leadership or focus. Don’t get confused about the strength of your brand. You can have a strong brand in cost leadership and also in a niche. What is it in overall terms that gives you a competitive strategic advantage?

  
  

• Once you have established your strategic advantage, make sure that your customer value proposition and your messaging emphasises it. This will give resonance to your communications.