What are the 4 Porter’s generic strategies, and what do you need to know about them? Continue reading to learn more!
Everyone who has anything to do with marketing has heard about the importance of unique business benefits. By now, it’s not enough to just work for money – every company has a mission, values , authenticity, and individuality.
This trend towards uniqueness and value reconstruction from competitors can be considered a consequence or evidence of Michael Porter’s theory of competitive strategies.
He formulated his vision of competition in a series of books in the 1980s, but his approach is relevant today. In this article, we will explore the 4 Porter’s generic strategies and how to use them to grow your business.
Porter’s generic strategies: how can you use them as a business?
What are Porter’s generic competitive strategies
Porter’s generic strategies is the concept of how the subjects of the competitive market should behave, depending on the scale of competition and the type of advantages that this or that company has.
Using these general strategies of the competition, the company should, first of all, analyze itself and its capabilities, its own microenvironment, and only secondarily focus on its industry and other market players.
There are two main factors influencing the choice of strategy in this concept.
- The competition scope. Does the company want to attract a wide audience or, on the contrary, plan to focus on a narrow circle of consumers?
- The main competitive advantage. Is the company going to compete on price or rather focus on creating unique product features?
In general, this can be distributed on a matrix – in fact, such an explanation is offered by Porter himself.
Porter’s Generic Strategies: Competitive advantage
Interesting fact: Porter singles out only three general competitive strategies in his book: cost leadership, differentiation, and focus. He separately divides the latter into two types: focusing on value and on differentiation.
However, the matrix scheme of the explanation of the theory suggests that there are actually four theories, and it is this number that has become fixed in the public consciousness.
Let’s consider what each of the points means in terms of Porter’s generic strategies.
What does the competition scope mean?
1. Broad target
Here we are talking about companies that want to scale as much as possible and attract the largest possible audience of customers. The most striking examples here are global manufacturers of consumer goods: IKEA, PepsiCo, Intel, etc.
Of course, all these companies have their own vision of the ideal target audience, there are products aimed at different customer segments, but in general, they strive for the widest possible expansion and the involvement of everyone who is willing to pay.
2. Narrow target
This includes companies that deliberately reduce the number of customers for which they are ready to compete. This should not be about refusing to serve a client if he does not fall into the desired audience – such an approach would be discrimination.
But if the company suspends orders due to a heavy load, instead of increasing production, it is clearly focused on a narrow audience. These include, for example, designers who personally sew clothes.
Or various interest clubs that can accept a limited number of participants and do not seek to invite the whole city to themselves.
Let’s consider a specific example. Imagine a furniture store in a small town. If this store sells basic things and you can just walk in and buy a stool, that store is competing for broad target segments, even in a small town.
But if another store opens that will import unique products and work primarily with interior designers (who would use their products in their clients’ projects), then this store will be competing in a narrow target segment.
And this segment can be even narrower if, for example, the store will work with items in the same style and cooperate with designers who specialize, for example, in minimalism.
If you want the maximum flow of customers and are ready to sell as much as customers can buy – then pay attention to strategies for wide competition. If you are willing to stop at a certain level of orders and stop accepting new ones at some point, then your strategies lie in focus.
What does competitive advantage mean?
Now, let’s take a look at competitive advantage from the perspective of Porter’s generic strategies.
Any company will have many distinctive features, not only strengths, but also weaknesses. But it is not enough to have these aspects, they must be effectively applied in order to radically differ from competitors. At the same time, all differences can be attributed to one of two groups.
1. Lower cost
The first group is lower cost, also known as the cost leadership strategy. It is one of the leading perspectives according to Porter’s generic strategies.
If you can somehow get a product cheaper than competitors, you have an opportunity to compete on price. This could include, for example, a discount on large purchases from a supplier that competitors with smaller sales volumes do not have.
This also includes the stock of funds that would allow dumping (but the question of the ethics of such competition already arises here).
2. Differentiation strategy
The differentiation strategy focuses on making a clear distinction of the product or service from that offered by competitors, and it is the one of the main aspects of Porter’s generic strategies.
Let’s look at these points on a hypothetical example. Suppose the company’s strength is that the company’s managers have good qualifications and they have built clear and efficient processes in the company.
If optimization refers to production and you sew three dresses from fabric that the competitor only has enough for one, then this is where your strength lies in minimizing costs.
But if these processes speed up distribution and your dress appears at the customer when competitors are just threading the needle, then such high-speed distribution can become your differentiation advantage.
An optimistic business owner may believe that his business is better than the competition in terms of both price and product uniqueness. But then you should ask yourself why competitors still exist, why customers still go to them.
Typically, the ability to compete on price or differentiation depends on the market and industry drivers.
What are Porter’s competitive strategies
1. Cost leadership
First of Porter’s generic strategies is cost leadership.
