In his book, “Competitive Advantage,” in 1985, Porter conceptualized the concept of competitive advantage, by looking at two key aspects. Industry attractiveness, and the company’s strategic positioning. The latter, according to Porter, can be achieved either via cost leadership, differentiation, or focus.
Component
Description
Origin
Introduced by Michael E. Porter in his 1985 book “Competitive Advantage.”
Overview
Porter’s Generic Strategies are a set of fundamental business strategies that organizations can adopt to gain a competitive advantage in their respective markets. These strategies focus on achieving either cost leadership, differentiation, or a niche market position. They provide a framework for businesses to make strategic choices based on their competitive priorities and target market segments.
Key Elements
– Cost Leadership: A strategy aiming to become the lowest-cost producer in the industry.
– Differentiation: A strategy emphasizing unique product or service attributes that distinguish the company from competitors.
– Focus (Niche): A strategy concentrating on a specific market segment, catering to the unique needs of that segment.
How It Works
1. Choose Competitive Scope: Decide whether to target a broad market or a narrow, niche market segment.
2. Select Competitive Advantage: Choose between cost leadership (lowest cost), differentiation (unique features), or focus (niche market).
3. Implement Strategy: Develop and execute business activities and operations that align with the chosen competitive strategy.
4. Sustain Competitive Advantage: Continuously work to maintain the chosen competitive advantage in the market.
Generic Strategies
– Cost Leadership: Strive to be the industry’s low-cost producer, offering products or services at competitive prices.
– Differentiation: Create unique, high-quality products or services that justify premium pricing.
– Focus (Niche): Concentrate on serving a specific market segment exceptionally well, often at premium prices.
Applications
– Industry Analysis: Used in analyzing competitive positioning within an industry.
– Strategic Planning: Guides organizations in making strategic choices based on competitive priorities.
Benefits
– Competitive Advantage: Provides a clear framework for achieving and sustaining a competitive edge.
– Strategic Clarity: Helps businesses focus their efforts and resources on a defined strategy.
– Market Positioning: Facilitates effective positioning within a market segment.
Drawbacks
– Competitive Dynamics: Other firms may also adopt similar strategies, leading to intense competition.
– Environmental Changes: Rapid changes in technology or market dynamics can challenge strategy sustainability.
Key Takeaway
Porter’s Generic Strategies offer three fundamental approaches to gaining competitive advantage: cost leadership, differentiation, and focus. Organizations select one of these strategies based on their competitive priorities and target market segments. Implementing and sustaining the chosen strategy are critical for long-term success in the market. While effective, these strategies require adaptation to changing market conditions and competitive pressures.
As Porter was trying to conceptualize and break down what determined a competitive advantage for companies within specific industries, Porter created a framework that would stick for decades.
This framework moved along two core sub-frameworks.
And another one, also based on the industry attractiveness, determined the strategic positioning (Porter’s generic strategies to gain a competitive advantage).
As he explained in the book, “competition is at the core of the success or failure of firms.”
The whole point for Porter was, through competitive strategy, “to establish a profitable and sustainable position against the forces that determine industry competition.”
Industry attractiveness could be analyzed through five core forces:
Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces
Once a company had clear in mind the context and industry, it needed to make a strategic choice, which for Porter, was summarized in three core moves.
Be a cost leader, differentiator, focuser, or die…
On the other side, based on a different context, a company could still reach a competitive advantage in a broad market through differentiation.
A third generic strategy that targeted a narrow scope within an industry could also be reached through cost focus or differentiation focus.
There is one scenario that Porter emphasized avoiding: being stuck in the middle.
Getting stuck in the middle
In all the cases in which a company wouldn’t be able to execute one of the generic strategies highlighted by Porter in competitive advantage, this would result in a stuck-in-the-middle scenario where no competitive advantage is created.
Drawbacks of Porter’s Generic Strategies
Over-Simplification of Strategy Development:
Limited Flexibility: Porter’s model offers a limited set of strategic choices, potentially oversimplifying the complexities and nuances of modern business environments.
One-Size-Fits-All Approach: The model may not suit all companies, especially those operating in rapidly changing industries or with unique business models.
Risk of Strategic Rigidity:
Inflexibility in Changing Markets: Strict adherence to a single strategy might limit a company’s ability to adapt to market changes or explore innovative approaches.
Potential for Strategic Blind Spots: Focusing on one of the generic strategies could lead to neglect in other important areas of the business.
