Porter’s Generic Strategies: Differentiation, Cost Leadership and Focus

One of the two key questions that underpin the options that organizations have for competitive strategy is addressed by Porter’s Generic Strategies. The first concern is how to decide which sector to engage as a business and which industries are desirable for long-term success. The Five Forces Model, Porter’s framework for analyzing this, is well known to all of us. After choosing a specific sector to enter, the second question concerns the factors that determine a company’s relative competitive position within that market. Because having a presence in a desirable sector is not enough to make a firm successful, you must also establish a strong competitive position by implementing one of three general strategies: Focus, Cost Leadership, and Differentiation. Being “stuck in the center,” as Porter puts it, will arise from failing to select one of these strategies, which will lead to strategic mediocrity and below-average performance. With the use of examples, this article will discuss Porter’s Generic Strategies.

Differentiation

Differentiation is a form of competitive strategy used by businesses to set their goods and services apart from those of rivals in an effort to stand out from the crowd. To make a product stand out, a business may employ innovative marketing strategies, distinctive product characteristics, higher quality, better performance, outstanding service, or new technology. If customers are devoted to a company’s brand, a differentiation strategy might lessen conflict with rivals. Therefore, businesses that pursue distinctiveness rely heavily on client loyalty. Companies using this sort of strategy typically charge their items more than rivals due to their distinctiveness. Apple, Harley-Davidson, Nespresso, LEGO, Nike, and Starbucks are a few examples of businesses with distinctive goods and services.

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Cost Leadership

Cost Leadership is a type of competitive strategy in which an organization actively seeks out effective large-scale production facilities, reduces costs, utilizes economies of scale, gains production experience, and employs strict cost controls to be more efficient in the production of products or the offering of services than competitors: the objective is to be the low-cost producer in the industry. A low-cost position also indicates that a business may offer equivalent quality at fair profits by undercutting competitors’ costs, for instance through penetration pricing. Low-cost producers often market generic goods and services. Southwest Airlines, Wal-Mart, McDonald’s, EasyJet, Costco, and Amazon are a few examples of businesses that have cost leadership positions.

Focus

The focus strategy is a third category that modifies the cost leadership and differentiation strategies. It is divided into two groups. In either scenario, the focus approach entails focusing efforts on clients with particular demands or desires, or what is known as a niche market. With this level of client concentration, a company may either produce a specific product at a reduced cost or create a good or service that specifically addresses the demands or desires of the target market. Both focus strategy subcategories have the following advantages:

Example: By finding ways to produce a widely used product at a reduced cost, a cost focus approach may enable the creation of a cost advantage for the consumer in the niche market.

A business will probably need to follow one or the other subtype of focus strategy, as in the descriptions above. Trying to do both may result in a lack of concentration or efficiency with either approach.

Stuck in the Middle

A corporation is said to be “stuck in the middle” if it tries to implement each general approach but is unsuccessful in doing so. Regardless of the industry it operates in, such a corporation lacks a competitive advantage. In actuality, such a firm will compete at a disadvantage given that the industry’s “cost leaders,” “differentiators,” and “focusers” will be better positioned to compete. However, it’s possible that a firm that’s in the middle nonetheless generates intriguing profits because it’s in a really appealing sector to work in or because its rivals are also in the middle. Porter contends that because distinction is often expensive, it will be very difficult for businesses to pursue both cost leadership and uniqueness if one of the two exceptions does not exist. Each generic strategy has a unique operating model need and takes a fundamentally different approach to achieving and maintaining excellent performance.

Other interpretations of Porter’s Generic Strategies

Porter’s Generic Strategies Model has supporters and detractors, much like many other business frameworks. Porter’s claim that you must adhere to one method at all times or risk becoming “stuck in the middle” has been contested, among others, by Miller (1992). He asserts that there is a workable middle ground between tactics and cites Caterpillar Inc. as an illustration. Caterpillar distinguished itself by manufacturing the best caliber earthmoving machinery available worldwide while paying close attention to cost-efficiency. Strategic specialization, according to Miller, runs the risk of becoming rigid and insensitive to client requirements. Additionally, Chan Kim and Mauborgne (2005) do away with the “value-cost” trade-off that a business must make when deciding between several methods. With their Blue Ocean Strategy, they advise businesses to pursue both distinction and low cost at once: the goal is to raise customer value while concurrently lowering expenses. Popular authors do, however, adhere to Porter’s theory of competitive choice. For instance, Treacy and Wiersema (1995) expanded on Porter’s concept and transformed his generic strategies into the value disciplines. Choose between operational excellence, product leadership, and customer intimacy, they advise businesses.