PORTER'S GENERIC STRATEGIES
A business model for determining a strategic position
Michael Porter is a professor at Harvard Business School. In 1980 he wrote the book Competitive Strategy in which he described the three generic positions of differentiation, cost leadership and focus.
Strategies are long-term plans. They are your map as to how you are going to take your product to market, win customers and beat the competition – over a period of years. In general, we tend to be good at tactics (short-term manoeuvres such as promotions or sales initiatives) and we can neglect the longer term. Even worse, we can have a long-term plan and keep tinkering with it such that it never is really implemented.
Michael Porter with his generic strategies starts at the beginning. He argues that a brand or a business must stand for something if it is to be successful. His thesis is that there are three important positions that a brand can take:
• Low-cost – this is where a company has a considerable cost advantage over competing companies. This strategy is a bit more complicated than it may appear. In order to take a low-cost position in the market you must have a real competitive advantage which means that no other companies can compete at your level. These advantages come from mass production at a huge scale or some competing advantage that comes from low-cost raw materials and labour. A low-cost position can be under threat if circumstances change. For example if a competitor finds a new and cheaper source of raw materials; if a competitor opens a much larger factory; if a competitor moves its manufacturing facilities to a new low labour cost environment.
• Niche – this is were a company sells specialised products to a narrow segment of the market. Companies that specialise and serve niches usually enjoy strong positions. Everyone likes a specialist! Niche brands are common in supplying sports equipment. They are important in many business to business markets. New entrants can be a threat to niche companies. They can disrupt the market with new and higher performing products.
• Differentiated – this is where a company sells a strongly branded product to a mass market. A strong branded product can exist in low cost and niche markets. Aldi is a low cost operator in the grocery market and it has a strong brand. However, its major strength is its low cost. Harley Davidson is a niche supplier of motor bikes and it has a strong brand. However, Harley's major strength is making motor bikes. Differentiated products are those where the product may be very similar to others on the market but the brand carries it through. Strongly differentiated brands in the vehicle market are Mercedes and BMW. Their cars aren't necessarily any more reliable than other car brands but they have carved perceptions of quality, driver enjoyment and public acclaim that allow them to enjoy premium prices.
Porter explains his generic strategies with the following diagram that plots strategic advantage against the market segment that is being targeted.
A good strategy is one that is solidly located in one of the three positions. The worst place to be is stuck in the middle where a brand tries to stand for everything and, in doing so, achieves nothing. Porter believes that it is difficult but not impossible to address a broad audience with more than one position. This has to be achieved by segmentation. Airlines for example offer a strongly differentiated value proposition to business class customers and a stripped down offer to those in coach or economy class.
Determining which strategy is the right one should begin with a SWOT analysis. This will show the company’s strengths and weaknesses and the opportunities and threats that it faces. It would also be helpful to carry out an analysis using Porter's Five Forces to see how these are shaping the company. Against this background, a generic strategy can be chosen that is right for the company and which plays to its strengths.
Clarity is really important when developing a strategy. It is why Michael Porter argues in favour of building a strategy based on differentiation, cost leadership or focus. Don’t get confused about the strength of your brand. You can have a strong brand in cost leadership and also in a niche.