Competitive Limitations:
Vulnerability to Competitors: Relying solely on cost leadership or differentiation could make a company vulnerable to competitors who find ways to undercut prices or innovate products.
Challenges in Sustaining Strategy: Maintaining a competitive edge through cost leadership or differentiation can become increasingly difficult over time, especially in saturated markets.
Implementation Challenges:
Resource and Capability Constraints: Implementing these strategies effectively often requires significant resources and specific organizational capabilities, which may not be feasible for all companies.
Balancing Cost and Differentiation: Achieving the right balance between cost-effectiveness and differentiation can be challenging, particularly for companies pursuing a combination strategy.
When to Use Porter’s Generic Strategies
Appropriate Scenarios:
Established Markets: Useful in relatively stable industries where market segments are well-defined and competition is understood.
Strategic Planning: Can provide a starting point for companies developing their strategic plans and assessing their competitive landscape.
Strategic Application:
Competitive Analysis: Helps in analyzing competitors’ strategies to identify potential gaps or opportunities in the market.
Business Model Development: Assists in developing or refining a business model to align with one of the core strategies for competitive advantage.
How to Use Porter’s Generic Strategies
Implementing the Strategies:
Cost Leadership: Focus on becoming the low-cost producer in the industry by optimizing operations, achieving economies of scale, and controlling costs.
Differentiation: Differentiate the company’s products or services from competitors through unique features, superior quality, or exceptional service.
Focus Strategy: Concentrate on a specific market segment or niche, tailoring products or services to better meet the needs of that particular group.
Best Practices:
Continuous Market Analysis: Regularly analyze the market and competition to ensure that the chosen strategy remains relevant and effective.
Adaptation and Evolution: Be prepared to adapt and evolve the strategy in response to market changes and internal business growth.
Alignment with Company Capabilities: Ensure that the chosen strategy aligns well with the company’s resources, capabilities, and overall business goals.
What to Expect from Implementing Porter’s Generic Strategies
Potential for Competitive Advantage:
Improved Market Position: A well-implemented strategy can lead to a stronger competitive position in the market.
Increased Efficiency or Market Share: Depending on the strategy, companies might experience increased operational efficiency or capture a larger share of the market.
Organizational Impact:
Strategic Focus: Promotes a clear strategic focus within the organization.
Resource Allocation: Influences how resources are allocated to support the chosen strategic direction.
Challenges and Limitations:
Need for Continuous Review: The dynamic nature of markets requires ongoing review and potential adjustment of the strategy.
Risk of Overcommitment: There’s a risk of overcommitting to a single strategy, which might limit responsiveness to new opportunities or threats.
In summary, Porter’s Generic Strategies provide a framework for considering different paths to competitive advantage but should be applied with an understanding of their limitations and the specific context of the business.
These strategies offer a starting point for strategic thinking, but they require adaptation and flexibility to remain effective in today’s rapidly changing business environments.
It is also crucial for businesses to continuously monitor their market and adjust their strategies as needed to maintain their competitive edge and respond to new challenges and opportunities.
Case Studies
Automobile Industry
Porter’s Generic Strategies Application:
Cost Leadership: Companies like Hyundai and Kia focus on producing vehicles at a lower cost while maintaining acceptable quality standards.
Differentiation: Luxury brands like Mercedes-Benz or BMW differentiate with high-end features, advanced technology, and brand prestige.
Focus: Tesla initially employed a focus strategy, targeting the niche electric vehicle market with high-end models like the Roadster, before broadening its range.
Stuck-in-the-Middle Scenario: A car manufacturer attempting to produce luxury vehicles at a low cost might compromise on quality, failing to attract either the luxury or budget market segments.
Fast-food Industry
Porter’s Generic Strategies Application:
Cost Leadership: Brands like McDonald’s and Burger King emphasize quick service, large volumes, and competitive pricing.
Differentiation: Chipotle differentiates with a focus on fresh, organic, and locally-sourced ingredients.
Focus: A vegan fast-food joint might cater specifically to the vegan market with specialized offerings.
Stuck-in-the-Middle Scenario: A fast-food chain attempting to offer gourmet meals at rock-bottom prices might struggle with operational inefficiencies and fail to appeal to either gourmet diners or budget-conscious customers.
Technology Industry
Porter’s Generic Strategies Application:
Cost Leadership: Companies like Acer or Lenovo offer affordable computing solutions with competitive specs.
Differentiation: Apple stands out with its unique design, user-friendly interface, and brand appeal.
