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Porter’s Generic Strategies
The study of business strategy was strongly influenced by Michael Porter, Harvard Professor, and author. In 1985, he wrote the seminal text, Competitive Advantage: Creating and Sustaining Superior Performance, concerning business strategy. In his text, he proposed 3 (or 4) categories of “generic strategies” for approaching a product market. Per Porter, any one of these strategies is capable of producing a “competitive advantage” for a business in a given market. It is important to note that, every strategy is not possible for a single firm. However, if the firm is capable and executes a strategy sufficiently, then it can achieve a competitive advantage in the market.
In summary, the strategies were as follows:
- Cost Leadership – Minimizing the costs incurred in providing value (product or service) to a customer or client.
- Differentiation – This means making one’s product unique or special, compared to other competitors or substitute products in the market.
- Cost Focus – Note: This does not mean a focus on cost. It means minimizing costs in a focused market.
- Differentiation Focus – Note: This does not mean a focus on differentiation. It means an orientation toward differentiation from other competitors/products within a focused market.
Let’s take a deeper look at each of Porter’s Generic Strategies.
The Cost Leadership Strategy
Cost leadership means being an industry leader in low-cost production. Remember, this does not concern the cost for the consumer. It concerns the cost of production for the business. The strategic position serves one of two purposes at any stage of execution:
1. It produces higher profit margins for the business at a given price, or
2. It allows for an overall lower price to consumers, which can be used to increase market share.
In order to employ this strategic approach, you must be able to establish and maintain a lower cost structure than any competitor. This includes the cost structure of competitors producing similar (and sometimes, substitute) goods.
Note: This strategic approach is the genesis of out-sourced production of products to countries where the cost of manufacturing and shipping is lower than the costs within the United States.
Techniques for effectuating this strategy vary. As noted above, outsourcing is a common way of lowering production costs of products and services. Companies often employ new technologies in hopes of bringing down traditional cost structure (e.g., Wal- Mart). Operations managers study efficiency theories, such a Lean Sigma in order to determine ways of cutting waste (i.e., costs) in the production process.
The downside of cost leadership strategy is that competitors will enter the market (new entrants) when old cost structures are replaced by more efficient structures (ex. Southwest Airlines). The existing business may be stuck at old cost rates (such as fuel) where new entrants have the benefit of lower rates.
The Differentiation Strategy
Differentiation is the strategic tactic of separating your produce or service from others in the industry. Unlike cost leaders, differentiation strategy focuses on the value proposition to customers. That is, the product or service has some unique character or feature that differentiates it from other competitors where the value proposition is greater to certain customers. Examples of differentiation sub-strategies include:
- Product performance (Speed, strength, etc.)
- Quality of how the product is made.
- Durability of product
- Functionality (e.g., ease of use, features, etc.)
- Brand Image (e.g., luxury goods – Rolex)
- Novelty of Innovation
- Operational Efficiency
- Support for Customer (Warranty, Guarantee, Customer Service)
- To employ this strategy a business will have to find unique qualities about its product or service that can set it apart from other products or services in the market. This requires an in-depth understanding of one’s own product, as well as an understanding of all of the available products in the market.
The Focus Strategy
The focus strategy is a third category that is split into 2 categories that modify the cost leadership and differentiation strategy. In either case, the focus strategy involves concentrating efforts on customers who have unique needs or wants, commonly referred to as a “niche” market. This level of customer focus allows a business to either produce a given product in a lower cost structure or to produce a product or service with unique features or characteristics that meet the needs or wants of the focus market. Either subcategory of the focus strategy allows for distinct advantage:
Example: A cost focus strategy may uncover ways of producing a generally accepted product at a lower cost that allows for creating a cost advantage for the customer in the niche market.
- Example: A differentiation focus strategy may allow the business to uncover previously unrecognized needs or wants and meet those needs or want through unique product features.
As in the above explanations, a business will likely have to pursue one or the other subcategory of focus strategy. Trying to accomplish both can lead to a lack of focus or effectiveness with either strategy.