Porter's Generic Strategies

Designed by Michael Porter in 1979, Porter’s Generic Strategies is a frameworks used to outline the three major strategic options open to organizations that wish to achieve a sustainable competitive advantage. Each of the three options needs to be considered within the context of two aspects of the competitive environment. Firstly, the sources of competitive advantage which establish whether the products are differentiated in any way, or if they are the lowest cost producer in the industry. Secondly, the competitive scope of the market determines if the company targets a wide market or if it focuses on a very narrow niche market.

The three generic strategies which this creates are cost leadership, differentiation and focus represented diagrammatically as shown in Figure above.

The cost leader in any market gains competitive advantage from being able to produce products at

the lowest cost. To achieve success by using this strategy, the company has to be the cost leader, rather than one of the firms trying to achieve the position. Some ways to obtain these low costs include unique access to sources of low cost materials, outsourcing, efficient manufacturing and avoiding supplementary costs. Usually low cost companies adopt this principle for all their activities

and departments. A low cost producer usually finds and exploits all sources of cost advantage, including selling a standard, no frills product.

A differentiation strategy focuses on designing a product or service with unique qualities that customers perceive as being better than the products of the competition. This allows companies to desensitize prices and to focus on those features which generate value. This leads to higher prices as creating a

competitive advantage requires additional costs which the company will hope to recover through higher prices. Additionally, producers need to segment markets in order to target goods and services for each specific segment, thus generating a higher price than the average. The downside to this strategy is that these unique features will eventually be copied by the competition or customers could change their tastes and options, so there is a constant pressure to innovate and continuously improve.

Finally, the focus strategy applies to a narrow segment that is concentrated neither on cost advantage nor on differentiation. Usually companies using this strategy have a reduced size, focus all their resources and efforts on a narrow and well defined segment of market, and have the advantage of a high degree of customer loyalty. They can therefore pass higher costs on to their customers

because close substitute products or services are less likely to exist. Disadvantages are that these small specialized niches may disappear over the longer term and it is also possible that some broad market cost-leader companies start imitating or adapting their products in order to compete directly.

Porter also mentions that in order to achieve success on a long term, a company must select only one of these generic strategies. Otherwise, there is the danger of trying all and achieving none, thus creating a confusing image and remaining ”stuck in the middle”, without being able to create a true competitive advantage.