Focus: Razer focuses specifically on gamers, offering specialized laptops, peripherals, and software.
Stuck-in-the-Middle Scenario: A tech company producing high-end, luxury smartphones without unique features or brand recognition might struggle to compete against established brands like Apple or Samsung.
Airline Industry
Porter’s Generic Strategies Application:
Cost Leadership: Budget airlines like Ryanair or EasyJet focus on basic service at low prices.
Differentiation: Carriers like Emirates or Singapore Airlines offer premium services, luxurious in-flight experiences, and extensive in-flight entertainment.
Focus: Regional airlines may focus on serving specific geographic areas or niche markets.
Stuck-in-the-Middle Scenario: An airline offering low-cost tickets but with premium services might struggle to maintain profitability or identify its target audience.
Fashion Retail Industry
Porter’s Generic Strategies Application:
Cost Leadership: Brands like Primark or Walmart’s clothing line focus on producing trendy clothing at affordable prices.
Differentiation: Gucci or Louis Vuitton emphasize exclusivity, high-quality materials, and brand prestige.
Focus: A brand might focus specifically on sustainable, eco-friendly fashion, catering to an environmentally-conscious audience.
Stuck-in-the-Middle Scenario: A clothing retailer attempting to sell luxury items in bulk quantities at low prices might struggle to maintain brand prestige or appeal to the luxury market segment.
Beverage Industry
Porter’s Generic Strategies Application:
Cost Leadership: Generic store brands of sodas or bottled water offer basic beverages at competitive prices.
Differentiation: Coca-Cola differentiates with its secret formula, global brand recognition, and extensive marketing.
Focus: A brand like LaCroix targets a niche market with flavored sparkling water without sweeteners or artificial ingredients.
Stuck-in-the-Middle Scenario: A beverage company introducing a high-priced cola without a unique flavor or brand differentiation might struggle to compete against established giants like Coca-Cola or Pepsi.
Publishing Industry
Porter’s Generic Strategies Application:
Cost Leadership: Companies like Amazon Kindle Direct Publishing allow authors to self-publish at low costs, making e-books available at competitive prices.
Differentiation: Penguin Random House emphasizes its legacy, the quality of authors it publishes, and its global reach.
Focus: Hay House Publishers specializes in self-help and transformational books, catering to readers interested in personal development.
Cosmetics Industry
Porter’s Generic Strategies Application:
Cost Leadership: Brands like e.l.f. Cosmetics offer quality makeup products at affordable price points.
Differentiation: Sephora differentiates itself by offering a wide variety of high-end brands, exclusive collections, and a unique in-store experience.
Focus: Fenty Beauty, launched by Rihanna, initially focused on providing a diverse range of foundation shades catering to all skin tones, addressing a gap in the market.
Online Streaming Industry
Porter’s Generic Strategies Application:
Cost Leadership: Platforms like Tubi or Crackle provide free streaming services, monetized through ads.
Differentiation: Netflix differentiates with its original content, user-friendly interface, and absence of commercials.
Focus: Crunchyroll focuses specifically on anime and manga content, catering to a niche audience of anime enthusiasts.
Fitness and Gym Industry
Porter’s Generic Strategies Application:
Cost Leadership: Planet Fitness markets itself as a low-cost gym with a judgment-free environment.
Differentiation: Gold’s Gym emphasizes its legacy, high-quality equipment, and commitment to serious fitness.
Focus: OrangeTheory Fitness provides heart rate-based training focusing on high-intensity interval training (HIIT) workouts, targeting fitness enthusiasts looking for structured, intense workouts.
Coffee Shop Industry
Porter’s Generic Strategies Application:
Cost Leadership: Dunkin’ emphasizes quick service and competitive prices for its range of coffees and donuts.
Differentiation: Starbucks differentiates with its unique coffee blends, in-store ambiance, and customer loyalty programs.
Focus: Blue Bottle Coffee focuses on offering high-quality, freshly roasted coffee, targeting coffee connoisseurs and enthusiasts.
Music Industry
Porter’s Generic Strategies Application:
Cost Leadership: Platforms like SoundCloud allow emerging artists to upload and share their music for free or at low costs.
Differentiation: Spotify offers a vast music library, curated playlists, and a personalized music experience with its “Discover Weekly” feature.
Focus: Tidal, co-owned by Jay-Z and other artists, focuses on providing lossless audio quality and exclusive content, targeting audiophiles and fans seeking exclusive releases.
