Different companies approach markets in different ways. Look at Aldi vs Waitrose in the UK, or Trader Joes vs Whole Foods in the US. It’s healthy for markets to have alternative strategies and different approaches. Porter's Generic Strategies helps you classify these approaches into four categories.
Porter identified 4 generic strategies that can be used to both classify company behaviour and drive company behaviour. They’re all around gaining competitive advantage, so if you’re at currently looking at your strategy then reminding yourself of the generic strategies can be very useful.
The four strategies are called:
You’ll see right away that the strategies have shared qualities. Read through each definition as it’s not always clear – for example Cost Focus does not mean an emphasis on cost to market.
The Cost Leadership Strategy is where a business focuses on reducing the cost to deliver the products or services to a customer, ensuring you’re more profitable and thus can add shareholder value or invest in other parts of the business.
There are a number of factors to consider when you’re going for Cost Leadership:
It may be helpful to bring in the Five Forces analysis of your marketplace for this strategy and consider the Supplier and Buyer powers.
When looking at the Cost Leadership Strategy you should review:
When done well the Cost Leadership Strategy opens up several options to companies:
Remember: Cost Leadership is a long term strategy – if you stop focusing on it, cost will start to creep back into the business in ways that were not required. Read more in our Guide to Strategic Cost Reduction.
The Differentiation Strategy is where a business focuses on differentiating their products or services from competitors. This strategy has a wide spectrum from full product diversity through to unique features within a core product.
There’s a number of factors to consider when you’re going for Differentiation:
When looking at the Differentiation Strategy you should review:
When done well the Differentiation Strategy opens up several options to companies:
Porter developed a way to evaluate if a market is worth diversifying into using three tests - you can read more in our guide to Porter's Three Tests.
Remember: Differentiation as a strategy can open you up to risks – make sure your BAU revenue is well protected and you do not get distracted. In Differentiation the work you do today is as important initially as the work for tomorrow.
The Cost Focus Strategy is an evolution of the Cost Leadership Strategy. As the name suggests, there are two aspects to this strategy. The “Focus” refers to when a company focuses on a niche market, either by industry or geography, and becomes the expert in delivering for that industry. The “Cost” refers to the company producing the product or service for an aggressive cost to them, much like the Cost Leadership Strategy we discussed earlier.
In addition to the factors from Cost Leadership, you should consider the following:
This strategy has all the benefits of Cost Leadership while also providing additional options:
Remember: You can’t have a Cost Focus Strategy without focusing on the Cost! Follow our guide to Strategic Cost Reduction.
The Differentiation Focus Strategy is an evolution of the Differentiation Strategy. As with Cost Focus, there are two aspects – one focusing on the Differentiation aspect of the strategy while the other highlights the fact the business is entering a niche marketplace.
In addition to the factors from Differentiation, you should consider the following:
This strategy has all the benefits of Differentiate while also providing additional options:
Remember: Differentiate Focus is hard in a mature marketplace – investigate your competitor products and customer feedback before deciding on this approach. Consider running both Five Forces and Porter's Three Tests on the new marketplace.
Yes & No! It’s possible to run multiple strategies in parallel if you organise the business correctly. For example, your core product might be Cost Focus, while your future business is Differentiation, meaning your overall strategy is the latter. It would not work if you attempted to be a Cost Leader and Differentiation in your core product or service.
Porter’s Generic Strategies are designed for businesses but departments can use them within their own strategy, most notably a Product Strategy can take the form of one of the four generic strategies.
Although originally designed for use by companies, there’s no reason a non-profit can not take advantage of the generic strategies. For some more reading on charity strategy check out our guide to creating a charity fundraising strategy.
Michael Porter developed his Generic Strategies in a 1985 paper entitled Competitive Advantage: Creating and Sustaining Superior Performance.
Michael Porter is one of the most influential strategy researchers, contributing numerous academic frameworks commonly used across the world. For another one of his frameworks look at our introduction to Porter’s Five Forces.
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