Porter’s Generic Strategies
Having a basic strategy at the heart of your business is a crucial part of both short and long term success. It is easy enough to set out in business with a general idea of what you want to accomplish, but those who lack a specific strategy will usually be swallowed up by the market. Rather than falling into this trap, take the time to develop a specific strategy which is going to guide your day to day decision making going forward. Most people find it much easier to run an organization when they have a strategy in place that is dictating how they proceed.
With that concept in mind, using Porter’s Generic Strategies is a great way to place yourself on a path toward success. The strategies – four in all – that are included in this model are high-level concepts of how you can choose to proceed in business. Not all businesses are created equal, and there is a great deal of variation in strategy even among businesses that are similarly successful. You can take a variety of paths to reach your goals, but you have to know which path it is that you wish to take if you are going to come out on top in the end.
In the content below, we will take a brief look at each of the four strategies you can choose from within this model.
This is a common business strategy, and it is probably one that you have considered as you try to gain an edge on the competition. Cost leadership means you are going to lead the market in controlling costs in one way or another.
Within this strategy, however, there are actually two ways you can go. One option is to offer your products at a lower cost than your competition, convincing consumers to pick your product simply because it is the least expensive choice on the shelves. On the other hand, you could opt to take a cost leadership strategy by producing your units for the lowest cost while still charging average prices for the goods. In this way, you will make a larger margin on each sale than will your competitors, so you can win in the long run even if you don’t sell significantly more units. In fact, you might even be able to win by selling less units if your profit margins are large enough.
While it might seem like an easy choice to simply sell your products for the lowest possible price, you need to make sure that you can sustain that plan over the long run. For instance, if there is a larger player in this market, they may decide to undercut you for a period of time in order to run you out of business. Are you going to be able to keep up on the cost front? If not, you may need to pick a different strategy – or at least use a blend of strategies to carve out part of the market for yourself.
In many ways, the differentiation strategy is exactly the opposite from the cost leadership option. With this plan, you are going to try to take over the market from a quality and functionality stand point, rather than simply trying to sell the least expensive item on the shelf.
When you think about differentiation, you should be thinking about luxury brands. For instance, how does a luxury brand sell a purse for $500 or more when plenty of companies sell purses for $20? They convince the market that the quality and style that is offered by their product is worth the higher price. They have differentiated themselves from the lower cost options successfully, and they succeed as a result.
Of course, it isn’t exactly easy to differentiate yourself from a quality or functionality stand point. Not only do you need to have a great product to offer, you also need to have a strong marketing plan to inform buyers about your item. When in doubt, consumers are going to default to the most affordable choice, so you need to be able to educate them about your product and everything that it can do. Without a great marketing plan and team, you will probably be left with a high priced item that is stuck on the shelves.
The strategy in this part of the model is the same as the cost leadership concept, except you are going to be focused on one specific niche of the market. Rather than trying to sell to everyone, you are only going to be trying to sell to a small portion of the market that is focused on buying a unique product.
While this strategy might not have the growth potential that you will find when dealing with the broader market, you will have the opportunity to become the major player within the niche – therefore securing your place for years to come. If you can get into a small niche with a product that is sold for less than any other, you will stand a great chance to succeed.
As you might imagine, the differentiation focus strategy is similar to cost focus, except you are going to work within a niche market while trying to stand out on a quality basis.
You might not be the least expensive product available – in fact, you might be the most expensive product available – but that isn’t the point. As long as you can present consumers with something they are looking for, and you can justify your higher price, you may be able to grab a large share of the niche market.
Porter’s Generic Strategies are a great way to think about the overall positioning of your business. You certainly don’t want to wander blindly into the market, hoping to get lucky and find a spot for your company to thrive. Use this model early on in the planning process to pick out a strategy and let that strategy lead you out into the market.
- The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to four generic strategies for achieving above average performance in an industry: cost leadership, differentiation, cost focus and differentiation focus.
- A company chooses to pursue one of two types of competitive advantage, either via lower costs than its competition or by differentiating itself along dimensions valued by customers to command a higher price.
- A company also chooses one of two types of scope, either focus (offering its products to selected segments of the market) or industry-wide, offering its product across many market segments.
- The generic strategy reflects the choices made regarding both the type of competitive advantage and the scope.