The article focuses on the main aspects of Porter’s generic strategies. The three generic strategies of cost leadership, differentiation, and focus are discussed along with the advantages and
risks inherent with each strategic option. The article includes tips for students and analysts on how to write good generic
strategies analysis for a firm. Moreover, sources of findings information for generic strategies analysis have been discussed.
The limitations of Porter’s generic strategies analysis have been discussed, and the relationship between these strategies
and industry forces is also discussed.
Porter’s Generic Strategies Analysis
Porter’s generic strategies framework constitutes
a major contribution to the development of the strategic management literature. Generic strategies were first presented in two books by Professor Michael Porter of the Harvard
Business School (Porter, 1980,
1985). Porter (1980, 1985) suggested that some of the most basic choices faced by companies are essentially the scope of the
markets that the company would serve and how the company would compete in the selected markets. Competitive strategies focus
on ways in which a company can achieve the most advantageous position that it possibly can in its industry (Pearson, 1999). The profit of a company is essentially the difference between its revenues and costs. Therefore high profitability can be achieved through achieving
the lowest costs or the highest prices vis-à-vis the competition. Porter used the terms ‘cost leadership’ and
‘differentiation’, wherein the latter is the way in which companies can earn a price premium.
Main aspects of Porter’s Generic Strategies
Companies can achieve competitive advantages essentially by differentiating their products and services from those of competitors and through low costs. Firms can target
their products by a broad target, thereby covering most of the marketplace, or they can focus on a narrow target in the market
(Lynch, 2003) (Figure 1). According to Porter, there are three generic strategies that a company can undertake to attain competitive
advantage: cost leadership, differentiation, and focus.
Source: Porter (1985)
Porter’s three generic
strategies are discussed in more detail in the following section.
The companies that attempt to become the lowest-cost producers in an industry can be referred to as those following
a cost leadership strategy. The company with the lowest costs would earn the highest profits in the event when the competing
products are essentially undifferentiated, and selling at a standard market price. Companies following this strategy place emphasis on cost reduction in every activity in the value chain. It is important to note that a company might
be a cost leader but that does not necessarily imply that the company’s products would have a low price. In certain
instances, the company can for instance charge an average price while following the low cost leadership strategy and reinvest
the extra profits into the business (Lynch, 2003). Examples of companies following a cost leadership strategy include RyanAir, and easyJet, in airlines, and ASDA and Tesco, in superstores.
The risk of following the cost leadership strategy is that the company’s focus on reducing costs, even sometimes
at the expense of other vital factors, may become so dominant that the company loses vision of why it embarked on one such
strategy in the first place.
When a company differentiates its products, it is often able to charge a premium price for its products or services
in the market. Some general examples of differentiation include better service levels to customers, better product performance
etc. in comparison with the existing competitors. Porter (1980) has argued that for a company employing a differentiation
strategy, there would be extra costs that the company would have to incur. Such extra costs may include high advertising spending to promote a differentiated brand image for the product, which in fact can be considered as a cost and an
investment. McDonalds , for example, is differentiated by its very brand name and brand images of Big Mac and Ronald McDonald.
Differentiation has many advantages for the firm which makes use of the strategy. Some problematic areas include the
difficulty on part of the firm to estimate if the extra costs entailed in differentiation can actually be recovered from the
customer through premium pricing. Moreover, successful differentiation strategy of a firm may attract competitors to enter
the company’s market segment and copy the differentiated product (Lynch, 2003).
Porter initially presented focus as one of the three generic strategies, but later identified focus as a moderator
of the two strategies. Companies employ this strategy by focusing on the areas in a market where there is the least amount
of competition (Pearson, 1999). Organisations can make use of the focus strategy by focusing on a specific niche in the market
and offering specialised products for that niche. This is why the focus strategy is also sometimes referred to as the niche
strategy (Lynch, 2003). Therefore, competitive
advantage can be achieved only in the company’s target segments by employing the focus strategy. The company can make
use of the cost leadership or differentiation approach with regard to the focus strategy. In that, a company using the cost
focus approach would aim for a cost advantage in its target segment only. If a company is using the differentiation focus
approach, it would aim for differentiation in its target segment only, and not the overall market.
This strategy provides the company the possibility to charge a premium price for superior quality (differentiation
focus) or by offering a low price product to a small and specialised group of buyers (cost focus). Ferrari and Rolls-Royce are classic examples of niche players in the automobile
industry. Both these companies have a niche of premium products available at a premium price. Moreover, they have a small percentage
of the worldwide market, which is a trait characteristic of niche players. The downside of the focus strategy, however, is
that the niche characteristically is small and may not be significant or large enough to justify a company’s attention.
The focus on costs can be difficult in industries where economies of scale play an important role. There is the evident danger
that the niche may disappear over time, as the business environment and customer preferences change over time.
Stuck in the middle
According to Porter (1980), a company’s failure to make a choice between cost leadership and differentiation
essentially implies that the company is stuck in the middle. There is no competitive advantage for a company that is stuck
in the middle and the result is often poor financial performance (Porter, 1980). However, there is disagreement between scholars
on this aspect of the analysis. Kay (1993) and Miller (1992) have cited empirical examples of successful companies like Toyota and Benetton, which have adopted more than one generic strategy. Both these companies used the generic strategies of differentiation
and low cost simultaneously, which led to the success of the companies.