Porter’s Generic Strategies – Meaning, Types, and Example

Each and every firm or business organization has to work with a plan or strategy to achieve the desired goals. Hence, we can say that adopting or choosing the right strategy is a quite critical and key factor for the success of any business entity. However, companies face challenges in selecting the right strategy for them. Because of the exclusive and comparable availability of various strategies leading to the same goal at a time. And, this is where Porter’s Generic Strategies concept comes in handy. In a nutshell, we can say that Porter’s Generic Strategies help a firm to plan its strategic direction to get a competitive advantage over rivals. Or choose the right strategy amongst the available options.

Primarily, Porter’s Generic Strategies help to answer two central questions regarding the type of competitive strategy to choose.

  1. The 1st question concerns the attractiveness of industries for long-term prosperity and how to select an industry to operate. So this is with regards to the business stream where one firm would like to work or do business.
  2. And the 2nd query is with regards to assessing and deciding how and where the firm would like to place itself within the competitive landscape of the industry. Or the relative competitive position of the firm within the choosen industry segment. 

Michael Porter in the year 1985 came up with the idea of “generic strategies” to help firms with this dilemma of choosing the right strategy. He documented and detailed the three types of generic strategies in his book titled “Competitive Advantage: Creating and Sustaining Superior Performance”. And these suggested three strategies that are – Cost Leadership, Product or Service Differentiation, and Focus. Porter further classified focus in two approaches: Cost Focus and Differentiation Focus.

So, in all, there are four strategies that a company can select from. Here we will deal with all these types of 4 generic strategies. 

Porters Generic Strategies: What Are They?

Following are the four types of generic strategies as per Porter:

Cost Leadership

In this, a company targets a broad market but offer product or service at a very low price. A firm usually has two options to choose from in this strategy. The first is to maintain a similar price as that of the competitors, but reduce other business costs. This allows a firm to increase its profit margin without spending anything extra and keeping the cost-competitive.

And, the 2nd option is to reduce the selling price to maximize cost leadership. In this, the profit margin will be less, but a firm is more likely to gain a bigger market share to compensate for the less margins. Thus the distribution of key costs will help the company still earn the same or higher level of margins as well as expand its market share.

Southwest Airlines and Wal-Mart are good examples of companies following such a strategy.

Differentiation

In this strategy, the key efforts of the company remain to showcase its product or service or offerings as unique as possible compared to the competitors. Or,  the company strives to keep its products on a different platform or level. The whole idea is to attract more and more customers by that unique feature that is not available with the existing products in the market. Thereby making an inroad to the competitor’s market share.

To properly implement such a strategy, a firm needs to have a robust R&D and a commitment towards innovation. Also, the firm must carry effective marketing to ensure target customers know what makes the product different. 

There are several ways to differentiate a product or service, such as re-branding, adding more features, creating specialized products, effective marketing strategy, and more. A company can only be able to differentiate if it is attentive and responsive to the needs of its customers.

Apple, Harley-Davidson, LEGO, and Starbucks are good examples of companies following such a strategy.

Cost Focus

In this, a firm targets a niche market, as well as offers products or services at the lowest price. The niche market could be in terms of industry or geography. Before adopting this strategy the key factor for success is that the company should need to understand and appreciate the nitty-gritty of this niche market. Because on the one hand, the firm is already targetting one of the segments of the market, hence it has to be very clear about the cost-sensitive requirements of this niche area. We can find good examples of such companies using these strategies are Claire’s and Home Depot.

Differentiation Focus

In this strategy also, a firm focuses on a niche market but offers a product or service that is unique. Here the primary focus remains on features rather than cost. Such a strategy helps companies to build brand loyalty amongst the users. For this approach to be victorious, it is crucial that a company maintains the uniqueness of its product or service. The examples of companies that followed these strategies are Rolls Royce, the car company, and Omega. Over the years thus the brands become a status symbol.

Choosing the Right Generic Strategy

While choosing the right generic strategy one needs to go through the selection process. And for that, the following steps need to be followed: 

Step 1:  Conduct a SWOT Analysis for each of the generic strategies. SWOT is an important indicator of the self-analysis of the company with regard to its strengths, weaknesses, opportunities, and threats for each of the chosen options. It would give the company an idea of the strategy that it would be comfortable within line with its goals and mission. And the strategy that would benefit the firm the most.

Step 2: After this, the firm needs to use the Five Forces Analysis to get an idea of the industry the firm is operating in, or plan to operate in. The SWOT analysis is more of an internal sort of analysis. Whereas this five forces analysis is more of an external environment analysis in which the firm is operating or plan to operate. This Five Forces Analysis takes into account: suppliers, customers, availability of comparable products, the threat of new entrants, and internal competition.

Step 3: Now the firm needs to compare the results of step 1 (SWOT Analysis) and step 2 (Five Forces Analysis). Basically, for each strategy, the firm needs to evaluate how it can use each strategy to influence the five forces. Or, for each strategy, the firm needs to ask the following questions:

  • Will it help to lower or manage supplier power?
  • Will it help lower or manage customer power?
  • Impact on competition, no impact or lower the competiton. 
  • Will it help to lower or end substitution threat?
  • Whether or not it helps to lower the threat of new entry?

On the basis of the above three steps detailed analysis, the firm should go for the strategy that will give it the best set of options. 

Examples of Porters Generic Strategies

Below are the hypothetical examples of each of Porters Generic Strategy:

Cost leadership – Company A is able to offer the product at a much less price than the competitors. It is able to do this because it has an efficient distribution system in place, enjoys economies of scale, and has low inventory wastage.

Differentiation – Company B offers beauty products. It is able to differentiate its product by offering hand-made products that are made from natural ingredients.

Focus – As said above, there are two types of focus strategy – cost and differentiation. Here we are discussing the example of cost focus. Company C is a jewelry company that makes super affordable nickel-free jewelry for women between 18-34 years of age.

Final Words

So, Porter’s Generic Strategies allows the business to pick the correct strategy for the trade. However, many criticize this approach because it takes away the flexibility as the company focuses on one strategy only. To overcome this drawback, companies nowadays go for a ‘hybrid’ strategy. That means the companies deploy a mix of more than one strategy for better results. Such a tactic allows companies to easily adapt to the rapidly changing market dynamics.

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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