Michael Porters Generic Strategies | Competitive Strategy Examples
Porter identified four possible competitive strategies in the book, Competitive Advantage, published in 1985.
In order to achieve a better result than the competition in the industry, these four strategies should be seen as a continuation of Porter’s five forces. Still, it’s specifically about how a firm can achieve a favorable competitive position in the industry.
What is a Competitive Advantage?
A competitive advantage is when a company achieves higher profits than the average competitors in the product market,
Consider companies that have similar revenues and similar costs and, therefore, similar profits. Well, the firm can achieve a competitive advantage in one of two ways.
- The firm can somehow drop costs while keeping revenues constant. In this case, the business now achieves a competitive advantage due to lower costs.
- The firm can increase revenues while holding costs constant. In this case, the business now achieves a competitive advantage due to higher revenues.
A company could realize an even more significant advantage if it could somehow do both, but that isn’t easy to do in practice.
Michael Porters Generic Strategies
Michael Porter suggested that two key dimensions can define generic strategies.
- The scope of the strategy
- Source of the competitive advantage
The model has two main divisions.
The scope of the strategy/Competitive Scope
The scope of the strategy is sometimes also called the industry or market. It is broadly categorized into two;
Broad scope strategy & Narrow Broad scope strategy
Broad scope strategy – serve many or all segments in the industry.
Narrow Broad scope strategy–where the firm focuses on customers only in selected segments and where the focus can be more narrowly targeted at these customers’ special needs.
Source of Competitive Advantage
It is the basis of competitive advantage; the company could either be the low-cost leader or a differentiator.
Lower-Cost Strategy and Differentiation Strategy
A low-cost strategy is where the firm offers a comparable product cheaper than the industry’s competition or the selected segment.
Differentiation strategy where the firm offers a service or a product that is perceived as unique compared to its competitors. By doing this, the firm isolates itself from industry rivalry, and consequently, their customers become more loyal on less price sensitive.
Porters Generic Strategies Model
Porter’s Generic Strategies Model is divided into two-by-two subcategories that create a model with four fields. These are
- Cost leadership
- Focus areas
- Focus differentiation.
Low-Cost Leadership Strategy
Cost leadership is really about being the low-cost provider for a broad customer base. A firm set out to become the low-cost producer in its industry and called the cost leader.
This could be achieved by economies of scale, where low-cost producers sell a standard product to a broad target of the industry customers. They are also very cost-effective, particularly in procurement, production, and distribution.
These low costs allowed them to capture higher profits than their competitors consistently. These companies all offer products. They’re pretty similar to other products in the marketplace, but they have lower costs.
Low-Cost Leadership Strategy Examples
Ikea and Walmart are examples of cost leaders. They make large profits by selling their products a little cheaper or at the industry level, as they have lower costs than the competition.
Product Differentiation Strategy
The firm offers something unique compared to other firms in the industry. The firm is trying to find aspects of the product that customers appreciate. It may be the product itself.
Differentiation is really about doing something different that makes your broad market customers willing to pay more for your products and services.
We’re talking about a product’s technology or design that appeals, especially to the customer. The customer is willing to pay a premium for those aspects compared to the industry’s standard product.
Some bike manufacturers are trying to sell bikes based on the appearance and additional technology accessories such as GPS. Some customers are willing to pay extra for this.
Differentiation may also be the service that the firm offers both during and after the sale. Differentiation may also include the firm’s brand image on the product, which can be created through marketing.
Clothing labels are an example. The industry products are relatively similar, but customers are willing to pay extra for certain brands.
Product Differentiation Strategy Examples
Product differentiation strategy examples company is cosmetics from Elizabeth Arden. This is a B two C product, where they differentiate themselves from competitors in the industry with their brand image and how their products are displayed in stores.
The second example of a product differentiation strategy company is Caterpillar in the B two B market for construction machinery. Their differentiation is both the product itself, It has a very high quality, and after-sales service, it’s easy to get spare parts. These two factors are very important parameters in the construction industry, for which customers are willing to pay a premium.
Other examples of Product differentiation strategy companies are Apple and Harley Davidson.
The companies offer products that customers want, and customers are willing to pay high prices. Higher prices allow these companies to capture higher profits than their competitors consistently.
Focus Strategy in Business
Focus strategy is quite different from cost leadership and differentiation because it rests on the assumption that there can be a narrow competitive scope within an industry.
The focuser selects a segment or a group of segments in the industry and tailors its strategy to serving them to the exclusion of others.
By optimizing its strategy for the target segments, the focus seeks to achieve a competitive advantage in its target segments, even though it does not possess a competitive advantage overall.
Michael Porter points out that it is impossible to identify a segment that can be operated separately in all industries.
Before, we would have said that the sale of water cannot be divided into segments. But times are changing.
If it’s possible to identify segments that can be operated separately in the industry, the focus strategy’s competitive advantage can be divided into two fields.