The goal of the cost leadership strategy is to become the market leader. Not one of the leaders, but the one, associated with the industry in general. But when multiple companies start following this strategy, it can exhaust both them and their customers.
With this distribution of power, every smallest segment of the market becomes overvalued for competitors, and the struggle for individual victories requires companies to use more resources than they can actually give them.
It seems that everything here is simple: make the price lower, attract the largest possible audience and everything will be fine. But this is the most obvious option. Porter offers a different view of price competition: to reduce cost while keeping prices at the level of competitors.
In this way, you will increase profits and, accordingly, have the opportunity to further develop the business, and further reduce the cost price. In general, the author insists that leadership in cost minimization is possible only in the presence of radical advantages, such as a significant technological gap.
The second one of Porter’s generic strategies is differentiation. This includes all the advantages that distinguish you from competitors, but do not lead to a decrease in the price of the product, and even justify its increase in price.
In fact, the core of a differentiation strategy can be any characteristic of your business that is attractive to customers, other than price.
Porter’s generic strategies: differentiation strategy
The most vivid example here will be, perhaps, the clothes of luxury brands. Companies hardly articulate prices in their communication, emphasizing the aesthetic value of their product.
Or car manufacturers: in the mass mind there are constant associations with car brands, and someone who dreams of a BMW will not buy, for example, a Volvo, even if the latter will be more profitable. Because these two brands “sell” different values to potential buyers.
In fact, everything we teach in the article about branding is about differentiation in the market.
If we talk about the economic side of the issue, then it is worth remembering that differentiation usually requires additional costs, so they must be taken into account in the calculation of the business model.
The costs of differentiation should not exceed the profit that the company will receive from added value.
At the same time, Porter reminds us that the main costs of the product should be kept at the level of competitors and try to optimize everything that does not relate to the costs of differentiation.
Next, we move on to the third of Porter’s generic strategies – Focus. Companies that choose a focus strategy choose a separate segment of customers and seek to satisfy the needs of a single segment.
It usually means that certain customer segments are not satisfied with the way they are served by competitors, so the company is focused on solving the special problems of a certain segment so that they receive a decent product or service.
3.1. Cost focus
When a company chooses a strategy of cost focus, it is about making available a product that is needed by such a limited group of consumers that companies with wide competition do not see the point of reducing spending on it.
Let’s imagine a large printing house that, among other things, offers printing on T-shirts. Such a printing house focuses on orders from clothing brands, so it offers editions of 1,000 or even 10,000 copies, because expensive equipment must pay off and smaller editions are simply unprofitable.
But there are customers in the market who need 100-200 T-shirts: small businesses, bloggers who sell their own merch, etc. And to meet the needs of such customers, sooner or later a small printing house will appear, with other equipment that will allow printing small batches of t-shirts cost-effectively.
3.2. Differentiation focus
The same logic applies to the focus on differentiation. Even 10 years ago, vegetarians were forced to ask waiters which dishes did not contain meat. Vegans sometimes had to refuse food in restaurants, because without animal-derived ingredients, often only tea was on the menu.
Food establishments have long considered it unprofitable to create separate vegan menus. So, to meet the needs of this customer segment, separate vegan establishments began to emerge, competing with the entire industry for a specific customer segment, focusing on differentiation.
Conclusion: how to apply Porter’s generic strategies to your business
Now that we have considered all of Porter’s generic strategies and the aspects that affect them, you should understand how to implement the acquired knowledge in your business.
First of all, analyze your own ambitions. There is an opinion that businesses should constantly strive for expansive growth and scaling. But these are just loud words of sellers of “successful success“.
Try to answer honestly for yourself whether you want to serve everyone who is willing to pay money, or rather focus on a narrow category of consumers for whom you want to work.
And then evaluate your own strength. Do you have the opportunity to reduce the cost of the product, or should you rather focus on the uniqueness of the product and service. This is a very important moment, choose your priority.
Porter warns that simultaneous work in two directions causes the company to “slip” and eventually such a business gets stuck somewhere in the middle of the market. The fate of such companies is disappointing.
For those buyers who are looking for the cheapest offers, the product of the “stuck” company will always be overpriced. At the same time, buyers who agree to pay for a service or need a unique product will not be fully satisfied and will next turn to competitors with specific differentiation.
At the intersection of these two solutions will be the strategy model you should apply. But it is not enough just to choose the type of strategy – then you will have to work on creating a road map and implementing the plan into life.
It may be a lot of work, but the result will be a sustainable business that becomes a leader in its industry, or at least for a certain sector of customers.
A strategy is not a life hack that can be repeated for someone. Read Porter’s books on competition if you are interested in this topic. Involve business partners and stakeholders in analysis and planning. List the values and guidelines that exist in your industry and that are important to your business.
Now, it’s your turn – which one of Porter’s generic strategies would you pursue and why?