Key Highlights
Competitive Advantage Concept: Michael Porter introduced the concept of competitive advantage in his book “Competitive Advantage” in 1985. He emphasized two key aspects: industry attractiveness and strategic positioning.
Porter’s Generic Strategies: Porter’s generic strategies outline three core moves to achieve competitive advantage: cost leadership, differentiation, and focus. A company can either be a cost leader, offering products at a lower price, or differentiate its products to stand out in the market. Alternatively, it can focus on a narrow market segment with cost focus or differentiation focus.
Stuck-in-the-Middle Scenario: Porter warns against getting stuck in the middle, where a company fails to execute any of the generic strategies, resulting in no competitive advantage.
Porter’s Other Strategic Frameworks:
Porter’s Five Forces: Analyzes industry attractiveness by examining five forces—bargaining power of buyers and suppliers, threat of substitutes, threat of new entrants, and competitive rivalry.
Porter’s Diamond Model: Explains why certain industries in a nation become internationally competitive, considering factors like strategy, structure, rivalry, factor conditions, demand conditions, and related and supporting industries.
Porter’s Four Corners Analysis: Helps a business understand its competitive landscape by assessing competitors’ drivers, current strategy, management assumptions, and capabilities.
Porter’s Value Chain Model: Analyzes a company’s collection of processes to create value for consumers, directly linked to competitive advantage.
Comparison’s Table
Porter’s Generic Strategies
Blue Ocean Strategy
Ansoff Matrix
Miles and Snow Typology
Purpose
Achieve competitive advantage by choosing a clear course of action.
Create uncontested market space by innovating and creating new demand.
Identify growth strategies based on market and product combinations.
Identify organizational strategies based on responses to environmental changes.
Focus
Competitive positioning within an industry.
Innovation and value creation.
Market and product diversification.
Adaptive strategies based on environmental dynamics.
Key Features
Cost leadership, differentiation, focus.
Value innovation, eliminating competition, creating new demand.
Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, related and supporting industries.
Developed by American academic Michael Porter, the Four Corners Analysis helps a business understand its particular competitive landscape. The analysis is a form of competitive intelligence where a business determines its future strategy by assessing its competitors’ strategy, looking at four elements: drivers, current strategy, management assumptions, and capabilities.
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.
The ADKAR model is a management tool designed to assist employees and businesses in transitioning through organizational change. To maximize the chances of employees embracing change, the ADKAR model was developed by author and engineer Jeff Hiatt in 2003. The model seeks to guide people through the change process and importantly, ensure that people do not revert to habitual ways of operating after some time has passed.
You can use the Ansoff Matrix as a strategic framework to understand what growthstrategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growthstrategy can be derived from whether the market is new or existing, and whether the product is new or existing.
The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.
The lean startup canvas is an adaptation by Ash Maurya of the business model canvas by Alexander Osterwalder, which adds a layer that focuses on problems, solutions, key metrics, unfair advantage based, and a unique value proposition. Thus, starting from mastering the problem rather than the solution.
The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is valueinnovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.
First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is valueinnovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.
A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.
The GE McKinsey Matrix was developed in the 1970s after General Electric asked its consultant McKinsey to develop a portfolio management model. This matrix is a strategy tool that provides guidance on how a corporation should prioritize its investments among its business units, leading to three possible scenarios: invest, protect, harvest, and divest.
The McKinsey 7-S Model was developed in the late 1970s by Robert Waterman and Thomas Peters, who were consultants at McKinsey & Company. Waterman and Peters created seven key internal elements that inform a business of how well positioned it is to achieve its goals, based on three hard elements and four soft elements.
McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.
The McKinsey Horizon Model helps a business focus on innovation and growth. The model is a strategy framework divided into three broad categories, otherwise known as horizons. Thus, the framework is sometimes referred to as McKinsey’s Three Horizons of Growth.
Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces.
According to Michael Porter, a competitive advantage, in a given industry could be pursued in two key ways: low cost (cost leadership), or differentiation. A third generic strategy is focus. According to Porter a failure to do so would end up stuck in the middle scenario, where the company will not retain a long-term competitive advantage.
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.
Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, related and supporting industries.
A SWOT Analysis is a framework used for evaluating the business‘s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.
Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.
The STEEPLE analysis is a variation of the STEEP analysis. Where the step analysis comprises socio-cultural, technological, economic, environmental/ecological, and political factors as the base of the analysis. The STEEPLE analysis adds other two factors such as Legal and Ethical.
A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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