These are cost and differentiation.
Cost Focus Strategy Porter
Cost Focus Strategy in Porter generic strategies exploits the differences in cost behavior in some segregated segments. Cost focus is a cost leadership strategy in a narrow or focused market.
Even in these focus segments, the company is still cost-conscious; these are the same parameters as the broad cost leader but just focused on a separate, narrower segment.
Examples: Cost Focus Strategy Companies
Aldi is an excellent example of a Cost Focus Strategy Companies. Aldi targets a very narrow and extremely price-sensitive customer but only carries the products they can offer at a considerable discount.
They strategically locate close to traditional supermarkets so that these extreme penny-pinching customers can still go somewhere close by to get the other things they need that Aldi doesn’t carry
Another Examples of Cost Focus Strategy Companies
Another example would be a business offering the chartering of small planes for business trips for companies. Small aircraft flight charter is a sub-market of all flights. Providers must, however, always be cost-conscious; otherwise, customers will find another provider.
Focused Differentiation Strategy
Focused differentiation strategy companies exploit buyers’ needs in a certain segment. Differentiation focus is a differentiation strategy in a narrow or focused market.
Such differences imply that the segments are poorly served by broadly targeted competitors who served them at the same time as they serve others.
Porter warns specifically about the distinction between broad differentiation and focus differentiation. Focus Differentiation is specifically directed to selected parts of a segment. This part segment is willing to pay more for a particular benefit.
Focused Differentiation Strategy Companies Examples
An example of a focused differentiation strategy company is Ferrari. They target performance-focused drivers who have millions to play with.
Another example of a focused differentiation strategy for companies could be voyages of longer duration, which are targeted at older people who want extra service.
No stairs, trained nurses to accompany them on the journey, etcetera.
Exclusive travel is a narrow part of the total market, and the elderly are a focus differentiation within this segment.
How to use Michale Porters Generic Strategies
Generally, you can select any one of these four Porters generic strategies in your efforts to achieve a competitive advantage. It is tough, however, to try to do more than one.
Problems with Porter’s Generic Strategies
Many companies that try to do more than one frequently gets stuck in the middle. For Example, when you cut costs aggressively, you also tend to cut product features and services. Therefore it is tough to differentiate your product when you are aggressively pursuing a low-cost strategy.
Additionally, you often have to spend money to make your product somehow better than the other products out there. Doing so is inconsistent with a cost leadership strategy. Cost awareness and differentiation is a contradiction in terms. Differentiation costs money.
The main activities you engage in to become a cost leader are merely inconsistent in most cases, with the main activities you engage in to be a differentiator.
Getting stuck in the middle is a pretty unhappy place because your products aren’t different enough for customers to be willing to pay more, but they aren’t cheap enough for customers to choose you for your bargain prices.
You are left without any exact, unique value for the customers you’re trying to woo.
So, while some companies have found ways to do both, it is usually wise to choose one and stick with it.
Michael Porter, however, warns about companies that do not have defined a clear generic strategy. They engage in each generic strategy but failed to achieve any of them.
They are stuck in the middle and possess no competitive advantage. Competitiveness is weak compared to firms with a clear strategy: cost leadership, differentiation, or focus.
These firms have a clear position in relation to their customers.
Michael Porters Generic Strategies Application Example
Porters Generic Strategies Companies Example 1
Airlines are trying to be in all strategies simultaneously. They want to serve all types of customers, which means they sell cheap tickets, business class tickets, first-class tickets, etcetera. They want it all, and consequently, they end up stuck in the middle.
Porters Generic Strategies Companies Example 2; Handbags
Application of Low-Cost Leadership Strategies Examples
The cost leader could be affirmed that achieves economies of scale by sourcing mass-produced identical bags in the Far East. These are then sent to Europe in containers and are sold without service through discount stores.
All costs must be kept down to sell at lower prices than their competition in the industry.
Application of product differentiation Strategies Examples
These might be branded bags like Gucci or Prada. These are bags with the brand that customers are willing to pay a high price for
Application of Cost Focus Strategy Examples
It could be advertising handbags, where a firm offers to mass-produce handbags for other firms with their logo on them.
It is a small part of the handbag market, but the manufacturer must keep the price low otherwise, the customer will select another manufacturer.
Application Focus Differentiation Strategies Example
Here, it could be an exclusive golf bag with an exclusive brand such as Titlist. The manufacturer focuses on a particular segment of the submarket and Golf bags, and customers do not look at the price, but other factors such as quality, image, etcetera.
Porter’s Generic Strategies Advantages and Disadvantages/Criticism/Limitations
- It isn’t easy to define an industry. The boundaries of the industry are almost always moving.
- The model makes no recommendations about which generic strategy in the individual industry is the better choice.
- The model allows for continuous positioning of our own firms, competitive advantage, as well as continuous monitoring of our competitors, position in the industry, so we do not get stuck in the middle.